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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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)
<TABLE>
<S> <C>
DELAWARE 75-2294945
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11701 LUNA ROAD 75234
DALLAS, TEXAS (Zip code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (469) 357-1000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.00025 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of Common Stock on March 20,
2000 as reported on the Nasdaq National Market, was approximately $15.0 billion
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of the Registrant's Common Stock).
As of March 20, 2000, the Registrant had 157,356,216 outstanding shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
In addition to the historical information contained herein, the discussion
in this Form 10-K contains certain 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 consumer
benefits attributable to our products; 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. The
cautionary statements made in this Form 10-K should be read as being applicable
to all related forward-looking statements whenever they appear in this Form
10-K. Our actual results could differ materially from the results discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under the section
captioned "Factors That May Affect Future Results" in Item 1 of this Form 10-K
as well as those cautionary statements and other factors set forth elsewhere
herein.
References in this Form 10-K 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.
OUR COMPANY
i2 is a leading global provider of intelligent eBusiness solutions that
help enterprises optimize business processes both internally and among trading
partners. Our solutions enable enterprises to significantly improve
efficiencies, collaborate with suppliers and customers, respond to market
demands and engage in dynamic business interactions over the Internet. Our
solutions consider the real conditions of companies to optimize key business
processes -- from product design to customer relationships. We have recently
launched TradeMatrix, a robust platform of business-to-business solutions,
services and marketplaces, which will allow customers, partners, suppliers and
service providers to do business together in real time. TradeMatrix offers a
full breadth of services that include planning, procurement, commerce,
fulfillment, customer care, retail, strategic sourcing and product development.
Our RHYTHM product suite principally includes solutions for supply chain
management, customer management, product lifecycle management, inter-process
planning and strategic planning, which provide the basis for these value-added
services offered to marketplace participants. We recently have signed agreements
to develop and host public and private Internet-based electronic marketplaces
with our customers and partners in the automotive, aerospace, high-tech,
softgoods and consumer packaged goods industries. Our RHYTHM software
applications, along with new software solutions and services designed
specifically for the TradeMatrix environment, are used to power these electronic
marketplaces. We also provide services such as consulting, training and
maintenance in support of these offerings.
We provide dynamic software solutions to leading companies in industries
such as aerospace and defense, automotive, chemicals, durable and non-durable
consumer goods, high-tech hardware, software and electronics, industrial
equipment, logistics, metals, pulp and paper, pharmaceuticals, retail,
semiconductors, textiles and apparel and telecommunications. Our customers
include Alliant Foodservice, Barnes & Noble, Bristol-Myers Squibb, British
American Tobacco, British Steel, Caterpillar, Compaq, Ericsson, Ford, Frito-Lay,
General Electric, General Motors, Hewlett-Packard, IBM, Merck, 3M, Nike, Nokia,
Nortel, Philips, Ryder Logistics, Siemens, Sun Microsystems, Texas Instruments,
Tech Data, Toshiba, United Technologies, US Steel and VF Corporation.
Our executive offices are located at One i2 Place, 11701 Luna Road, Dallas,
Texas 75234, and our telephone number is (469) 357-1000.
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RECENT DEVELOPMENTS
On March 12, 2000, we entered into a definitive agreement to acquire Aspect
Development, Inc. ("Aspect"), a developer of collaborative solutions for
business-to-business marketplaces. Pursuant to the agreement, we will exchange
all of the outstanding capital stock of Aspect and will assume all outstanding
stock options of Aspect, for approximately 44.9 million shares of our common
stock and options. The transaction will be accounted for as a purchase, is
subject to regulatory and i2 and Aspect stockholder approvals, and is expected
to close in the third quarter of this year.
Also on March 12, 2000, we entered into a definitive agreement to acquire
SupplyBase, Inc. ("SupplyBase"), a developer of interactive database products,
services and supply chain management tools. Under the agreement, we will issue
approximately 1.8 million shares of our common stock for all of the outstanding
capital stock and stock options of SupplyBase. The transaction will be accounted
for as a purchase, is subject to regulatory approval and SupplyBase stockholder
approval, and is expected to close in the second quarter of this year.
These strategic acquisitions will result in substantial one-time charges
along with ongoing substantial amortization of intangibles to our earnings.
INDUSTRY BACKGROUND
Today's increasingly competitive business environment has forced many
companies in diverse industries to increase efficiencies while improving
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 trading network may span
multiple continents, requiring suppliers in one part of the world to collaborate
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 value chains or
marketplaces.
The growth of the Internet and the proliferation of software applications
are accelerating these changes by enabling a ubiquitous, platform-independent
communications network. This platform independence has prompted demands for a
dynamic, open and highly integrated environment among customers, suppliers and
other trading partners. In response to these evolving market forces, many
companies have sought to re-engineer their business processes to reduce
manufacturing cycle times, shift from mass production to order-driven
manufacturing, increase the use of outsourcing and share information more
readily with vendors and customers over the Internet.
The Internet also is impacting other core business concerns, including
customer relationships and product management. In order to integrate and
optimize new business solutions, organizations are seeking eBusiness initiatives
such as web-based sales, one-to-one marketing, online customer service, supply
chain management and web-based fulfillment. To successfully achieve the desired
benefits from these eBusiness initiatives, organizations require a comprehensive
end-to-end software solution that integrates and optimizes key business
processes -- from customer management to distribution -- with real time
visibility and collaboration capabilities among trading partners. In addition,
many organizations need solutions and services that enable them to quickly and
cost-effectively deploy and optimize Internet-based marketplace trading
capabilities.
THE i2 SOLUTION
We provide our customers with dynamic software solutions and services
designed to optimize and integrate key business processes such as supply chain
management, customer management and product lifecycle management. Our solutions
also enable web-based real time collaboration and order fulfillment capabilities
in both business-to-business and business-to-consumer exchanges. Customers are
using our solutions to design or re-engineer their business models in pursuit of
increased market share and enhanced competitiveness, by making business
decisions more intelligently, or through what we call "intelligent eBusiness."
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Our solutions for intelligent eBusiness build upon our powerful foundation
of advanced planning and optimization capabilities. Our products can help build
competitive advantage and profitability by combining operational excellence,
customer intimacy and product leadership. TradeMatrix leverages our advanced
optimization and execution capabilities to provide value-added services to
buyers, sellers, designers and service providers within multiple digital
marketplaces.
Our approach to customer relationships is centered on the creation of value
for our customers. As part of this dedication to providing value for our
customers, in 1995 we established a goal of generating more than $50 billion in
total value for our customers by 2005, through growth and savings. We have
reported over $7.6 billion of value delivered to date toward this goal.
i2 -- A HISTORY OF INNOVATION
We have offered supply chain management solutions since the company was
founded 12 years ago. Our founders, Sanjiv Sidhu and Ken Sharma, developed a
dynamic solution to optimize the flow of materials within a factory. This
solution, Factory Planner, is our flagship product, and it has helped our
customers maximize the profitability of the factory, while reducing their
materials and inventory costs.
We have expanded this solution to the entire supply chain -- which includes
all of the factories, the distribution centers, the transportation processes and
the demand planning and fulfillment pieces. We have continued to apply
innovative solutions to the supply chain, product design and customer management
processes. These solutions are encompassed within our RHYTHM suite of products.
As companies design new products, they also can plan for the unique
manufacturing and logistics requirements associated with the design.
As the marketplace changed, we introduced the concept of Marketplace
services, which consist of a portfolio of shared information services, to enable
public and private digital trading communities to optimize both planning and
trading processes. These services provide enhanced decision making within
business-to-consumer and business-to-business environments, from collaboration
with strategic partners to fulfilling and tracking multi-vendor orders for
customers. Selected services from the RHYTHM suite of products and from the
Marketplace services portfolio are assembled into a public or private
Internet-based trading community. Private trading communities, like the one
announced with Sun Microelectronics, a division of Sun Microsystems, address a
known set of participants, such as a company and its customers, suppliers or
service providers. Public trading communities offer open participation for a
target industry.
These concepts and solutions have now evolved into TradeMatrix, a dynamic
Internet marketplace of business-to-business and business-to-consumer services.
TradeMatrix is a digital community where customers, partners, suppliers and
providers gather to do business in real time. TradeMatrix encompasses both
private and public electronic marketplaces and is powered by our RHYTHM suite of
products, along with new software solutions and services designed specifically
for the TradeMatrix environment. This new technology allows users to leverage
the Internet to develop the right product offerings, speed the product offerings
to market and streamline processes to minimize costs. As the lead member of the
TradeMatrix platform, we will provide a large portion of the technology that
powers TradeMatrix. However, as part of the RHYTHM and TradeMatrix eBusiness
solutions, technology partners will not only add components to the framework,
but also will contribute to the technology design.
STRATEGY
Our objectives are to expand our leadership position in providing
intelligent eBusiness solutions, and continue to help create significant value
for our customers. Our strategy for achieving these objectives is comprised of
the following elements:
Expand Intelligent eBusiness Product Offerings. We believe that we
have gained significant experience in eBusiness methodologies through our
planning and optimization product and service offerings and relationships
with customers and partners. We intend to continue to leverage this
experience, together with our expertise in advanced software technology, to
extend the scope and depth of
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our suite of intelligent eBusiness solutions to enable our customers to
optimize a broader range of intra-and inter-enterprise functions.
Enhance Support for Customers' eBusiness Initiatives. Our planning and
optimization solutions have enabled emerging and established businesses to
design or re-engineer their supply chains to realize the efficiencies
resulting from their eBusiness initiatives. Our TradeMatrix platform, which
is powered by our RHYTHM software applications, will allow customers to use
our software in a hosted, web-based environment for collaboration, order
fulfillment and other functions. Our RHYTHM software applications also can
be integrated with disparate systems, such as transaction-based enterprise
resource planning applications. We believe that TradeMatrix will allow us
to provide value-added services to multiple marketplaces and their
participants, further advancing our customers' eBusiness initiatives
through dynamic trading and digital marketplace facilitation and
collaboration. We also are working with customers to develop their own open
online e-marketplaces. Recently, we signed an agreement with Toyota Motor
Sales USA to develop and operate iStarXchange, an electronic marketplace
serving the automotive replacement parts market for the auto service and
repair industry.
Expand Expertise in Targeted Vertical Markets. We currently are
focusing on selected vertical markets, such as aerospace and defense,
automotive, chemicals, consumer goods, high-tech hardware, software and
electronics, industrial equipment, logistics, metals, pulp and paper,
pharmaceuticals, retail, semiconductors, textiles and apparel and
telecommunications. At the same time, we are evaluating the benefits that
our solutions could provide to other vertical markets. Each industry faces
unique problems and issues that must be addressed by focused intelligent
eBusiness applications. We will continue to leverage the highly flexible
nature of our core RHYTHM planning and optimization software to develop and
maintain our family of pre-configured templates tailored to address the
particular requirements of targeted vertical markets.
Invest Aggressively to Build Market Share. We have made and will
continue to make substantial investments to expand our sales and marketing,
research and development, consulting and administrative infrastructure,
balanced with our goals for increasing profitability. We believe that such
investments are necessary to increase our market share and to capitalize on
the growth opportunities in the emerging intelligent eBusiness market.
Acquire or Invest in Complementary Businesses, Products and
Technologies. We continue to believe that select acquisitions or
investments may provide opportunities to broaden our product offerings and
provide more advanced technologies for eBusiness. For example, the
acquisition of Sales Marketing Administration Research Tracking
Technologies, Inc., or SMART, enhanced our eBusiness product portfolio by
providing advanced customer management capabilities. Recently, we have
entered into agreements to acquire Aspect and SupplyBase to enhance our
business-to-business platform. We may in the future pursue additional
acquisitions or investments in businesses, products and technologies, or
enter into joint ventures, which complement or expand our business.
Continue to Form Strategic Alliances. We intend to expand and seek
additional strategic relationships with leading enterprise software and
eBusiness vendors to integrate the RHYTHM technology into their software
products and to create joint-marketing opportunities. Consistent with this
strategy, IBM and Ariba recently agreed to form a strategic alliance to
deliver the industry's first end-to-end solution for business-to-business
e-commerce and collaboration. In addition, we intend to augment our sales
efforts by establishing and expanding relationships with other
complementary eBusiness vendors and systems consulting and integration
firms to more rapidly penetrate our targeted markets. We currently have
relationships with Andersen Consulting, Deloitte & Touche, Ernst & Young,
KPMG Peat Marwick and PricewaterhouseCoopers, among others. Recently,
PricewaterhouseCoopers agreed to co-develop our next generation of customer
management solutions and to jointly develop, sell and deliver end-to-end
intelligent eBusiness solutions.
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PRODUCTS
Our intelligent eBusiness software products operate as flexible, integrated
solutions and are available in single and multi-site configurations, with
various extensions. Our solutions are designed to assist our customers in
improving current business processes, return on assets, profitability and
customer service levels. As a result of these and other advantages, our
solutions enable customers to also increase market share, enhance their
competitive advantage and deliver on their promises to their customers.
RHYTHM SUITE
Our RHYTHM suite of integrated software products principally includes
solutions for supply chain management, customer management, product lifecycle
management, inter-process planning and strategic planning that allow companies
to manage customer relationships, accelerate product innovation and synchronize
supply chain processes across all vendors and suppliers.
SUPPLY CHAIN MANAGEMENT. Our supply chain management solution is designed
to achieve operational excellence throughout a customer's extended supply chain.
This solution is composed of three sub-processes:
- Demand Planning. Demand planning analyzes customers' buying patterns
and develops aggregate, collaborative forecasts. Demand planning feeds into
the supply planning process, and subsequently the demand fulfillment
process. Demand planning involves long-term, intermediate-term and
short-term time horizons.
- Supply Planning. Supply planning optimally positions enterprise
resources to meet demand. This is a planning-level sub-process that spans
the strategic and tactical supply-planning processes. Long-term planning,
inventory planning, distribution planning, collaborative procurement,
transportation planning and supply allocation are all part of this
sub-process.
- Demand Fulfillment. Demand fulfillment provides fast, accurate and
reliable delivery date responses to customer orders. Demand fulfillment is
primarily an execution level sub-process that includes order capturing,
customer verification, order promising, backlog management and order
fulfillment.
Available extensions to our supply chain management solution include
products for data warehousing and reporting capabilities as well as
Internet-based collaboration tools that enable an enterprise and its trading
partners to share and collaborate on demand forecasts and procurement
requirements.
CUSTOMER MANAGEMENT. Our customer management solutions enable increased
customer intimacy and improved business process effectiveness. These solutions
are designed to improve customer satisfaction and maximize return on marketing,
sales and customer service investments. Our customer management solutions span
the following sub-processes:
- Marketing. Marketing identifies, segments and profiles customers,
delivering personalized marketing content and creating purchasing intent
through customized marketing offers that best match customer needs.
- Commerce. Commerce configures, prices and executes sales
transactions -- either directly or through indirect channels -- and
provides real time order fulfillment.
- Customer Care. Customer care sustains long-term customer loyalty
through high-quality customer interaction, service and maintenance
programs, while lowering overall service expenses and assets deployed.
PRODUCT LIFECYCLE MANAGEMENT. Our product lifecycle management solutions
consist of several modules that span all the major phases in the typical product
development and product lifecycle processes, from early concept definition,
through development, test and launch, to product phase-out and replacement.
These solutions plan and optimize product portfolios based on financial
objectives, resource constraints, account supply chain data and other product
development systems. They provide integrated information about product
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lifecycles, demand forecasts, marketing efforts, production capabilities,
development time and resource bottlenecks.
INTER-PROCESS PLANNING. Our inter-process planning solutions balance
resource requirements among the supply chain management, customer management and
product life cycle management processes to achieve enterprise-wide efficiency
and responsiveness.
STRATEGIC PLANNING. Our strategic planning solutions 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 designed for use in understanding the financial impact of
decisions, monitoring key metrics, reviewing periodic strategic plans or
optimizing the supply chain when major changes occur such as mergers or
divestitures.
TRADEMATRIX SERVICES AND SOLUTIONS
TradeMatrix is an intelligent Internet business platform that offers
value-added services tailored for buyers, sellers, designers, service providers
and end-customers spanning multiple digital marketplaces. TradeMatrix offers a
full breadth of services that include planning, procurement, commerce,
fulfillment, customer care, retail, strategic sourcing and product development.
Its web site is www.tradematrix.com. TradeMatrix uniquely leverages our advanced
optimization and execution capabilities to improve decision-making across these
multiple digital marketplaces. We believe that TradeMatrix will be unique in its
ability to intuitively handle diverse workflows and market mechanisms that will
allow it to become a one-stop destination for many dynamic trading activities.
TradeMatrix will enable buyers to procure both direct and indirect materials,
provide sellers with services to expand market presence and enhance brand
management, offer designer services focused on product development to reduce
time-to-market, and provide value-added service providers with tools to enhance
customer relationships. TradeMatrix is built on open standards, enabling the
participation of leading marketplace partners and technologies. The following
are some of the services that TradeMatrix currently offers.
- TradeMatrix Planning Solution enables companies to forecast demand and
optimally position enterprise resources to meet market demands.
TradeMatrix Planning Solutions are composed of various individual
services that can be combined to form a comprehensive solution. These
services encompass demand management, inventory planning, master planning
and replenishment planning workflows.
- TradeMatrix Procurement Service is a hosted procurement service that
enables users to reduce the cost of purchasing and procuring labor, while
lowering inventory and decreasing time-to-market for new products.
TradeMatrixes' hosted eProcurement solution addresses industry-specific
procurement needs from qualification through sourcing, ordering,
monitoring, reporting and analysis. The TradeMatrix solution is
characterized by a thorough understanding of industry-specific business
processes and workflows and supports both direct and indirect
procurement.
- TradeMatrix Commerce Service enables companies to proactively manage
customer interactions across the entire customer lifecycle, including
relationships within marketing, selling, customer collaboration, order
processing and order monitoring. Through Commerce Service, companies can
create targeted marketing campaigns, personalize customer interactions,
facilitate all elements of e-commerce transactions, make real time
multi-enterprise order fulfillment promises and provide order tracking
and tracing.
- TradeMatrix Fulfillment Solution optimally responds to customer requests
and manages multi-enterprise customer orders, thereby improving customer
service. Our Fulfillment Solution encompasses the entire process,
starting from when the order is taken from a customer to when the product
arrives at the customer's door. The Fulfillment Solution prioritizes the
promise made to the customer, while optimally sourcing the inventory and
coordinating delivery to the customer.
- TradeMatrix Customer Care Solution allows participants' customers to
access information quickly, resolve problems and receive support
instantly. Customer Care leverages online customer support from
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automated help desks and call centers and allows customers to research,
order and schedule service. Companies can collaborate with customers to
schedule service, track and fulfill returns and exchanges and manage and
maintain a spare and replacement part inventory.
- TradeMatrix Retail Solution gives companies an opportunity to capture
more demand, minimize product obsolescence and maximize storage
effectiveness. Retail Solutions addresses the complexities of retail,
whether online or brick-and-mortar. Retailers of all kinds can more
effectively determine what products to launch and promote, plan and shape
demand for these products, replenish stock as needed, and analyze
performance (such as promotions). Retailers can use these services to
collaborate and trade with vendors, distributors and packers.
- TradeMatrix Strategic Sourcing Solution allows companies to source
components for design or manufacturing based on preferred vendor
relationships, vendor capabilities or vendor consolidation. These
capabilities are offered through our relationship with Aspect Development
and other content providers. We have recently announced agreements to
acquire Aspect Development and SupplyBase.
- TradeMatrix Product Development Solution allows companies to accelerate
the overall product development process. TradeMatrix provides a secure
and scalable Internet-based collaboration platform to enable rapid
communication among design partners, from the initial planning phase
through sourcing, development and into production. Through Product
Development Solutions, companies can capture and prioritize customer
requirements, secure multi-enterprise design collaboration and project
coordination, search vendor and component databases, optimize product
launch and integrate with key supply chain planning systems.
PRODUCT DEVELOPMENT
We originally introduced our RHYTHM software in 1992 and have subsequently
added a number of new products and product enhancements. We have adopted a
strategy of periodically reinventing our products in order to meet our
customers' needs, and we strive to ensure that each new generation of RHYTHM is
compatible with previous releases. We focus our ongoing product development
efforts on broadening the functionality of our RHYTHM suite of products and
services to more fully address various eBusiness initiatives. The RHYTHM suite
is the engine underlying the TradeMatrix platform. These services and solutions
are evolving and have been developed using an intelligent eBusiness architecture
that is (1) modular, so that components may be easily substituted; (2) flexible,
to quickly respond to changing business conditions; (3) open, to support
multiple protocols; and (4) scalable, to the handle the large volumes of queries
and transactions that are typical in an eBusiness environment.
Our internal development staff has developed the RHYTHM products and
TradeMatrix platform through small project teams focused on independent
components of the software under development. We maintain product release
planning procedures to ensure integration, testing and version control among the
different project development teams. We maintain development centers in
Bangalore and Mumbai, India; Cambridge, Massachusetts; Austin and Dallas, Texas;
Parsippany, New Jersey; San Francisco, California; Ulvila, Finland; and Toronto,
Ontario.
Research and development expenses, while significant, have declined
gradually as a percentage of revenues in recent periods as we have continued to
focus on development of new and enhanced products. Research and development
expenses were $132.3 million in 1999, representing 23.2% of total revenues,
$94.2 million in 1998, representing 25.5% of total revenues, and $57.4 million
in 1997, representing 25.9% of total revenues.
CUSTOMER SERVICE AND SUPPORT
We believe 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. We have expanded our service and support centers geographically and now
have support centers across the U.S. and in Australia, Belgium, Brazil, Canada,
Denmark, France, Germany, India, Japan,
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Mexico, Singapore, South Africa, Taiwan and the United Kingdom. Accordingly, we
are committed to continue recruiting and maintaining a high-quality technical
support team. Our customer service and support activities consist of the
following:
Maintenance and Product Updates. We provide ongoing product support
services under our license agreements. Maintenance contracts are typically sold
to customers at the time of the initial RHYTHM license and may be renewed for
additional periods. Under our maintenance agreements with our customers, we
provide, without additional charge, product updates and enhancements to the
RHYTHM products previously purchased by the customer. 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 us at market
prices. Ongoing support and maintenance services are provided on up to a
seven-day week, 24-hour day basis.
Hosting Services. Our TradeMatrix platform delivers eBusiness applications
and technology across a network, hosted in a centralized, managed environment.
With a simple browser and network connection, companies can access TradeMatrix
offerings. While the customer typically owns the applications, we may own or
outsource the hardware, manage the application and server architecture, maintain
and upgrade software and provide customer support. Our TradeMatrix platform
provides companies with immediate access to the benefits of our dynamic
eBusiness solutions, allows companies to more efficiently access applications by
reducing customers' needs to build and maintain complex technology, and
leverages our complete software architecture and infrastructure for supporting
applications hosting.
Consulting. We offer our customers on-site consulting services aimed at
assisting in the implementation of our solutions and services and integration
with the customers' existing systems. We receive hourly, daily or structured
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. We also leverage the use
of third party consulting firms to more rapidly penetrate our target market.
Training. We offer an intensive education training program for our
customers and our third-party implementation providers. Classes are offered at
in-house facilities at our offices and customer locations. These classes focus
on supply chain management principles as well as the implementation and use of
RHYTHM products.
SALES AND MARKETING
We market our software and services primarily through our direct sales
organization augmented by other sales channels, including eBusiness providers
and systems consulting and integration firms. At December 31, 1999, we conducted
sales and other related activities through several offices in the U.S. and
additional offices in Australia, Belgium, Brazil, Canada, Denmark, Finland,
France, Germany, India, Italy, Japan, Korea, Mexico, Singapore, South Africa,
Taiwan and the United Kingdom. Our direct sales organization consists of
regionally based sales representatives and sales engineers supported by
personnel with experience in the aerospace and defense, automotive, chemicals,
durable and non-durable consumer goods, high-tech hardware, software and
electronics, industrial equipment, logistics, metals, pulp and paper,
pharmaceuticals, retail, semiconductors, textiles and apparel and
telecommunications industries.
We currently have joint marketing agreements with a number of eBusiness
providers, including IBM and Siebel, and several systems consulting and
integration firms, including PricewaterhouseCoopers. 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
generally vary from zero to 30% of the sales price of the license. By using
these indirect sales channels, we seek to capitalize on the installed base of
other eBusiness providers and obtain favorable product recommendations from
systems consulting and integration firms, thereby increasing our products'
market coverage. Furthermore, we have negotiated contracts with other software
providers, where these companies can offer their products to customers through
our TradeMatrix platform. We will receive a specified commission on those sales
while the other provider will receive license revenues. There can be no
assurance that any of these joint marketing and development agreements will be
beneficial to us or that these relationships will be sustained.
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CUSTOMERS
As of December 31, 1999, we had licensed RHYTHM products to over 700
customers since inception. The following is a partial list of companies that
have licensed more than $1.0 million of RHYTHM products:
AUTOMOTIVE/INDUSTRIAL/
CHEMICAL
Caterpillar
Dresser Rand
Eaton
Ford
GE Plastics
GM/EDS
Navistar
Occidental Chemical
Polimeri
Renault
United Technologies
Yazaki
HIGH TECH/ELECTRONICS/
TELECOM
Acer
Altera
Apple
Applied Materials
AST Research
Bell Microproducts
Canon
Casio
Celestica
Compaq
Dallas Semiconductor
Dell
EMC
Ericsson
Fujitsu
Gateway 2000
Hewlett-Packard
IBM
Integrated Device
Technologies
Iomega
Lucent Technologies
Matsushita
Maxtor
Microage
Micron Electronics
Motorola
NEC
Nokia
Nortel
Philips
Quantum
Samsung
Seagate
Seiko Epson
Silicon Graphics
ST Microelectronics
Siemens
Sun Microsystems
Texas Instruments
Thomson
Toshiba
United Microelectronics
Tech Data
Tokyo Electron
Xircom
CONSUMER/GOODS/RETAIL
Alliant Foodservice
Barnes & Noble
British American Tobacco
Delta Faucet
Dekor
Dobbs International
Dole
E&J Gallo Winery
Frito-Lay
Haworth
Herman Miller
LFI
Lipton
3M
Nike
Polo Ralph Lauren
Russell
Sara Lee Knit Products
Sherwin Williams
Steelcase
VF Corporation
Whirlpool
LOGISTICS
Con-Way
Mark VII
Ryder Logistics
United Parcel Service
MEDICAL/PHARMACEUTICAL
Abbott Laboratories
Bristol-Myers Squibb
Johnson & Johnson Medical
Meditronic
Merck
Tyco Healthcare
METALS
Bethlehem Steel
British Steel
Iscor Limited
LTV
National Steel
Sidmar
Timken
Weirton
US Steel
Vacuumschmelze
PULP AND PAPER
CSS Industries
Fletcher Challenge
Sonoco
OTHER
GE Capital
KPMG
Newport News Shipbuilding
We provide our RHYTHM software products to customers under non-exclusive,
non-transferable license agreements. As is customary in the software industry,
in order to protect our intellectual property rights, we do not sell or transfer
the title to our products under these license agreements. Under our standard
form of license agreement, license software may be used solely for the
customer's internal operations.
Under our TradeMatrix platform the software applications reside in one
location, and from any client computer the end users automatically gain access
to the most current business data and applications. Our TradeMatrix platform is
based on an application service provider architecture, which is comprised of
data
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servers, application servers and computers or devices running a web browser.
Internet computing centralizes business information and applications, allowing
them to be managed more effectively and efficiently.
COMPETITION
The markets in which we operate are highly competitive. Our competitors are
diverse and offer a variety of solutions directed at various segments of the
supply chain as well as the enterprise as a whole. Competitors include:
- vendors establishing electronic marketplaces and indirect procurement
capabilities, such as Ariba and Commerce One;
- enterprise resource application software vendors such as SAP AG,
PeopleSoft Inc., Oracle Corporation and Baan Company, N.V., each of which
currently offers sophisticated enterprise resource planning, or ERP,
solutions that currently or may in the future incorporate applications
competitive with our products;
- supply chain software vendors including Manugistics Group, Inc. and
Logility, Inc.;
- other business application software vendors which may broaden their
product offerings by internally developing, or by acquiring or partnering
with independent developers of, advanced planning and scheduling
software;
- internal development efforts by corporate information technology
departments; and
- companies offering standardized or customized products for mainframe
and/or mid-range computer systems.
In connection with specific customer solicitations, a number of ERP vendors
have from time to time jointly marketed our products as a complement to their
own systems. We believe that as our market share increases, and as the ranges of
products offered by us and these ERP vendors expand and increasingly overlap,
relationships which were cooperative in the past will become more competitive.
We believe that additional ERP vendors are focusing significant resources on
increasing the functionality of their own planning and scheduling modules, and
at least two other ERP vendors have acquired independent developers of advanced
planning and scheduling software which compete with RHYTHM.
PROPRIETARY RIGHTS AND LICENSES
We regard our trademarks, copyrights, trade secrets, technology and other
proprietary rights as critical to our business. To protect our proprietary
rights, we primarily rely on a combination of copyright, trademark and trade
secret laws, confidentiality procedures, license agreements and contractual
provisions. We license our software products in object code (machine-readable)
format to customers under license agreements and we do not sell or otherwise
transfer title of our software products to our customers. Our non-exclusive,
non-transferable license agreements generally allow the use of our software
products solely by the customer for internal purposes without the right to
sublicense or transfer our software products.
Trademarks are important to our business as we use them in our marketing
and promotional activities as well as with the delivery of our software
products. Our registered trademarks include i2, i2 Technologies and design,
RHYTHM, RHYTHMLINK, Global Supply Chain Management, MOA and PLANET. We have
filed trademark applications in the U.S. and numerous foreign countries for
TradeMatrix, TradeMatrix.com, Rhythm Transportation Enabled Planning,
Heterocasting, EBPO, Electronic Business Process Optimization, FreightMatrix,
FreightMatrix.com, eServiceMatrix, eserviceMatrix.com, SoftgoodsMatrix,
SoftgoodsMatrix.com, AutoMatrix, AutoMatrix.com and B2A.
We own 13 U.S. patents which predominantly relate to planning systems and
interactive report generation. These patents expire at various times through
2018. We also depend on trade secrets and proprietary know-how for certain
unpatented aspects of our business. To protect our proprietary information, we
enter into confidentiality agreements with our employees, consultants and
licensees, and generally control
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access to and distribution of our proprietary information. From time to time we
resell some software that we license from third parties.
EMPLOYEES
As of December 31, 1999, we had approximately 2,800 full-time employees,
including approximately 970 primarily engaged in research and development
activities and approximately 730 engaged in sales and marketing activities. Our
future success depends in significant part upon the continued service of our key
technical and senior management personnel and our continuing ability to attract
and retain highly qualified technical and managerial personnel. None of our
employees are represented by collective bargaining units and we have never
experienced a work stoppage. We believe that employee relations are very good.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating our company and our business.
Our financial results may vary significantly from quarter-to-quarter and we
may fail to meet expectations, which may negatively impact the price of our
stock. Our operating results have varied significantly from quarter-to-quarter
in the past, and we expect our operating results to continue to vary from
quarter-to-quarter in the future, due to a variety of factors, many of which are
outside of our control. Factors that could affect quarterly operating results
include:
- volume and timing of customer orders;
- length of the sales cycle;
- customer budget constraints;
- announcement or introduction of new products or product enhancements by
us or our competitors;
- changes in prices of our products and those of our competitors;
- foreign currency exchange rate fluctuations;
- market acceptance of new products;
- mix of direct and indirect sales;
- changes in our strategic relationships; and
- changes in our business strategy.
Furthermore, customers may defer or cancel their purchases of products if
they experience a downturn in their business or if there is a downturn in the
general economy. We will continue to determine our investment and expense levels
based on expected future revenues. A significant portion of our expenses is not
variable in the short term, and we cannot reduce our costs quickly to respond to
decreases in revenues. Therefore, if revenues are below expectations, this
shortfall is likely to adversely and disproportionately affect our operating
results. In addition, we may reduce our prices or accelerate investment in
research and development efforts in response to competitive pressures or to
pursue new market opportunities. Any of these activities may further limit our
ability to adjust spending in response to revenue fluctuations. Revenues may not
grow at historical rates in future periods, or they may not grow at all.
Accordingly, we may not maintain positive operating margins in future quarters.
Any of these factors could cause our operating results to be below the
expectations of public market analysts and investors, and the price of our
common stock may fall.
We anticipate seasonal fluctuations in revenues, which may cause volatility
in our stock price. The market price of our common stock has been volatile in
the past, and the market price of our common stock may be volatile in the
future. Historically, our revenues have tended to be strongest in the fourth
quarter of the year. We believe that our seasonality is due to the calendar year
budgeting cycles of many of our customers and our compensation policy that
rewards sales personnel for achieving annual revenue quotas. In future
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periods, these seasonal trends may cause our quarter-to-quarter operating
results to vary, which may result in failing to meet the expectations of public
market analysts and investors.
We depend on significant individual license sales. Therefore, our operating
results for a given period could suffer serious harm if we fail to close the
large sales we targeted for that period. We generally derive a significant
portion of revenues in each quarter from a small number of relatively large
sales. For example, in each quarter of 1999, in the last three quarters of 1998
and in each quarter of 1997, one or more customers individually accounted for at
least 10% of our total software license revenues in each respective quarter.
Moreover, due to customer purchasing patterns, we typically realize a
significant portion of our software license revenues in the last few weeks of a
quarter. As a result, we are subject to significant variations in license
revenues and results of operations if we incur any delays in customer orders. If
in any future period we fail to close one or more substantial license sales that
we have targeted to close in that period, this failure could seriously harm our
operating results for that period.
We may not remain competitive, and increased competition could seriously
harm our business. Our competitors offer a variety of eBusiness including supply
chain and other core processes. These competitors include:
- vendors establishing electronic marketplaces and indirect procurement
capabilities, such as Ariba and Commerce One;
- enterprise resource application software vendors such as SAP AG,
PeopleSoft Inc., Oracle Corporation and Baan Company, N.V., each of which
currently offers sophisticated enterprise resource planning, or ERP,
solutions that currently or may in the future incorporate applications
competitive with our products;
- supply chain software vendors including Manugistics Group, Inc. and
Logility, Inc.;
- other business application software vendors which may broaden their
product offerings by internally developing, or by acquiring or partnering
with independent developers of, advanced planning and scheduling
software;
- internal development efforts by corporate information technology
departments; and
- companies offering standardized or customized products for mainframe
and/or mid-range computer systems.
Historically, a number of enterprise resource planning vendors have from
time to time 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, our relationships with these vendors have and may continue to become
more competitive. We believe that enterprise resource planning vendors are
focusing significant resources on establishing and increasing the functionality
of their own eBusiness solutions, and other enterprise resource planning vendors
have recently acquired independent developers of advanced planning and
scheduling software which compete with RHYTHM.
Relative to us, many of our competitors have:
- longer operating histories;
- significantly greater financial, technical, marketing and other
resources;
- greater name recognition;
- a broader range of products to offer; and
- a larger installed base of customers.
Current and potential competitors have established, or may establish,
cooperative relationships among themselves or with third parties to enhance
their products, which may result in increased competition. In
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addition, we expect to experience increasing price competition as we compete for
market share, and we may not be able to compete successfully with our existing
or new competitors. If we experience increased competition, substantial harm may
result to our business, operating results and financial condition.
Our strategy of establishing and promoting our TradeMatrix is unproven and
may be unsuccessful. As part of our business strategy, we are offering the
TradeMatrix platform to trading community participants in digital marketplaces.
This strategy is unproven, and currently we are providing only a limited portion
of our intended TradeMatrix services in only a small number of digital trading
communities. We have limited experience developing and operating digital
marketplaces, and we cannot be certain that these trading communities will be
operated effectively, that enterprises will join and remain in these trading
communities, that we will develop and provide successfully all intended
TradeMatrix services, or that we will generate significant revenues from these
services. To date, we have not generated significant revenues from these
services. If this business strategy is flawed, or if we are unable to execute
effectively, our business, operating results and financial condition could be
substantially harmed.
In addition, we expect to rely on third parties' efforts to promote our
TradeMatrix platform. Because our revenues from these sources are likely to be
largely based on subscriptions to or utilization of our digital marketplaces,
any failure by these third parties to successfully promote our TradeMatrix
platform, or any reluctance to participate in our digital marketplaces on the
part of suppliers, manufacturers, distributors, logistics providers or
customers, could harm our business, results of operations and financial
condition.
Rapid growth in our operations could continue to strain our managerial and
operational resources. We have experienced rapid growth. Revenues have increased
to $571.1 million in 1999 from $369.2 million in 1998 and from $221.8 million in
1997. Our employee count has increased to approximately 2,800 at December 31,
1999, from approximately 2,200 at December 31, 1998, and from approximately
1,200 at December 31, 1997. We have also increased the scope of our operating
and financial systems and the geographic distribution of our operations and
customers. This growth has strained our management and operations, and they will
continue to be strained if rapid growth continues. Our officers and other key
employees will need to implement and improve our operational, customer support
and financial control systems and effectively expand, train and manage our
employee base. Further, we expect that we will be required to manage an
increasing number of relationships with various customers and other third
parties. We may not be able to manage future expansion successfully, and our
inability to do so would harm our business, operating results and financial
condition.
Any decrease in demand for our RHYTHM suite of products and services could
significantly reduce our revenues. We derive substantially all of our revenues
from licenses of our RHYTHM suite of products and related services.
RHYTHM-related revenues, including maintenance and consulting contracts, will
continue to account for substantially all of our revenues for the foreseeable
future. As a result, our future operating results will depend upon continued
market acceptance of RHYTHM and enhancements thereto. However, 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 our business,
operating results and financial condition.
We are investing significant resources in developing and marketing our
intelligent eBusiness solutions. The market for these solutions is new and
evolving, and, if this market does not develop as we anticipate, or if we are
unable to develop acceptable solutions, serious harm would result to our
business. We currently derive a substantial portion of our revenues from
licenses for decision-support software products associated with supply chain
management software and related services. However, we are investing significant
resources in further developing and marketing enhanced products and services to
facilitate eBusiness over public and private networks. For the first few months
after we introduce new products and services, the demand for and market
acceptance of those products and services are subject to a high level of
uncertainty, especially where acquisition of our products or services requires a
large capital commitment or other significant commitment of resources. Adoption
of eBusiness 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
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and services involve a new approach to the method of conducting business, and,
as a result, intensive marketing and sales efforts may be necessary to educate
prospective customers regarding the uses and benefits of these products and
services in order to generate demand. The market for this broader functionality
may not develop, competitors may develop superior products and services, or we
may not develop acceptable solutions to address this functionality. Any one of
these events could seriously harm our business, operating results and financial
condition.
Rapid adoption of our TradeMatrix platforms could reduce our software
licensing revenues. Our current revenue model is mainly focused on license
revenue, with additional revenues earned from consulting, maintenance and
training. The TradeMatrix platform offers a more diverse and expansive set of
service offerings that will generate additional revenue streams for hosting,
transaction processing and set-up fees. The TradeMatrix pricing model differs
from our historical model of deriving revenues from licenses of the RHYTHM suite
of products, which we largely recognize upon executing a contract and delivering
software. Under the TradeMatrix model, up-front license fees may be less
substantial and the fees derived from subscriptions to our utilization of the
digital marketplace services may be more robust. We can not predict the rate at
which our customers will adopt the TradeMatrix platform or whether these
expanded service offerings will adversely impact our license revenues.
We do not have significant experience in hosting electronic marketplaces
and may not adequately predict the volume of traffic. If the volume of traffic
on the web site for our TradeMatrix platform increases, the platform may
experience slower response times or other problems. We will rely on several
third parties to expand, manage and maintain the necessary computer equipment,
software, Internet and telecommunication services required for efficient access
to TradeMatrix as demand increases. Any delays in response time or performance
problems could cause TradeMatrix users to perceive this service as not
functioning properly and therefore cause them to reduce or discontinue use of
our products and services.
Our TradeMatrix platform may experience performance problems or delays as a
result of service interruptions. We must protect our network infrastructure and
equipment against damage from human error, physical or electronic security
breaches, power loss and other facility failures, fire, earthquake, flood,
telecommunications failure, sabotage, vandalism and other similar events.
Despite precautions we have taken, a natural disaster or other unanticipated
problems at our data centers could result in interruptions in our services or
significant damage to equipment supporting the platform. In addition, failure of
any of our telecommunications providers to provide consistent data
communications capacity could result in interruptions in our services. Each of
these could experience outages, delays and other difficulties due to system
failures unrelated to our systems. Any damage to or failure of our systems or
service providers could result in reductions in, or terminations of, services
supplied to our customers, which could have a material adverse effect on our
business.
If we publish inaccurate catalog content data, our business could
suffer. The accurate publication of catalog content is critical to our
customers' businesses. Our TradeMatrix platform contains content management
tools that help suppliers manage the collection and publication of catalog
content. Any defects or errors in these tools or the failure of these tools to
accurately publish catalog content could deter businesses from participating in
the TradeMatrix marketplaces, damage our business reputation, harm our ability
to win new customers and potentially expose us to legal liability. In addition,
from time to time some of our customers may submit inaccurate pricing or other
inaccurate catalog information. Even though such inaccuracies are not caused by
our work and are not within our control, such inaccuracies could deter current
and potential customers from using our products and could harm our business,
operating results and financial condition.
The markets in which we compete experience rapid technological change. If
we do not respond to the technological advances we could seriously harm our
business. Enterprises are increasing their focus on decision-support solutions
for eBusiness challenges. As a result, they are requiring their application
software vendors to provide greater levels of functionality and broader product
offerings. Moreover, competitors continue to make rapid technological advances
in computer hardware and software technology and frequently introduce new
products, services and enhancements. We must continue to enhance our current
product line and develop and introduce new products and services that keep pace
with the technological developments of
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our competitors. We must also satisfy increasingly sophisticated customer
requirements. If we cannot successfully respond to the technological advances of
others, or if our new products or product enhancements and services do not
achieve market acceptance, these events could seriously harm our business,
operating results and financial condition.
If use of the Internet for commerce and communication does not increase as
we anticipate, our business will suffer. We are offering new and enhanced
products and services, which depend on increased acceptance and use of the
Internet as a medium for commerce and communication. Rapid growth in the use of
the Internet is a recent phenomenon. As a result, acceptance and use may not
continue to develop at historical rates, and a sufficiently broad base of
business customers may not adopt or continue to use the Internet as a medium of
commerce. Demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty, and there
exist few proven services and products.
Our business could be seriously harmed if:
- use of the Internet and other online services does not continue to
increase or increases more slowly than expected;
- the necessary communication and computer network technology underlying
the Internet and other online services does not effectively support any
expansion that may occur;
- new standards and protocols are not developed or adopted in a timely
manner; or
- for any other reason -- such as concerns about security, reliability,
cost, ease of use, accessibility or quality of service -- the Internet
does not create a viable commercial marketplace, inhibiting the
development of electronic commerce and reducing the need for and
desirability of our products and services.
Future regulation of the Internet may slow its growth, resulting in
decreased demand for our products and services and increased costs of doing
business. Due to increasing popularity and use of the Internet, it is possible
that state and federal regulators could adopt laws and regulations that impose
additional burdens on companies conducting business online. For example, the
growth and development of the market for Internet-based services may prompt
calls for more stringent consumer protection laws. Moreover, the applicability
to the Internet of existing laws in various jurisdictions governing issues such
as property ownership, sales tax, libel and personal privacy is uncertain and
may take years to resolve. Any new legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could decrease the expansion of the Internet, causing
our costs to increase and our growth to be harmed.
Concerns that our products do not adequately protect the privacy of
consumers could inhibit sales of our products. One of the principal features of
our customer management software applications is the ability to develop and
maintain profiles of consumers for use by businesses. Typically, these products
capture profile information when consumers, business customers and employees
visit a web site and volunteer information in response to survey questions
concerning their backgrounds, interests and preferences. Our products augment
these profiles over time by collecting usage data. Although we have designed our
customer management products 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 resist providing the personal data necessary to support this
profiling capability. If we cannot adequately address consumers' privacy
concerns, these concerns could seriously harm our business, financial condition
and operating results.
If our encryption technology fails to ensure the security of our customers'
online transactions, serious harm to our business could result. The secure
exchange of value and confidential information over public networks is a
significant concern of consumers engaging in online transactions and
interaction. Our customer management software applications 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
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algorithms that these applications use to protect customer transaction data. If
any compromise or breach were to occur, it could seriously harm our business,
financial condition and operating results.
We may not successfully integrate or realize the intended benefits of our
recent acquisitions. We acquired InterTrans Logistics Solutions Limited, or
ITLS, in April 1998 and SMART in July 1999. In addition, we have acquired other
businesses and products to help broaden and strengthen our product portfolio.
The success of these acquisitions will depend primarily on our ability to:
- retain, motivate and integrate the acquired personnel;
- integrate multiple information systems; and
- integrate acquired software with our existing products and services.
We may encounter difficulties in integrating our operations and products
with those of ITLS, SMART and others. We may not realize the benefits that we
anticipated when we made these acquisitions. Our failure to successfully
integrate our operations and products with those of ITLS, SMART and others could
seriously harm our business, operating results and financial condition.
We may make future acquisitions or enter into joint ventures that may not
be successful. In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. In furtherance of this strategy, in March 2000 we entered
into agreements to acquire Aspect and SupplyBase. 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. Future acquisitions could cause 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 that could seriously harm our financial condition
and operating results. We expect that we will be required to amortize a
significant amount of goodwill and write-off significant amounts of in-process
research and development and other acquisition-related expenses if we complete
the pending Aspect and SupplyBase acquisitions. Further, we may not be able to
integrate any acquired business, product or technology with our existing
operations or train, retain and motivate personnel from the acquired business.
If we are unable to fully integrate an acquired business, product or technology
or train, retain and motivate personnel from the acquired business, we may not
receive the intended benefits of that acquisition.
We face risks associated with international sales and operations that could
harm our company. Our international operations are subject to risks inherent in
international business activities. In addition, we may expand our international
operations in the future which would increase our exposure to these risks. The
risks we face internationally include:
- difficulties and costs of 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;
- political instability; and
- general economic conditions in international markets.
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Changes in the value of the U.S. Dollar, as compared to the currencies of
foreign countries where we transact business, could harm our operating
results. To date, our international revenues have been denominated primarily in
U.S. dollars. The majority of our international expenses and some revenues have
been denominated in currencies other than the U.S. dollar. Therefore, changes in
the value of the U.S. dollar as compared to these other currencies may adversely
affect our operating results. As our international operations expand, we will
use an increasing number of foreign currencies, causing our exposure to currency
exchange rate fluctuations to increase. Although we have implemented limited
hedging programs to mitigate our exposure to currency fluctuations, currency
exchange rate fluctuations have caused, and will continue to cause, currency
transaction gains and losses. While these transactional gains and losses have
not been material to date, they may harm our business, results of operations or
financial condition in the future.
We depend on our strategic partners and other third parties. If we fail to
derive benefits from our existing and future strategic relationships, our
business will suffer. From time to time, we have collaborated with other
companies, including IBM and PricewaterhouseCoopers, in areas such as product
development, marketing, distribution and implementation. Maintaining these and
other relationships is a meaningful part of our business strategy. However, some
of our current and potential strategic partners are either actual or potential
competitors, which may impair the viability of these relationships. In addition,
some of our relationships have failed to meet expectations and may fail to meet
expectations in the future. We may not be able to enter into successful new
strategic relationships in the future.
The loss of any of our key personnel or our failure to attract additional
personnel could seriously harm our company. We rely upon the continued service
of a relatively small number of key technical and senior management personnel,
particularly Sanjiv Sidhu, our chairman and chief executive officer. Our future
success depends on retaining our key employees and our continuing ability to
attract, train and retain other highly qualified technical and managerial
personnel. Very few of our key technical personnel and none of our senior
management personnel are bound by employment agreements. As a result, our
employees could leave with little or no prior notice. In the past, we have had
difficulty recruiting qualified personnel. We may not be able to attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. Our loss of any of our key technical and senior management
personnel or our inability to attract, train and retain additional qualified
personnel could seriously harm our business, operating results and financial
condition.
If we fail to adequately protect our intellectual property rights or face a
claim of intellectual property infringement by a third party, we could lose our
intellectual property rights or be liable for significant damages. We rely
primarily on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect our proprietary
rights. In addition, we generally license RHYTHM products to end users in object
code (machine-readable) format, and our 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, these measures
afford only limited protection. Unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that we regard as proprietary.
Although we believe software piracy may be a problem, we are not able to
determine the extent to which piracy of our software products exists. Policing
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent misappropriation of our technology. This is
particularly true in foreign countries where the laws may not protect
proprietary rights to the same extent as the laws of the United States and may
not provide us with an effective remedy against piracy.
As the number of products and competitors continues to grow, the
functionality of products in different industry segments is increasingly
overlapping. As a result, we increasingly may be subject to claims of
intellectual property infringement. Although we are not aware that any of our
products infringe upon the proprietary rights of third parties, third parties
may claim infringement by us with respect to current or future products. Any
infringement claims, with or without merit, could be time-consuming, result in
costly litigation or damages, cause product shipment delays or the loss or
deferral of sales, or require us to enter into royalty or licensing agreements.
If we enter into royalty or licensing agreements in settlement of any litigation
or claims, these agreements may not be on terms acceptable to us. Unfavorable
royalty and licensing agreements could seriously harm our business, operating
results and financial condition.
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We resell some software that we license from third parties. Although we may
continue this practice, third-party software licenses may not continue to be
available to us on commercially reasonable terms. Our inability to maintain or
obtain any of these software licenses will delay or reduce our product shipments
until we can identify, license and integrate equivalent software. Any loss of
these licenses or delay or reduction in product shipments could harm our
business, operating results and financial condition.
Our products' failure to remain compatible with existing and new computers
and software operating systems would seriously harm our business. Our RHYTHM
software can operate on hardware platforms from Digital Equipment,
Hewlett-Packard, IBM and Sun Microsystems and operating systems from Sun
Microsystems and Microsoft. RHYTHM can access data from most widely-used
structured query language databases, including Informix, Oracle and Sybase. If
additional hardware or software platforms gain significant market acceptance, we
may be required to attempt to adapt RHYTHM to those platforms in order to remain
competitive. However, those platforms may not be architecturally compatible with
RHYTHM's software product design, and we may not be able to adapt RHYTHM to
those additional platforms on a timely basis, or at all. Any failure to maintain
compatibility with existing platforms or to adapt to new platforms that achieve
significant market acceptance would seriously harm our business, operating
results and financial condition.
Our software is complex and may contain undetected errors. Our software
programs are complex and may contain undetected errors or "bugs." Although we
conduct extensive testing, we may not discover bugs until our customers install
and use a given product or until the volume of services that a product provides
increases. On occasion, we have experienced delays in the scheduled introduction
of new and enhanced products because of bugs. Undetected errors could result in
loss of customers or reputation, adverse publicity, loss of revenues, delay in
market acceptance, diversion of development resources, increased insurance costs
or claims against us by customers, any of which could seriously harm our
business, operating results and financial condition.
Releases and problems with new products may cause purchasing delays, which
would harm our revenues. Customers may delay their purchasing decisions in
anticipation of our new or enhanced products, or products of competitors. Delays
in customer purchasing decisions could seriously harm our business and operating
results. Moreover, significant delays in the general availability of new
releases, significant problems in the installation or implementation of new
releases, or customer dissatisfaction with new releases could seriously harm our
business, operating results and financial condition.
Our failure to successfully recruit and retain technical and implementation
personnel could reduce our license revenues or limit the growth of our license
revenues. A shortage of qualified technical sales support personnel could harm
our ability to expand sales and enter into new vertical markets. We will depend
on our trained implementation personnel or those of independent consultants to
implement our products and services. A shortage in the number of trained
implementation personnel could limit our ability to implement our software and
services on a timely and effective basis. Delayed or ineffective implementation
of our software and services may limit our ability to expand our revenues and
may result in customer dissatisfaction and harm to our reputation. Any of these
events could seriously harm our business, operating results and financial
condition.
We may be subject to product liability claims. Our license agreements
typically seek to limit our exposure to product liability claims from our
customers. However, these contract provisions may not preclude all potential
claims. Additionally, our general liability insurance may be inadequate to
protect us from all liabilities that we may face. Product liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. As a result, any claim, whether or not successful, could
harm our reputation and business, operating results and financial condition.
Our executive officers and directors have voting control. Our executive
officers and directors together beneficially own approximately 43% of the total
voting power of our company. Accordingly, these stockholders will be able to
determine the composition of our Board of Directors, will retain the voting
power to approve all matters requiring stockholder approval and will continue to
have significant influence over our affairs.
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<PAGE> 20
Our charter and by-laws have anti-takeover provisions. Provisions of our
Certificate of Incorporation and our Bylaws as well as the Delaware General
Corporation Law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. We are 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 inhibit a non-negotiated merger or other
business combination.
Our stock price historically has been volatile, which may make it more
difficult for you to resell our common stock when you want at prices you find
attractive. The market price of our common stock has been volatile in the past,
and the market price of our common stock may be volatile in the future. The
following factors may significantly affect the market price of the common stock:
- quarterly variations in our results of operations;
- the announcement of new products, product enhancements, joint ventures
and other alliances by us or our competitors;
- technological innovations by us or our 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 the market price of our common stock.
If we are required to register as an investment company, we would become
subject to substantial regulation, which would interfere with our ability to
implement our business plan. We have substantial cash, cash equivalents and
short-term investments. We plan to continue investing these assets in short-term
instruments consistent with prudent cash management policy and not primarily for
the purpose of achieving investment returns. Investment in securities primarily
for the purpose of achieving investment returns could result in our being
classified as an "investment company" under the Investment Company Act of 1940.
The Investment Company Act requires the registration of companies that are
primarily in the business of investing, reinvesting or trading securities or
that fail to meet certain statistical tests regarding their composition of
assets and sources of income, even though they consider themselves not to be
primarily engaged in investing, reinvesting or trading securities. We believe
that we are primarily engaged in a business other than investing, reinvesting or
trading securities and, therefore, are not an investment company within the
meaning of the Investment Company Act. If the Investment Company Act required us
to register as an investment company, we would become subject to substantial
regulation with respect to our capital structure, management, operations, and
transactions with affiliated persons and other matters. Application of the
provisions of the Investment Company Act to us may materially and adversely
affect our business, prospects and operating results.
ITEM 2. PROPERTIES
Our primary offices are located in approximately 180,000 square feet of
space in Dallas, Texas, under a lease expiring in May 2010, and approximately
195,400 square feet of space in Irving, Texas, under leases expiring between
October 2000 and July 2003. We also lease space for our other offices in the
United States, Australia, Belgium, Brazil, Canada, China, Denmark, France,
Germany, India, Italy, Japan, Korea, Mexico, Singapore, South Africa, Sweden,
Taiwan and the United Kingdom. These leases expire at various dates through
2023.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded publicly on the Nasdaq National Market under the
symbol "ITWO." The following table lists the high and low per share sales prices
for our common stock as reported by the Nasdaq National Market for the periods
indicated. On January 14, 2000, our Board of Directors approved a two-for-one
split of our common stock. The stock split was paid as a 100% dividend on
February 17, 2000, to holders of record as of February 3, 2000. All share and
per share amounts included herein have been adjusted to reflect the stock split
as though it had occurred at the beginning of the periods presented.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fourth quarter of 1999..................................... $109.00 $18.69
Third quarter of 1999...................................... 24.19 13.06
Second quarter of 1999..................................... 21.78 8.88
First quarter of 1999...................................... 18.00 11.25
Fourth quarter of 1998..................................... 15.97 4.63
Third quarter of 1998...................................... 21.13 6.32
Second quarter of 1998..................................... 20.00 13.50
First quarter of 1998...................................... 16.41 12.53
</TABLE>
As of March 20, 2000, there were 157,356,216 shares of our common stock
outstanding held by approximately 680 holders of record.
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain any earnings for use in our business and do not
anticipate paying any cash dividends in the foreseeable future. Future
dividends, if any, will be determined by our Board of Directors.
During 1999, we issued an aggregate of 4,190,112 shares of our common stock
to employees pursuant to exercises of stock options (with exercise prices
ranging from $0.0044 to $3.03 per share) under our stock option plans which were
deemed exempt from registration under Section 5 of the Securities Act of 1933 in
reliance upon Rule 701 thereunder. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to, or for sale in connection with, any
distribution thereof and appropriate legends were affixed to the share
certificates issued in each such transaction.
On December 10, 1999, we issued an aggregate principal amount of $350
million of our 5 1/4% convertible subordinated notes due 2006, which were sold
at par less an underwriting discount of 2.75% of the principal amount of the
notes. The net proceeds of this offering, after giving effect to discounts,
commissions, premiums and expenses, were approximately $339.9 million. These
securities were issued and sold to Goldman, Sachs & Co., Morgan Stanley & Co.
Incorporated and Credit Suisse First Boston Corporation, as the initial
purchasers, in reliance on the exemption from registration under the Securities
Act of 1933, as amended provided by Section 4(2) thereof. In connection with
this transaction, each of the initial purchasers represented that it was a
"qualified institutional buyer" within the meaning of the Securities and
Exchange Act of 1934. The notes are convertible at the option of the holder into
shares of common stock at a conversion price of approximately $75.99 per share
at any time until maturity. The notes are traded on the Private Offerings,
Resales and Trading through Automated Linkages (PORTAL) Market of the National
Association of Securities Dealers, Inc. We do not intend to apply for listing of
the notes on any securities exchange or for inclusion of the notes in any
automated quotation system.
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<PAGE> 22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes included elsewhere in this report. The following statements of operations
data for the years ended December 31, 1997, 1998 and 1999, and the balance sheet
data as of December 31, 1998 and 1999, have been derived from consolidated
financial statements which have been audited by Arthur Andersen LLP, independent
public accountants, as set forth in their report included elsewhere in this
document. The statement of operations data for the year ended December 31, 1996,
and the balance sheet data as of December 31, 1996, and 1997, have been derived
from consolidated financial statements which have been audited by Arthur
Andersen LLP. The statement of operations data for the year ended December 31,
1995, and the balance sheet data as of December 31, 1995, have been derived from
unaudited consolidated financial statements. Amounts shown are in thousands,
except per share data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses..................... $ 24,162 $ 62,063 $141,766 $234,316 $352,597
Services.............................. 10,837 30,569 58,218 91,726 147,893
Maintenance........................... 3,462 8,881 21,792 43,115 70,620
-------- -------- -------- -------- --------
Total revenues................ 38,461 101,513 221,776 369,157 571,110
-------- -------- -------- -------- --------
Costs and expenses:
Cost of software licenses............. 390 260 2,746 7,967 17,981
Cost of services and maintenance...... 7,601 21,761 48,422 77,459 125,934
Sales and marketing................... 10,487 35,484 77,071 129,978 194,752
Research and development.............. 8,503 23,559 57,392 94,199 132,278
General and administrative............ 5,286 11,108 24,984 38,191 53,188
In-process research and development
and acquisition-related
expenses(1)........................ -- 1,133 9,306 7,618 6,552
-------- -------- -------- -------- --------
Total costs and expenses...... 32,267 93,305 219,921 355,412 530,685
-------- -------- -------- -------- --------
Operating income........................ 6,194 8,208 1,855 13,745 40,425
Other income (expense) net.............. (167) 1,671 3,309 8,753 7,642
-------- -------- -------- -------- --------
Income (loss) before income taxes....... 6,027 9,879 5,164 22,498 48,067
Provision for income taxes.............. 2,054 4,705 6,916 17,279 24,552
-------- -------- -------- -------- --------
Net income (loss)....................... $ 3,973 $ 5,174 $ (1,752) $ 5,219 $ 23,515
======== ======== ======== ======== ========
Net income (loss) per share............. $ 0.04 $ 0.04 $ (0.01) $ 0.04 $ 0.16
======== ======== ======== ======== ========
Net income (loss) per share, assuming
dilution.............................. $ 0.03 $ 0.04 $ (0.01) $ 0.03 $ 0.14
======== ======== ======== ======== ========
Weighted average common shares
outstanding........................... 90,656 119,580 128,884 143,588 150,419
Weighted average common shares
outstanding, assuming dilution........ 121,788 136,232 128,884 157,060 167,839
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................... $ 8,122 $ 59,694 $151,889 $155,998 $579,391
Working capital......................... 7,408 62,636 167,877 182,778 585,039
Total assets............................ 28,251 113,546 264,923 344,808 861,549
Total debt.............................. -- 600 2,114 5,032 350,000
Total stockholders' equity.............. 10,378 75,236 192,964 228,986 332,168
</TABLE>
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<PAGE> 23
- ---------------
(1) We incurred acquisition-related expenses related to business combinations of
$1.1 million in 1996, $9.3 million in 1997, $7.6 million in 1998 and $6.6
million in 1999, including write-offs of in-process research and development
of $1.1 million in 1996, $4.6 million in 1997, $4.7 million in 1998 and $3.3
million in 1999. The remaining costs included amortization of goodwill and
acquired technology and investment banking, legal and accounting fees and
expenses. Excluding these expenses, net income and net income per share,
assuming dilution, would have been $6.3 million and $0.05 per share in 1996,
$5.0 million and $0.03 per share in 1997, $12.8 million and $0.08 per share
in 1998, and $30.1 million and $0.18 per share in 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis below 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 of our plans, objectives, expectations and intentions. Such
forward-looking statements generally are 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. The
forward-looking statements in this discussion and analysis are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The section above under Part I, Item I entitled "Factors That May Affect
Future Results" sets forth certain factors that could cause our actual future
results to differ materially from those statements.
OVERVIEW
i2 is a leading global provider of intelligent eBusiness solutions that
help enterprises optimize business processes both internally and among trading
partners. Our solutions enable enterprises to significantly improve
efficiencies, collaborate with suppliers and customers, respond to market
demands and engage in dynamic business interactions over the Internet. Our
solutions consider the real conditions of companies to optimize key business
processes -- from product design to customer relationships. We have recently
launched TradeMatrix, a robust platform of business-to-business solutions,
services and marketplaces, which will allow customers, partners, suppliers and
service providers to do business together in real time. TradeMatrix offers a
full breadth of services that include planning, procurement, commerce,
fulfillment, customer care, retail, strategic sourcing and product development.
Our RHYTHM product suite principally includes solutions for supply chain
management, customer management, product lifecycle management, inter-process
planning and strategic planning, which provide the basis for these value-added
services offered to marketplace participants. We recently have signed agreements
to develop and host public and private Internet-based electronic marketplaces
with our customers and partners in the automotive, aerospace, high-tech,
softgoods and consumer packaged goods industries. Our RHYTHM software
applications, along with new software solutions and services designed
specifically for the TradeMatrix environment, are used to power these electronic
marketplaces. We also provide services such as consulting, training and
maintenance in support of these offerings.
In July 1999, we acquired Sales Marketing Administration Research Tracking
Technologies, Inc., or SMART. Under the terms of the acquisition agreement, we
agreed to issue up to 4.2 million shares of common stock for all of the
outstanding capital stock and options of SMART. In connection with the SMART
acquisition, we incurred expenses of $2.1 million that included, among other
things, investment, legal and accounting fees and expenses. The transaction was
accounted for as a pooling-of-interests. Accordingly, our financial statements
include the financial position, results of operations and cash flows of SMART
for all periods presented.
All share and per share amounts in this Form 10-K have been adjusted to
reflect a two-for-one stock split of our common stock effected as a 100%
dividend on February 17, 2000.
23
<PAGE> 24
RECENT DEVELOPMENTS
On March 12, 2000, we entered into a definitive agreement to acquire Aspect
Development, Inc. ("Aspect"), a developer of collaborative solutions for
business-to-business marketplaces. Pursuant to the agreement, we will exchange
all of the outstanding capital stock of Aspect and will assume all outstanding
stock options of Aspect, for approximately 44.9 million shares of our common
stock and options. The transaction will be accounted for as a purchase, is
subject to regulatory and i2 and Aspect stockholder approvals, and is expected
to close in the third quarter of this year.
Also on March 12, 2000, we entered into a definitive agreement to acquire
SupplyBase, Inc. ("SupplyBase"), a developer of interactive database products,
services and supply chain management tools. Under the agreement, we will issue
approximately 1.8 million shares of our common stock for all of the outstanding
capital stock and stock options of SupplyBase. The transaction will be accounted
for as a purchase, is subject to regulatory approval and SupplyBase stockholder
approval, and is expected to close in the second quarter of this year.
These strategic acquisitions will result in substantial one-time charges
along with ongoing substantial amortization of intangibles to our earnings.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain items reflected in our consolidated
statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Revenues:
Software licenses......................................... 63.9% 63.5% 61.7%
Services.................................................. 26.3 24.8 25.9
Maintenance............................................... 9.8 11.7 12.4
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
Costs and expenses:
Cost of software licenses................................. 1.2 2.2 3.1
Cost of services and maintenance.......................... 21.8 21.0 22.1
Sales and marketing....................................... 34.8 35.2 34.1
Research and development.................................. 25.9 25.5 23.2
General and administrative................................ 11.3 10.3 9.3
In-process research and development and
acquisition-related expenses........................... 4.2 2.1 1.1
----- ----- -----
Total costs and expenses.......................... 99.2 96.3 92.9
----- ----- -----
Operating income............................................ 0.8 3.7 7.1
Other income, net........................................... 1.5 2.4 1.3
----- ----- -----
Income before income taxes.................................. 2.3 6.1 8.4
Provision for income taxes.................................. 3.1 4.7 4.3
----- ----- -----
Net income (loss)........................................... (0.8)% 1.4% 4.1%
===== ===== =====
</TABLE>
Revenues
Our revenues consist of software license revenues, service revenues and
maintenance revenues. Software license revenues consist of sales of software
licenses which, for periods subsequent to December 31, 1997, are recognized in
accordance with the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." Under SOP
97-2, software license revenues are recognized upon execution of a contract and
delivery of software, provided that the license fee is fixed and determinable,
no significant production, modification or customization of the software is
required and collection is considered
24
<PAGE> 25
probable by management. For periods prior to December 31, 1997, software license
revenues were recognized in accordance with SOP 91-1, "Software Revenue
Recognition." Under SOP 91-1, software license revenues were recognized upon
execution of a contract and shipment of the software, provided that no
significant vendor obligations remained outstanding, amounts were due within one
year and collection was considered probable by management. The application of
SOP 97-2 did not have a material impact on our consolidated financial statements
for the year ended December 31, 1998. In 1999, software license revenues were
recognized in accordance with SOP 97-2, as modified by SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition with respect to Certain Transactions."
Service revenues primarily are 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 54.7% to $571.1 million in 1999 from $369.2
million in 1998, and increased 66.5% in 1998 from $221.8 million in 1997. We
derive substantially all of our revenues from licenses associated with our
RHYTHM suite of software products, as well as related services and maintenance.
Software Licenses. Revenues from software licenses increased 50.5% to
$352.6 million in 1999 from $234.3 million in 1998, and increased 65.3% in 1998
from $141.8 million in 1997. Software license revenues constituted 61.7% of
total revenues in 1999, 63.5% in 1998 and 63.9% in 1997. The increases in the
dollar amount of software license revenues were due to increased customer
awareness of the potential benefits derived from deploying our software
solutions. 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 increase the level of indirect sales activities. We expect that sales of our
software products through sales alliances, distributors, resellers and other
indirect channels will increase as a percentage of software license revenues.
However, our efforts to expand indirect sales may not be successful, or these
relationships may not continue in the future.
Services. Revenues from services increased 61.3% to $147.9 million in 1999
from $91.7 million in 1998, and increased 57.6% in 1998 from $58.2 million in
1997. Services revenues constituted 25.9% of total revenues in 1999, 24.8% in
1998, and 26.3% in 1997. The increases in the dollar amount of services revenues
were due primarily to an increase in the number of RHYTHM licenses sold and a
significant investment in our consulting organization as a result of the
increased demand for our solutions. The increases also were 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, training and consulting services.
Maintenance. Revenues from maintenance increased 63.8% to $70.6 million in
1999 from $43.1 million in 1998, and increased 97.7% in 1998 from $21.8 million
in 1997. Maintenance revenues constituted 12.4% of total revenues in 1999, 11.7%
in 1998 and 9.8% in 1997. The increases in the dollar amount of maintenance
revenues were primarily due to the continued increase in the number of RHYTHM
licenses sold and a high percentage of maintenance agreement renewals. We expect
that maintenance revenues both in dollar amount and as a percentage of total
revenues will continue to increase from the levels achieved in 1999.
Concentration of Revenues. In 1999, one customer accounted for more than
10% of total revenues. While on an annual basis no individual customer accounted
for more than 10% of total revenues in 1998 or 1997, we generally derive a
significant portion of our software license revenues in each quarter from a
small number of relatively large sales. For example, in each quarter of 1999, in
the last three quarters of 1998 and in each quarter of 1997, one or more
customers individually accounted for at least 10% of total software license
revenues during that quarter. While we believe that the loss of any one of these
customers would not seriously harm our business, operating results or financial
condition, our inability to consummate one or more substantial license sales in
any future period could seriously harm our operating results for that period.
International Revenues. We recognized $181.2 million of revenues from
international sources in 1999, representing approximately 32% of total revenues,
$73.2 million in 1998, representing approximately 20% of
25
<PAGE> 26
total revenues, and $66.7 million in 1997, representing approximately 30% of
total revenues. Our revenues from international sources were generated primarily
from customers located in Asia, Canada and Europe. Revenues generated from the
European region in 1999, 1998 and 1997 were 16%, 11% and 15% of total revenues,
respectively. The increase in revenues from international sources as a
percentage of total revenues in 1999 was due primarily to increased levels of
sales execution from our international sales force and management team. We
believe that continued growth and profitability may require further expansion in
international markets. To increase the level of international sales, we have
utilized and may continue to utilize substantial resources to expand existing
international operations and establish additional international operations. We
cannot be certain that our investments in international operations will produce
desired levels of revenues or profitability.
Costs and Expenses
Cost of Software Licenses. Cost of software licenses consists primarily of:
- 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 $18.0 million in 1999, representing 5.1% of
software license revenues, $8.0 million in 1998, representing 3.4% of software
license revenues, and $2.7 million in 1997, representing 1.9% of software
license revenues. The increases in cost of software licenses were due primarily
to an increase in commissions to third parties in connection with joint
marketing and other related agreements and the amount of royalty fees associated
with third-party software included with sales of RHYTHM. We expect the cost of
software licenses to vary in the future depending upon the level of third-party
services.
Cost of Services and Maintenance. Cost of services and maintenance was
$125.9 million in 1999, representing 57.6% of total services and maintenance
revenues, $77.5 million in 1998, representing 57.4% of total services and
maintenance revenues, and $48.4 million in 1997, representing 60.5% of total
services and maintenance revenues. The dollar increases in cost of services and
maintenance were due to an 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 in recent years. We
expect to continue to increase the number of our consulting, product support and
training personnel in the foreseeable future as a means to maintain and
strengthen our position in 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
our revenues do not increase at anticipated rates, the hiring of additional
personnel could seriously harm our profit margins.
Sales and Marketing. Sales and marketing expenses were $194.8 million in
1999, representing 34.1% of total revenues, $130.0 million in 1998, representing
35.2% of total revenues, and $77.1 million in 1997, representing 34.8% of total
revenues. The increases in the dollar amount of sales and marketing expenses
were due to continued expansion of our direct sales force, increased sales
commissions as a result of the higher revenue levels, continued investment in
strengthening our international selling presence and increased marketing and
promotional activities as a result of our expanded suite of intelligent
eBusiness solutions. We expect these expenses will continue to increase in
absolute dollars and may increase as a percentage of total revenues.
Research and Development. Research and development expenses were $132.3
million in 1999, representing 23.2% of total revenues, $94.2 million in 1998,
representing 25.5% of total revenues, and $57.4 million in 1997, representing
25.9% of total revenues. The increases in the dollar amount of research and
development expenses were due to the hiring of additional research and
development personnel and other related costs incurred to support our growing
solution footprint. We expect that the dollar amount of research and
26
<PAGE> 27
development expenses will increase as we continue to invest in developing new
products, applications and product enhancements for existing products and
intelligent eBusiness solutions.
In accordance with Statement of Financial Accounting Standards, or SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers. To
date, the establishment of technological feasibility of our products and general
release of such software have substantially coincided. As a result, software
development costs qualifying for capitalization have been insignificant and we
have not capitalized any software development costs.
General and Administrative. General and administrative expenses were $53.2
million in 1999, representing 9.3% of total revenues, $38.2 million in 1998,
representing 10.3% of total revenues, and $25.0 million in 1997, representing
11.3% of total revenues. 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 our business. The decrease in
general and administrative expenses as a percentage of total revenues was due
primarily to the increase in revenues and our ability to leverage our base of
resources to support a larger organization. We expect that the dollar amount of
general and administrative expenses will continue to increase in the foreseeable
future.
In-Process Research and Development and Acquisition-Related Expenses. In
the recent past, we have sought to expand the depth of our current product
offerings through various technology or business acquisitions. Some of these
acquisitions involve technology that is not yet determined to be technologically
feasible and has no alternative future use in its then-current stage of
development. In such instances, in accordance with appropriate accounting
guidelines, the portion of the purchase price allocated to in-process research
and development is expensed immediately upon acquisition. Further, the final
purchase price on certain transactions is ultimately dependent upon certain
events such as payouts based on the attainment of specified revenue targets for
the acquired products or technologies. Such future earnouts, if any, may be
considered as additional costs to acquire the company. We acquired SMART in
1999, InterTrans Logistics Solutions Limited, or ITLS, in 1998 and Think Systems
Corporation and Optimax Systems Corporation in 1997. These acquisitions were
each accounted for as a pooling-of-interests. Accordingly, our consolidated
financial statements include the financial position, results of operations and
cash flows of these companies. Additionally, in 1999, 1998 and 1997, we
completed other business acquisitions which were accounted for using the
purchase method.
We incurred $6.6 million in 1999, $7.6 million in 1998 and $9.3 million in
1997 in certain acquisition-related expenses, of which $3.3 million in 1999,
$4.7 million in 1998 and $4.6 million in 1997 represented the write-off of
in-process research and development. The remaining costs primarily consisted of
investment banking, legal and accounting fees and expenses and amortization of
intangibles. See Note 3 in the Notes to Consolidated Financial Statements for
further discussion.
Other Income, Net
Other income, net was $7.6 million in 1999, representing 1.3% of total
revenues, $8.8 million in 1998, representing 2.4% of total revenues, and $3.3
million in 1997, representing 1.5% of total revenues. Other income, net includes
interest income, interest expense and bank fees, foreign currency gains and
losses and miscellaneous income. Included in other income, net for 1998 was a
gain of $1.8 million on the sale of SMART's hosting business.
Provision for Income Taxes
We recorded income tax expense of $24.6 million in 1999, $17.3 million in
1998 and $6.9 million in 1997. Our effective income tax rates were 51.1% in
1999, 76.8% in 1998 and 133.9% in 1997. The fluctuations in our effective income
tax rates were primarily due to the non-deductibility of certain subsidiaries'
losses and the in-process research and development and certain other
acquisition-related expenses. Excluding the effects of
27
<PAGE> 28
certain subsidiaries' losses, the in-process research and development and
certain other acquisition-related expenses, our effective tax rate was 38.1% in
1999, 38.5% in 1998 and 34.2% in 1997.
Net Income Per Share
Net income per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share." This method requires calculation of both net income per
share and net income per share, assuming dilution. Net income per share excludes
the potentially dilutive effect of common stock equivalents such as stock
options, while net income per share, assuming dilution includes such potentially
dilutive effects. Future weighted-average shares outstanding calculations could
be impacted by the following factors:
- the ongoing issuance of common stock associated with stock option
exercises;
- the issuance of common shares associated with our employee stock purchase
program;
- any fluctuations in our stock price, which could cause changes in the
number of common stock equivalents included in the net income per share,
assuming dilution computation;
- the issuance of common stock to effect business combinations should we
enter into such transactions;
- the issuance of common stock or warrants to effect joint marketing, joint
development, or other such arrangements should we enter into such
transactions; and
- assumed or actual conversions of debt into common stock with respect to
the convertible notes issued in December 1999.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations and met our capital
expenditure requirements primarily through cash flows from operations and sales
of debt and equity securities. Our liquidity and financial position consisted of
$585.0 million of working capital at December 31, 1999, as compared to $182.8
million at December 31, 1998. The increases in working capital were primarily
related to an increase in cash, cash equivalents and short-term investments to
$579.4 million at December 31, 1999 from $156.0 million at December 31, 1998.
The increase in cash, cash equivalents and short-term investments is primarily
due to the net proceeds from our convertible note offering in December 1999 of
$339.9 million. Cash flows from operations were $86.6 million in 1999, $13.9
million in 1998 and $3.9 million in 1997. Operating cash flows increased in 1999
as compared to 1998 and increased in 1998 as compared to 1997 primarily due to
an increase in net income, deferred revenues, accrued liabilities and the tax
benefit from stock option activity. The tax benefit from stock option activity
is primarily the result of disqualifying dispositions of stock acquired under
our stock plans.
Accounts receivable, net of allowance for doubtful accounts, increased to
$157.6 million at December 31, 1999 from $127.7 million at December 31, 1998
primarily due to strong fourth quarter revenues in 1999. Days' sales outstanding
was 83 days and 99 days for the quarter ending December 31, 1999 and the year
ending December 31, 1999, respectively. Accounts receivable and days' sales
outstanding can fluctuate for a variety of reasons, including:
- the amount and timing of revenues earned;
- our collection experience;
- negotiated payment terms;
- the amount of receivables generated from international customers which
generally have longer payment terms compared to customers in the U.S.;
and
- 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 December 31, 1999 is
adequate to cover any collection difficulties with respect to accounts
receivable. However, a significant portion of our accounts
28
<PAGE> 29
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 that are later
determined to be uncollectible, particularly if one or more large receivables
become uncollectible.
Cash used in investing activities, primarily for capital expenditures and
short-term investments, was $65.4 million for 1999 as compared to $102.7 million
for 1998 and $18.0 million for 1997. Cash used in investing activities was
higher in 1998 primarily due to the January 1998 investment of the net proceeds
from our public offering at the end of 1997, at which time the proceeds were
invested primarily in financial instruments classified as cash equivalents. At
December 31, 1999, we did not have any material commitments for capital
expenditures.
Cash provided by financing activities was $371.7 million for 1999 as
compared to $14.2 million for 1998 and $109.8 million for 1997. Cash provided by
financing activities for 1999 includes the net proceeds of $339.9 million from
our convertible note offering in December 1999. Cash provided by financing
activities for 1997 includes the net proceeds of $89.4 million from our public
offering of common stock at the end of 1997.
On December 10, 1999, we issued an aggregate principal amount of $350
million of our 5 1/4% convertible subordinated notes due 2006, which were sold
at par less an underwriting discount of 2.75% of the principal amount of the
notes. The net proceeds of this offering, after giving effect to discounts,
commissions, premiums and expenses, was approximately $339.9 million. The notes
are convertible at the option of the holder into shares of common stock at a
conversion price of approximately $75.99 per share at any time prior to
maturity. The net proceeds from the offering are being used for working capital
and other general corporate purposes.
In August 1999, we entered into one-year revolving credit facilities
agreement with an aggregate borrowing capacity of $30.0 million. The agreement
is unsecured and contains customary restrictive covenants, including covenants
requiring us to maintain certain financial ratios. We are not subject to a
borrowing base limitation and borrowings thereunder bear interest at LIBOR plus
0.75% to 1.75% depending on certain cash ratios. The maximum borrowings
available under the facility were reduced by the value of outstanding letters of
credit issued by the lender on our behalf, $14.2 million of which were
outstanding at December 31, 1999. At December 31, 1999, there were no borrowings
outstanding under this agreement and we were in compliance with all covenants.
We may in the future pursue additional acquisitions of businesses, products
and technologies (in addition to the pending Aspect and SupplyBase
transactions), or enter into joint venture arrangements, that could complement
or expand our business. Any material acquisition or joint venture could result
in a decrease to our working capital depending on the amount, timing and nature
of the consideration to be paid.
We believe that existing cash and cash equivalent balances, short-term
investment balances, available borrowings under revolving credit agreements and
potential cash flows from operations will satisfy our working capital and
capital expenditure requirements for the next 12 months. However, any material
acquisitions of complementary businesses, products or technologies or joint
venture arrangements could require us to obtain additional equity or debt
financing. There can be no assurance that such financing would be available on
acceptable terms, if at all.
YEAR 2000 ISSUES
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish 21st century dates from 20th
century dates due to the two-digit date fields used by many computer systems and
software programs. This inability to distinguish whether "00" means 1900 or
2000, may have resulted in failures or the creation of erroneous results. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished leading up to 2000 was
effective and prevented such problems.
We believe that current versions of our software products, including
software licensed from third parties, are Year 2000 compliant. However, some
customers may be running earlier versions of the software products developed by
companies that we have acquired that may not be Year 2000 compliant, and we have
encouraged
29
<PAGE> 30
those customers to migrate to current product versions. Moreover, our products
are often 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 our products.
We are not currently aware of any material operational issues or costs
associated with preparing and maintaining our computer and technology systems
for the Year 2000. However, we may experience material unanticipated problems
and costs caused by undetected errors or defects, which could seriously harm our
business. These include, without limitation, delay or loss of revenues,
diversion of development resources, damage to our reputation, increased service
and warranty costs, or liability from our customers. In addition, some experts
have predicted significant litigation against software vendors regarding Year
2000 compliance issues. Due to the unprecedented nature of any existing or
future litigation, it is uncertain whether or to what extent we may be impacted.
We have not been a party to any litigation or arbitration proceeding to date
involving products or services related to Year 2000 issues. However, in the
future, we may need to defend our products or services in those 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 harm our business, operating results and financial
condition.
We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential customers could have for or
delay purchases of our products and services. As a result, our business could be
seriously harmed. We are also subject to external forces that might generally
affect industry and commerce, such as utility or transportation company Year
2000 compliance failure interruptions.
To date, we have incurred approximately $433,000 of expenses in compliance
and remediation work which was funded from operating cash flows. We may incur
additional costs related to the Year 2000 plan for administrative personnel to
finish managing the project, outside contractor assistance, technical support
for our products, product engineering and customer satisfaction. Computer
experts have warned that there may still be residual consequences of the change
in centuries. Any such difficulties could result in a decrease in sales of our
products, an increase in the allocation of resources to address our customers'
problems with the Year 2000 without additional revenue commensurate with such
resource dedication, or an increase in litigation costs relating to losses
suffered by our customers due to Year 2000 problems.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, issued SFAS No.
133. SFAS No. 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS No. 133 requires that all
derivatives be recognized at fair value in the balance sheet, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of hedging
relationship that exists. SFAS No. 133 will be effective for fiscal years
beginning after June 15, 2000. We do not expect SFAS No. 133 to have a material
effect on our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Foreign Exchange. Our revenues originating outside the U.S. in 1999, 1998
and 1997 were 32%, 20% and 30% of total revenues, respectively. Revenues
generated from the European region in 1999, 1998 and 1997 were 16%, 11% and 15%
of total revenues, respectively. International sales are made mostly from our
foreign sales subsidiaries in the local countries and are typically denominated
in U.S. dollars. Any gains or losses from hedging activities have not been
material to date. Our subsidiaries incur most of their expenses in the local
currency.
Our 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
30
<PAGE> 31
regulations and restrictions and foreign exchange rate volatility. Accordingly,
our future results could be materially adversely impacted by changes in these or
other factors.
Interest Rates. We invest our cash in a variety of financial instruments,
including bank time deposits, money market funds 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 our investments is presented in "Other income, net." We
account for our investment instruments in accordance with SFAS 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 SFAS No. 115.
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, our future investment income may fall
short of expectations due to changes in interest rates, or we may suffer losses
in principal if forced to sell securities which have seen a decline in market
value due to changes in interest rates. Our investment securities are held for
purposes other than trading. While certain of our investment securities had
maturities in excess of one year, we intend to liquidate such securities within
one year. The weighted-average interest rate on investment securities at
December 31, 1999 was 5.3%. The book value of securities held at December 31,
1999 approximates fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in Part IV Item 14(a)(1)
and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this report
because we will file a definitive Proxy Statement pursuant to Regulation 14A
(the "Proxy Statement") no later than 120 days after the end of the fiscal year
covered by this report, and certain information to be included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Proxy Statement under the sections captioned "Proposal 1 -- Election of
Directors, "Executive Compensation -- Directors and Executive Officers" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Principal Stockholders."
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<PAGE> 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Executive Compensation -- Certain
Transactions with Management."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
<TABLE>
<S> <C> <C>
1. Consolidated Financial Statements. The following consolidated
financial statements of i2 Technologies, Inc., are filed as part
of this Form 10-K on the pages indicated:
PAGE
---
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets at December 31, 1998 and 1999... F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999............................ F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999............................ F-5
Notes to Consolidated Financial Statements.................. F-6
2. Consolidated Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts............ S-1
Schedules other than the one listed above are omitted as the
required information is inapplicable or the information is
presented in the consolidated financial statements or related
notes.
3. Exhibits. The exhibits to this Form 10-K have been included only
with the copy of this Form 10-K filed with the Securities and
Exchange Commission. Copies of individual exhibits will be
furnished to stockholders upon written request to i2 and payment
of a reasonable fee.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1* -- Agreement and Plan of Reorganization, dated May 12, 1999,
by and among i2, Intelligent Acquisition Corp. and Sales
Marketing Administration Tracking Technologies, Inc.
(filed as Exhibit 2.1 to i2's Registration Statement on
Form S-4 (Reg. No. 333-79681)(the "Form S-4").
2.2* -- Agreement and Plan of Reorganization, dated March 12,
2000, by and among i2, Hoya Merger Corp. and Aspect
Development, Inc. (filed as Exhibit 1 to the Schedule 13D
filed by i2 on March 22, 2000 with respect to Aspect
Development, Inc. and incorporated herein by reference).
2.3 -- Agreement and Plan of Reorganization, dated March 12,
2000, by and among i2, Starfish Merger Corporation and
SupplyBase, Inc. (The schedules and exhibits which are
referenced in the table of contents and elsewhere in such
Agreement are hereby incorporated by reference. Such
schedules and exhibits which are not included as exhibits
to this Form 10-K will be furnished supplementally to the
Commission upon request.)
3.1* -- Restated Certificate of Incorporation (filed as Exhibit
3.1 to i2's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999)
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.2* -- Amended and Restated Bylaws (filed as Exhibit 3.1 to i2's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998)
4.1* -- Specimen Common Stock certificate (filed as Exhibit 4.1
to i2's Registration Statement on Form S-1 (Reg No.
333-1752) (the "Form S-1"))
4.2* -- Indenture, dated as of December 10, 1999 between i2 and
Chase Bank of Texas, National Association, as trustee,
including the form of note set forth in Section 2.2
thereof (filed as Exhibit 4.2 to i2's Registration
Statement on Form S-3 (Reg. No. 333-31342) (the "Form
S-3"))
4.3* -- Registration Rights Agreement, dated as of December 10,
1999 between i2 and Goldman, Sachs & Co., Morgan Stanley
Dean Witter and Credit Suisse First Boston (filed as
Exhibit 4.3 to the Form S-3)
10.1* -- Form of Registration Rights Agreement, dated April 1,
1996, among i2, Sanjiv S. Sidhu and Sidhu-Singh Family
Investments, Ltd. (filed as Exhibit 10.2 to the Form S-1)
10.2* -- 1995 Stock Option/Stock Issuance Plan (filed as Exhibit
99.7 to i2's Registration Statement on Form S-8 (Reg. No.
333-85791) (the "1999 S-8"))
10.3* -- Form of Indemnification Agreement 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
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, 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, between
the i2 and Park West E-2 Associates (filed as Exhibit
10.11 to the Form S-1)
10.7* -- Second Amendment of Lease Agreement between i2 and TRST
Irving, Inc. dated as of February 23, 1996 (filed as
Exhibit 10.1 to i2's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996)
10.8* -- Third Amendment to Lease Agreement between i2 and TRST
Irving, Inc. dated as of July 25, 1996 (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"))
10.9* -- Fifth Amendment to Lease Agreement between i2 and
Principal Mutual Life Insurance Company dated as of
August 29, 1996 (filed as Exhibit 10.2 to the September
1996 10-Q)
10.10* -- Fourth Amendment to Lease Agreement between i2 and TRST
Irving, Inc. dated as of December 19, 1996 (filed as
Exhibit 10.17 to i2's Annual Report on Form 10-K for the
year ended December 31, 1996)
10.11* -- Employee Stock Purchase Plan (filed as Exhibit 99.1 to
the 1999 Form S-8)
10.12* -- International Employee Stock Purchase Plan (filed as
Exhibit 99.4 to the 1999 Form S-8)
10.13* -- 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"))
10.14* -- Think Systems Corporation 1997 Incentive Stock Plan
(filed as Exhibit 99.1 to the Think/Optimax S-8)
10.15* -- Optimax Systems Corporation Stock Option Plan (filed as
Exhibit 99.10 to the Think/Optimax S-8)
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16* -- InterTrans Logistics Solutions Limited 1997 Stock
Incentive Plan (filed as Exhibit 99.7 to i2's
Registration Statement on Form S-8 (Reg. No. 333-53667))
10.17* -- SMART Technologies, Inc., 1996 Stock Option/Stock
Issuance Plan (filed as Exhibit 99.13 to 1999 Form S-8)
10.18* -- Lease with One Colinas Crossing dated March 24, 1999
between Colinas Crossing, LP and i2 (filed as Exhibit
99.6 to i2's Current Report on Form 8-K dated November
30, 1999 (the "November 1999 8-K"))
10.19* -- Lease with Two Colinas Crossing dated August 3, 1999
between Colinas Crossing, LP and i2 (filed as Exhibit
99.7 to the November 1999 8-K)
16.1* -- Letter Regarding Change in Certifying Accountant (filed
as Exhibit 16.1 to i2's Current Report on Form 8-K filed
on April 21, 1999)
21.1 -- List of subsidiaries
23.1 -- Consent of Arthur Andersen LLP
24.1 -- Power of Attorney, pursuant to which amendments to this
Form 10-K may be filed, is included on this signature
page contained in Part IV of this Form 10-K
27.1 -- Financial Data Schedule for the year ended December 31,
1999
</TABLE>
- ---------------
* Incorporated herein by reference to the indicated filing
(b) Reports on Form 8-K.
We filed two reports on Form 8-K (Item 5) on November 30, 1999, (i) one
containing a press release announcing our intention to raise capital through a
private offering of convertible subordinated notes and (ii) the other providing
selected financial data, management's discussion and analysis of financial
condition and results of operations and consolidated financial statements for
the July 1999 acquisition of SMART.
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<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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.
Dated: March 21, 2000
By: /s/ WILLIAM M. BEECHER
----------------------------------
William M. Beecher
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby severally constitutes and appoints Sanjiv S. Sidhu and
William M. Beecher, and each or any of them, his true and lawful
attorneys-in-fact and agents, each with the power of substitution and
resubstitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below 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 March 21, 2000
- ----------------------------------------------------- and Chief Executive Officer
Sanjiv S. Sidhu (Principal executive officer)
/s/ WILLIAM M. BEECHER Executive Vice President March 21, 2000
- ----------------------------------------------------- and Chief Financial Officer
William M. Beecher (Principal financial officer)
/s/ NANCY F. BRIGHAM Controller (Principal March 21, 2000
- ----------------------------------------------------- accounting officer)
Nancy F. Brigham
/s/ HARVEY B. CASH Director March 21, 2000
- -----------------------------------------------------
Harvey B. Cash
/s/ THOMAS J. MEREDITH Director March 21, 2000
- -----------------------------------------------------
Thomas J. Meredith
/s/ SANDEEP R. TUNGARE Director March 21, 2000
- -----------------------------------------------------
Sandeep R. Tungare
</TABLE>
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<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
i2 Technologies, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of i2 Technologies,
Inc. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the three years ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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. 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 financial position of i2 Technologies, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for the three years ended December 31, 1999 in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
January 14, 2000 (except with respect to the matters
discussed in the second paragraph of Note 8 and
Note 13, as to which the dates are February 17,
2000 and March 12, 2000, respectively)
F-1
<PAGE> 37
I2 TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 62,611 $454,585
Short-term investments.................................... 93,387 124,806
Accounts receivable, net of allowance for doubtful
accounts of $8,551 and $17,474, respectively........... 127,677 157,586
Prepaids and other current assets......................... 9,407 10,607
Deferred income taxes..................................... 5,070 15,868
-------- --------
Total current assets.............................. 298,152 763,452
Furniture and equipment, net................................ 31,628 50,483
Deferred income taxes and other assets...................... 15,028 47,614
-------- --------
Total assets...................................... $344,808 $861,549
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,675 $ 20,039
Accrued liabilities....................................... 23,301 40,803
Accrued compensation and related expenses................. 21,924 40,443
Short-term debt........................................... 2,032 --
Notes payable to stockholders............................. 3,000 --
Deferred revenue.......................................... 51,229 72,617
Income taxes payable...................................... 2,213 4,511
-------- --------
Total current liabilities......................... 115,374 178,413
Deferred income taxes....................................... 448 968
Long-term debt.............................................. -- 350,000
-------- --------
Total liabilities................................. 115,822 529,381
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000 shares
authorized, none issued................................ -- --
Common stock, $0.00025 par value, 500,000 shares
authorized, 146,500 and 155,412 shares issued and
outstanding, respectively.............................. 36 39
Additional paid-in capital................................ 214,922 297,879
Accumulated other comprehensive loss...................... (833) (4,126)
Retained earnings......................................... 14,861 38,376
-------- --------
Total stockholders' equity........................ 228,986 332,168
-------- --------
Total liabilities and stockholders' equity........ $344,808 $861,549
======== ========
</TABLE>
See accompanying notes.
F-2
<PAGE> 38
i2 TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Software licenses......................................... $141,766 $234,316 $352,597
Services.................................................. 58,218 91,726 147,893
Maintenance............................................... 21,792 43,115 70,620
-------- -------- --------
Total revenues.................................... 221,776 369,157 571,110
Costs and expenses:
Cost of software licenses................................. 2,746 7,967 17,981
Cost of services and maintenance.......................... 48,422 77,459 125,934
Sales and marketing....................................... 77,071 129,978 194,752
Research and development.................................. 57,392 94,199 132,278
General and administrative................................ 24,984 38,191 53,188
In-process research and development and
acquisition-related expenses........................... 9,306 7,618 6,552
-------- -------- --------
Total costs and expenses.......................... 219,921 355,412 530,685
-------- -------- --------
Operating income............................................ 1,855 13,745 40,425
Other income, net........................................... 3,309 8,753 7,642
-------- -------- --------
Income before income taxes.................................. 5,164 22,498 48,067
Provision for income taxes.................................. 6,916 17,279 24,552
-------- -------- --------
Net income (loss)........................................... $ (1,752) $ 5,219 $ 23,515
======== ======== ========
Net income (loss) per share................................. $ (0.01) $ 0.04 $ 0.16
======== ======== ========
Net income (loss) per share, assuming dilution.............. $ (0.01) $ 0.03 $ 0.14
======== ======== ========
Weighted average common shares outstanding.................. 128,884 143,588 150,419
Weighted average common shares outstanding, assuming
dilution.................................................. 128,884 157,060 167,839
Comprehensive income (loss):
Net income................................................ $ (1,752) $ 5,219 $ 23,515
Foreign currency translation adjustments, net of income
tax.................................................... (277) (454) (3,293)
-------- -------- --------
Total comprehensive income (loss)........................... $ (2,029) $ 4,765 $ 20,222
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 39
i2 TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL OTHER TOTAL
---------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL LOSS EARNINGS EQUITY
------- ------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 123,876 $30 $ 63,914 $ (102) $11,394 $ 75,236
Exercise of options and issuance
under stock purchase plan..... 6,050 2 4,416 -- -- 4,418
Common stock issued, net of
offering costs................ 8,004 2 89,427 -- -- 89,429
Tax benefit of stock options..... -- -- 10,106 -- -- 10,106
Amortization of deferred
compensation.................. -- -- 740 -- -- 740
Issuance of SMART preferred stock
which was exchanged for i2
common stock in merger........ 1,240 -- 15,064 -- -- 15,064
Foreign currency translation..... -- -- -- (277) -- (277)
Net loss......................... -- -- -- -- (1,752) (1,752)
------- --- -------- ------- ------- --------
Balance at December 31, 1997....... 139,170 34 183,667 (379) 9,642 192,964
Exercise of options and issuance
under stock purchase plan..... 7,176 2 11,278 -- -- 11,280
Shares issued in acquisition..... 154 -- 2,708 -- -- 2,708
Tax benefit of stock options..... -- -- 16,669 -- -- 16,669
Amortization of deferred
compensation.................. -- -- 600 -- -- 600
Foreign currency translation..... -- -- -- (454) -- (454)
Net income....................... -- -- -- -- 5,219 5,219
------- --- -------- ------- ------- --------
Balance at December 31, 1998....... 146,500 36 214,922 (833) 14,861 228,986
Exercise of options and issuance
under stock purchase plan..... 8,630 3 36,388 -- -- 36,391
Shares issued in acquisition..... 282 -- 4,800 -- -- 4,800
Tax benefit of stock options..... -- -- 41,329 -- -- 41,329
Amortization of deferred
compensation.................. -- -- 440 -- -- 440
Foreign currency translation..... -- -- -- (3,293) -- (3,293)
Net income....................... -- -- -- -- 23,515 23,515
------- --- -------- ------- ------- --------
Balance at December 31, 1999....... 155,412 $39 $297,879 $(4,126) $38,376 $332,168
======= === ======== ======= ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 40
i2 TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (1,752) $ 5,219 $ 23,515
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-off of in-process research and development....... 4,564 4,674 3,267
Depreciation and amortization.......................... 6,016 12,211 16,427
Provision for losses on receivables.................... 3,903 4,640 8,923
Amortization of deferred compensation.................. 740 600 440
Deferred income taxes.................................. (4,169) (10,709) (26,651)
Tax benefit from stock option exercises................ 10,106 16,669 41,329
Changes in operating assets and liabilities:
Accounts receivable, net............................. (43,818) (55,701) (38,832)
Prepaids and other assets............................ (2,871) (4,466) (10,196)
Accounts payable..................................... 2,790 3,843 8,182
Accrued liabilities.................................. 6,249 9,404 18,913
Accrued compensation and related expenses............ 11,452 5,808 17,362
Deferred revenue..................................... 11,728 19,485 21,388
Income taxes payable................................. (996) 2,213 2,493
-------- --------- --------
Net cash provided by operating activities......... 3,942 13,890 86,560
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable -- stockholders.......................... 1,000 -- --
Business acquisitions, net of acquired cash............... (4,826) (4,148) (500)
Purchases of furniture and equipment...................... (17,694) (19,712) (33,496)
Net (purchases) sales of short-term investments........... 3,493 (78,849) (31,419)
-------- --------- --------
Net cash used in investing activities............. (18,027) (102,709) (65,415)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit.................... 1,542 943 --
Payments on revolving line of credit...................... (885) (1,600) (2,032)
Proceeds from issuance of debt............................ 800 2,032 500
Payments on debt.......................................... (458) (1,457) (3,500)
Advances from stockholders, net........................... (65) 3,000 4,000
Payments on advances from stockholders.................... -- -- (4,000)
Issuance of SMART preferred stock which was exchanged for
i2 common stock in merger.............................. 15,064 -- --
Net proceeds from issuance of common stock................ 89,429 -- --
Net proceeds from issuance of convertible debt............ -- -- 339,875
Net proceeds from sale of common stock to employees and
exercise of stock options.............................. 4,418 11,279 36,831
-------- --------- --------
Net cash provided by financing activities......... 109,845 14,197 371,674
-------- --------- --------
Effect of exchange rates on cash.......................... (72) (118) (845)
Net increase (decrease) in cash and cash equivalents........ 95,688 (74,740) 391,974
Cash and cash equivalents at beginning of period............ 41,663 137,351 62,611
-------- --------- --------
Cash and cash equivalents at end of period.................. $137,351 $ 62,611 $454,585
======== ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 41
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
i2 is a leading global provider of intelligent eBusiness solutions that
help enterprises optimize business processes both internally and among trading
partners. Our solutions enable enterprises to significantly improve
efficiencies, collaborate with suppliers and customers, respond to market
demands and engage in dynamic business interactions over the Internet. Our
solutions consider the real conditions of companies to optimize key business
processes -- from product design to customer relationships. We have recently
launched TradeMatrix, a robust platform of business-to-business solutions,
services and marketplaces, which will allow customers, partners, suppliers and
service providers to do business together in real time. TradeMatrix offers a
full breadth of services that include planning, procurement, commerce,
fulfillment, customer care, retail, strategic sourcing and product development.
Our RHYTHM product suite principally includes solutions for supply chain
management, customer management, product lifecycle management, inter-process
planning and strategic planning, which provide the basis for these value-added
services offered to marketplace participants. We recently have signed agreements
to develop and host public and private Internet-based electronic marketplaces
with our customers and partners in the automotive, aerospace, high-tech,
softgoods and consumer packaged goods industries. Our RHYTHM software
applications, along with new software solutions and services designed
specifically for the TradeMatrix environment, are used to power these electronic
marketplaces. We also provide services such as consulting, training and
maintenance in support of these offerings.
In 1997, we acquired Think Systems Corporation (Think) and Optimax Systems
Corporation (Optimax). In 1998, we acquired InterTrans Logistics Solutions
Limited (ITLS). In 1999, we acquired Sales Marketing Administration Research
Tracking Technologies, Inc. (SMART). Each of these business combinations was
accounted for as a pooling-of-interests. Accordingly, the accompanying
consolidated financial statements give retroactive effect to the combinations
for all periods presented (see Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the results of i2 and our 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 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. All of our 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, 1998 and
1999. 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
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.
Our debt securities include the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
U.S. Government......................................... $ 1,449 $342,923
State and Local Municipalities.......................... 21,440 1,300
Corporations............................................ 104,884 162,047
-------- --------
$127,773 $506,270
======== ========
</TABLE>
F-6
<PAGE> 42
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
While certain of our securities had maturities in excess of one year, we
intend to liquidate such securities within one year. At December 31, 1998 and
1999, $34.4 million and $37.0 million of corporate debt securities were included
in cash and cash equivalents, respectively. Interest income earned in 1997, 1998
and 1999 was $3.2 million, $7.6 million, and $8.7 million, respectively.
Financial Instruments. Financial instruments that potentially subject us 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. Our customer base consists of
large numbers of geographically diverse customers dispersed across many
industries. As a result, concentration of credit risk with respect to accounts
receivables is not significant. However, we periodically perform credit
evaluations of our customers and maintain reserves for potential losses. We have
used and expect to continue to use foreign exchange contracts to hedge the risk
in receivables denominated in foreign currencies. Risk of non-performance by
counterparties to such contracts is minimal due to the size and credit standings
of the financial institutions used. Our foreign exchange contracts outstanding
at December 31, 1997, 1998 and 1999 were not material. Gains and losses on
foreign exchange contracts have also not been material to date.
Depreciation and Amortization. Furniture and equipment are recorded at cost
and are depreciated over their useful lives ranging from three to seven years
using the straight-line method. Leasehold improvements are amortized over the
expected term of the lease or estimate useful life, whichever is shorter.
Acquired technology and other intangible assets related to business acquisitions
are amortized on a straight-line basis over periods of two to five years. We
review our intangible assets for impairment on a quarterly basis to determine
whether an adjustment to the carrying value is needed. Amortization of goodwill,
acquired technology and other intangible assets was not material for the years
ended December 31, 1997, 1998 and 1999.
Capitalized Research and Development Costs. In accordance with Statement of
Financial Accounting Standards, or SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed," software
development costs are expensed as incurred until technological feasibility has
been established, at which time such costs are capitalized until the product is
available for general release to customers. To date, the establishment of
technological feasibility of our products and general release of such software
have substantially coincided. As a result, software development costs qualifying
for capitalization under SFAS 86 have been insignificant and, therefore, we have
not capitalized any such costs.
Revenue Recognition. 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, or 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, 1998, software license
revenues are recognized in accordance with SOP 97-2, as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions." Service revenues are primarily derived from fees for
implementation, consulting and training services and are generally recognized
under service agreements 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.
Amounts received in advance of satisfying revenue recognition criteria are
classified as deferred revenue in the accompanying consolidated balance sheets.
We generally warrant that our 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,
1999, we had not incurred any significant expenses related to warranty claims.
F-7
<PAGE> 43
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Per Share. We compute 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 potentially dilutive common stock issuable upon exercise of stock
options or convertible debt. Net income per share, assuming dilution, includes
the effect of potentially dilutive common stock issuable upon exercise of stock
options using the treasury stock method and shares issuable under the conversion
feature of our convertible notes. Share and per share amounts for all periods
presented have also been adjusted to reflect a stock split during 1998 and 2000
(see Note 8). The computations give retroactive effect to the exchange of common
shares in connection with the Think, Optimax, ITLS and SMART acquisitions (see
Note 3). Reconciliations of the net income (loss) per share computations for the
years ended December 31, 1997, 1998 and 1999 are included in Note 8.
Stock-Based Compensation Plans. We elected to continue to account for our
stock-based compensation plans under the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." As discussed
in Note 8, 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
our foreign subsidiaries is the local currency. Assets and liabilities are
translated at rates in effect at the balance sheet date and statement of
operations amounts are translated at average rates for the period. The resulting
translation adjustments are disclosed as a separate component of stockholders'
equity and comprehensive income. Transaction gains and losses are recorded in
"other income, net" in the consolidated statement of operations.
Reclassifications. Certain prior year financial statement items have been
reclassified to conform to the current year's format.
Comprehensive Income. Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," requires companies to report an additional
measure of income on the income statement or to create a new financial statement
that shows the new measure of income. Comprehensive income includes foreign
currency translation gains and losses that have been previously excluded from
net income and reflected instead in stockholders' equity.
3. BUSINESS COMBINATIONS.
The following table represents the acquisitions from 1997 through 1999 that
were accounted for as a pooling-of-interests:
<TABLE>
<CAPTION>
i2 SHARES
COMPANY DATE ISSUED
- ------- ---------- ------------
<S> <C> <C>
Think............................................... May 1997 15.4 million
Optimax............................................. May 1997 5.4 million
ITLS................................................ April 1998 6.6 million
SMART............................................... July 1999 4.2 million
</TABLE>
The consolidated financial statements give retroactive effect to these
combinations for all periods presented.
F-8
<PAGE> 44
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The separate revenues and net income (loss) of i2 (including Think, Optimax
and ITLS) and SMART (prior to acquisition date) and the combined amounts
presented in the consolidated financial statements follow (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Total revenues:
i2......................................... $213,692 $361,916 $569,246
SMART...................................... 8,084 7,241 1,864
-------- -------- --------
$221,776 $369,157 $571,110
======== ======== ========
Net income (loss):
i2......................................... $ 3,998 $ 19,983 $ 33,536
SMART...................................... (5,750) (14,764) (10,021)
-------- -------- --------
$ (1,752) $ 5,219 $ 23,515
======== ======== ========
</TABLE>
We also acquired certain other businesses in 1997, 1998, and 1999 for an
aggregate purchase price of $5.0 million, $9.2 million, and $5.3 million
respectively, 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
specified revenue targets associated with the acquired technologies through the
year 2000. These acquisitions were accounted for using the purchase accounting
method. Accordingly, we allocated the purchase prices based on the fair value of
assets acquired and liabilities assumed. A portion of the purchase price of
these transactions was identified, using proven valuation procedures and
techniques, as intangible assets. 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 were 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 us and our
competitors. At the date of each acquisition, the products under development had
not reached technological feasibility and had no alternative future use.
Accordingly, $4.7 million and $3.3 million in 1998 and 1999 respectively, were
expensed as in-process research and development at each acquisition date. The
value assigned to in-process R&D is comprised of various research and
development projects. These projects include the introduction of new
technologies as well as revisions of enhancements to certain acquired
technologies. There is risk associated with the completion of the projects, and
there is no assurance that each will attain either technological feasibility or
commercial success.
During 1999, we incurred a total of approximately $6.6 million in
acquisition related expenses in connection with the SMART acquisition, as well
as other purchase acquisitions. These costs included investment banking, legal
and accounting fees and expenses, amortization of acquisition-related intangible
assets and the write-off of in-process R&D.
During 1998, we incurred a total of approximately $7.6 million in
acquisition related expenses in connection with the ITLS acquisition, as well as
other purchase acquisitions. These costs included investment banking, legal and
accounting fees and expenses, amortization of acquisition-related intangible
assets and the write-off of in-process R&D.
During 1997, we incurred approximately $9.3 million in acquisition-related
expenses in connection with the Think and Optimax acquisitions, as well as other
purchase acquisitions, of which $4.6 million represents the write-off of
in-process R&D. The remaining costs included investment banking, legal and
accounting fees and expenses and amortization of acquisition-related intangible
assets.
F-9
<PAGE> 45
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,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Computer equipment...................................... $ 42,583 $ 52,701
Furniture and fixtures.................................. 9,950 19,388
Leasehold improvements.................................. 2,008 16,406
-------- --------
54,541 88,495
Less: Accumulated depreciation.......................... (22,913) (38,012)
-------- --------
$ 31,628 $ 50,483
======== ========
</TABLE>
5. LINES OF CREDIT
At December 31, 1998, we had a $15.0 million revolving credit agreement
that expired in October 1999, was unsecured and contained customary restrictive
covenants, including covenants requiring us to maintain certain financial
ratios. The revolving credit agreement was not subject to a borrowing base
limitation and the borrowings thereunder bore interest at LIBOR plus 0.75% to
1.75%, depending on certain cash ratios. The maximum borrowings available under
the facility were reduced by the value of outstanding letters of credit issued
by the lender on our behalf, $6.7 million of which were outstanding at December
31, 1998. At December 31, 1998, there were no borrowings outstanding under this
agreement and we were in compliance with all covenants. In August 1999, we
entered into one-year revolving credit facilities with an aggregate borrowing
capacity of $30.0 million with substantially the same terms as the prior credit
facility. The maximum borrowings available under the facility were reduced by
the value of outstanding letters of credit issued by the lender on our behalf,
$14.2 million of which were outstanding at December 31, 1999. At December 31,
1999, there were no borrowings outstanding under this agreement and we were in
compliance with all covenants.
At December 31, 1998, SMART had an $8.0 million line of credit with a
financial institution bearing interest at the financial institution's prime rate
(8.5% at December 31, 1998). Interest was due monthly and the line matured in
October 2001. The advances on the line were collateralized by all of the assets
of SMART. As of December 31, 1998, the outstanding balance was $2.0 million,
which we have repaid concurrent with the acquisition of SMART in July 1999.
6. BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- --------
<S> <C> <C>
SMART line of credit with a financial institution, bearing
interest at prime (8.5% at December 31,1998).............. $ 2,032 $ --
SMART note payable to a stockholder, bearing interest at
7%........................................................ 3,000 --
5 1/4% Convertible subordinated notes, interest payable on
June 15 and December 15; due December 15, 2006............ -- 350,000
------- --------
5,032 350,000
Less: current maturities of long-term debt.................. (5,032) --
------- --------
Long-term debt, less current maturities..................... $ -- $350,000
======= ========
</TABLE>
All SMART debt outstanding as of December 31, 1998 was paid concurrent with
the acquisition of SMART in July 1999.
F-10
<PAGE> 46
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 10, 1999, we issued an aggregate principal amount of $350
million of our 5 1/4% convertible subordinated notes due 2006, which were sold
at par less an underwriting discount of 2.75% of the principal amount of the
notes. The net proceeds of this offering, after giving effect to discounts,
commissions, premiums and expenses, was approximately $339.9 million. These
securities were issued and sold to Goldman, Sachs & Co., Morgan Stanley & Co.
Incorporated and Credit Suisse First Boston Corporation, as the initial
purchasers, in reliance on the exemption from registration under the Securities
Act of 1933, as amended provided by Section 144A thereof. In connection with
this transaction, each of the initial purchasers represented that it was a
"qualified institutional buyer" within the meaning of the Securities and
Exchange Act of 1934. The notes are convertible at the option of the holder into
shares of common stock at a conversion price of approximately $75.99 per share
at any time prior to maturity. The net proceeds from the offering will be used
for working capital and other general corporate purposes.
7. COMMITMENTS
We lease our office facilities and certain office equipment under operating
leases that expire at various dates through 2023. We have renewal options for
most of our operating leases. Total rent expense incurred during 1997, 1998 and
1999 was approximately $5.3 million, $9.3 million and $17.2 million,
respectively.
Future minimum lease payments under all noncancellable operating leases as
of December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 26,235
2001........................................................ 24,408
2002........................................................ 20,116
2003........................................................ 13,910
2004 and thereafter......................................... 71,102
--------
Total minimum lease payments...................... $155,771
========
</TABLE>
8. STOCKHOLDERS' EQUITY
Stock Splits. On April 22, 1998, our Board of Directors (our "Board")
approved a two-for-one stock split of our common stock. Subsequently, our
stockholders at our 1998 annual meeting of stockholders approved the increase in
authorized shares of common stock. The stock split was paid as a 100% dividend
on June 2, 1998.
On January 14, 2000, our Board approved a two-for-one stock split. The
stock split was paid as a 100% dividend on February 17, 2000. All share and per
share amounts included herein have been adjusted to reflect the stock splits as
though they had occurred at the beginning of the initial periods presented.
Public Offerings. In December 1997, we completed a secondary offering of
12,000,000 shares of our common stock. We sold a total of 8,000,000 of those
shares of common stock, resulting in net proceeds to us of $89.4 million after
deducting offering expenses and the underwriting discount of $3.6 million.
F-11
<PAGE> 47
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income (Loss) Per Share. Reconciliations of the net income (loss) per
share and net income (loss) per share, assuming dilution, computations for the
years ended December 31, 1997, 1998 and 1999 are as follows (amounts in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Weighted average common shares outstanding........... 128,884 143,588 150,419
Common shares issuable upon exercise of stock
options, net of shares assumed to be repurchased... -- 13,472 17,139
Common shares issuable upon conversion of debt....... -- -- 281
-------- -------- --------
Weighted average common shares outstanding, assuming
dilution........................................... 128,884 157,060 167,839
======== ======== ========
Net income (loss).................................... $ (1,752) $ 5,219 $ 23,515
======== ======== ========
Net income (loss) per share.......................... $ (.01) $ .04 $ .16
======== ======== ========
Net income (loss) per share, assuming dilution....... $ (.01) $ .03 $ .14
======== ======== ========
</TABLE>
Potentially dilutive securities are excluded from the net income (loss) per
share, assuming dilution computation when the exercise price of the securities
exceeds the average fair value of our common stock for a particular period. For
the years ended 1997, 1998 and 1999, approximately 17,264,000, 198,000, and
3,518,000 stock options, respectively, were excluded from the net income (loss)
per share, assuming dilution computation as the impact was antidilutive.
We incurred a net loss for the year ended December 31, 1997. As a result,
the common shares issuable upon exercise of stock options would have been
anti-dilutive to the net loss per share and were excluded from the dilutive
computation.
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 our
wholly owned subsidiaries. The Employee Stock Purchase Plan and the
International Employee Stock Purchase Plan (collectively, the "Purchase Plans")
are designed to allow our eligible employees to purchase shares of common stock
through periodic payroll deductions. We have reserved 5,000,000 shares of common
stock for issuance 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 4,000 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 our 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.
1995 Stock Option/Stock Issuance Plan. In September 1995, the stockholders
and the Board approved the 1995 Stock Option/Stock Issuance Plan, which replaced
our original 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 40,000,000 shares which was
subsequently increased to 48,000,000 shares in 1996. The amount of shares of
common stock reserved for issuance was increased to 62,000,000 shares in 1997
and 86,000,000 shares in 1999. In January 2000, the Board approved a 40,000,000
share increase which will bring the total reserved for issuance to 126,000,000
shares, subject to the approval of our stockholders. 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.
F-12
<PAGE> 48
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Discretionary Option Grant Program provides for the grant of incentive
stock options to employees and for the grant of nonqualified stock options to
employees, directors and consultants. 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 stock 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 at the original exercise price for all unvested shares.
Under the Stock Issuance Program, the Board or a committee of the Board, or
the Plan Administrator, may grant shares of our common stock to any person at
any time, at such prices 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 our 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 4,000 shares of our 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 4,000 shares of our 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, or 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. The options generally vest
over a five-year period commencing on or before the date of grant. The maximum
amount of shares that may be granted under the Plans shall not exceed 3,800,000.
Each option shall expire not more than 10 years from the date of the grant. In
connection with the acquisition of Think, we assumed all of the options
outstanding under the Think Plans, which are now exercisable into i2 common
stock.
Optimax Stock Option Plan. Optimax's Board of Directors adopted and its
shareholders approved the Optimax Systems Corporation Stock Option Plan, or the
Optimax Plan. Under the Optimax 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. The maximum amount of shares that may be granted under the Plan shall
not exceed 1,250,000. Each option shall expire not more than 10 years from the
date of the grant. In connection with the acquisition of Optimax, we assumed all
such options, which are now exercisable into i2 common stock.
ITLS Stock Option Plan. ITLS' Board of Directors adopted and its
shareholders approved the ITLS 1997 Stock Option Plan, or the ITLS Plan. Under
the ITLS 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. The maximum amount of
shares that may be granted under the Plan shall not exceed 100,000. Each option
shall expire not more than 10 years from the date of the grant. In connection
with the acquisition of ITLS, we assumed all such options, which are now
exercisable into i2 common stock.
SMART Stock Option Plan. SMART's Board of Directors adopted and its
shareholders approved the 1996 Stock Option/Stock Issuance Plan, or the SMART
Plan. Under the SMART Plan, the SMART Board of Directors granted incentive and
nonqualified stock options to employees of SMART at prices equal to the
estimated fair market value of SMART's common stock on the date of grant. The
vesting schedule and term of each grant was determined by SMART's Board of
Directors. The maximum amount of shares that may be granted under the Plan shall
not exceed 2,000,000. Each option shall expire not more than 10 years from the
F-13
<PAGE> 49
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of the grant. In connection with the acquisition of SMART, we assumed all
such options, which are now exercisable into i2 common stock.
Option activity under our 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, 1996................. 8,399,426 18,995,432 $ .77
Authorized............................... 15,413,396 -- --
Granted.................................. (13,136,834) 13,136,834 7.34
Exercised................................ -- (5,784,584) .32
Canceled................................. 1,159,760 (1,159,760) 7.43
----------- ----------
Balance, December 31, 1997................. 11,835,748 25,187,922 3.99
Authorized............................... -- -- --
Granted.................................. (19,854,798) 19,854,798 8.64
Exercised................................ -- (6,693,990) .85
Canceled................................. 8,491,028 (8,491,028) 11.30
----------- ----------
Balance, December 31, 1998................. 471,978 29,857,702 5.71
Authorized............................... 24,000,000 -- --
Granted.................................. (17,548,410) 17,548,410 24.68
Exercised................................ -- (7,668,490) 3.35
Canceled................................. 3,070,188 (3,070,188) 9.84
----------- ----------
Balance, December 31, 1999................. 9,993,756 36,667,434 14.93
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
December 31, 1997........................................ 12,265,522 $ .45
==========
December 31, 1998........................................ 8,897,338 $1.97
==========
December 31, 1999........................................ 7,056,795 $4.66
==========
</TABLE>
In October 1998, the Board approved a plan to reprice a portion of our
outstanding stock options, excluding options held by certain executive officers.
As a result, 7,515,370 options with exercise prices ranging from $7.00 to $16.41
per share were repriced at $6.97 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 us in a merger or asset sale, except to the extent our 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.
All options outstanding at December 31, 1999, are incentive options except
for 17,423,881 options, which are nonqualified stock options.
F-14
<PAGE> 50
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other information regarding options outstanding and options exercisable as
of December 31, 1999, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING WEIGHTED-
RANGE OF EXERCISE NUMBER AVERAGE CONTRACTUAL NUMBER AVERAGE
PRICES OF SHARES EXERCISE PRICE LIFE (YEARS) OF SHARES EXERCISE PRICE
- ----------------- ---------- --------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$ .004-$ 3.03 2,969,310 $ .56 4.7 2,872,982 $ .57
3.04- 4.87 227,766 4.33 7.9 200,661 4.25
4.88- 6.97 10,358,686 6.72 8.7 1,796,854 6.69
6.98- 3.92 9,558,218 9.45 8.2 2,171,870 8.36
13.93- 18.00 6,534,888 16.28 9.4 14,428 16.22
18.01- 24.00 3,503,408 20.62 9.6 0 --
24.01- 48.00 2,167,488 40.95 9.9 0 --
48.01- 75.00 350,100 70.02 9.9 0 --
75.01- 100.00 997,570 93.28 10.0 0 --
---------- ---------
Total 36,667,434 14.93 $8.6 7,056,795 4.66
========== =========
</TABLE>
Pro Forma Net Income (Loss) and Net Income (Loss) Per Share. Pro forma
information regarding net income (loss) and net income (loss) per share has been
determined as if we had accounted for our 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 1997, 1998 and 1999, respectively: risk-free
interest rates of 6.2%, 5.2% and 5.6%; volatility factors of the expected market
price of our common stock of 0.66, 0.75 and 0.84; a weighted-average expected
life of the options of 4, 3 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 1997: a weighted-average risk-free
interest rate of 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
Plan, ITLS Plan and SMART 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 1997, 1998 and
1999, respectively: risk free interest rates of 5.4%, 5.0% and 5.0%; volatility
factors of the expected market price of our common stock of 0.66, 0.75 and 0.84;
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 1997, 1998 and 1999 were $6.06, $4.60 and $5.63,
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 our 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
Plans' 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 Plans' shares is amortized to expense over
the purchase period.
F-15
<PAGE> 51
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Our pro forma information follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Pro forma net income (loss)............................. $(7,433) $(9,232) $(3,652)
Pro forma net income (loss) per share................... (0.06) (0.06) (.02)
Pro forma net income (loss) per share, assuming
dilution.............................................. (0.06) (0.06) (.02)
</TABLE>
Information regarding exercise prices and fair values of options granted is
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Number of options issued at fair market value
of stock.................................... 13,136,834 19,854,798 17,548,410
Weighted-average exercise price per share..... $ 7.34 $ 8.64 $ 24.68
Weighted-average fair value of options........ $ 4.23 $ 4.62 $ 4.29
</TABLE>
9. INCOME TAXES
Our provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................... $ 9,702 $21,982 $24,604
State................................................. 1,224 2,490 3,120
Foreign............................................... 158 3,278 12,310
Deferred:
Federal............................................... (1,629) (4,752) (7,558)
State................................................. (40) (185) (990)
Foreign............................................... (2,499) (5,534) (6,934)
------- ------- -------
Total......................................... $ 6,916 $17,279 $24,552
======= ======= =======
</TABLE>
Our provision for income taxes reconciles to the amount computed by
applying the statutory U.S. federal rate of 35% for 1997, 1998 and 1999 to
income before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Expense computed at statutory rate....................... $1,807 $ 7,874 $16,824
Non-deductible in-process research and development and
acquisition costs...................................... 3,164 2,635 2,294
State taxes, net of federal tax benefit.................. 770 1,536 1,050
Stock option compensation................................ 200 205 205
Research and development tax credits..................... (584) (1,375) (1,185)
Non-deductible meals and entertainment................... 385 518 1,062
Valuation allowance for net deferred tax asset........... 2,122 5,661 1,904
Other.................................................... (948) 225 2,398
------ ------- -------
Provision for income taxes..................... $6,916 $17,279 $24,552
====== ======= =======
</TABLE>
F-16
<PAGE> 52
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities at December 31, 1998 and 1999, are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Foreign tax credits....................................... $ 2,685 $ 4,030
Deferred revenue.......................................... 1,723 2,604
Accrued liabilities....................................... 2,466 8,287
Bad debt allowance........................................ 2,735 6,158
Research and development tax credits...................... 2,066 4,075
Net operating losses...................................... 14,316 28,485
Other..................................................... 1,748 3,165
------- --------
Total deferred tax asset.......................... 27,739 56,804
Deferred tax liabilities:
Depreciation.............................................. (328) --
Acquired intangible assets................................ (469) (662)
Other..................................................... (3,005) (3,723)
------- --------
Total deferred tax liability................................ (3,802) (4,385)
Valuation allowance for net deferred tax asset.............. (8,519) (10,423)
------- --------
Net deferred tax asset............................ $15,418 $ 41,996
======= ========
</TABLE>
We consider the earnings of foreign subsidiaries to be permanently
reinvested outside the United States. Accordingly, no United States income tax
on these earnings has been provided. Aggregate unremitted earnings of foreign
subsidiaries, for which U.S. income taxes have not been provided, totaled
approximately $25.3 million as of December 31, 1999.
At December 31, 1998 and 1999, we had approximately $19.0 million and $56.5
million of U.S. federal net operating loss carryforwards and research and
development carryforwards of approximately $0.4 million and $4.1 million,
respectively. At December 31, 1998 and 1999, we had $19.4 million and $22.3
million of foreign net operating loss carryforwards, respectively. The federal
net operating loss carryforwards and research and development carryforwards
expire in the years 2011 through 2019 and are subject to certain annual
limitations. The foreign net operating loss carryforwards have no expiration.
We paid income taxes of approximately $2.8 million, $5.9 million and $3.2
million in 1997, 1998 and 1999, respectively.
Management regularly evaluates the realizability of its deferred tax assets
given the nature of its operations and given the tax jurisdictions in which it
operates. We adjust our valuation allowance from time to time based on such
evaluations. The valuation allowance increased by approximately $1.9 million
during 1999 due to uncertainties regarding the realization of net operating loss
carryforwards.
10. EMPLOYEE RETIREMENT PLAN
We have established 401(k) retirement plans, (or the "Retirement Plans")
that cover a majority of our employees. Eligible employees may contribute up to
18% of their compensation, subject to certain limitations, to the Retirement
Plans. We may make contributions to the Retirement Plans at the discretion of
the Board. As of December 31, 1999, no contributions by us had been made.
F-17
<PAGE> 53
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS
We are principally engaged in the design, development, marketing and
support of our RHYTHM suite of intelligent eBusiness solutions, including
software applications and related service offerings. Historically, substantially
all revenues result from the licensing of our software products and related
consulting and customer support (maintenance) services. Our chief operating
decision-maker reviews financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by geographic region for
purposes of making operating decisions and assessing financial performance.
Accordingly, we consider ourselves to be in a single industry segment,
specifically the license, implementation and support of our software
applications and related services.
Revenues are attributable to regions based on the locations of the
customers' operations. The following geographic information presents total
revenues for the years ended December 31, 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States........................................ $155,070 $295,933 $389,912
Europe............................................... 34,707 39,739 93,844
Asia................................................. 20,280 21,095 60,111
Other................................................ 11,719 12,390 27,243
-------- -------- --------
$221,776 $369,157 $571,110
======== ======== ========
</TABLE>
12. MAJOR CUSTOMERS
During 1999, one customer accounted for approximately $36.8 million, or
10%, of total revenues. During 1998 and 1997, no individual customer accounted
for more than 10% of total revenues.
13. SUBSEQUENT EVENTS
On March 12, 2000, we entered into a definitive agreement to acquire Aspect
Development, Inc., a developer of collaborative solutions for
business-to-business marketplaces. Pursuant to the agreement, we will exchange
all of the outstanding capital stock of Aspect and will assume all outstanding
stock options of Aspect, in exchange for approximately 44.9 million shares of
our common stock and options. The transaction will be accounted for as a
purchase, is subject to regulatory approval and i2 and Aspect stockholder
approvals, and is expected to close in the third quarter of this year.
Also on March 12, 2000, we entered into a definitive agreement to acquire
SupplyBase, Inc., a developer of high-end, interactive database products,
services and supply chain management tools. Under the agreement, we will issue
approximately 1.8 million shares of our common stock for all of the outstanding
capital stock and stock options of SupplyBase. The transaction will be accounted
for as a purchase, is subject to regulatory approval and SupplyBase stockholder
approval, and is expected to close in the second quarter of this year.
These strategic acquisitions will result in substantial one-time charges
along with ongoing substantial amortization of intangibles to our earnings.
F-18
<PAGE> 54
i2 TECHNOLOGIES, INC.
SCHEDULE II TO CONSOLIDATED FINANCIAL STATEMENTS
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts (in thousands)
Year Ended 12/31/99................................ 8,551 11,065 (2,142) 17,474
Year Ended 12/31/98................................ 4,578 4,924 (951) 8,551
Year Ended 12/31/97................................ 1,269 4,155 (846) 4,578
</TABLE>
F-19
<PAGE> 55
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1* -- Agreement and Plan of Reorganization, dated May 12, 1999,
by and among i2, Intelligent Acquisition Corp. and Sales
Marketing Administration Tracking Technologies, Inc.
(filed as Exhibit 2.1 to i2's Registration Statement on
Form S-4 (Reg. No. 333-79681)(the "Form S-4").
2.2* -- Agreement and Plan of Reorganization, dated March 12,
2000, by and among i2, Hoya Merger Corp. and Aspect
Development, Inc. (filed as Exhibit 1 to the Schedule 13D
filed by i2 on March 22, 2000 with respect to Aspect
Development, Inc. and incorporated herein by reference).
2.3 -- Agreement and Plan of Reorganization, dated March 12,
2000, by and among i2, Starfish Merger Corporation and
SupplyBase, Inc. (The schedules and exhibits which are
referenced in the table of contents and elsewhere in such
Agreement are hereby incorporated by reference. Such
schedules and exhibits which are not included as exhibits
to this Form 10-K will be furnished supplementally to the
Commission upon request.)
3.1* -- Restated Certificate of Incorporation (filed as Exhibit
3.1 to i2's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999)
3.2* -- Amended and Restated Bylaws (filed as Exhibit 3.1 to i2's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998)
4.1* -- Specimen Common Stock certificate (filed as Exhibit 4.1
to i2's Registration Statement on Form S-1 (Reg No.
333-1752) (the "Form S-1"))
4.2* -- Indenture, dated as of December 10, 1999 between i2 and
Chase Bank of Texas, National Association, as trustee,
including the form of note set forth in Section 2.2
thereof (filed as Exhibit 4.2 to i2's Registration
Statement on Form S-3 (Reg. No. 333-31342) (the "Form
S-3"))
4.3* -- Registration Rights Agreement, dated as of December 10,
1999 between i2 and Goldman, Sachs & Co., Morgan Stanley
Dean Witter and Credit Suisse First Boston (filed as
Exhibit 4.3 to the Form S-3)
10.1* -- Form of Registration Rights Agreement, dated April 1,
1996, among i2, Sanjiv S. Sidhu and Sidhu-Singh Family
Investments, Ltd. (filed as Exhibit 10.2 to the Form S-1)
10.2* -- 1995 Stock Option/Stock Issuance Plan (filed as Exhibit
99.7 to i2's Registration Statement on Form S-8 (Reg. No.
333-85791) (the "1999 S-8"))
10.3* -- Form of Indemnification Agreement 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
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, 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, between
the i2 and Park West E-2 Associates (filed as Exhibit
10.11 to the Form S-1)
10.7* -- Second Amendment of Lease Agreement between i2 and TRST
Irving, Inc. dated as of February 23, 1996 (filed as
Exhibit 10.1 to i2's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996)
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.8* -- Third Amendment to Lease Agreement between i2 and TRST
Irving, Inc. dated as of July 25, 1996 (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"))
10.9* -- Fifth Amendment to Lease Agreement between i2 and
Principal Mutual Life Insurance Company dated as of
August 29, 1996 (filed as Exhibit 10.2 to the September
1996 10-Q)
10.10* -- Fourth Amendment to Lease Agreement between i2 and TRST
Irving, Inc. dated as of December 19, 1996 (filed as
Exhibit 10.17 to i2's Annual Report on Form 10-K for the
year ended December 31, 1996)
10.11* -- Employee Stock Purchase Plan (filed as Exhibit 99.1 to
the 1999 Form S-8)
10.12* -- International Employee Stock Purchase Plan (filed as
Exhibit 99.4 to the 1999 Form S-8)
10.13* -- 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"))
10.14* -- Think Systems Corporation 1997 Incentive Stock Plan
(filed as Exhibit 99.1 to the Think/Optimax S-8)
10.15* -- Optimax Systems Corporation Stock Option Plan (filed as
Exhibit 99.10 to the Think/Optimax S-8)
10.16* -- InterTrans Logistics Solutions Limited 1997 Stock
Incentive Plan (filed as Exhibit 99.7 to i2's
Registration Statement on Form S-8 (Reg. No. 333-53667))
10.17* -- SMART Technologies, Inc., 1996 Stock Option/Stock
Issuance Plan (filed as Exhibit 99.13 to 1999 Form S-8)
10.18* -- Lease with One Colinas Crossing dated March 24, 1999
between Colinas Crossing, LP and i2 (filed as Exhibit
99.6 to i2's Current Report on Form 8-K dated November
30, 1999 (the "November 1999 8-K"))
10.19* -- Lease with Two Colinas Crossing dated August 3, 1999
between Colinas Crossing, LP and i2 (filed as Exhibit
99.7 to the November 1999 8-K)
16.1* -- Letter Regarding Change in Certifying Accountant (filed
as Exhibit 16.1 to i2's Current Report on Form 8-K filed
on April 21, 1999)
21.1 -- List of subsidiaries
23.1 -- Consent of Arthur Andersen LLP
24.1 -- Power of Attorney, pursuant to which amendments to this
Form 10-K may be filed, is included on this signature
page contained in Part IV of this Form 10-K
27.1 -- Financial Data Schedule for the year ended December 31,
1999
</TABLE>
- ---------------
* Incorporated herein by reference to the indicated filing
<PAGE> 1
EXECUTION COPY
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
i2 TECHNOLOGIES, INC.,
STARFISH MERGER CORP.
AND
SUPPLYBASE, INC.
MARCH 12, 2000
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TABLE OF CONTENTS
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ARTICLE I THE MERGER..........................................................1
1.1 The Merger..................................................1
1.2 Closing; Effective Time.....................................2
1.3 Effect of the Merger........................................2
1.4 Certificate of Incorporation; Bylaws........................2
1.5 Directors and Officers......................................2
1.6 Effect on Capital Stock.....................................2
1.7 Surrender of Certificates...................................6
1.8 No Further Ownership Rights in Target Capital Stock.........7
1.9 Lost, Stolen or Destroyed Certificates......................8
1.10 Tax and Accounting Consequences.............................8
1.11 Exempt Securities...........................................8
1.12 Taking of Necessary Action; Further Action..................8
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TARGET...........................8
2.1 Organization, Standing and Power............................9
2.2 Capital Structure...........................................9
2.3 Authority..................................................10
2.4 Financial Statements.......................................11
2.5 Absence of Certain Changes.................................11
2.6 Accounts Receivable........................................12
2.7 Litigation.................................................12
2.8 Restrictions on Business Activities........................12
2.9 Governmental Authorization.................................12
2.10 Title to Property..........................................12
2.11 Intellectual Property......................................13
2.12 Environmental Matters......................................15
2.13 Taxes......................................................16
2.14 Employee Benefit Plans.....................................18
2.15 Employees and Consultants..................................20
2.16 Certain Agreements Affected by the Merger..................21
2.17 Related-Party Transactions.................................21
2.18 Insurance..................................................22
2.19 Compliance with Laws.......................................22
2.20 Brokers' and Finders' Fees.................................22
2.21 Support Agreements.........................................22
2.22 Board Approval; Stockholder Approval Required..............22
2.23 Customers and Suppliers....................................22
2.24 Material Contracts.........................................23
2.25 No Breach of Material Contracts............................24
2.26 Third-Party Consents.......................................24
2.27 Material Third Party Consents..............................24
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2.28 Minute Books...............................................24
2.29 Complete Copies of Materials...............................25
2.30 Year 2000 Compatibility....................................25
2.31 Absence of Undisclosed Liabilities.........................25
2.32 Inventory..................................................25
2.33 Accounting and Tax Matters.................................25
2.34 Export Control Laws........................................26
2.35 Product Releases...........................................26
2.36 Representations Complete...................................26
2.37 Permit Application; Information Statement..................26
2.38 Registration Rights........................................27
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB........27
3.1 Organization, Standing and Power...........................27
3.2 Capital Structure..........................................28
3.3 Authority..................................................28
3.4 SEC Documents; Financial Statements........................29
3.5 Accounting and Tax Matters.................................29
3.6 Absence of Undisclosed Liabilities.........................29
3.7 No Brokers.................................................29
3.8 Representations Complete...................................29
3.9 Information to be Supplied by Acquiror.....................30
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME...............................30
4.1 Conduct of Business of Target..............................30
4.2 Restrictions on Conduct of Business of Target..............30
4.3 Notices....................................................33
ARTICLE V ADDITIONAL AGREEMENTS..............................................33
5.1 No Solicitation............................................33
5.2 Preparation of Information Statement; Permit Application...34
5.3 Stockholders' Meeting or Consent Solicitation..............36
5.4 Access to Information......................................36
5.5 Confidentiality............................................37
5.6 Public Disclosure..........................................37
5.7 Consents; Cooperation......................................37
5.8 Update Disclosure; Breaches................................38
5.9 Legal Requirements.........................................38
5.10 Tax-Free Reorganization....................................39
5.11 Blue Sky Laws..............................................39
5.12 Stock Options..............................................39
5.13 Target Director and Officer Indemnification................40
5.14 Escrow Agreement...........................................41
5.15 Form S-8...................................................41
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5.16 Listing of Additional Shares...............................41
5.17 Employees..................................................41
5.18 Benefit Arrangements.......................................41
5.19 Conversion of Target Preferred Stock.......................41
5.20 Additional Agreements; Best Efforts........................42
5.21 Notice to Holders of Target Warrants.......................42
ARTICLE VI CONDITIONS TO THE MERGER..........................................42
6.1 Conditions to Obligations of Each Party to Effect the
Merger.....................................................42
6.2 Additional Conditions to Obligations of Target.............43
6.3 Additional Conditions to the Obligations of Acquiror.......44
ARTICLE VII TERMINATION, EXPENSES, AMENDMENT AND WAIVER......................46
7.1 Termination................................................46
7.2 Effect of Termination......................................47
7.3 Expenses and Termination Fees..............................47
7.4 Amendment..................................................48
7.5 Extension; Waiver..........................................49
ARTICLE VIII ESCROW AND INDEMNIFICATION......................................49
8.1 Survival of Representations, Warranties and Covenants......49
8.2 Indemnification............................................49
8.3 Escrow Fund................................................50
8.4 Escrow Basket..............................................50
8.5 Escrow Period..............................................50
8.6 Claims upon Escrow Fund....................................50
8.7 Objections to Claims.......................................51
8.8 Resolution of Conflicts; Arbitration.......................51
8.9 Stockholders' Agent........................................52
8.10 Distribution Upon Termination of Escrow Period.............53
8.11 Actions of the Stockholders' Agent.........................53
8.12 Third-Party Claims.........................................53
8.13 Maximum Liability and Remedies.............................54
ARTICLE IX GENERAL PROVISIONS................................................54
9.1 Notices....................................................54
9.2 Interpretation.............................................55
9.3 Counterparts...............................................55
9.4 Entire Agreement; Third Party Beneficiaries................55
9.5 Severability...............................................56
9.6 Remedies Cumulative........................................56
9.7 Governing Law..............................................56
9.8 Assignment; Amendment; Binding Effect......................56
9.9 Rules of Construction......................................56
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SCHEDULES
Target Disclosure Schedule
Acquiror Disclosure Schedule
EXHIBITS
Exhibit A Support Agreement
Exhibit B Certificate of Merger
Exhibit C Escrow Agreement
Exhibit D-1 Employment Agreement for Kedar Doshi
Exhibit D-2 Employment and Noncompetition Agreement for Ron Domingue
Exhibit D-3 Employment Agreement for Antoinette Fowler
Exhibit D-4 Employment and Noncompetition Agreement for Paul Friedman
Exhibit D-5 Employment Agreement for Steve Goldner
Exhibit D-6 Employment and Noncompetition Agreement for Chris Golec
Exhibit D-7 Employment Agreement for Alex Huesemann
Exhibit D-8 Employment Agreement for Simon Kao
Exhibit D-9 Employment Agreement for Richard Kramlich
Exhibit D-10 Employment and Noncompetition Agreement for Peter Lanell
Exhibit D-11 Employment and Noncompetition Agreement for David Mendez
Exhibit D-12 Employment Agreement for Ray Sayre
Exhibit D-13 Employment and Noncompetition Agreement for Dennis Stradford
Exhibit D-14 Employment and Noncompetition Agreement for Alan White
Exhibit D-15 Employment Agreement for Balaine Wightman
Exhibit E Legal Opinion of Brobeck, Phleger & Harrison LLP
Exhibit F Legal Opinion of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
Exhibit G FIRPTA Notice
Exhibit H 280G Agreement
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is made and
entered into as of March 12, 2000 by and among i2 Technologies, Inc., a Delaware
corporation ("ACQUIROR"), Starfish Merger Corp., a Delaware corporation ("MERGER
SUB"), and SupplyBase, Inc. a Delaware corporation ("TARGET").
RECITALS
A. The Boards of Directors of Target, Acquiror and Merger Sub believe
it is in the best interests of their respective companies and the stockholders
of their respective companies that Target and Merger Sub combine into a single
company through the statutory merger of Merger Sub with and into Target (the
"MERGER") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, each outstanding share
of the capital stock of Target ("TARGET CAPITAL STOCK"), shall be converted into
shares of common stock of Acquiror, $0.00025 par value ("ACQUIROR COMMON
STOCK"), at the exchange rates set forth herein.
C. Target, Acquiror and Merger Sub desire to make certain
representations and warranties and other agreements in connection with the
Merger.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "CODE"), and to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code.
E. Concurrent with the execution of this Agreement and as an inducement
to Acquiror to enter into this Agreement, each affiliate of Target who is a
stockholder, officer or director of Target is entering into a Support Agreement
in the form attached hereto as Exhibit A (each, a "SUPPORT AGREEMENT") to vote
the shares of Target Capital Stock owned by such person to approve this
Agreement and the Merger.
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as hereinafter defined) and subject
to and upon the terms and conditions of this Agreement, the Certificate of
Merger attached hereto as Exhibit B (the "CERTIFICATE OF Merger") and the
applicable provisions of the Delaware General Corporation Law ("DELAWARE LAW"),
Merger Sub shall be merged with and into Target, the separate corporate
existence of Merger Sub shall cease and Target shall continue as the surviving
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corporation. Target as the surviving corporation after the Merger is hereinafter
sometimes referred to as the "SURVIVING CORPORATION."
1.2 Closing; Effective Time. The closing of the transactions contemplated
hereby (the "CLOSING") shall take place as soon as practicable after the
satisfaction or waiver of each of the conditions set forth in Article VI hereof,
or at such other time as the parties hereto agree (the date on which the Closing
shall occur being the "CLOSING DATE"). The Closing shall take place at the
offices of Brobeck, Phleger & Harrison LLP at 301 Congress Avenue, Suite 1200,
Austin, Texas, or at such other location as the parties hereto agree. On the
Closing Date, the parties hereto shall cause the Merger to be consummated by
filing the Certificate of Merger with the Secretary of State of the State of
Delaware, in accordance with the relevant provisions of Delaware Law (the time
and date of such filing being the "EFFECTIVE TIME" and the "EFFECTIVE DATE,"
respectively).
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 Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of Target shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Target shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Merger
Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by Delaware Law and such Certificate of Incorporation;
provided, however, that Article I of the Certificate of Incorporation shall be
amended to read as follows: "The name of the corporation is SupplyBase, Inc."
(b) 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. At the Effective Time, the directors of Merger
Sub immediately prior to the Effective Time shall be the directors of the
Surviving Corporation, to hold office until such time as such directors resign,
are removed or their respective successors are duly elected or appointed and
qualified. The officers of Merger Sub immediately prior to the Effective Time
shall be the officers of the Surviving Corporation, to hold office until such
time as such officers resign, are removed or their respective successors are
duly elected or appointed and qualified.
1.6 Effect on Capital Stock. By virtue of the Merger and without any action
on the part of Acquiror, Merger Sub, Target or the holders of any of Target's
securities:
(a) Conversion of Target Capital Stock. The maximum number of shares of
Acquiror Common Stock to be issued (including Acquiror Common Stock to be
reserved for issuance upon exercise of options to purchase shares of Target
Common Stock (as hereinafter
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defined) ("TARGET OPTIONS") and warrants to purchase shares of Target Common
Stock ("TARGET WARRANTS") assumed by Acquiror pursuant to Sections 1.6(d) and
5.12) in exchange for the acquisition by Acquiror of all Target Capital Stock
outstanding immediately prior to the Effective Time and the assumption by
Acquiror of all unexpired and unexercised Target Options outstanding immediately
prior to the Effective Time shall be 1,875,000 shares (the "TOTAL ACQUIROR
CAPITAL SHARES"), reduced (i) by any Dissenting Shares (as hereinafter defined)
and (ii) subject to payment by Acquiror at the Closing of the Target Merger
Expenses (as hereinafter defined), by the Target Merger Expense Set Off Shares
(as hereinafter defined). Certain of such shares of Acquiror Common Stock shall
be deposited in the Escrow Fund (as hereinafter defined) in accordance with
Article VIII hereof. At the Closing, Acquiror shall pay all costs and expenses
incurred by Target through the Closing Date in connection with this Agreement
and the transactions contemplated hereby including, without limitation, the fees
and expenses of its advisers, accountants and legal counsel (collectively, the
"TARGET MERGER EXPENSES"). The term "TARGET MERGER EXPENSE SET OFF SHARES" shall
equal the Target Merger Expenses divided by the average closing "sale" price of
a share of Acquiror Common Stock for the ten (10) most recent days that Acquiror
Common Stock has traded ending on the fifth trading day immediately preceding
the Closing Date, as reported on the Nasdaq National Market (such average price
being the "ACQUIROR CLOSING STOCK PRICE"). No other adjustment shall be made in
the number of shares of Acquiror Common Stock issued in the Merger as a result
of any cash proceeds received by Target from the date hereof to the Closing Date
pursuant to the exercise of Target Options and Target Warrants. Except for the
Target Options and Target Warrants, there are no other options, warrants or
other rights, whether contingent or otherwise, to purchase shares of Target
Capital Stock. Subject to the terms and conditions of this Agreement and the
Certificate of Merger, as of the Effective Time, by virtue of the Merger and
without any action on the part of the holder of any shares of Target Capital
Stock:
(A) Each share of Target common stock, par value $0.001 per share
(the "TARGET COMMON STOCK"), issued and outstanding immediately prior to the
Effective Time (other than (i) shares to be cancelled pursuant to Section 1.6(b)
and (ii) shares, if any, held by persons who have not voted such shares for
approval of the Merger and with respect to which such persons shall become
entitled to exercise dissenters' rights in accordance with Delaware Law and, if
applicable, the California General Corporation Law, as amended ("CALIFORNIA
LAW") (the shares referred to in clause (ii) being the "DISSENTING SHARES"))
shall be converted into and exchanged for the number of shares of Acquiror
Common Stock equal to (i) (A) the Total Acquiror Shares minus (B) the Target
Merger Expense Set Off Shares divided by (ii) the sum of (x) all Target Common
Stock outstanding immediately prior to the Effective Time, (y) the Target Common
Stock issuable upon the conversion of all Target Series A Preferred Stock, par
value $0.001 per share ("TARGET SERIES A PREFERRED STOCK"), Target Series B
Preferred Stock, par value $0.001 per share ("TARGET SERIES B PREFERRED STOCK"),
and Target Series C Preferred Stock, par value $0.001 per share ("TARGET SERIES
C PREFERRED STOCK"), outstanding immediately prior to the Effective Time and (z)
the Target Common Stock issuable upon the exercise of all Target Options and
Target Warrants outstanding immediately prior to the Effective Time (the result
of clause (i) divided by clause (ii) being referred to as the "COMMON EXCHANGE
RATIO").
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(B) Each share of Target Series A Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than Dissenting
Shares) shall be converted into and exchanged for a number of shares of Acquiror
Common Stock determined by multiplying (i) the Common Exchange Ratio by (ii) the
number of shares of Target Common Stock issuable upon the conversion of one
share of Target Series A Preferred Stock immediately prior to the Effective Time
(the product of clause (i) multiplied by clause (ii) being referred to as the
"SERIES A EXCHANGE RATIO").
(C) Each share of Target Series B Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than Dissenting
Shares) shall be converted into and exchanged for a number of shares of Acquiror
Common Stock determined by multiplying (i) the Common Exchange Ratio by (ii) the
number of shares of Target Common Stock issuable upon the conversion of one
share of Target Series B Preferred Stock immediately prior to the Effective Time
(the product of clause (i) multiplied by clause (ii) being referred to as the
"SERIES B EXCHANGE RATIO").
(D) Each share of Target Series C Preferred Stock (as defined below)
issued and outstanding immediately prior to the Effective Time (other than
Dissenting Shares) shall be converted into and exchanged for a number of shares
of Acquiror Common Stock determined by multiplying (i) the Common Exchange Ratio
by (ii) the number of shares of Target Common Stock issuable upon the conversion
of one share of Target Series C Preferred Stock immediately prior to the
Effective Time (the product of clause (i) multiplied by clause (ii) being
referred to as the "SERIES C EXCHANGE RATIO").
The Common Exchange Ratio, Series A Exchange Ratio, Series B Exchange Ratio and
Series C Exchange Ratio are collectively referred to as the "EXCHANGE RATIOS"
and individually as an "EXCHANGE RATIO."
(b) Cancellation of Target Capital Stock Owned by Acquiror or Target.
At the Effective Time, each share of Target Capital Stock owned by Acquiror or
Target or any direct or indirect wholly owned subsidiary of Acquiror or of
Target immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof.
(c) Target Stock Option Plans. At the Effective Time, the Target 1998
Stock Option Plan and 1999 Stock Plan, each as amended (together, 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 5.12.
(d) Target Warrants. At the Effective Time, each outstanding Target
Warrant shall be assumed by Acquiror. Each such warrant so assumed by Acquiror
under this Agreement shall continue to have, and be subject to, the same terms
and conditions as those that existed immediately prior to the Effective Time,
except that (i) such warrant shall 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 warrant immediately
prior to the Effective Time multiplied by the Common Exchange Ratio and rounded
down to the nearest whole number of shares of Acquiror Common Stock and (ii) the
per share exercise price for the
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shares of Acquiror Common Stock issuable upon exercise of such assumed warrant
shall be equal to the quotient determined by dividing the exercise price per
share of Target Common Stock at which such warrant was exercisable immediately
prior to the Effective Time by the Common Exchange Ratio, rounded up to the
nearest whole cent. Acquiror shall take all corporate action necessary to
reserve and make available for issuance a sufficient number of shares of
Acquiror Common Stock for delivery under the Target Warrants assumed in
connection with this Section 1.6(d).
(e) Capital Stock of Merger Sub. At the Effective Time, each share of
Merger Sub common stock, par value $0.01 per share, 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,
$0.01 par value, 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 capital stock of the Surviving Corporation.
(f) Adjustments to Exchange Ratios. The Exchange Ratios 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, recapitalization
or other like change with respect to Acquiror Common Stock or Target Capital
Stock occurring after the date hereof and prior to the Effective Time.
(g) Fractional Shares. No fraction of a share of Acquiror Common Stock
will be issued, but in lieu thereof each holder of shares of Target Capital
Stock who would otherwise be entitled to a fraction of a share of Acquiror
Common Stock (after aggregating all fractional shares of Acquiror Common Stock
to be received by such holder) shall receive from Acquiror an amount of cash
(rounded to the nearest whole cent) equal to the product of (i) such fraction,
multiplied by (ii) the Acquiror Closing Stock Price.
(h) Dissenters' Rights. Any Dissenting Shares shall not be converted
into Acquiror Common Stock and shall not receive any cash in lieu of fractional
shares but instead shall be converted into the right to receive such
consideration as may be determined to be due with respect to such Dissenting
Shares pursuant to Delaware Law and, if applicable, California Law. Target
agrees that, except with the prior written consent of Acquiror, or as required
under Delaware Law and, if applicable, California Law, it will not make any
payment with respect to, or settle or offer to settle, any claim, demand or
other liability with respect to any Dissenting Shares. Each holder of Dissenting
Shares (a "DISSENTING STOCKHOLDER") who, pursuant to the provisions of Delaware
Law and, if applicable, California Law, becomes entitled to payment of the fair
value for shares of Target Capital Stock shall receive payment therefor (but
only after the value therefor shall have been agreed upon or finally determined
pursuant to such provisions). If, after the Effective Time, any Dissenting
Shares shall lose their status as Dissenting Shares, Acquiror shall issue and
deliver, upon surrender by such Dissenting Stockholder of a certificate or
certificates representing shares of Target Capital Stock, the number of shares
of Acquiror Common Stock to which such Dissenting Stockholder would otherwise be
entitled under this Section 1.6 and the Certificate of Merger less the number of
shares allocable to such Dissenting Stockholder that have been or will be
deposited in the Escrow Fund (as defined below) pursuant to Section 1.7(c) and
Article VIII hereof.
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1.7 Surrender of Certificates.
(a) Exchange Agent. ChaseMellon Shareholder Services, L.L.C., the
transfer agent and registrar for the Acquiror Common Stock, shall act as
exchange agent (the "EXCHANGE AGENT") in the Merger.
(b) Acquiror to Provide Common Stock and Cash. Promptly after the
Effective Time (and in any event no later than ten (10) business days after the
Effective Time), Acquiror shall make available in accordance with this Article
I, through such reasonable procedures as Acquiror may adopt, (i) the shares of
Acquiror Common Stock issuable pursuant to Section 1.6(a) 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 into an escrow
fund (the "ESCROW FUND") pursuant to the requirements of Article VIII hereof and
(ii) cash in an amount sufficient to permit payment of cash in lieu of
fractional shares pursuant to Section 1.6(f).
(c) Exchange Procedures. Promptly after the Effective Time (and in any
event no later than ten (10) business days after the Effective Time), Acquiror
shall cause the Exchange Agent to mail to each holder of record (the "FORMER
TARGET STOCKHOLDERS") of a certificate or certificates (the "CERTIFICATES")
which immediately prior to the Effective Time represented outstanding shares of
Target Capital Stock, whose shares were converted into the right to receive
shares of Acquiror Common Stock pursuant to Section 1.6, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon receipt of the
Certificates by the Exchange Agent, and shall be in such form and have such
other provisions as Acquiror may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for certificates
representing shares of Acquiror Common Stock (and cash in lieu of fractional
shares). Upon surrender of a Certificate for cancellation to such agent or
agents as may be appointed by Acquiror, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Acquiror Common Stock (less the number of shares of Acquiror Common
Stock to be deposited in the Escrow Fund on such holder's behalf pursuant to
Article VIII hereof), 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 fractional
shares pursuant to Section 1.6. As soon as practicable after the Effective Time
(and in any event no later than ten (10) business days after the Effective Time)
and subject to and in accordance with the provisions of Section 8.3, Acquiror
shall cause to be delivered to the Escrow Agent (as defined in Section 8.3) a
certificate or certificates representing (x) an amount of shares (allocated
pro-rata among all Target stockholders) equal to the sum of 10% of the Acquiror
Common Stock issued in exchange for outstanding Target Capital Stock
(collectively the "ESCROW SHARES"), which shall be registered in the name of the
Escrow Agent as nominee for the holders of Certificates cancelled pursuant to
this Section 1.7. Such shares shall be
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beneficially owned by such holders and shall be held in escrow and shall be
available to compensate Acquiror for damages as provided in Article VIII. To the
extent not used for such purposes, such shares shall be released, all as
provided in Article VIII hereof.
(d) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Acquiror Common Stock with a record date
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 until the holder of record of such Certificate surrenders such
Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of Acquiror Common Stock issued in exchange therefor,
without interest, at the time of such surrender, the amount of any such
dividends or other distributions with a record date after the Effective Time
which would have been previously payable (but for the provisions of this Section
1.7(d)) with respect to such shares of Acquiror Common Stock.
(e) 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 shall be a condition of the
issuance thereof that the Certificate so surrendered is properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Acquiror or the Exchange Agent any transfer or other
Taxes (as defined in Section 2.13(c)) 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
satisfaction of Acquiror or the Exchange Agent that such Tax has been paid or is
not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 1.7, no party hereto or any of their respective agents shall be liable
to any person for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(g) Dissenting Shares. The provisions of this Section 1.7 also shall
apply to Dissenting Shares that lose their status as such, except that the
obligations of Acquiror under this Section 1.7 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 1.6 hereof.
1.8 No Further Ownership Rights in Target Capital Stock. All shares of
Acquiror Common Stock issued upon the surrender for exchange of shares of Target
Capital Stock in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Target
Capital Stock, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of Target Capital Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
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1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, the Acquiror shall issue or cause to
be issued in exchange for such lost, stolen or destroyed Certificate, upon the
making of an affidavit of that fact by the holder thereof, such shares of
Acquiror Common Stock as may be required pursuant to Section 1.6; provided,
however, that Acquiror may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
Certificate 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 any of their agents with respect to the Certificate alleged to
have been lost, stolen or destroyed.
1.10 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall constitute a reorganization within the meaning of Section
368 of the Code. No party shall take any action which would, to such party's
knowledge, cause the Merger to fail to so qualify as a reorganization within the
meaning of Section 368 of the Code.
1.11 Exempt Securities. The parties hereto expect that the shares of
Acquiror Common Stock to be issued in connection with the Merger will be exempt
securities under the Securities Act of 1933, as amended (the "SECURITIES ACT"),
by reason of Section 3(a)(10) thereof, and that the issuance of Acquiror Common
Stock and Acquiror's assumption of Target Options and Target Warrants hereunder
will be qualified under the securities laws of the State of California pursuant
to Section 25121 thereof, after a fairness hearing (the "FAIRNESS HEARING") has
been held pursuant to the authority granted by Section 25142 of such law. Each
of Acquiror, Merger Sub and Target shall use their respective best efforts (a)
to file an application for such hearing and qualification as soon as reasonably
practicable after the date of this Agreement and (b) to obtain such
qualification.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Target and Merger Sub, the officers and directors of Target
and Merger Sub are fully authorized in the name of their respective corporations
or otherwise to take, and shall take, all such lawful and necessary action, so
long as such action is not inconsistent with this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TARGET
In this Agreement, any reference to any event, change, condition or effect
being "MATERIAL" with respect to any entity means any material event, change,
condition or effect related to the financial condition, properties, assets
(including intangible 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 "MATERIAL ADVERSE EFFECT" with respect to any
entity means any event, change or effect that is materially adverse to the
financial condition, properties, assets (including intangible assets),
liabilities, business, operations or results of operations of such entity and
its subsidiaries, taken as a whole; provided, that for purposes of Section
6.2(a) and
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Section 6.3(a), neither of the following shall constitute a Material Adverse
Effect: (i) changes or effects which are primarily and directly cause by the
execution and delivery of this Agreement or the announcement of the transactions
contemplated hereby (it being understood that in any controversy concerning the
applicability of this clause (i) the party claiming the benefit of this clause
(i) shall have the burden of proof with respect to the elements of such clause)
and (ii) changes or effects which are primarily and directly caused by
Acquiror's refusal to consent to action requested to be taken by Target which
Target (at the time of such request) certified to Acquiror was necessary, in the
good faith judgment of Target's Board of Directors, to avoid a Material Adverse
Effect on Target.
In this Agreement, the words "AWARE," "KNOWLEDGE" or similar words,
expressions or phrases with respect to a party means such party's actual
knowledge after inquiry of officers, directors and other key employees of such
party and its subsidiaries reasonably believed to have knowledge of the relevant
matters.
Target represents and warrants to Acquiror and Merger Sub that the
statements contained in this Article II are true and correct, except as set
forth in the Disclosure Schedule delivered by Target to Acquiror prior to the
execution and delivery of this Agreement (the "TARGET DISCLOSURE SCHEDULE"). The
Target Disclosure Schedule shall be arranged in paragraphs corresponding to the
numbered Sections contained in this Article II, and the disclosure in any
Section shall qualify only the corresponding Section in this Article II. Any
reference in this Article II to an agreement being "ENFORCEABLE" shall be deemed
to be qualified to the extent such enforceability is subject to (i) laws of
general application relating to bankruptcy, insolvency, moratorium, fraudulent
conveyance and the relief of debtors and (ii) the availability of specific
performance, injunctive relief and other equitable remedies.
2.1 Organization, Standing and Power. Target is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has full corporate power and authority to conduct its business as
presently conducted and as proposed to be conducted and to enter into this
Agreement and to carry out the transactions contemplated by this Agreement.
Target is duly qualified and in good standing to do business as a foreign
corporation in California and is not required to be so qualified in any other
jurisdiction, except where the failure to be so qualified would not have a
Material Adverse Effect on Target. Target has furnished to Acquiror true and
complete copies of its Certificate of Incorporation and Bylaws, each as amended
to date and currently in effect. Target is not in violation of any of the
provisions of its Certificate of Incorporation or Bylaws. Target does not own,
directly or indirectly, any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity.
2.2 Capital Structure. The authorized capital stock of Target consists of
20,000,000 shares of common stock, par value $0.001 per share (the "TARGET
COMMON STOCK"), of which 4,717,354 shares are issued and outstanding, and
12,753,326 shares of preferred stock, par value $0.001 per share, of which
4,289,496 shares have been designated as Target Series A Preferred Stock,
2,963,830 shares have been designated as Target Series B Preferred Stock and
5,500,000 shares have been designated as Target Series C Preferred Stock. As of
the date of this
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Agreement, there are 4,289,496 shares of Target Series A Preferred Stock,
2,963,830 shares of Target Series B Preferred Stock and 4,676,667 shares of
Target Series C Preferred Stock issued and outstanding. All of the issued and
outstanding shares of Target Capital Stock have been duly authorized and validly
issued and are fully paid and nonassessable. Except as set forth in Section 2.2
of the Target Disclosure Schedule, (a) no subscription, warrant, option,
convertible security or other right (contingent or otherwise) to purchase or
acquire from Target any shares of capital stock of Target is authorized or
outstanding, (b) Target has no obligation (contingent or otherwise) to issue any
subscription, warrant, option, convertible security or other such right or to
issue or distribute to holders of any shares of its capital stock any evidences
of indebtedness or assets of Target and (c) Target has no obligation (contingent
or otherwise) to purchase, redeem or otherwise acquire any shares of its capital
stock or any interest therein or to pay any dividend or make any other
distribution in respect thereof. True and complete copies of all agreements and
instruments relating to or issued under the Target Stock Option Plan 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 from the forms made available to
Acquiror. All of the issued and outstanding shares of capital stock of Target
have been offered, issued and sold by Target in compliance with applicable
securities laws.
2.3 Authority. The execution and delivery by Target of this Agreement and
the Certificate of Merger, and the consummation by Target of the transactions
contemplated hereby and thereby, 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. This Agreement has been duly executed and
delivered by Target and constitutes a valid and binding obligation of Target
enforceable 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
breach 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, or require a waiver or consent under
(a) its Certificate of Incorporation or Bylaws (each as amended to date) or (b)
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 Target or any of its
subsidiaries or their properties or assets, except where such conflict,
violation, default, termination, cancellation or acceleration with respect to
the foregoing provisions of clause (b) would not, individually or in the
aggregate, have a Material Adverse Effect on Target. No consent, approval, order
or authorization of, or registration, qualification, designation, declaration or
filing with, any court, administrative agency or commission or other
governmental authority or instrumentality ("GOVERNMENTAL ENTITY") is required on
the part of Target in connection with the execution and delivery of this
Agreement or the consummation of the other transactions contemplated by this
Agreement, except for (w) the filing of the Certificate of Merger, (x) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable state securities laws and the
securities laws of any foreign country; (y) such filings as may be required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
("HSR"), and (z) such other consents, approvals, orders, authorizations,
registrations, declarations and filings which, if not obtained or made, would
not
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have a Material Adverse Effect on Target and would not prevent, or materially
alter or delay, any of the transactions contemplated by this Agreement. The
terms of the Target Stock Option Plan permit the assumption thereof by Acquiror
or the substitution of options to purchase Acquiror Common Stock as provided in
this Agreement, without the consent or approval of the holders of such options,
the Target stockholders or otherwise and without any acceleration of the
exercise schedule or vesting provisions in effect for such options. The terms of
the Target Warrants permit the assumption thereof by Acquiror or the
substitution of warrants to purchase Acquiror Common Stock as provided in this
Agreement, without the consent or approval of the holders of such warrants, the
Target stockholders or otherwise and without any acceleration of the exercise
schedule or vesting provisions in effect for such warrants.
2.4 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 as at, and for the fiscal years ended,
December 31, 1997 and 1998, and its unaudited financial statements (balance
sheet, statement of operations and statement of cash flows) on a consolidated
basis as at, and for the 12-month period ended, December 31, 1999 (collectively,
the "TARGET FINANCIAL STATEMENTS"). The Target Financial Statements were
complete and correct in all material respects as of their respective dates, and
were prepared in accordance with generally accepted accounting principles
("GAAP") (except that the unaudited financial statements do not have notes
thereto) applied on a consistent basis throughout the periods indicated and with
each other (except as may be indicated in the notes thereto). The Target
Financial Statements fairly present in all material respects the consolidated
financial condition and operating results of Target as of the dates, and for the
periods, indicated therein, subject to normal year-end audit adjustments. Target
maintains and will continue to maintain a standard system of accounting
established and administered in accordance with GAAP.
2.5 Absence of Certain Changes. Since December 31, 1999 (the "TARGET
BALANCE SHEET DATE"), Target has conducted its business in the ordinary course
of business and there has not occurred: (a) up to and including March 12, 2000,
any change, event or condition (whether or not covered by insurance) that has
resulted in, or would result in, a Material Adverse Effect on Target; (b) any
acquisition, sale or transfer of any material asset of Target other than in the
ordinary course of business (including transfers of Target Intellectual Property
(as defined in Section 2.11) on a non-exclusive basis to Target's customers,
distributors or other licensees in the ordinary course of business); (c) any
material change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by Target or any material
revaluation by Target of any of its assets; (d) any declaration, setting aside,
or payment of a dividend or other distribution with respect to the capital stock
Target, or any direct or indirect redemption, purchase or other acquisition by
Target of any of its capital stock; (e) any Material Contract entered into by
Target; (f) any material amendment or termination of, or default under, any
contract to which Target is a party or by which it is bound which would
reasonably be expected to have a Material Adverse Effect on Target; (g) any
amendment or change to the Certificate of Incorporation or Bylaws of Target or
any proposal by Target's Board of Directors or stockholders relating thereto;
(h) any material increase in or modification of the compensation or benefits
payable or to become payable by Target to any of its consultants, independent
contractors, directors or employees or (i) any negotiation or agreement by
Target or any of its
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subsidiaries to do any of the things described in the preceding clauses (a)
through (h) (other than negotiations with Acquiror and its representatives
regarding the transactions contemplated by this Agreement).
2.6 Accounts Receivable. The accounts receivable shown on the most recent
Balance Sheet included in the Target Financial Statements (the "TARGET BALANCE
SHEET") arose in the ordinary course of business. Allowances for doubtful
accounts and returns have been prepared in accordance with the past practices of
Target. The accounts receivable of Target arising after the Target Balance Sheet
Date and prior to the date hereof arose in the ordinary course of business. No
agreement for deduction or discount has been made with respect to any accounts
receivable.
2.7 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Target, threatened
against Target or any of its properties or any of its officers or directors (in
their capacities as such) that, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on Target. All actions,
suits, proceedings, claims, arbitrations or investigations to which Target is a
party (or, to the knowledge of Target, threatened to become a party) is
disclosed in Section 2.7 of the Target Disclosure Schedule. There is no
judgment, decree or order against Target or, to the knowledge of Target, any of
its directors or officers (in their capacities as such), that would prevent,
enjoin, or materially alter or delay any of the transactions contemplated by
this Agreement.
2.8 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon Target which would reasonably be
expected to have the effect of prohibiting or materially impairing any current
business practice of Target, any acquisition of property by Target or the
conduct of business by Target as currently conducted by Target.
2.9 Governmental Authorization. Target has obtained each federal, state,
county, local or foreign governmental consent, license, permit, grant or other
authorization of a Governmental Entity (a) pursuant to which Target currently
operates or holds any interest in any of its properties or (b) that is required
for the operation of Target's business or the holding of any such interest ((a)
and (b) herein collectively called the "TARGET AUTHORIZATIONS"), and all of such
Target Authorizations are in full force and effect, in each case except where
the failure to obtain or have any such Target Authorizations would not have a
Material Adverse Effect on Target.
2.10 Title to Property. Target has good and valid title to all of its
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), or with
respect to leased properties and assets, valid leasehold interests in, free and
clear of all mortgages, liens, pledges, charges or encumbrances of any kind or
character, except (a) the lien of current taxes not yet due and payable, (b)
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 and (c) liens securing debt which is reflected on the
Target Balance Sheet. The plant,
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property and equipment of Target that are used in the operations of their
business are in good operating condition and repair. All properties used in the
operations of Target are reflected in the Target Balance Sheet to the extent
GAAP requires the same to be reflected. Section 2.10 of the Target Disclosure
Schedule identifies each parcel of real property owned or leased by Target.
2.11 Intellectual Property.
(a) Target owns or is licensed for, and in any event possesses
sufficient and legally enforceable rights with respect to, all Intellectual
Property (as hereinafter defined) that is used in, or that may be necessary for,
its business as currently conducted or, to Target's knowledge, as proposed to be
conducted ("TARGET INTELLECTUAL PROPERTY," which term will also include all
other Intellectual Property owned by or licensed to Target now or in the past)
without any conflict with or infringement or misappropriation of any rights or
property of others ("INFRINGEMENT"), except to the extent that the failure to
have such rights has not had and would not have a Material Adverse Effect on
Target and except for such items as may reasonably be expected to be available
for licensing on reasonable terms from third parties. Such ownership, licenses
and rights are exclusive except (A) with respect to Inventions (as hereinafter
defined) in the public domain that are not important differentiators of Target's
business or proposed business, (B) with respect to standard, generally
commercially available, "off-the-shelf" third party products that are not part
of any current or proposed product, service or Intellectual Property offering of
Target and (C) where the failure to be exclusive has not had and would not have
a Material Adverse Effect on Target. No Target Intellectual Property (excluding
Intellectual Property licensed to Target only on a nonexclusive basis) was
conceived or developed directly or indirectly with or pursuant to government
funding or a government contract. "INTELLECTUAL PROPERTY" means: (i) inventions
(whether or not patentable); trade names, trade marks, service marks, logos and
other designations (collectively, "MARKS"); works of authorship; mask works;
data; technology, know-how, trade secrets, ideas and information; designs;
formulas; algorithms; processes; schematics; computer software (in source code
and/or object code form); and all other intellectual and industrial property of
any sort (collectively, "INVENTIONS") and (ii) patent rights; Mark rights;
copyrights; mask work rights; sui generis database rights; trade secret rights;
moral rights; and all other intellectual and industrial property rights of any
sort throughout the world, and all applications, registrations, issuances and
the like with respect thereto ("IP RIGHTS"). With respect to patent rights,
moral rights and Mark rights, the representations and warranties of this Section
2.11(a) are made only to Target's knowledge and without having conducted any
special investigation or patent or trademark search. All copyrightable matter
within Target Intellectual Property has been created by persons who were
employees or contractors of Target at the time of creation and no third party
has or will have "moral rights" or rights to terminate any assignment or license
with respect thereto. Target has not received any written communication and, to
its knowledge, has not received any verbal communication alleging that Target
has been or may be (whether in its current or proposed business or otherwise)
engaged in, liable for or contributing to any Infringement, nor does Target have
any particular reason to expect that any such communication will be forthcoming.
(b) To the extent included in Target Intellectual Property (but
excluding Intellectual Property licensed to Target only on a nonexclusive
basis), Section 2.11 of the Target Disclosure Schedule lists (by name, number,
jurisdiction, owner and, where applicable, the name
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and address of each inventor) all patents and patent applications; all
registered and unregistered Marks; and all registered and, if material,
unregistered copyrights and mask works; and all other issuances, registrations,
applications and the like with respect to those or any other IP Rights. No
cancellation, termination, expiration or abandonment to the knowledge of Target
of any of the foregoing (except natural expiration or termination at the end of
the full possible term, including extensions and renewals, and failures to
obtain allowable subject matter for patent applications from applicable
registration authorities) is anticipated by Target, except where such event
would not have a Material Adverse Effect on Target. Except as referenced in
written documentation previously provided to Acquiror (including without
limitation file wrappers), Target is not aware of any material challenges (or
any specific basis therefor) with respect to the validity of any of the
foregoing issued or registered IP Rights (or any part or claim thereof) or with
respect to the patentability of any claim of any of the foregoing patent
applications.
(c) There is, to the knowledge of Target, no unauthorized use,
disclosure, infringement or misappropriation of any Target Intellectual Property
(excluding any such activity with respect to third party Intellectual Property
outside the scope of any exclusivity granted to Target) by any third party,
including, without limitation, any employee or former employee of Target.
(d) Target has taken all commercially reasonable and appropriate steps
to protect and preserve the confidentiality of all Target Intellectual Property
with respect to which Target has exclusivity and wishes to maintain
confidentiality and that is not otherwise disclosed in published patents or
patent applications or registered copyrights (collectively, the "TARGET
CONFIDENTIAL INFORMATION"). All use by and disclosure to employees or others of
Target Confidential Information has been pursuant to the terms of valid and
binding written confidentiality and nonuse/restricted-use agreements. Target has
not disclosed or delivered to any third party (other than an escrow holder), or
permitted the disclosure or delivery by any escrow holder or other person any
part of any Source Materials (as defined in Section 2.24(m)).
(e) Each current and former employee and contractor of Target who is
or was involved in, or who has contributed to, the creation or development of
any Target Intellectual Property (other than third-party Intellectual Property
licensed to Target) has executed and delivered and is in compliance with an
enforceable agreement in substantially the form of Target's standard Proprietary
Information and Inventions Agreements (which agreement provides valid written
assignments of all title and rights to any Target Intellectual Property
conceived or developed thereunder, or otherwise in connection with his or her
contracting, consulting or employment, but not already owned by Target by
operation of law).
(f) To Target's knowledge, Target is not using, and it will not be
necessary to use, (i) any Inventions of any of its past or present employees or
contractors (or people currently intended to be hired) made prior to or outside
the scope of their employment by Target or (ii) any confidential information or
trade secrets of any former employer of any such person.
(g) There are no actions that must be taken by Target or any
subsidiary within sixty (60) days following the Closing Date that, if not taken,
will result in the loss of any Intellectual Property, including the payment of
any registration, maintenance or renewal fees or
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the filing of any responses to U.S. Patent and Trademark Office actions,
documents, applications or certificates for the purposes of obtaining,
maintaining, perfecting or preserving or renewing any Intellectual Property.
2.12 Environmental Matters.
(a) The following terms shall be defined as follows:
(i) "ENVIRONMENTAL AND SAFETY LAWS" shall mean any federal, state,
local or foreign laws, ordinances, codes, regulations, rules and orders relating
to the protection of the environment, or that classify, regulate, call for the
remediation of, require reporting with respect to, or list or define air, water,
groundwater, solid waste, hazardous or toxic substances, materials, wastes,
pollutants or contaminants, or which relate to the health and safety of
employees, workers or other persons, including the public, as in effect on the
date hereof.
(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, such
substances, materials, wastes, pollutants defined in or regulated under any
Environmental and Safety Laws.
(iii) "PROPERTY" shall mean all real property leased or owned by
Target or any subsidiary 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 follows: (i) to its knowledge,
no methylene chloride or asbestos is contained in or has been used at or
released from the Facilities; (ii) all Hazardous Materials and wastes have been
used, handled and disposed of in material compliance with all Environmental and
Safety Laws; and (iii) Target has received no written notice of any
noncompliance of the Facilities or of its past or present operations with
Environmental and Safety Laws (except for such matters which have been resolved
without material liability to Target); (iv) to its knowledge, no notices,
administrative actions or suits are pending or threatened relating to a
violation of any Environmental and Safety Laws; (v) Target has not received
written notice that it is a potentially responsible party under the federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
or analogous state statute or any similar foreign law or regulation requiring
assessment or clean up, arising out of events occurring prior to the Closing
Date; (vi) to Target's knowledge, there have not been in the past, and are not
now, any Hazardous Materials on, under or migrating to or from the Facilities or
Property, for which Target could reasonably be expected to have a material
liability; (vii) to Target's knowledge, there have not been in the past, and are
not now, any underground tanks at, on or under the Property including without
limitation, treatment or storage tanks, sumps, or water, gas or oil wells;
(viii) to Target's 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; (ix) to Target's knowledge, there is no formaldehyde on the Property or
in the Facilities,
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nor any insulating material containing urea formaldehyde in the Facilities; (x)
to Target's knowledge, the Facilities and Target's activities therein have at
all times been in material compliance with all Environmental and Safety Laws;
(xi) Target has all the permits and licenses required to be issued for its
operations and are in full compliance with the terms and conditions of those
permits, except where the failure to have or comply with such permits or
licenses would not have a Material Adverse Effect on Target; and (xii) all
written environmental assessments known to Target of Target's current or past
Properties or Facilities have been provided to Acquiror.
2.13 Taxes.
(a) All Tax returns, statements, reports, declarations and other forms
and documents (including without limitation estimated Tax returns and reports
and material information statements, returns and reports) required to be filed
with any Tax Authority with respect to any Taxable period ending on or before
the Effective Time, by or on behalf of Target (collectively "TAX RETURNS" and
individually a "TAX RETURN"), have been or will be properly completed and filed
when due (including any extensions of such due date) and all amounts shown due
on such Tax Returns on or before the Effective Time have been or will be paid on
or before such due date. The Target Balance Sheet (i) fully accrues all actual
and contingent liabilities for Taxes with respect to all periods through the
Target Balance Sheet Date and Target has not and will not incur any Tax
liability in excess of the amount reflected on such Target Balance Sheet with
respect to such periods (excluding any amount thereof that reflects timing
differences between the recognition of income for purposes of GAAP and for Tax
purposes) and (ii) properly accrues in accordance with GAAP all material
liabilities for Taxes payable after the Target Balance Sheet Date with respect
to all transactions and events occurring on or prior to such date. All
information set forth in the notes to the Target Financial Statements relating
to Tax matters is true, complete and accurate in all material respects. No
material Tax liability since the Target Balance Sheet Date has been or will be
incurred by Target other than in the ordinary course of business, and adequate
provision has been made by Target for all Taxes since that date in accordance
with GAAP on at least a quarterly basis.
(b) Target has previously provided or made available to Acquiror true
and correct copies of all Tax Returns. Target has withheld and paid to the
applicable financial institution or Tax Authority all amounts required to be
withheld. To the knowledge of Target, Tax Returns filed with respect to Taxable
years of Target through the Taxable year ended December 31, 1998 in the case of
the United States, have been examined and closed. Target (or any member of any
affiliated or combined group of which Target has been a member) has not granted
any extension or waiver of the limitation period applicable to any Tax Returns
that is still in effect. There is no material claim, audit, action, suit,
proceeding, or (to the knowledge of Target) investigation now pending or (to the
knowledge of Target) threatened against or with respect to Target in respect of
any Tax or assessment. No notice of deficiency or similar document of any Tax
Authority has been received by Target, and there are no liabilities for Taxes
(including liabilities for interest, additions to Tax and penalties thereon and
related expenses) with respect to the issues that have been raised (and are
currently pending) by any Tax Authority that would, if determined adversely to
Target, materially and adversely affect the liability of Target for Taxes. There
are no liens for Taxes (other than for current Taxes not yet
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due and payable) upon the assets of Target. Target has never been a member of
an affiliated group of corporations, within the meaning of Section 1504 of the
Code. Target is in full compliance with all the terms and conditions of any Tax
exemptions or other Tax-sharing agreement or order of a foreign government and
the consummation of the Merger will not have any adverse effect on the continued
validity and effectiveness of any such Tax exemption or other Tax-sharing
agreement or order. Neither Target nor any person on behalf of Target has
entered into or will enter into any agreement or consent pursuant to the
collapsible corporation provisions of Section 341(f) of the Code (or any
corresponding provision of state, local or foreign income tax law) or agreed to
have Section 341(f)(2) of the Code (or any corresponding provision of state,
local or foreign income tax law) apply to any disposition of any asset owned by
Target. None of the assets of Target is property that Target is required to
treat as being owned by any other person pursuant to the so-called "safe harbor
lease" provisions of former Section 168(f)(8) of the Code. None of the assets of
Target directly or indirectly secures any debt the interest on which is
tax-exempt under Section 103(a) of the Code. None of the assets of Target is
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
Target has not made and will not make a deemed dividend election under Treas.
Reg. Section 1.1502-32(f)(2) or a consent dividend election under Section 565 of
the Code. Target has never been a party (either as a distributing corporation as
a corporation that has been distributed) to any transaction intended to qualify
under Section 355 of the Code or any corresponding provision of state law.
Target has not participated in (and will not participate in) an international
boycott within the meaning of Section 999 of the Code. No Target stockholder is
other than a United States person within the meaning of the Code. Target does
not have and has not had a permanent establishment in any foreign country, as
defined in any applicable tax treaty or convention between the United States of
America and such foreign country and Target has not engaged in a trade or
business within any foreign country. Target has never elected to be treated as
an S-corporation under Section 1362 of the Code or any corresponding provision
of federal or state law. All material elections with respect to Target's Taxes
made during the fiscal years ended December 31, 1997, 1998 and 1999 are
reflected on the Target Tax Returns for such periods, copies of which have been
provided or made available to Acquiror. After the date of this Agreement, no
material election with respect to Taxes will be made without the prior written
consent of Acquiror, which consent will not be unreasonably withheld or delayed.
Target is not party to any joint venture, partnership or other arrangement or
contract which would reasonably be expected to be treated as a partnership for
federal income tax purposes. Target is not currently and never has been subject
to the reporting requirements of Section 6038A of the Code. There is no
agreement, contract or arrangement to which Target is a party that could,
individually or collectively, as a result of the Merger, result in the payment
of any amount that would not be deductible by reason of Section 280G (as
determined without regard to Section 280G(b)(4)), Section 162(a) (by reason of
being unreasonable in amount), Section 162 (b) through (p) or Section 404 of the
Code. Target is not a party to or bound by any Tax indemnity, Tax sharing or Tax
allocation agreement (whether written or unwritten or arising under operation of
federal law as a result of being a member of a group filing consolidated Tax
returns, under operation of certain state laws as a result of being a member of
a unitary group, or under comparable laws of other states or foreign
jurisdictions) which includes a party other than Target nor does Target owe any
amount under any such Agreement. Target is not, and has not been, a United
States real property holding corporation (as defined in Section 897(c)(2) of the
Code)
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during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
Other than by reason of the Merger, Target has not been and will not be required
to include any material adjustment in Taxable income for any Tax period (or
portion thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions, events or
accounting methods employed prior to the Closing.
(c) For purposes of this Agreement, the following terms have the
following meanings: "TAX" (and, with correlative meaning, "TAXES" and "TAXABLE")
means any and all taxes including, without limitation, (i) any net income,
alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, value added, net worth, 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 (domestic or foreign), (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
period or as the result of being a transferee or successor thereof 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 in this Section 2.13, the term "TARGET" means Target and any entity
included in, or required under GAAP to be included in, any of the Target
Financial Statements.
2.14 Employee Benefit Plans.
(a) Section 2.14 of the Target Disclosure Schedule lists, with respect
to Target, any subsidiary of Target and any trade or business (whether or not
incorporated) which is treated as a single employer with Target (each, an "ERISA
AFFILIATE") 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 any employee, officer or director 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 of greater than $10,000 remain for the
benefit of, or relating to, any present or former employee, consultant or
director of Target (together, the "TARGET EMPLOYEE PLANS").
(b) Target has furnished 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 copies of the
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Form 5500 reports filed for the last three plan 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 (or has
time remaining in which to apply) 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 or has been established under a
standardized prototype plan for which an Internal Revenue Service opinion letter
has been obtained by the plan sponsor and is valid as to the adopting employer.
Target has also furnished Acquiror with the most recent Internal Revenue Service
determination or opinion letter issued with respect to each such Target Employee
Plan, and nothing has occurred since the issuance of each such letter which
could 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 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 other than as required
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"); (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 could 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 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 and each subsidiary or ERISA Affiliate have 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 to any of the Target Employee Plans; (v) all material contributions
required to be made by Target or any subsidiary or ERISA Affiliate 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 years; (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 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 of 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). With respect to each Target Employee Plan
subject to ERISA as either an employee pension plan within the meaning of
Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of
Section 3(1)
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of ERISA, Target has prepared in good faith and timely filed all requisite
governmental reports (which were true and correct 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 such Target Employee Plan, including any audit or
inquiry by the Internal Revenue Service or United States Department of Labor. No
payment or benefit which will or may be made by Target 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 and each of its
U.S. subsidiaries have complied with (i) the applicable health care continuation
and notice provisions of COBRA and the regulations (including proposed
regulations) thereunder except to the extent that such failure to comply would
not, in the aggregate, have a Material Adverse Effect on Target, (ii) the
applicable requirements of the Family 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 (including proposed 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, any Target subsidiary or other
ERISA Affiliate 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 the Target Financial Statements.
(f) 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 4.12 of the Code.
(g) Neither Target nor any Target subsidiary or other ERISA Affiliate
is a party to, or has made any contribution to or otherwise incurred any
obligation under, any "multiemployer plan" as defined in Section 3(37) of ERISA.
2.15 Employees and Consultants. Target has provided Acquiror with a true
and complete list of all persons employed by Target, all persons who perform
work for Target pursuant to any agreement(s) between Target and any employment
agency, and all independent contractors of Target as of the date hereof and the
position and total compensation, including base salary or wages, bonus,
commissions, and all other available forms of compensation, payable to each such
individual. Section 2.15 of the Target Disclosure Schedule lists all current
written or oral employment agreements, independent contractor agreements,
consulting agreements or termination or severance agreements to which Target is
a party. Any employment, independent contractor or consulting agreement which
varies in any material terms from Target's standard form agreement has been
provided to Acquiror. This Agreement and the
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transactions contemplated hereby do not and will not violate any such
employment, independent contractor or consulting agreements. Target is 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. All
individuals performing services for Target as independent contractors (defined
as any individual who provides services for Target who is not treated as a
common-law employee for purposes of statutory withholdings and/or employment
benefits) at any time are properly classified as independent contractors
pursuant to all applicable regulations, including but not limited to I.R.S.
Revenue Ruling 87-41, 1987-1 C.B. 296. Target withheld all amounts required by
law or by agreement to be withheld from the wages, salaries, and other payments
to employees; and is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing. Target is not 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 under any workers
compensation plan or policy or for long term disability. There are no claims or
controversies pending or, to the knowledge of Target, threatened, between Target
and any of its employees, which claims of controversies have or could reasonably
be expected to result in an action, suit, proceeding, claim, arbitration or
investigation before any agency, court or tribunal, foreign or domestic. Target
is not a party to any collective bargaining agreement or other labor union
contract nor does Target know of any activities or proceedings of any labor
union to organize any such employees. To the knowledge of Target, no employees
or independent contractors of Target are in violation of any term of any
employment contract, patent disclosure agreement, enforceable noncompetition
agreement, or any enforceable restrictive covenant to a former employer or
customer relating to the right of any such employee or independent contractor to
be employed by Target because of the nature of the business conducted or
presently proposed to be conducted by Target or to the use of trade secrets or
proprietary information of others. No employees or independent contractors of
Target have given notice to Target, nor is Target otherwise aware, that any such
employee intends to terminate his or her employment with Target.
2.16 Certain Agreements Affected by the Merger. Neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will (a) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to
any director, employee or consultant of Target or any of its subsidiaries, (b)
materially increase any benefits otherwise payable by Target or any of its
subsidiaries or (c) result in the acceleration of the time of payment or vesting
of any such benefits, except as required under Code Section 411(d)(3).
2.17 Related-Party Transactions. No employee, officer or director of
Target, or to Target's knowledge, any member of his or her immediate family, is
indebted to Target, nor is Target indebted (or committed to make loans or extend
or guarantee credit) to any such employee, officer or director or, to Target's
knowledge, any member of his or her immediate family. To Target's knowledge,
none of such persons has a direct ownership interest in any firm
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or corporation with which Target has a material business relationship, except
(a) to the extent that employees, officers, or directors of Target and members
of their immediate families own stock in publicly traded companies and (b)
ownership interests held by investment funds affiliated with Target's directors.
To Target's knowledge, no member of the immediate family of any officer or
director of Target is directly or indirectly interested in any Material Contract
(as defined below) of Target.
2.18 Insurance. Section 2.18 of the Target Disclosure Schedule lists all
policies of insurance and bonds, and the respective amounts of such policies and
bond, carried by Target. There is no 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 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.
2.19 Compliance with Laws. Target and each of its subsidiaries 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 their business, except for such violations or failures to comply as
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on Target.
2.20 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' or financial advisory fees or any
similar charges in connection with this Agreement or the Merger.
2.21 Support Agreements. All of the persons and/or entities deemed in the
reasonable judgment of Target to be "affiliates" of Target within the meaning of
Rule 145 promulgated under the Securities Act ("RULE 145") are listed in Section
2.21 of the Target Disclosure Schedule. Each of such persons has executed and
delivered to Acquiror a Support Agreement.
2.22 Board Approval; Stockholder Approval Required. The Board of Directors
of Target has unanimously (i) approved this Agreement and the Merger, (ii)
determined that in its opinion the Merger is advisable and in the best interests
of the stockholders of Target and (iii) recommended that the stockholders of
Target approve this Agreement and the Merger. The affirmative vote of the
holders of (i) a majority of the outstanding shares of Target Capital Stock and
(ii) the holders of at least 65% of the outstanding shares of Target Series B
Preferred Stock and Target Series C Preferred Stock (voting together as a single
class and not as separate series and on an as-converted basis), in each case
outstanding on the record date set for the determination of stockholders
entitled to vote on or consent to the Merger are the only votes or consents of
the holders of Target Capital Stock necessary to approve this Agreement and the
Merger.
2.23 Customers and Suppliers. As of March 12, 2000 no customer which
individually accounted for more than 5% of Target's gross revenues during the
12-month period preceding
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such date, and no material supplier of Target during such period, has canceled
or otherwise terminated, or made any threat to Target to cancel or otherwise
terminate its relationship with Target for any reason including, without
limitation the consummation of the transactions contemplated hereby, or has at
any time on or after the Target Balance Sheet Date 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. 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.
2.24 Material Contracts. Section 2.24 of the Target Disclosure Schedule
sets forth a list of all material agreements or commitments ("MATERIAL
CONTRACTS") of any nature to which Target is a party or by which it is bound,
including without limitation:
(a) each agreement which requires future expenditures by Target in
excess of $40,000 in any one case or $80,000 in the aggregate or which might
result in payments to Target in excess of $40,000 in any one case or $80,000 in
the aggregate;
(b) all employment and consulting agreements, employee benefit, bonus,
pension, profit-sharing, stock option, stock purchase and similar plans and
arrangements, and distributor and sales representative agreements;
(c) each agreement with any 1% or greater stockholder, officer or
director of Target, or any "affiliate" or "associate" of such persons (as such
terms are defined in the rules and regulations promulgated under the Securities
Act), including without limitation any agreement or other arrangement providing
for the furnishing of services by, rental of real or personal property from, or
otherwise requiring payments to, any such person or entity;
(d) any agreement between Target and a third party relating to Target
Intellectual Property, other than non-exclusive licenses generally available
from third parties;
(e) any agreement for the borrowing of money or line of credit, trust
indenture, mortgage, promissory note, loan agreement or any currency exchange,
commodities or other hedging arrangement or any leasing transaction of the type
required to be capitalized in accordance with GAAP;
(f) agreements with respect to security interests, liens or pledges;
(g) any agreement not made in the ordinary course of Target's
business;
(h) any agreement which provides for the restraint or restriction of
Target's right to compete with any person in the conduct of its business;
(i) any confidentiality, secrecy or non-disclosure agreement with any
party with which Target has, has had or reasonably expects to have a significant
relationship;
(j) any distributor, reseller, agency or manufacturer's representative
contract;
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(k) any contract to support or maintain Target's products, that
expires or may be renewed at the option of any person other than Target so as to
expire more than one year after the date of this Agreement;
(l) any agreement of guarantee, support, 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;
(m) any agreement pursuant to which Target has deposited or is
required to deposit with an escrow holder or any other person or entity, all or
part of the source code (or any algorithm or documentation contained in or
relating to any source code) of any Target Intellectual Property ("SOURCE
MATERIALS"); and
(n) any agreement to indemnify, hold harmless or defend any other
person with respect to any assertion of personal injury, damage to property or
Intellectual Property infringement, misappropriation or violation or warranting
the lack thereof, other than indemnification provisions contained in a customary
purchase orders/purchase agreements/product licenses arising in the ordinary
course of business.
2.25 No Breach of Material Contracts. The Target has performed all of the
material obligations required to be performed by it, and is not in default in
any material respect under, any Material Contract. Each of the Material
Contracts is (as to Target) 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 to Target's knowledge with respect to the other
contracting party, or otherwise that, with or without the giving of notice, the
lapse of the time or the happening of any other event or conditions, would
reasonably be expected to (a) become a material default or event of default
under any Material Contract, (b) result in the loss or expiration of any
material right or option by Target (or the gain thereof by any third party)
under any Material Contract or (c) result in the release, disclosure or delivery
to any third party of any Source Materials. True, correct and complete copies of
all Material Contracts have been delivered to the Acquiror.
2.26 Third-Party Consents. Section 2.26 of the Target Disclosure Schedule
lists all contracts that require a novation or consent to assignment, as the
case may be, prior to the Effective Time so that the Surviving Corporation shall
be made a party in place of Target or as assignee.
2.27 Material Third Party Consents. Section 2.27 of the Target Disclosure
Schedule sets forth every contract which, if no novation occurs to make Acquiror
or the Surviving Corporation a party thereto or if no consent to assignment is
obtained, would have a material adverse effect on Acquiror's or the Surviving
Corporation's ability to operate the business in the same manner as the business
was operated by Target prior to the Effective Time.
2.28 Minute Books. The minute books of Target made available to Acquiror
contain an accurate summary of all resolutions adopted and all other material
actions taken at all meetings of directors and stockholders and all actions by
written consent since the time of incorporation of Target through the date of
this Agreement.
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2.29 Complete Copies of Materials. Target has delivered or made available
true and complete copies of each document which has been requested in writing by
Acquiror or its counsel or other representatives in connection with their legal
and accounting review of Target.
2.30 Year 2000 Compatibility. None of the products and services sold,
licensed, rendered, or otherwise provided by Target in the conduct of its
business has materially malfunctioned, materially ceased to function, generated
materially incorrect data or produced materially incorrect results or caused any
of the above with respect to the property or business of third parties using
such products or services when processing, providing or receiving (a)
date-related data from, into and between the Twentieth (20th) and Twenty-First
(21st) centuries or (b) date-related data in connection with any valid date in
the Twentieth (20th) and Twenty-First (21st) centuries. Target has not made any
other representations or warranties specifically relating to the ability of any
product or service sold, licensed, rendered or otherwise provided by Target in
the conduct of its business to operate without malfunction, to operate without
ceasing to function, to generate correct data or to produce correct results when
processing, providing or receiving (x) date-related data from, into and between
the Twentieth (20th) and Twenty-First (21st) centuries and (y) date-related data
in connection with any valid date in the Twentieth (20th) and Twenty-First
(21st) centuries.
2.31 Absence of Undisclosed Liabilities. Target has no material obligations
or liabilities of any nature (matured or unmatured, fixed or contingent) other
than (a) those set forth or adequately provided for in the Target Balance Sheet,
(b) those not required to be set forth or adequately provided for in the Target
Balance Sheet under GAAP, (c) those incurred in the ordinary course of business
since the Target Balance Sheet Date and (d) those incurred in connection with
the execution of this Agreement.
2.32 Inventory. The inventories shown on the Target Financial Statements,
or thereafter acquired by Target, net of revenues on the Target Financial
Statements consisted of items of a quantity and quality usable or salable in the
ordinary course of business. Since the Target Balance Sheet Date, Target has
continued to replenish inventories in a normal and customary manner consistent
with past practices. Target has not received written or oral notice that it will
experience in the foreseeable future any difficulty in obtaining, in the desired
quantity and quality and at a reasonable price and upon reasonable terms and
conditions, the raw materials, supplies or component products required for the
manufacture, assembly or production of its products. The values at which
inventories are carried reflect the inventory valuation policy of Target, which
is consistent with its past practice and in accordance with GAAP applied on a
consistent basis. Since the Target Balance Sheet Date, due provision was made on
the books of Target in the ordinary course of business consistent with past
practices to provide for all slow-moving, obsolete, or unusable inventories to
their estimated useful or scrap values and such inventory reserves are adequate
to provide for such slow-moving, obsolete or unusable inventory and inventory
shrinkage. Target has no inventory in the distribution channel and Target has no
commitments to purchase inventory.
2.33 Accounting and Tax Matters. Except as set forth in the preliminary
letter issued by KPMG LLP, Target's independent accountants, as of the date
hereof, to Target's knowledge neither Target nor any of its affiliates has taken
or agreed to take any action, nor does Target
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have knowledge of any fact or circumstance, that would prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the Code.
2.34 Export Control Laws. Target 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) Target has obtained all export licenses and other approvals
required for its exports of products, software and technologies from the United
States;
(b) Target is in 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 with respect to such export licenses or other approvals;
(d) To Target's knowledge there are no actions, conditions or
circumstances pertaining to Target's export transactions 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.
2.35 Product Releases. Target has provided Acquiror a Schedule of Product
Releases, which Schedule is included in Section 2.35 of the Target Disclosure
Schedule. Target has a good faith belief that it can achieve the release of
products on the schedule described therein and is not currently aware of any
material change in its circumstances or other fact that has occurred that would
cause it to believe that it will be unable to meet such release schedule.
2.36 Representations Complete. None of the representations or warranties
made by Target herein or in any Schedule hereto, including the Target Disclosure
Schedule, or certificate furnished by Target pursuant to this Agreement, when
all such documents are read together in their entirety, contains or will contain
at the Effective Time any untrue statement of a material fact, or omits or will
omit at the Effective Time to 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 in any material respect.
2.37 Permit Application; Information Statement. The information supplied by
Target for inclusion in the application for issuance of the Permit pursuant to
which the shares of Acquiror Common Stock to be issued in the Merger and the
Target Options to be assumed in the Merger will be qualified under California
Law (the "PERMIT APPLICATION") shall not, at the time the Fairness Hearing is
held and the time the qualification of such securities is effective under
Section 25122 of California Law, contain any untrue statement of a 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. The information supplied by Target for inclusion
in the information statement to be sent to the
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stockholders of Target in connection with the Target stockholders' consideration
of this Agreement and the Merger (the "TARGET STOCKHOLDERS' ACTION") (such
information statement as amended or supplemented is referred to herein as the
"INFORMATION STATEMENT") shall not, on the date the Information Statement is
first mailed to Target stockholders, at the time of the Target Stockholders'
Action and at the Effective Time, contain any statement which, at such time, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they are made, not false or misleading; or omit
to state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies or consents for the
Target Stockholders' Action which has become false or misleading.
Notwithstanding the foregoing, Target makes no representation, warranty or
covenant with respect to any information supplied by Acquiror or Merger Sub
which is contained in the Permit Application or the Information Statement.
2.38 Registration Rights. There is no agreement of Target to register under
the Securities Act any shares of Target Capital Stock or any shares of Target
Capital Stock issuable upon the exercise of Target Options or Target Warrants,
except pursuant to agreements that will be terminated or that will terminate
pursuant to their terms at or prior to the Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
Acquiror and Merger Sub represent and warrant to Target that the statements
contained in this Article III are true and correct, except as set forth in the
disclosure schedule delivered by Acquiror to Target prior to the execution and
delivery of this Agreement (the "ACQUIROR DISCLOSURE SCHEDULE"). The Acquiror
Disclosure Schedule shall be arranged in paragraphs corresponding to the
numbered Sections contained in this Article III, and the disclosure in any
Section shall qualify only the corresponding Section in this Article III. Any
reference in this Article III to an agreement being "ENFORCEABLE" shall be
deemed to be qualified to the extent such enforceability is subject to (i) laws
of general application relating to bankruptcy, insolvency, moratorium,
fraudulent conveyance and the relief of debtors and (ii) the availability of
specific performance, injunctive relief and other equitable remedies.
3.1 Organization, Standing and Power. Each of Acquiror and its
subsidiaries, including Merger Sub, is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. Each of Acquiror and its subsidiaries 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 a true and correct copy of the Certificate of Incorporation and Bylaws
or other charter documents, as applicable, of Acquiror and Merger Sub, each as
amended to date, to Target. Neither Acquiror nor Merger Sub is in violation of
any of the provisions of its Certificate of Incorporation or Bylaws or
equivalent organizational documents.
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3.2 Capital Structure. The authorized capital stock of Acquiror consists of
500,000,000 shares of Acquiror Common Stock, par value $0.00025, and 5,000,000
shares of preferred stock, par value $0.001 per share, of which there were
issued and outstanding as of the close of business on March 3, 2000, 156,835,002
shares of Acquiror Common Stock and no shares of preferred stock. The authorized
capital stock of Merger Sub consists of 1,000 shares of common stock, par value
$0.01 per share, all of which are issued and outstanding and held by Acquiror.
All outstanding shares of Acquiror and Merger Sub have been duly authorized,
validly issued, fully paid and are nonassessable and free of any liens or
encumbrances other than any liens or encumbrances created by or imposed upon the
holders thereof. The shares of Acquiror Common Stock to be issued pursuant to
the Merger will be duly authorized, validly issued, fully paid and
nonassessable, and no stockholder of Acquiror will have any preemptive right of
subscription or purchase in respect thereof.
3.3 Authority. Acquiror and Merger Sub have 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 obligations of Acquiror and Merger Sub
enforceable against 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 (a) any provision of the Certificate
of Incorporation or Bylaws of Acquiror or Merger Sub, as amended, or (b) 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 any of its subsidiaries
or their properties or assets, except where such conflict, violation, default,
termination, cancellation or acceleration with respect to the foregoing
provisions of clause (b) would not, individually or in the aggregate, have a
Material Adverse Effect on Acquiror. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity, is required by or, to the knowledge of Acquiror, with respect to
Acquiror or any of its subsidiaries in connection with the execution and
delivery of this Agreement by Acquiror and Merger Sub or the consummation by
Acquiror and Merger Sub of the Merger and the other transactions contemplated
hereby, except for (u) the filing of the Certificate of Merger, (v) any filings
as may be required under applicable state securities laws and the securities
laws of any foreign country, (w) the filing of a Form 8-K with the Securities
and Exchange Commission ("SEC") within fifteen (15) days after the Closing Date,
(x) the filing with the Nasdaq National Market of a Notification Form for
Listing of Additional Shares with respect to the shares of Acquiror Common Stock
issuable upon conversion of the Target Capital Stock in the Merger and upon
exercise of the Target Options, (y) such filings as may be required under HSR,
and (z) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on Acquiror and would not prevent, materially alter or delay any of the
transactions contemplated by this Agreement.
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3.4 SEC Documents; Financial Statements. As of their respective filing
dates, 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 (collectively, the
"ACQUIROR SEC DOCUMENTS") complied in all material respects with the applicable
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 in any
material respect, except to the extent corrected by a subsequently filed
Acquiror SEC Document. All documents required to be filed as exhibits to the
Acquiror SEC Documents have been so filed. 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 were prepared in accordance with generally accepted accounting principles
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-Q, as permitted
by Form 10-Q under the Exchange Act). The Acquiror Financial Statements fairly
present in all material respects the consolidated financial condition and
operating results of Acquiror and its subsidiaries at the dates and during the
periods indicated therein (subject, in the case of unaudited statements, to
normal, recurring year-end audit adjustments). There has been no change in
Acquiror's accounting policies except as described in the notes to the Acquiror
Financial Statements.
3.5 Accounting and Tax Matters. Except as set forth in the preliminary
letter issued by Arthur Andersen LLP, Acquiror's independent accountants, as of
the date hereof, to Acquiror's knowledge neither Acquiror nor any of its
affiliates has taken or agreed to take any action, nor does Acquiror have
knowledge of any fact or circumstance, that would prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the Code.
3.6 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
Acquiror's Balance Sheet dated December 31, 1999 (the "ACQUIROR BALANCE SHEET"),
(ii) those not required to be set forth or adequately provided for in the
Acquiror Balance Sheet under GAAP, (iii) those incurred in the ordinary course
of business since December 31, 1999 and (iv) those incurred in connection with
the execution of this Agreement.
3.7 No Brokers. Acquiror has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders' fees or agents' commissions
or investment bankers' or financial advisory fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
3.8 Representations Complete. None of the representations, warranties or
statements made by Acquiror herein or in any Schedule hereto, including the
Acquiror Disclosure Schedule, or certificate furnished by Acquiror pursuant to
this Agreement, when all such documents are
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read together in their entirety, contains or will contain at the Effective Time
any untrue statement of a material fact, or omits or will omit at the Effective
Time to 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 in any material respect.
3.9 Information to be Supplied by Acquiror. The information supplied by
Acquiror and Merger Sub for inclusion in the Permit Application shall not, at
the time the Fairness Hearing is held and the time the qualification of such
securities is effective under Section 25122 of California Law, contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The information supplied by Acquiror for
inclusion in the Information Statement shall not, on the date the Information
Statement is first mailed to Target's stockholders, at the time of the Target
Stockholders' Action and at the Effective Time, contain any statement which, at
such time, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they are made, not false or misleading;
or omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies or consents
for the Target Stockholders' Action which has become false or misleading.
Notwithstanding the foregoing, Acquiror and Merger Sub make no representation,
warranty or covenant with respect to any information supplied by Target which is
contained in any of the foregoing documents.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 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, Target agrees (except to the extent expressly
contemplated by this Agreement or as consented to in writing by Acquiror), to
carry on its business in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted. During such period, Target further
agrees to (a) pay debts and Taxes when due subject to good faith disputes over
such debts or Taxes, (b) subject to Acquiror's consent to the filing of material
Tax Returns, if applicable, pay or perform other obligations when due and (c)
use all 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 business
shall be unimpaired at the Effective Time. Target agrees to promptly notify
Acquiror of any event or occurrence not in the ordinary course of Target's
business, and of any event which could have a Material Adverse Effect on Target.
4.2 Restrictions on 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 expressly contemplated by
this Agreement, Target shall not do, cause or permit any of the following,
without the prior written consent of Acquiror:
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(a) Charter Documents. Cause or permit any amendments to its
Certificate of Incorporation or Bylaws;
(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, 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;
(c) Material Contracts. Enter into any material contract, agreement,
license or commitment, or violate, amend or otherwise modify or waive any of the
terms of any of its material contracts, agreements or licenses other than in the
ordinary course of business consistent with past practice;
(d) 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 authorize cash payments in exchange for any options or other rights
granted under any of such plans;
(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 Target 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 (i) issuance of shares of Target Common
Stock pursuant to the exercise of stock options, warrants or other rights
therefor outstanding as of the date of this Agreement and (ii) the issuance of
shares of Target Common Stock or the grant of Target Options, aggregating not
more than 152,764 shares, to non-officer employees of Target, in each case in
the ordinary course of business;
(f) Intellectual Property. Transfer to or license any person or entity
or otherwise extend, amend or modify any rights to Target Intellectual Property
other than the grant of non-exclusive licenses in the ordinary course of
business;
(g) Exclusive Rights. Enter into or amend any agreements pursuant to
which any other party is granted exclusive marketing, manufacturing or other
exclusive rights of any type or scope with respect to any of its products or
technology;
(h) Dispositions. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets (other than Target Intellectual
Property) which are material, individually or in the aggregate, to its business;
(i) Indebtedness. Incur or commit to incur any indebtedness for
borrowed money in excess of $80,000 in the aggregate or guarantee any such
indebtedness in excess of $80,000 in the aggregate or issue or sell any debt
securities or guarantee any debt securities of others;
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(j) Leases. Enter into any operating leases requiring payments in
excess of $40,000 in the aggregate;
(k) Payment of Obligations. Pay, discharge or satisfy in an amount in
excess of $40,000 in any one case or $80,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted, contingent
or otherwise) arising other than (i) in the ordinary course of business and (ii)
the payment, discharge or satisfaction of liabilities reflected or reserved
against in the Target Financial Statements;
(l) Capital Expenditures. Incur or commit to incur any capital
expenditures in excess of $80,000 in the aggregate;
(m) Insurance. Materially reduce the amount of any insurance coverage
provided by existing insurance policies;
(n) Termination or Waiver. Terminate or waive any right of substantial
value;
(o) Employee Benefits; Severance. Take any of the following actions:
(i) increase or agree to increase the compensation, including base salary,
wages, bonus, and/or commissions payable or to become payable to its directors,
officers, employees, or independent contractors, except for increases in base
salary or wages of non-officer employees that are scheduled to take place in the
ordinary course of business; (ii) grant any additional severance or termination
pay to, or enter into any employment or severance agreements with, any officer,
employee, or independent contractor; (iii) enter into any collective bargaining
agreement; or (iv) establish, adopt, enter into or amend any bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, trust, fund, policy or arrangement for the benefit of any directors,
officers, employees or independent contractors;
(p) Lawsuits. Commence a lawsuit or arbitration 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 would result in the material
impairment of a valuable asset of its business, provided that it consults with
Acquiror prior to the filing of such a suit, or (iii) for a breach of this
Agreement;
(q) 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, in each case which are material, individually or in
the aggregate, to its business;
(r) Taxes. Make any material Tax election other than in the ordinary
course of business and consistent with past practice, change any material Tax
election, adopt any Tax accounting method other than in the ordinary course of
business and consistent with past practice, change any Tax accounting method,
file any Tax Return (other than any estimated Tax Returns, immaterial
information returns, payroll tax returns or sales Tax Returns) or any
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amendment to a Tax Return, enter into any closing agreement, settle any Tax
claim or assessment or consent to any Tax claim or assessment;
(s) 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
(t) Other. Take or agree in writing or otherwise to take, any of the
actions described in Sections 4.2(a) through (s) 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.
4.3 Notices. Target shall give all notices and other information required
to be given to the employees of Target, any collective bargaining unit
representing any group of employees of Target, and any applicable government
authority under the National Labor Relations Act, the Internal Revenue Code, the
Consolidated Omnibus Budget Reconciliation Act, and other applicable law in
connection with the transactions provided for in this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 No Solicitation.
(a) From and after the date of this Agreement until the earlier of the
termination of this Agreement or the Effective Time, Target shall not, directly
or indirectly, through any officer, director, employee, representative or agent,
(i) solicit, initiate, or knowingly encourage any written inquiries or proposals
that constitute, or could reasonably be expected to lead to, a proposal or offer
for a merger, consolidation, business combination, sale of all or substantially
all of the assets, sale of shares of capital stock (including without limitation
by way of a tender offer) or similar transactions involving Target, or any asset
of Target the absence of which would materially diminish the value of the Merger
to Acquiror or the benefits expected by Acquiror to be realized from the Merger,
other than the transactions contemplated by this Agreement (any of the foregoing
written inquiries or proposals being referred to in this Agreement as a
"TAKEOVER PROPOSAL") or (ii) engage in negotiations or discussions concerning,
or provide any non-public information to any person or entity relating to, any
Takeover Proposal, (iii) agree to, approve or recommend any Takeover Proposal;
provided, however, that nothing herein shall prohibit Target, before the
adoption of this Agreement by the stockholders of Target, from (x) furnishing
information regarding Target, (y) entering into negotiations or discussions
with, any person or group in response to a Takeover Proposal submitted by such
person or group (and not withdrawn) and (z) subject to the provisions of Section
5.3 of this Agreement, endorsing and/or recommending a superior Takeover
Proposal, and any such actions shall not be considered a breach of this
Agreement to the extent they are taken in compliance with the conditions and
limitations set forth in this Agreement if (1) neither Target nor any of its
representatives shall have violated any of the restrictions set forth in this
Section 5.1 or Section 5.3, (2) the Board of Directors of Target concludes, in
good faith, after consultation with its
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outside legal counsel, that failure to take such action would be inconsistent
with the fiduciary obligations of the Board of Directors of Target to Target
stockholders under applicable law, (3) prior to furnishing any such information
to, or entering into discussions or negotiations with, such person or group,
Target gives Acquiror written notice of the identity of such person or group,
the terms and conditions of the offer and Target's intention to furnish
information to, or enter into discussions or negotiations with, such person or
group, and (4) contemporaneously with furnishing any such information to such
person or group, Target furnishes such information to Acquiror (to the extent
that such information has not been previously furnished by Target to Acquiror).
(b) Target and its representatives will immediately cease and cause to
be terminated any and all existing discussions, negotiations, exchanges of
information and other activities with respect to any Takeover Proposal. Promptly
following the execution and delivery of this Agreement, Target shall (i) inform
each of its representatives of the obligations undertaken in this Section 5.1
and (ii) request each person that has heretofore executed a confidentiality or
non-disclosure agreement in connection with its consideration of acquiring it to
return to Target all confidential information heretofore furnished to such
person by or on behalf of it; provided, however, that within ten (10) business
days of Target's receipt from Acquiror of the form of a letter concerning
termination of such existing discussions, negotiations, exchanges of information
and other activities, Target shall send such letter to the other parties engaged
in such discussions, negotiations, exchanges of information and other
activities. Target shall notify Acquiror forthwith if any written inquiries,
proposals or offers relating to a Takeover Proposal are received by, any such
information is requested from, or any such discussions or negotiations are
sought to be initiated or continued with, Target or any of its representatives,
indicating, in connection with such notice, the name of the person making the
inquiry, proposal or offer and the material terms and conditions of any
proposals or offers. Thereafter Target shall provide Acquiror with a true and
complete copy of such Takeover Proposal or communication and shall otherwise
keep Acquiror informed, on a current basis, with respect to the status and terms
of any such proposal or offer and the status of any such negotiations or
discussions.
(c) Target and Acquiror agree that irreparable damage would occur in
the event that the provisions of this Section 5.1 were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed by the parties hereto that Acquiror shall be entitled to seek
an injunction or injunctions to prevent breaches of this Section 5.1 and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which the parties may be entitled at law or in equity.
5.2 Preparation of Information Statement; Permit Application.
(a) As soon as practicable after the execution of this Agreement,
Target shall prepare, with the cooperation of Acquiror, an Information Statement
for the stockholders of Target to approve this Agreement, the Certificate of
Merger and the transactions contemplated hereby and thereby. The Information
Statement 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. Acquiror and Target shall each use its best efforts
to cause
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the Information Statement 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 Information
Statement, or in any amendments or supplements thereto, and to cause its counsel
and independent accountants to cooperate with the other's counsel and
independent accountants in the preparation of the Information Statement. 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 Information Statement in order to make the statements
contained therein not misleading or to comply with applicable law. The
Information Statement 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 Target Board of Directors that the terms and conditions of
the Merger are fair and reasonable to the stockholders of Target. Anything to
the contrary contained herein notwithstanding, Target shall not include in the
Information Statement any information with respect to Acquiror or its affiliates
or associates, the form and content of which information shall not have been
approved by Acquiror prior to such inclusion.
(b) As soon as practicable after the execution of this Agreement,
Acquiror shall (i) prepare, with the cooperation of Target, the Permit
Application, (ii) file the Permit Application under Section 25121 of California
Law with the California Commissioner of Corporations (the "COMMISSIONER") and
(iii) file a request for a hearing to be held by the Commissioner to consider
the terms, conditions and fairness of the transactions contemplated by this
Agreement pursuant to Section 25142 of California Law. Acquiror and Target shall
each use commercially reasonable efforts to cause the Permit Application to
comply with the requirements of applicable federal and state laws. 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 Permit Application, 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 Permit Application.
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 Permit Application in order to make the statements
contained or incorporated by reference therein not misleading or to comply with
applicable law. Anything to the contrary contained herein notwithstanding,
Acquiror shall not include in the Permit Application any information with
respect to Target or its affiliates or associates, the form and content of which
information shall not have been approved by Target prior to such inclusion.
(c) As soon as permitted by the Commissioner, Target shall cause the
mailing of the hearing notice to all holders of securities entitled to receive
such notice pursuant to the requirements of the rules of the Commissioner and
California Law. Target shall furnish to Acquiror such data and information as is
reasonably necessary for Acquiror's preparation and filing of the request for
the hearing and the hearing notice.
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5.3 Stockholders' Meeting or Consent Solicitation.
(a) As soon as permitted by the Commissioner, Target shall promptly
take all actions necessary to either (a) call a meeting of its stockholders to
be held for the purpose of voting upon this Agreement and the Merger or (b)
commence a consent solicitation to obtain such approvals in order to effect
consummation of the Merger on or before April 3, 2000, or as soon thereafter as
is practicable. Target will, through its Board of Directors, recommend to its
stockholders approval of such matters as soon as practicable after the date
hereof. Target shall use all reasonable efforts to solicit from its stockholders
proxies or consents in favor of such matters.
(b) Subject to the right of Target to terminate this Agreement pursuant
to Section 7.1, nothing contained in Section 5.1 shall limit Target's obligation
to call, give notice of, convene and hold a meeting of Target's stockholders to
consider the Merger or solicit Target stockholder consents (regardless of
whether the recommendation of the Board of Directors of Target shall have been
withdrawn, amended or modified and regardless of whether any Takeover Proposal
has been commenced, disclosed, or announced).
5.4 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 of Target's properties, books,
contracts, commitments and records and (ii) all other information concerning the
business, properties and personnel of Target as Acquiror may reasonably request.
Target agrees to provide to Acquiror and its independent auditors, 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 earlier of the termination of this Agreement or 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.
(c) No information or knowledge obtained in any investigation pursuant
to this Section 5.4 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.
(d) Target shall provide Acquiror and its accountants, counsel and
other representatives reasonable access, during normal business hours during the
period prior to the earlier of the termination of this Agreement or the
Effective Time, to all of Target's Tax Returns and other records and workpapers
relating to Taxes and shall provide the following information to Acquiror and
its representatives promptly upon any request therefor: (i) a list of the types
of Tax Returns being filed by Target in each Taxing jurisdiction, including the
year of the commencement of the filing of each such type of Tax Return and all
closed years with respect to each such type of Tax Return filed in each
jurisdiction, (ii) a list of all material Tax elections filed in each
jurisdiction by Target, (iii) a schedule of any deferred intercompany gain with
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respect to transactions to which Target has been a party and (iv) receipts for
any Taxes paid to foreign Tax Authorities.
5.5 Confidentiality. The parties each agree that all information provided
by one party to the other in the course of pursuing the Merger will be deemed
confidential and proprietary to the providing party, and will not be disclosed
to any other person or entity (other than the receiving party's attorneys,
accountants, or other advisers subject to similar confidentiality restrictions),
and such information will not be used by the receiving party except for the
limited purpose of evaluating the desirability of completing this proposed
transaction; provided, however, that these confidentiality restrictions will not
apply to information that the receiving party can demonstrate is publicly
available or was already known by the receiving party through a third party with
no confidentiality obligations to the other party. All documents and other
written information (and all copies thereof, including copies on electronic
media) received by one party from the other shall promptly be returned to the
disclosing party upon the written request of the disclosing party. The parties
further acknowledge that the provisions of this Section 5.5 shall be in addition
to, and not in substitution for, the provisions of paragraph 15 of the letter
agreement dated February 25, 2000 between Target and Acquiror (the
"NON-DISCLOSURE AGREEMENT"), and that to the extent there is a conflict between
this Section 5.5 and the Non-Disclosure Agreement, the provisions of this
Section 5.5 shall prevail.
5.6 Public Disclosure. 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 required by Acquiror
to comply with the rules and regulations of the SEC or The Nasdaq Stock Market
or to comply with disclosure obligations under applicable securities laws.
5.7 Consents; Cooperation.
(a) Each of Acquiror and Target shall promptly apply for or otherwise
seek, and use all reasonable efforts to obtain, all consents and approvals
required to be obtained by it for the consummation of the Merger, and shall use
all commercially reasonable efforts to obtain all necessary consents, waivers
and approvals under any of its material contracts in connection with the Merger
for consent therefor or assignment thereof or otherwise. The parties hereto will
consult and cooperate with one another, and consider in good faith the views of
one another, in connection with any analyses, appearances, presentations,
memoranda, briefs, arguments, opinions and proposals made or submitted by or on
behalf of any party hereto in connection with proceedings under or relating to
HSR or any other federal or state antitrust or fair trade law.
(b) Each of Acquiror and Target shall use all commercially reasonable
efforts to resolve such objections, if any, as may be asserted by any
Governmental Entity with respect to the transactions contemplated by this
Agreement under HSR, the Sherman Act, as amended, the Clayton Act, as amended,
the Federal Trade Commission Act, as amended, and any other
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federal, state or foreign statutes, rules, regulations, orders or decrees that
are designed to prohibit, restrict or regulate actions having the purpose or
effect of monopolization or restraint of trade (collectively, "ANTITRUST LAWS").
In connection therewith, if any administrative or judicial action or proceeding
is instituted (or threatened to be instituted) challenging any transaction
contemplated by this Agreement as violative of any Antitrust Law, each of
Acquiror and Target shall cooperate and use all commercially reasonable efforts
vigorously to contest and resist any such action or proceeding and to have
vacated, lifted, reversed, or overturned any decree, judgment, injunction or
other order, whether temporary, preliminary or permanent (each an "ORDER"), that
is in effect and that prohibits, prevents, or restricts consummation of the
Merger or any such other transactions, unless by mutual agreement Acquiror and
Target decide that litigation is not in their respective best interests.
Notwithstanding the provisions of the immediately preceding sentence, it is
expressly understood and agreed that neither party shall have any obligation to
litigate or contest any administrative or judicial action or proceeding or any
Order beyond the earlier of (a) sixty (60) days after the date of this Agreement
or (b) the date of a ruling preliminarily enjoining the Merger issued by a court
of competent jurisdiction. Each of Acquiror and Target shall use all
commercially reasonable efforts to take such action as may be required to cause
the expiration of the notice periods under HSR or other Antitrust Laws with
respect to such transactions as promptly as possible after the execution of this
Agreement.
(c) Notwithstanding the foregoing, neither Acquiror nor Target shall
be required to agree, as a condition to any Approval, to divest itself of or
hold separate any subsidiary, division or business unit which is material to the
business of such party and its subsidiaries, taken as a whole, or the
divestiture or holding separate of which would be reasonably likely to have a
Material Adverse Effect on (a) the business, properties, assets, liabilities,
financial condition or results of operations of such party and its subsidiaries,
taken as a whole or (b) the benefits intended to be derived as a result of the
Merger.
5.8 Update Disclosure; Breaches. From and after the date of this Agreement
until the Effective Time, each party hereto shall promptly notify the other
party, by written update to its Disclosure Schedule, of (a) the occurrence or
non-occurrence of any event which would be likely to cause any condition to the
obligations of any party to effect the Merger and the other transactions
contemplated by this Agreement not to be satisfied, or (b) the failure of Target
or Acquiror, as the case may be, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it pursuant to this
Agreement which would be likely to result in any condition to the obligations of
any party to effect the Merger and the other transactions contemplated by this
Agreement not to be satisfied. The delivery of any notice pursuant to this
Section 5.8 shall not cure any breach of any representation or warranty
requiring disclosure of such matter prior to the date of this Agreement or
otherwise limit or affect the remedies available hereunder to the party
receiving such notice.
5.9 Legal Requirements. Each of Acquiror and Target will, and will cause
their respective subsidiaries 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
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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.
5.10 Tax-Free Reorganization. Neither Target, Acquiror nor Merger Sub will,
either before or after consummation of the Merger, take any action which, to the
knowledge of such party, would cause the Merger to fail to constitute a
"reorganization" within the meaning of Code Section 368.
5.11 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. Target shall use its best efforts to assist Acquiror as may be necessary
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.
5.12 Stock Options.
(a) At the Effective Time, the Target Stock Option Plan and each
outstanding option to purchase shares of Target Common Stock under such Plan,
whether vested or unvested, shall be assumed by Acquiror. 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
related stock option agreement immediately prior to the Effective Time, except
that (i) such option shall 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 Exchange 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 shall 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 to the Effective Time by the Common
Exchange Ratio, rounded up to the nearest whole cent. It is the intention of the
parties that the options so assumed by Acquiror qualify following the Effective
Time as incentive stock options as defined in Section 422 of the Code to the
extent such options qualified as incentive stock options prior to the Effective
Time. 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 in form and substance
satisfactory to the Stockholders' Agent (as defined in Section 8.9) evidencing
the foregoing assumption of such option by Acquiror.
(b) Acquiror shall comply with the terms of the Target Stock Option
Plan and ensure, to the extent required by, and subject to the provisions of,
such Target Stock Option Plan, that Target Options which qualified as incentive
stock options prior to the Effective Time continue to quality as incentive stock
options after the Effective Time.
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(c) Acquiror shall take all corporate action necessary to reserve and
make available for issuance a sufficient number of shares of Acquiror Common
Stock for delivery under Target Options assumed in accordance with this Section
5.12.
(d) All outstanding rights of Target which it may hold immediately
prior to the Effective Time to repurchase unvested shares of Target Capital
Stock (the "REPURCHASE OPTIONS") 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 (i) as described in
Section 5.12 of the Target Disclosure Schedule and (ii) that the shares
purchasable pursuant to the Repurchase Options and the purchase price per share
shall be adjusted to reflect the Common Exchange Ratio.
(e) Target shall use all reasonable efforts to prepare a spreadsheet
in form acceptable to Acquiror or its agent which spreadsheet shall list, as of
the Effective Time, all Target stockholders, and optionholders and
warrantholders and their respective addresses, the number of Target shares or
options or warrants to purchase shares held by such persons (including in the
case of shares, the respective certificate numbers), the Exchange Ratio
applicable to each holder, the number of shares of Acquiror Common Stock (or
options or warrants to purchase Acquiror Common Stock) to be issued to each
holder, the number of shares of Acquiror Common Stock to be deposited into the
Escrow Fund on behalf of each holder and the vesting arrangement with respect to
Target Options and Target Warrants (the "OPTION AND WARRANT SPREADSHEET"). The
Option and Warrant Spreadsheet shall be certified as complete and correct by a
duly elected officer of Target at the Closing.
5.13 Target Director and Officer Indemnification.
(a) Until the third anniversary of the Effective Date, Acquiror will,
and will cause the Surviving Corporation to, indemnify and hold harmless the
present and former officers, directors, employees and agents of Target in
respect of acts or omissions occurring on or prior to the Effective Time to the
extent provided under written agreements with such individuals and Target's
Certificate of Incorporation and Bylaws, in each case as in effect on the date
hereof; provided, that such indemnification shall be subject to any limitation
imposed from time to time under applicable law.
(b) In the event any claim, action, suit, proceeding or investigation
is asserted for which a person is entitled to indemnification hereunder, (i) any
counsel retained by the indemnified parties shall be reasonably satisfactory to
Acquiror and the Surviving Corporation and (ii) Acquiror and the Surviving
Corporation will cooperate in the defense of any such matter; provided, however,
that neither Acquiror nor the Surviving Corporation shall be liable for any
settlement effected without its written consent (which consent shall not be
unreasonably withheld); and provided, further, that, in the event that any claim
or claims for indemnification are asserted or made within such three-year
period, all rights to indemnification in respect of any such claim or claims
shall continue until the disposition of any and all such claims.
(c) The provisions of this Section 5.13 are intended to be for the
benefit of, and shall be enforceable by, each such indemnified party.
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5.14 Escrow Agreement. On or before the Effective Time, the Escrow Agent,
the Stockholders' Agent, Target and Acquiror will execute the Escrow Agreement
contemplated by Article VIII in substantially the form attached hereto as
Exhibit C (the "ESCROW AGREEMENT").
5.15 Form S-8. Acquiror agrees to file, after the Closing, no later than
fifteen (15) business days after Acquiror's receipt of the Option and Warrant
Spreadsheet, 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; provided, that Acquiror has received not
less than ten (10) business days prior to such projected filing date, all option
documentation relating to the outstanding options); and provided further, that
such options qualify for registration on such Form S-8. Target shall cooperate
with and assist Acquiror in the preparation of such registration statement.
5.16 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
upon conversion of the Target Capital Stock in the Merger and upon exercise of
the Target Options and Target Warrants assumed by Acquiror.
5.17 Employees. Set forth in Section 5.17 of the Acquiror Disclosure
Schedule is a list of employees of Target to whom Acquiror will make an offer of
employment pursuant to either (i) an Employment Agreement or (ii) an Employment
and Noncompetition Agreement substantially in the forms attached hereto as
Exhibits D-1 through D-15. Acquiror will negotiate in good faith to enter into
an agreement with the employees listed in Section 5.17 of the Acquiror
Disclosure Schedule. Target shall cooperate with Acquiror to assist Acquiror in
entering into an agreement with such employees.
5.18 Benefit Arrangements. Acquiror shall offer employment to all employees
of Target as of the Effective Time except those listed in Section 5.18 of the
Acquiror Disclosure Schedule. Acquiror and Target agree that Acquiror will
provide benefits following the Effective Time to Target employees who accept
such offer of employment that are substantially identical to the benefits
currently provided to similarly situated employees of Acquiror. From and after
the Effective Time, Acquiror shall grant all employees of Target who accept such
offer of employment credit for all service (to the same extent as service with
Acquiror is taken into account with respect to similarly situated employees of
Acquiror) with Target prior to the Effective Time for (i) eligibility and
vesting purposes and (ii) for purposes of vacation accrual after the Effective
Time as if such service with Target was service with Acquiror. Acquiror and
Target agree that where applicable with respect to any medical or dental benefit
plan of Acquiror, any covered expenses incurred on or before the Effective Time
by an employee or an employee's covered dependents shall be taken into account
for purposes of satisfying applicable deductible, coinsurance and maximum
out-of-pocket provisions after the Effective Time to the same extent as such
expenses are taken into account for the benefit of similarly situated employees
of Acquiror.
5.19 Conversion of Target Preferred Stock. Target shall use its reasonable
best efforts to ensure that either all of Target's outstanding Preferred Stock
shall have been converted into Target Common Stock in accordance with the
Certificate of Incorporation of Target or that the
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Certificate of Incorporation of Target shall provide that the Merger shall cause
a liquidation event with respect to the Target Preferred Stock, with the holders
of the Target Preferred Stock receiving in the Merger, in exchange for their
shares of Target Preferred Stock, shares of Acquiror Common Stock.
5.20 Additional Agreements; Best Efforts. Each of the parties agrees to use
their best efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, subject to the appropriate vote or consent of stockholders of
Target described in Section 5.3, including cooperating fully with the other
party, including by provision of information. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full title
to all properties, assets, rights, approvals, immunities and franchises, the
proper officers and directors of each party to this Agreement shall take all
such necessary action.
5.21 Notice to Holders of Target Warrants. As soon as practicable after the
execution of this Agreement, Target shall notify all holders of outstanding
Target Warrants of the Merger (including notifying such holders that no
registration rights with respect to such Target Warrants and underlying shares
will exist following the Closing) and shall, notwithstanding Section 5.5 hereof
but pursuant to a non-disclosure agreement approved by Target and Acquiror,
provide such holders all information requested by such holders relevant to the
exercise of Target Warrants.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 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, in writing, by agreement of all the
parties hereto:
(a) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the holders of at least 90% of the shares of the
Target Common Stock and 90% of the Target Preferred Stock outstanding as of the
record date set for the Target stockholders' meeting or solicitation of
stockholder consents, and any agreements or arrangements that may result in the
payment of any amount that would not be deductible by reason of Section 280G of
the Code shall have been approved by such number of stockholders of Target as is
required by the terms of Code Section 280G(b)(5)(B).
(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 shall any
proceeding brought by an administrative agency or commission
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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. In
the event an injunction or other order shall have been issued, each party agrees
to use its reasonable diligent 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, if any, necessary for consummation of or in
connection with the Merger and the several transactions contemplated hereby,
including such approvals, waivers and consents as may be required under the
Securities Act and under state blue sky laws.
(d) Fairness Hearing. The Commissioner shall have approved the terms
and conditions of the transactions contemplated by this Agreement and the
Certificate of Merger and the fairness of such terms and conditions pursuant to
Section 25142 of California Law following a fairness hearing and shall have
issued a Permit under Section 25121 of California Law for the issuance of (i)
the Acquiror Common Stock to be issued in the Merger, (ii) Acquiror options in
substitution for the Target Options, (iii) the Acquiror Common Stock issuable on
exercise of the Target Stock Options to be assumed by Acquiror, (iv) Acquiror
warrants in substitution for the Target Warrants and (v) the Acquiror Common
Stock issuable on exercise of the Target Warrants to be assumed by Acquiror.
(e) Tax Opinions. Acquiror and Target shall have received written
opinions of Acquiror's legal counsel and Target's legal counsel, respectively,
in form and substance reasonably satisfactory to them, and dated on or about the
Closing Date, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, and such opinions shall not
have been withdrawn. In rendering such opinions, counsel shall be entitled to
rely upon, among other things, reasonable assumptions as well as representations
of Acquiror and Target.
(f) Escrow Agreement. Acquiror, Target, the Escrow Agent and the
Stockholders' Agent shall have entered into an Escrow Agreement substantially in
the form attached hereto as Exhibit C.
6.2 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 Effective Time of
each of the following conditions, any of which may be waived, in writing, by
Target:
(a) Representations, Warranties and Covenants. Except as disclosed in
the Acquiror Disclosure Schedule dated the date of this Agreement, (i) the
representations and warranties of Acquiror and Merger Sub 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), except where the failure to be so true and correct would
not be reasonably expected to have a Material Adverse Effect on Acquiror, on and
as of the Effective Time as though such
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representations and warranties were made on and as of such time (except that
representations and warranties which by their express terms are made on and as
of a specified earlier date shall be made only on and as of such specified
earlier date) and (ii) Acquiror and Merger Sub 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 Effective
Time.
(b) Certificate of Acquiror. Target shall have been provided with a
certificate executed on behalf of Acquiror by its Chief Financial Officer to the
effect set forth in Section 6.2(a).
(c) Legal Opinion. Target shall have received a legal opinion from
Acquiror's legal counsel substantially in the form attached as Exhibit E hereto.
6.3 Additional Conditions to the Obligations of Acquiror. 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 Effective Time 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 Schedule 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 (A) changes contemplated by Section
4.2 of this Agreement and (B) 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
Effective Time as though such representations and warranties were made on and as
of such time (except that representations and warranties which by their express
terms are made on and as of a specified earlier date shall be made only on and
as of such specified earlier date), except where the failure to be so true and
correct would not be reasonably expected to have a Material Adverse Effect on
Target, 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 Effective Time.
(b) Certificate of Target. Acquiror shall have been provided with a
certificate executed on behalf of Target by its President and Chief Financial
Officer to the effect set forth in Section 6.3(a).
(c) Third Party Consents. Acquiror shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons, if any,
whose consent or approval shall be required in connection with the Merger under
the contracts of Target set forth in Section 2.27 of the Target Disclosure
Schedule.
(d) Legal Opinion. Acquiror shall have received a legal opinion from
Target's legal counsel, in substantially the form attached hereto as Exhibit F.
(e) FIRTPA Certificate. Target shall, prior to the Closing Date,
provide Acquiror with a properly executed FIRPTA Notification Letter,
substantially in the form of
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Exhibit G attached hereto, which states that shares of capital stock of Target
do not constitute "United States real 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.
(f) 280G Agreements. Target shall, prior to the Closing Date, provide
Acquiror with a properly executed Section 280G Agreement in the form of Exhibit
H hereto from each person identified by Target or Acquiror as potentially
receiving excess parachute payments, as defined in Section 280G of the Code, in
connection with the Merger.
(g) Resignation of Directors. The directors of Target in office
immediately prior to the Effective Time shall have resigned as directors of
Target effective as of the Effective Time.
(h) Employment Agreements; Employment and Non-Competition Agreements.
The employees of Target set forth in Section 5.17 of the Acquiror Disclosure
Schedule shall have accepted employment with Acquiror and shall have entered
into either (i) an Employment Agreement or (ii) an Employment and Noncompetition
Agreement substantially in the forms attached hereto as Exhibits D-1 through
D-15.
(i) Certificates of Good Standing. Target shall, prior to the Closing
Date, provide Acquiror a certificate from the Secretary of State of California
as to Target's good standing and payment of all applicable taxes.
(j) Termination of Pension Plan. Unless otherwise stated by Acquiror
in writing, Target shall, immediately prior to the Closing Date, terminate
Target's 401(k) Plan (the "401(k) PLAN") and no further contributions shall be
made to the 401(k) Plan, provided that as a condition of such termination
Target's employees shall be eligible to participate in Acquiror's 401(k) plan
immediately following the Closing Date. Target shall provide to Acquiror (i)
executed resolutions by the Board of Directors of Target authorizing the
termination and (ii) an executed amendment to the 401(k) Plan sufficient to
assure compliance with all applicable requirements of the Code and regulations
thereunder so that the tax-qualified status of the 401(k) Plan will be
maintained at the time of termination.
(k) Option and Warrant Spreadsheet. Acquiror shall have received the
Option and Warrant Spreadsheet, which shall have been certified as true and
correct by an authorized officer of Target.
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ARTICLE VII
TERMINATION, EXPENSES, AMENDMENT AND WAIVER
7.1 Termination. At any time prior to the Effective Time, whether before or
after approval by Target's stockholders of matters presented to Target's
stockholders in connection with the Merger, this Agreement may be terminated:
(a) by mutual consent duly authorized by the Boards of Directors of
Acquiror and Target;
(b) by either Acquiror or Target, if the Closing shall not have
occurred on or before July 15, 2000 (provided, that the right to terminate this
Agreement under this Section 7.1(b) shall not be available to any party whose
action or failure to act has been a principal 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 material breach of this Agreement);
(c) by Acquiror, if (i) Target shall have materially breached any
representation or warranty made as of the date of this Agreement (or shall have
breached in any respect, any representation or warranty which is qualified by
its terms as to materiality), or shall materially breach any obligation or
agreement hereunder in a manner causing conditions precedent to the Closing not
to be satisfied and such breach shall not have been cured within ten (10)
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
7.1(c)(i) shall not be available to Acquiror where Acquiror is at that time in
material breach of this Agreement or (ii) the Board of Directors of Target shall
have omitted, withdrawn or modified its recommendation of this Agreement or the
Merger in a manner adverse to Acquiror or recommended, endorsed, accepted or
agreed to a Takeover Proposal;
(d) by Target, if Acquiror shall have materially breached any
representation or warranty made as of the date of this Agreement (or shall have
breached in any respect, any representation or warranty which is qualified by
its terms as to materiality), or shall materially breach any obligation or
agreement hereunder in a manner causing conditions precedent to the Closing not
to be satisfied and such breach shall not have been cured within ten (10)
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
7.1(d) shall not be available to Target where Target is at that time in material
breach 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) any required approval of the
stockholders of Target shall not have been obtained by reason of the failure to
obtain the required vote upon a vote held at a duly held meeting of Target's
stockholders or at any adjournment thereof or the failure to obtain the consent
of Target's stockholders within five (5) business days after the date upon which
such consent is sought in accordance with Section 5.3;
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(f) by Target 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) any required approval of the
stockholders of Target shall not have been obtained by reason of the failure to
obtain the required vote upon a vote held at a duly held meeting of Target's
stockholders or at any adjournment thereof or the failure to obtain the consent
of Target's stockholders within five (5) business days after the date upon which
such consent is sought in accordance with Section 5.3;
(g) by Acquiror, if Target or any of its representatives shall
participate in discussions or negotiations, or take any other action, in breach
(other than an immaterial breach) of Section 5.1; or
(h) by Target, in response to a Takeover Proposal which is superior to
the Merger (as determined in good faith by Target's Board of Directors);
provided that Target shall have complied in all material respects with its
obligations under Sections 5.1 and Section 5.3 and such Takeover Proposal did
not otherwise result from a material breach of any of Target's obligations under
this Agreement; and provided further, that no termination pursuant to this
Section 7.1(h) shall be effective until after the third business day following
Acquiror's receipt of written notice advising Acquiror that Target's Board of
Directors is prepared to accept a Takeover Proposal which is superior in the
good faith determination of Target's Board of Directors to the Merger,
specifying the material terms of such Takeover Proposal and identifying the
person or persons making such Takeover Proposal; and the payment of any
applicable termination fee pursuant to Section 7.3.
7.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 7.1, 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
that such termination results from the breach by a party hereto of any of its
representations, warranties or covenants set forth in this Agreement; provided,
that the provisions of Section 5.5 (Confidentiality), Section 7.3 (Expenses and
Termination Fees), this Section 7.2 and Article IX shall remain in full force
and effect and survive any termination of this Agreement.
7.3 Expenses and Termination Fees.
(a) Subject to paragraphs (b) and (c) below, whether or not the Merger
is consummated, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby (including, without
limitation, the fees and expenses of advisers, accountants and legal counsel)
shall be paid by the party incurring such expense; provided, however, that if
the Merger is consummated, Acquiror shall pay all Target Merger Expenses
pursuant to Section 1.6(a). Any such costs and expenses incurred by Target prior
to, at or after the Closing and not presented to Acquiror for payment at or
prior to the Closing shall remain an obligation of the Former Target
Stockholders. If Acquiror or Target receives any invoices for said costs and
expenses after the Closing, it may, with Acquiror's written approval, pay such
expenses; provided, however, that such payment shall, if not promptly reimbursed
by the Former Target Stockholders at Acquiror's request, constitute "Damages"
recoverable under
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the Escrow Agreement and such Damages shall not be subject to the Escrow Basket
(as defined in Section 8.4).
(b) In the event that Acquiror shall terminate this Agreement pursuant
to any provision of Section 7.1(c), Target shall reimburse Acquiror for all of
the out-of-pocket costs and expenses incurred by Acquiror in connection with
this Agreement and the transactions contemplated hereby (including, without
limitation, the fees and expenses of its advisors, accountants and legal
counsel). In the event that (i) after a Takeover Proposal has been made to
Target or to Target stockholders generally or otherwise has become publicly
known and Target's Board of Directors shall have omitted, withdrawn or modified
its recommendation of this Agreement or the Merger in a manner adverse to
Acquiror or recommended, endorsed, accepted or agreed to a Takeover Proposal,
this Agreement shall be terminated by Acquiror pursuant to Section 7.1(c)(i)
(but only as a result of Target's breach of any material covenant or other
agreement made in this Agreement) or Section 7.1(e)(ii) or by Target pursuant to
Section 7.1(f)(ii) or by either party pursuant to Section 7.1(b)(but only as a
result of Target's breach of any material covenant or other agreement made in
this Agreement), or (ii) this Agreement shall be terminated by Acquiror pursuant
to Section 7.1(c)(ii) (other than as a result of a (A) change in Target's Board
of Director's recommendation based on a right of termination by Target under
Section 7.1(d)) or Section 7.1(g), or (B) the occurrence of any event or
condition that has a Material Adverse Effect on Acquiror), or (iii) this
Agreement shall be terminated by Target pursuant to Section 7.1(h), then, in any
such event, in addition to any other remedies Acquiror may have, Target shall
pay to Acquiror the sum of $15,600,000, which shall be due and payable in full
within five (5) business days after the termination of this Agreement.
(c) In the event that Target shall terminate this Agreement pursuant to
Section 7.1(d), Acquiror shall reimburse Target for all of the out-of-pocket
costs and expenses incurred by Target in connection with this Agreement and the
transactions contemplated hereby (including, without limitation, the fees and
expenses of its advisors, accountants and legal counsel).
(d) Each party acknowledges that the agreements contained in this
Section 7.3 are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, the other party would not enter
into this Agreement. Accordingly, if a party fails promptly to pay any of the
amounts due pursuant to this Section 7.3 and, in order to obtain such payment,
the other party commences a suit which results in a judgment or settlement for
any of the fees set forth in this Section 7.3, the liable party shall pay to the
party commencing such suit its costs and expenses (including reasonable
attorneys' fees and expenses) in connection with such suit, together with
interest on the amount of the fee at the prime rate of Chase Bank of Texas, N.A.
in effect on the date such payment was required to be made.
7.4 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 this Agreement by the stockholders of Target shall not
(a) alter or change the amount or kind of consideration to be received on
conversion of the Target Capital Stock, (b) alter or change any term of the
Certificate of Incorporation of the Surviving Corporation to be effected by the
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Merger, or (c) alter or change any of the terms and conditions of this Agreement
if such alteration or change would adversely affect the holders of Target
Capital Stock.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (c)
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 VIII
ESCROW AND INDEMNIFICATION
8.1 Survival of Representations, Warranties and Covenants. All the
representations and warranties set forth in this Agreement shall survive the
Effective Time until the first anniversary of the Effective Time; provided,
however, that there shall be no limitation period for matters involving fraud.
The covenants and agreements of the parties shall survive until the expiration
of the time period for their performance as provided herein.
8.2 Indemnification.
(a) Subject to the limitations set forth in this Article VIII, the
stockholders of Target will indemnify and hold harmless Acquiror and its
officers, directors, agents and employees, and each person, if any, who controls
or may control Acquiror within the meaning of the Securities Act (hereinafter
referred to individually as an "INDEMNIFIED PERSON" and collectively as
"INDEMNIFIED PERSONS") from and against any and all losses, costs, damages,
liabilities and expenses arising from claims, demands, actions, causes of
action, including, without limitation, reasonable legal fees, net of any
recoveries by Acquiror under existing insurance policies or indemnities from
third parties (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 Schedule or any exhibit or schedule to this Agreement. The Escrow
Fund shall be security for this indemnity obligation subject to the limitations
in this Agreement. If the Merger is consummated, recovery from the Escrow Fund
shall be the exclusive remedy under this Agreement for any breach or default in
connection with any of the representations, warranties, covenants or agreements
set forth in this Agreement or any exhibit hereto, absent fraud. "Damages" as
used herein is not limited to matters asserted by third parties, but includes
Damages incurred or sustained by Acquiror in the absence of claims by a third
party.
(b) 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 (i) of Target for
any breach of any representation, warranty or covenant if the Merger does not
49
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close or (ii) of any Target stockholder in connection with any breach by such
stockholder of the Support Agreement.
8.3 Escrow Fund. As security for the indemnity provided for in Section 8.2
hereof, the Escrow Shares issuable pursuant to Section 1.6(a) shall be
registered in the name of, and be deposited with, ChaseMellon Shareholder
Services, L.L.C., as escrow agent (the "ESCROW AGENT"), such deposit to
constitute an escrow fund to be governed by the terms set forth herein and in
the Escrow Agreement attached hereto as Exhibit C. The Escrow Fund shall be
allocated among the Former Target Stockholders on a pro-rata basis in accordance
with Section 1.6 hereof (the "ESCROW ALLOCATION") (excluding for purposes of
this calculation any Dissenting Shares). Upon compliance with the terms hereof
and subject to the provisions of this Article VIII, Acquiror and the Surviving
Corporation shall be entitled to obtain indemnity from the Escrow Fund for
Damages covered by the indemnity provided for in Section 8.2.
8.4 Escrow Basket. Notwithstanding the foregoing, Acquiror may not receive
any shares from the Escrow Fund unless and until an Officer's Certificate (as
defined in Section 8.6 below) identifying Damages, the aggregate amount of which
exceeds $200,000 (the "ESCROW BASKET"), has been delivered to the Escrow Agent
as provided in Section 8.5 below and such amount is determined pursuant to this
Article VIII to be payable, in which case Acquiror shall receive shares equal in
value to the full amount of Damages; provided, however, that in no event shall
Acquiror receive more than the number of shares of Acquiror Common Stock
originally placed in the Escrow Fund. In determining the amount of any Damage
resulting from any misrepresentation, breach or default or whether a
misrepresentation, breach or default has occurred, any materiality standard
contained in the applicable representation, warranty or covenant shall be
disregarded.
8.5 Escrow Period. The Escrow Period shall terminate on the first
anniversary of the Closing Date; provided, however, that a portion of the Escrow
Shares, which is necessary to satisfy any unsatisfied claims specified in any
Officer's Certificate delivered to the Escrow Agent prior to termination of the
Escrow Period with respect to facts and circumstances existing prior to
expiration of the Escrow Period, shall remain in the Escrow Fund until such
claims have been resolved.
8.6 Claims upon Escrow Fund.
(a) Upon receipt by the Escrow Agent on or before the last day of the
Escrow Period (the "TERMINATION DATE") of a certificate signed by the chief
financial or chief executive officer of Acquiror (an "OFFICER'S CERTIFICATE"):
(i) stating that Acquiror or the Surviving Corporation has
incurred or paid or properly accrued or disclosed (in accordance with GAAP)
Damages in an aggregate stated amount with respect to which Acquiror or the
Surviving Corporation is entitled to payment from the Escrow Fund pursuant to
this Agreement; and
(ii) specifying in reasonable detail the individual items of
Damages included in the amount so stated, the date each such item was incurred,
paid, properly accrued or
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disclosed (in accordance with GAAP) and the specific nature of the breach to
which such item is related, the Escrow Agent shall, subject to the provisions of
Sections 8.7 and 8.8 of this Agreement, deliver to Acquiror shares of Acquiror
Common Stock in an amount necessary to indemnify Acquiror for the Damages
claimed; provided, however, that no shares of Acquiror Common Stock shall be
delivered to Acquiror, as a result of a claim based upon an accrual or
disclosure of Damages until such time as the Acquiror has actually incurred or
paid Damages. All shares of Acquiror Common Stock subject to such claims shall
remain in the Escrow Fund until the earliest to occur of (A) Damages actually
are incurred or paid, (B) Acquiror determines in its reasonable good faith
judgment that no Damages will be required to be incurred or paid, or (C) with
respect to claims which Acquiror has accrued or disclosed, the earlier of (1)
such time as the claims are no longer accrued or disclosed or (2) the expiration
of the applicable statute of limitations (in which event such shares shall be
distributed in accordance with Section 8.10).
(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 Acquiror Closing Stock Price.
8.7 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 by Acquiror to the Stockholders' Agent and, for a period of
forty-five (45) days after such delivery to the Escrow Agent, the Escrow Agent
shall make no delivery of Acquiror Common Stock or other property pursuant to
Section 8.6 hereof unless the Escrow Agent shall have received written
authorization from the Stockholders' Agent to make such delivery. After the
expiration of such 45-day period, the Escrow Agent shall make delivery of the
Acquiror Common Stock or other property in the Escrow Fund in accordance with
Section 8.6 hereof and as set forth in a certificate provided by Acquiror,
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 45-day period.
8.8 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, the Stockholders'
Agent and Acquiror shall attempt in good faith for sixty (60) days 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 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,
either Acquiror or the Stockholders' Agent may, by written notice to the other,
demand arbitration of the matter unless the amount of the Damages 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 Acquiror and the
Stockholders' Agent agree to arbitration; and in such event the matter shall be
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<PAGE> 57
settled by arbitration conducted by a single arbitrator. Acquiror and the
Stockholders' Agent shall jointly select an arbitrator. If Acquiror or the
Stockholders' Agent fail to agree upon an arbitrator within thirty (30) days, an
arbitrator shall be selected for them by the American Arbitration Association
("AAA"). The decision of the arbitrator so selected 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 8.6, the Escrow Agent shall be entitled to act in accordance with such
decision and make or withhold payments or distributions out of the Escrow Fund
in accordance with such decision.
(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 8.8, 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 one-half (1/2) of the amount in
dispute, plus any amounts not in dispute; otherwise, the Target stockholders for
whom shares of Target Capital 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.
8.9 Stockholders' Agent.
(a) In the event that the Merger is approved by the Target
stockholders, effective upon such vote, and without further act of any Target
stockholder, Peter Dumanian shall be appointed as agent and attorney-in-fact
(the "STOCKHOLDERS' AGENT") for and on behalf of each stockholder of Target
(except such stockholders, if any, as shall have perfected their dissenters'
rights under Delaware Law), to give and receive notices and communications, to
authorize delivery to Acquiror of shares of Acquiror Common Stock 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 stockholders of Target from time to time upon
not less than thirty (30) days prior written notice to Acquiror; provided,
however, that the Stockholders' Agent may not be removed unless holders of a
two-thirds interest in the Escrow Fund agree to such removal and to the identity
of the substituted stockholders' agent. Any vacancy in the position of the
Stockholders' Agent may be filled by approval of the holders of a majority in
interest of the Escrow Fund. No bond shall be required of the Stockholders'
Agent, and the Stockholders' Agent shall not receive compensation for his
services. Notice or communications to or from the Stockholders' Agent shall
constitute notice to or from each of the stockholders of Target.
(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
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evidence of such good faith. The Target stockholders shall severally indemnify
the Stockholders' Agent and hold him or her harmless against any loss, liability
or expense (including legal fees and other expenses incurred in connection with
the exercise of the Stockholders' Agent's duties as such) 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 or her duties
hereunder.
(c) The Stockholders' Agent shall have reasonable access to
information about Target and Acquiror and the reasonable assistance of Target's
and Acquiror'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 or Acquiror to anyone (except on a need to know basis to individuals who
agree to treat such information confidentially).
(d) The Stockholders' Agent shall be entitled to a distribution from
the Escrow Fund equal to any claim for indemnification or reimbursement for
legal fees and other expenses under Section 8.9(b) which has not been satisfied;
provided, however, that no such distribution shall be made until all claims of
Acquiror set forth in any Officer's Certificate delivered to the Escrow Agent on
or prior to the Termination Date have been resolved.
8.10 Distribution Upon Termination of Escrow Period. Promptly following the
Termination Date, the Escrow Agent shall deliver to the Former Target
Stockholders all of the shares in the Escrow Fund in excess of any amount of
such shares reasonably necessary to satisfy any unsatisfied or disputed claims
for Damages specified in any Officer's Certificate delivered to the Escrow Agent
on or before the Termination Date pursuant to Section 8.6 and any unsatisfied or
disputed claims by the Stockholders' Agent under Section 8.9. As soon as all
such claims have been resolved, the Escrow Agent shall deliver to the Former
Target Stockholders all shares remaining in the Escrow Fund and not required to
satisfy such claims. Deliveries of shares to the Former Target Stockholders
pursuant to this section shall be made in proportion to the allocation set forth
in Section 8.3.
8.11 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.
8.12 Third-Party Claims. In the event Acquiror becomes aware of a
third-party claim that Acquiror believes may result in a demand against the
Escrow Fund, Acquiror shall 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
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shall have the right in its sole discretion to settle any such claim; provided,
however, that Acquiror may not effect the settlement of any such claim without
the consent of the Stockholders' Agent, which consent shall not be unreasonably
withheld, conditioned or delayed. 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 8.6 or any other provision of this Article
VIII to the amount of any claim by Acquiror against the Escrow Fund for
indemnity with respect to such settlement.
8.13 Maximum Liability and Remedies. The liability of any Former Target
Stockholder for damages under this Article VIII shall be several and not joint,
and any assertion of Damages against any Former Target Stockholder may only be
made pro rata based on the percentage of Escrow Shares attributable to each
Former Target Stockholder as set forth on the Escrow Allocation and shall be the
sole and exclusive remedy of Acquiror and the Surviving Corporation after the
Closing with respect to any representation, warranty, covenant or agreement made
by Target under this Agreement and no former stockholder, optionholder,
warrantholder, director, officer, employee or agent of Target shall have any
personal liability to Acquiror or the Surviving Corporation after the Closing in
connection with the Merger; provided, however, that nothing herein limits any
potential remedies and liabilities of Acquiror or the Surviving Corporation,
arising under applicable state and federal laws against any security holder,
director, officer, employee or agent of Target with respect to that person's
commission of fraud.
ARTICLE IX
GENERAL PROVISIONS
9.1 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.
One i2 Place
11701 Luna Road
Dallas, Texas 75234
Attention: Corporate Counsel
Facsimile No.: (469) 357-6893
Telephone No.: (469) 357-1000
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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 No.: (512) 477-5813
Telephone No.: (512) 477-5495
(b) if to Target, to:
SupplyBase, Inc.
303 Second Street, Suite 450
San Francisco, California 94107
Attention: Corporate Secretary
Facsimile No.: (___) ___-____
Telephone No.: (___) ___-____
with a copy to:
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, California 94025
Attention: Brooks Stough
Facsimile No.: (650) 321-2800
Telephone No.: (650) 321-2400
9.2 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 if requested by the party to whom such
information is to be made available. 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 March 12, 2000. 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.
9.3 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.
9.4 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements specifically referred to herein
or delivered pursuant hereto, including the Exhibits, the Schedules, the Target
Disclosure Schedule and the Acquiror
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Disclosure Schedule (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, except for the Non-Disclosure Agreement, which shall
continue in full force and effect, and shall survive any termination of this
Agreement or the Closing, in accordance with its terms and (b) are not intended
to confer upon any other person any rights or remedies hereunder, except as set
forth in Article I, Sections 5.12, 5.13, 5.15, 5.18 and Article VIII of this
Agreement.
9.5 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.
9.6 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.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to applicable
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.
9.8 Assignment; Amendment; Binding Effect. Neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. This Agreement may be amended after the
Effective Time only by the written agreement of Acquiror, Target and the
Stockholders' Agent. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and permitted assigns.
9.9 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.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
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IN WITNESS WHEREOF, Target, Acquiror and Merger Sub have caused this
Agreement 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/ SANJIV S. SIDHU
--------------------------------------
Name: Sanjiv S. Sidhu
---------------------------------
Title: Chairman of the Board and
Chief Executive Officer
---------------------------------
SUPPLYBASE, INC.
By: /s/ DENNIS STRADFORD
--------------------------------------
Name: Dennis Stradford
---------------------------------
Title: Chief Executive Officer
--------------------------------
STARFISH MERGER CORP.
By: /s/ SANJIV S. SIDHU
--------------------------------------
Name: Sanjiv S. Sidhu
---------------------------------
Title: Chairman of the Board and
Chief Executive Officer
--------------------------------
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
<PAGE> 1
EXHIBIT 21.1
i2 Technologies, Inc.
List of Subsidiaries
<TABLE>
<CAPTION>
Jurisdiction in
Name of subsidiary Which Organized
- ------------------ ---------------
<S> <C>
i2 Technologies Pty Ltd. Australia
iTWO Technologies Exports, Inc. Barbados
i2 Technologies N.V./S.A. Belgium
i2 Technologies do Brasil Ltda. Brazil
i2 Technologies (Canada), Inc. Canada
InterTrans Logistics Solutions Ltd. Canada
i2 Technologies (Cayman Islands) Ltd. Cayman Islands
i2 Technologies China Ltd. China
i2 Technologies A/S Denmark
i2 Technologies Oy Finland
i2 Technologies SARL France
i2 Technologies, GmbH Germany
Think Systems Private Limited India
i2 Technologies Srl Italy
i2 Technologies Japan, Inc. Japan
i2 Technologies (Korea), Inc. Korea
i2 Technologies (Mexico) S. de R.L. Mexico
i2 Technologies (Netherlands) B.V. Netherlands
InterTrans Logistics Solutions BV Netherlands
i2 Technologies (N.A.) N.V. Netherlands Antilles
i2 Technologies PTE Limited Singapore
MStar Pty Ltd. South Africa
InterTrans Logistics AG Switzerland
i2 Technologies (Taiwan) Inc. Taiwan
i2 Technologies, Limited Delaware
i2 Technologies International Services, Inc. Delaware
InterTrans Logistics Corp. Delaware
Sales Marketing Administration Research Delaware
Tracking Technologies, Inc.
SMART Technologies, Inc. Texas
Solution Dynamics, Inc. New Jersey
Stratman Software International, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
registration statements, Reg. Nos. 333-96341, 333-31342, 333-85791, 333-53667,
333-28147, 333-27009 and 333-03703.
/s/ ARTHUR ANDERSEN LLP
March 21, 2000
Dallas, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 454,585
<SECURITIES> 124,806
<RECEIVABLES> 157,586
<ALLOWANCES> 17,474
<INVENTORY> 0
<CURRENT-ASSETS> 763,452
<PP&E> 88,495
<DEPRECIATION> 38,012
<TOTAL-ASSETS> 861,549
<CURRENT-LIABILITIES> 178,413
<BONDS> 350,000
0
0
<COMMON> 39
<OTHER-SE> 332,129
<TOTAL-LIABILITY-AND-EQUITY> 861,549
<SALES> 352,597
<TOTAL-REVENUES> 571,110
<CGS> 17,981
<TOTAL-COSTS> 530,685
<OTHER-EXPENSES> (7,642)
<LOSS-PROVISION> 8,923
<INTEREST-EXPENSE> 1,792
<INCOME-PRETAX> 48,067
<INCOME-TAX> 24,552
<INCOME-CONTINUING> 23,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,515
<EPS-BASIC> 0.16<F1>
<EPS-DILUTED> 0.14<F1>
<FN>
<F1>INCLUDES THE EFFECT OF A TWO-FOR-ONE STOCK SPLIT WHICH WAS EFFECTIVE FEBRUARY
17, 2000.
</FN>
</TABLE>
