-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NTLPxcZhd86z3nnmOXcJxCD2OE6c6ZfdxdZ4NOb9Zxx0eT3JXWQ51JsAOh/nqEhj 965x9t/dnnmJUl7fPLrfHA== 0000950134-00-002233.txt : 20000323 0000950134-00-002233.hdr.sgml : 20000323 ACCESSION NUMBER: 0000950134-00-002233 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: I2 TECHNOLOGIES INC CENTRAL INDEX KEY: 0001009304 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 752294945 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28030 FILM NUMBER: 575824 BUSINESS ADDRESS: STREET 1: ONE 12 PLACE STREET 2: 11701 LUNA RD CITY: DALLAS STATE: TX ZIP: 75234 BUSINESS PHONE: 4643571000 MAIL ADDRESS: STREET 1: ONE 12 PLACE STREET 2: 11701 LUNA RD CITY: DALLAS STATE: TX ZIP: 75234 10-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 ================================================================================ 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) 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)
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 ------------------- --------------------- 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. ================================================================================ 2 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. 2 3 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." 3 4 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 4 5 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. 5 6 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 6 7 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 7 8 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, 8 9 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. 9 10 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 10 11 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 11 12 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 12 13 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 13 14 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 14 15 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 15 16 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 16 17 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. 17 18 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. 18 19 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. 19 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. 20 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.
HIGH LOW ------- ------ 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
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. 21 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.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- 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
22 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 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:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1998 1999 ------ ------ ------ 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% ===== ===== =====
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 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 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 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 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 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 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 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." 31 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: 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.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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)
32 33
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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)
33 34
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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
- --------------- * 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. 34 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.
SIGNATURE TITLE DATE --------- ----- ---- /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
35 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 37 I2 TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE)
DECEMBER 31, ------------------- 1998 1999 -------- -------- 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 ======== ========
See accompanying notes. F-2 38 i2 TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- 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 ======== ======== ========
See accompanying notes. F-3 39 i2 TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL OTHER TOTAL ---------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL LOSS EARNINGS EQUITY ------- ------ ---------- ------------- -------- ------------- 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 ======= === ======== ======= ======= ========
See accompanying notes. F-4 40 i2 TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1998 1999 -------- --------- -------- 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 ======== ========= ========
See accompanying notes. F-5 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):
DECEMBER 31, ------------------- 1998 1999 -------- -------- U.S. Government......................................... $ 1,449 $342,923 State and Local Municipalities.......................... 21,440 1,300 Corporations............................................ 104,884 162,047 -------- -------- $127,773 $506,270 ======== ========
F-6 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 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:
i2 SHARES COMPANY DATE ISSUED - ------- ---------- ------------ Think............................................... May 1997 15.4 million Optimax............................................. May 1997 5.4 million ITLS................................................ April 1998 6.6 million SMART............................................... July 1999 4.2 million
The consolidated financial statements give retroactive effect to these combinations for all periods presented. F-8 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):
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- 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 ======== ======== ========
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 45 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. FURNITURE AND EQUIPMENT Furniture and equipment consists of the following (in thousands):
DECEMBER 31, ------------------- 1998 1999 -------- -------- 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 ======== ========
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
DECEMBER 31, ------------------ 1998 1999 ------- -------- 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 ======= ========
All SMART debt outstanding as of December 31, 1998 was paid concurrent with the acquisition of SMART in July 1999. F-10 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): 2000........................................................ $ 26,235 2001........................................................ 24,408 2002........................................................ 20,116 2003........................................................ 13,910 2004 and thereafter......................................... 71,102 -------- Total minimum lease payments...................... $155,771 ========
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 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):
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- 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 ======== ======== ========
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 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 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:
OPTIONS OUTSTANDING SHARES ----------------------------- AVAILABLE NUMBER WEIGHTED-AVERAGE FOR GRANT OF SHARES EXERCISE PRICE ----------- ---------- ---------------- 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 =========== ==========
OPTIONS OUTSTANDING ----------------------------- NUMBER WEIGHTED-AVERAGE OF SHARES EXERCISE PRICE ---------- ---------------- December 31, 1997........................................ 12,265,522 $ .45 ========== December 31, 1998........................................ 8,897,338 $1.97 ========== December 31, 1999........................................ 7,056,795 $4.66 ==========
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 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:
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 - ----------------- ---------- --------------- ------------- ---------- --------------- $ .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 ========== =========
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 51 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Our pro forma information follows (in thousands, except per share amounts):
1997 1998 1999 ------- ------- ------- 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)
Information regarding exercise prices and fair values of options granted is as follows:
1997 1998 1999 ----------- ----------- ----------- 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
9. INCOME TAXES Our provision for income taxes consists of the following (in thousands):
1997 1998 1999 ------- ------- ------- 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 ======= ======= =======
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):
1997 1998 1999 ------ ------- ------- 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 ====== ======= =======
F-16 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):
1998 1999 ------- -------- 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 ======= ========
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 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):
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- 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 ======== ======== ========
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 54 i2 TECHNOLOGIES, INC. SCHEDULE II TO CONSOLIDATED FINANCIAL STATEMENTS VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF PERIOD EXPENSES WRITE-OFFS OF PERIOD ---------- ---------- ---------- ---------- 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
F-19 55 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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)
56
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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
- --------------- * Incorporated herein by reference to the indicated filing EX-2.3 2 AGREEMENT AND PLAN OF REORGANIZATION 1 EXECUTION COPY AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG i2 TECHNOLOGIES, INC., STARFISH MERGER CORP. AND SUPPLYBASE, INC. MARCH 12, 2000 2 TABLE OF CONTENTS
Page ---- 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
i 3 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
ii 4 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
iii 5 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 iv 6 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 7 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 2 8 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"). 3 9 (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 4 10 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. 5 11 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 6 12 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. 7 13 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 8 14 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 9 15 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 10 16 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 11 17 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, 12 18 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 13 19 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 14 20 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, 15 21 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 16 22 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) 17 23 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 18 24 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) 19 25 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 20 26 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 21 27 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 22 28 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; 23 29 (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. 24 30 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 25 31 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 26 32 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. 27 33 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. 28 34 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 29 35 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: 30 36 (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; 31 37 (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 32 38 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 33 39 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 34 40 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. 35 41 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 36 42 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 37 43 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 38 44 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. 39 45 (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. 40 46 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 41 47 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 42 48 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 43 49 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 44 50 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. 45 51 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; 46 52 (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 47 53 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 48 54 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 55 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 50 56 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 51 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 52 58 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 53 59 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 54 60 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 55 61 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] 56 62 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] EX-21.1 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 i2 Technologies, Inc. List of Subsidiaries
Jurisdiction in Name of subsidiary Which Organized - ------------------ --------------- 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
EX-23.1 4 CONSENT OF ARTHUR ANDERSEN LLP 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 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 454,585 124,806 157,586 17,474 0 763,452 88,495 38,012 861,549 178,413 350,000 0 0 39 332,129 861,549 352,597 571,110 17,981 530,685 (7,642) 8,923 1,792 48,067 24,552 23,515 0 0 0 23,515 0.16 0.14 INCLUDES THE EFFECT OF A TWO-FOR-ONE STOCK SPLIT WHICH WAS EFFECTIVE FEBRUARY 17, 2000.
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