-----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, LW1lxeV6Xo1194r+MCSrEAv6WvPWdSeESAzifAL5ylzZayjKwLS4bwplonFHQufO DV7XBZfghbnrXcyBk7E2Tg== 0000950134-98-001949.txt : 19980312 0000950134-98-001949.hdr.sgml : 19980312 ACCESSION NUMBER: 0000950134-98-001949 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980311 SROS: NASD 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-K405 SEC ACT: SEC FILE NUMBER: 000-28030 FILM NUMBER: 98563899 BUSINESS ADDRESS: STREET 1: 909 E LAS COLINAS BLVD STREET 2: 16TH FL CITY: IRVING STATE: TX ZIP: 75039 BUSINESS PHONE: 2148606000 MAIL ADDRESS: STREET 1: 909 E LAS COLINAS BLVD STREET 2: 16TH FLOOR CITY: IRVING STATE: TX ZIP: 75039 10-K405 1 FORM 10-K405 FOR YEAR ENDED DECEMBER 31, 1997 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 0-28030 i2 TECHNOLOGIES, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 75-2294945 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 909 E. LAS COLINAS BLVD., 16TH FLOOR IRVING, TEXAS 75039 (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (214) 860-6000 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. [X] 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 February 27, 1998 as reported on the Nasdaq National Market, was approximately $729 million (affiliates being, for these purposes only, directors, executive officers and holders of more than 5% of the Registrant's Common Stock). As of February 27, 1998, the Registrant had 32,690,164 outstanding shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 1998 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 customer benefits attributable to the Company's products; developments in the Company's markets and strategic focus; new products and product enhancements; potential acquisitions and the integration of acquired businesses, products and technologies; strategic relationships; and future economic, business and regulatory conditions. 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. The Company's 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 "Additional 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. i2 Technologies, Inc. ("i2" or the "Company") is the leading provider of client/server-based decision support software products for supply chain management and related applications. Supply chain management encompasses the planning and scheduling of manufacturing and related logistics, including demand forecasting, raw materials procurement, work-in-process, distribution and transportation across multiple enterprises. i2's client/server software solution, RHYTHM, is designed to provide customers with an end-to-end supply chain management solution, enabling customers to model complex, multi-enterprise supply chains to rapidly generate integrated solutions to supply chain challenges such as demand volatility, production bottlenecks, supply interruptions and distribution alternatives. RHYTHM utilizes a unique, constraint-based methodology which simultaneously considers a broad range of factors -- from changing revenue forecasts to machine capacities to individual customer commitments -- to optimize all aspects of the supply chain. RHYTHM's advanced decision-support capabilities enable companies to make better informed and more timely planning, scheduling and resource allocation decisions in order to improve throughput, operating efficiency, customer satisfaction and return on assets. The Company's software products and services are designed to enable customers to reduce costs, increase market share and enhance their competitive advantage. The Company's executive offices are located at 909 E. Las Colinas Blvd., 16th Floor, Irving, Texas 75039, and its telephone number is (214) 860-6000. The Company's logo and "RHYTHM" are registered trademarks of the Company. INDUSTRY BACKGROUND Today's increasingly competitive business environment has forced many companies to increase manufacturing efficiency while improving their flexibility and responsiveness to changing market conditions. In addition to facing higher competitive standards with respect to product quality, variety and price, businesses also recognize the need to shorten lead times, adjust production for frequent changes in customer requirements and quote more accurate and reliable delivery dates. Furthermore, a company's supply chain may span multiple continents, tying suppliers in one part of the world with a plant in another to serve customers in yet a third location. These forces are prompting companies to work closely and collaborate with a broad range of suppliers and customers to improve efficiencies across multi-enterprise supply chains. The growth of the Internet and intranets is accelerating these changes by providing a ubiquitous, platform-independent communications network. The combination of these forces has created a dynamic, complex and highly interdependent business environment. In response to these evolving market forces, many companies have 1 3 sought to reengineer their business processes to reduce manufacturing cycle times, shift from mass-production to order-driven manufacturing, increase use of outsourcing and share information with vendors and customers. The implementation of software solutions to manage various elements of the supply chain has become a key component of these reengineering initiatives. The Company believes that companies are increasingly recognizing efficient supply chain management as a critical source of competitive advantage in this rapidly changing business environment. THE TRADITIONAL APPROACH Companies have traditionally applied information technology to supply chain management through Manufacturing Resource Planning ("MRP") systems, which provide limited flexibility to accommodate rapidly changing business conditions and customer requirements. In order to respond to an increasingly competitive business environment and related complex supply chain issues, many companies have adopted Enterprise Resource Planning ("ERP") systems, which integrate MRP solutions with other enterprise management applications such as financial, accounting and human resources. Although ERP systems provide substantial benefits primarily by integrating financial and other controls with multi-plant manufacturing coordination, the supply chain decision support capabilities of many ERP systems remain limited by the planning and scheduling methodologies utilized in their MRP modules. Various ERP vendors are mitigating these limitations by internally developing, or by acquiring or partnering with independent developers of, advanced planning and scheduling software. Some of the significant limitations of traditional MRP systems and the MRP modules of ERP systems are as follows: LIMITED DECISION SUPPORT. Traditional solutions collect and report large amounts of transactional data, rather than provide sophisticated analysis of relevant information to support critical business decisions in real-time. While these solutions help customers unify disparate information resources within the enterprise and contribute to business process reengineering efforts, the Company believes that they are not well-suited to enable customers to make rapid, highly complex business decisions. LIMITED REPRESENTATION OF SUPPLY CHAIN. The Company believes that traditional solutions lack the flexibility and functionality needed to create a highly accurate model of the supply chain because they often employ fixed assumptions regarding critical operating constraints such as available production capacity and supplier lead times. Since this approach cannot adequately capture complex real-world constraints and interdependencies, it may result in the development of infeasible or suboptimal plans. In addition, traditional solutions calculate plans and schedules for individual, local segments of the production and supply process, without considering the consequences to the entire process. For example, an increase in customer demand might result in the purchase of additional raw materials without determining whether manufacturing capacity is available to process those materials. This approach incorrectly assumes that optimizing production for an individual step within the production process will lead to an optimal result for the manufacturing operation or supply chain as a whole. SEQUENTIAL PLANNING. Traditional planning methodologies model the supply chain as a sequence of discrete steps. For example, traditional solutions begin by developing a demand forecast from which a distribution plan is developed to determine the distribution center, warehouse or factory source which will be used to manufacture/distribute the products without regard to transportation or manufacturing constraints. A transportation plan is then generated to determine the optimal transportation methods to be used to ship the products without addressing the constraints of the remaining parts of the supply chain. A master production schedule is then generated which is used to develop a materials requirement plan, which in turn is used to arrive at a capacity requirements plan. Because the process does not address all constraints simultaneously, the initial planning cycle is rarely feasible or optimal. Moreover, as resources become constrained, sequential planning requires that the entire supply chain model be completely regenerated from the beginning to identify and resolve conflicts. As a result, the planning process often requires numerous manual iterations to develop a feasible solution. Once an initial plan has been developed, the time-consuming nature of sequential planning limits a manager's ability to rapidly 2 4 evaluate subsequent changes, such as material shortages and revisions in customer orders. Accordingly, a manager's ability to respond to changes and to effect corrective action may be delayed. LIMITED INTEGRATION AND FUNCTIONALITY. Traditional solutions may provide selected supply chain planning modules, but generally do not provide integrated functionality across the entire supply chain, including demand forecasting, manufacturing planning, plant scheduling, distribution and transportation. For example, several ERP vendors have acquired planning products which address specific supply chain challenges, but fail to provide global visibility and optimization across the entire supply chain. In addition, traditional solutions often offer only limited functionality within these areas. For example, MRP and ERP systems often provide limited "available-to-promise" functionality by simply processing orders on a "first-come, first-served" basis, without considering other constraints or business objectives. Furthermore, traditional solutions typically assume complete independence of supply and demand. Often, however, the overabundance or scarcity of a certain product can directly or indirectly impact demand for that product and related products. Complex interrelationships and interdependencies are not adequately accounted for in traditional planning methodologies, leading to potentially inaccurate conclusions and recommendations. LENGTHY IMPLEMENTATION CYCLES. Due to the broad scope, complexity and associated re-engineering requirements of ERP systems, many companies have found the implementation of such systems to be costly and time consuming. Such factors often delay or limit the realization of benefits associated with the implementation of ERP systems. THE i2 SOLUTION i2 is the leading provider of client/server-based decision support software products for supply chain management and related applications. The Company's RHYTHM products enable businesses to plan and schedule the principal elements of the supply chain by simultaneously considering internal constraints, such as manufacturing facility capacities, human resource availability, alternate cost strategies and distribution requirements, and external constraints, such as supplier lead times and customer requirements. RHYTHM utilizes object-oriented technology to model specific characteristics of a customer's operations, and focuses primarily on supply chain management functions such as raw materials procurement, capacity planning, distribution requirements and due date scheduling. RHYTHM also incorporates an advanced forecasting module which provides the ability to view and manipulate multi-dimensional data and analyze the causal relationships between customer demand and internal and external events. RHYTHM is designed to help businesses increase throughput, reduce inventory, decrease cycle times, improve customer delivery date performance and, consequently, enhance return on assets. The Company's software products are also designed to enable customers to reduce costs, increase market share and enhance their competitive advantage. i2's approach to customer relationships is centered on the identification of potential savings and the creation of value for customers. As part of this dedication to providing value for customers, i2 has established a goal of generating more than $50 billion in total value for its customers by the year 2005 through growth and savings. Although RHYTHM is usually deployed as a stand-alone alternative to MRP products, RHYTHM is often implemented in conjunction with, or as a complement to, existing MRP and ERP solutions. RHYTHM's data structures, methodologies and application logic differentiate it from existing solutions in the following ways: DECISION SUPPORT. RHYTHM's memory-resident, object-oriented design allows for very rapid analysis and response to planning and scheduling issues. RHYTHM identifies production and scheduling problems as circumstances change, proposes optimal solutions and allows for automatic or manual corrective action. i2's software also allows managers to perform real-time simulations which gauge the impact of potential local actions on the supply chain. The Company believes that this decision support functionality enables customers to better manage complex supply chain issues in an effort to reduce costs, maximize throughput and improve return on assets. ACCURATE REPRESENTATION OF SUPPLY CHAIN. RHYTHM is designed to incorporate a broad range of specific, real-world constraints and thereby enhance the accuracy of the supply chain model and improve 3 5 its decision-making utility. RHYTHM distinguishes between hard constraints, those which are not subject to change or flexibility (e.g., a machine's maximum rated production capacity), and soft constraints, those which may be altered in order to arrive at an optimal solution (e.g., preferred sources for materials). RHYTHM's incorporation of object-oriented data structures represents a significant advance in the creation of complex supply chain models. CONCURRENT PLANNING. In contrast to sequential planning, concurrent planning views all the steps in the manufacturing process simultaneously. Upon identification of a planning or scheduling change, RHYTHM immediately propagates the effect of the change upstream and downstream, from the point of origin, throughout the supply chain model to derive a revised, optimal solution. For example, an unforeseen loss of production capacity would automatically signal for a reduction in raw material procurement as well as the potential rescheduling of customer delivery dates. Because RHYTHM presents an integrated model of the supply chain, from demand forecasting to raw material procurement, work-in-process, distribution and transportation to customer delivery, it is able to provide solutions which optimize the efficiency of the supply chain as a whole rather than summing a series of local optimizations. GLOBAL INTEGRATION AND ADVANCED FUNCTIONALITY. RHYTHM provides customers with a fully integrated, end-to-end supply chain management solution, from demand forecasting to manufacturing planning, plant scheduling, distribution and transportation. This enables customers to address a broad range of supply chain issues and to gain visibility across their entire supply chains to identify, evaluate and address these issues rapidly and effectively. Additionally, RHYTHM analyzes complex supply/demand interrelationships in order to more accurately represent real-world supply chain mechanics. RHYTHM's architecture is designed to enable easy integration with a broad range of transactional, legacy and other decision support software programs, enabling customers to leverage their investments in these systems. RHYTHM also provides advanced functionality for its customers across the supply chain. For example, RHYTHM's available-to-promise functionality allows customers to commit to requested delivery dates based on a global view of materials, capacity and related business constraints, while considering a broad range of pre-defined user business objectives such as maximizing sales to higher profit margin customers rather than assimilating them on a "first-come, first-served" basis. In addition, the Company's multi-dimensional demand forecasting module allows users to forecast, plan and influence demand by evaluating more than 30 potential internal and external causal relationships. EASE OF IMPLEMENTATION. RHYTHM is designed as a broadly applicable software solution which is adaptable for customers in a wide range of industries. In addition, RHYTHM is designed to integrate easily with many existing client/server and legacy MRP and ERP systems. As a result, functional implementation at a single site can generally be completed within three to four months depending on the scope and complexity of the installation project. The Company's goal is for the customer to realize a significant return on its investment within a year of licensing. STRATEGY The Company's objectives are to maintain its leadership position in decision-support supply chain management software, help create significant value for its customers and continue to increase its market share of the supply chain management market. The Company's strategy for achieving these objectives is as follows: EXPAND PRODUCT OFFERINGS i2 believes that it has gained significant experience in supply chain management methodologies through its work with its existing customer base. The Company intends to continue to leverage this experience, together with its expertise in advanced software technology, to expand the scope of its supply chain management software to more fully address certain components of the supply chain. For example, the Company is currently developing additional functionality for RHYTHM in the areas of transportation logistics. The Company is also focusing on selected vertical markets such as Metals, Automotive, Consumer Packaged Goods and other industries. Although the RHYTHM software is standard across all industries, the Company is forming groups to identify and understand the needs of particular industries. The Company is 4 6 leveraging the highly flexible nature of RHYTHM to develop a series of preconfigured user interfaces tailored to address the requirements of such specific industries. INVEST AGGRESSIVELY TO BUILD MARKET SHARE The Company has made and continues to make substantial investments to expand its sales and marketing, research and development, consulting and administrative infrastructure. i2 believes that such investments are necessary to increase its market share and to capitalize on the growth opportunities in the supply chain management software market. INTEROPERATE WITH A BROAD RANGE OF SOFTWARE PLATFORMS AND APPLICATIONS The Company believes that most larger companies operate in heterogeneous computing environments, with diverse data repositories and transaction and legacy systems. Therefore, the Company's software must be able to interact and interoperate with a broad range of software platforms and products in order to successfully manage complex, multi-enterprise supply chains. The Company's strategy is to establish and maintain cooperative relationships with a broad range of hardware and software vendors while maintaining platform-neutral architecture. In this regard, the Company is working together with legacy and ERP vendors such as SAP AG ("SAP"), Oracle Corporation ("Oracle"), Baan Company N.V. ("Baan") and PeopleSoft, Inc. ("PeopleSoft") to establish and maintain the necessary complex interfaces between the Company's software and such vendor's transaction-based systems. In addition, the Company strives to balance its relationships with platform and transaction system vendors to avoid becoming too closely aligned with any individual vendor. FOCUS ON DEVELOPING COLLABORATIVE, MULTI-ENTERPRISE SOLUTIONS The Company has recently established a Global Decision Support Architecture. This architecture has been designed to enable RHYTHM to easily access data from a broad range of customer data repositories, enable smoother communications and data translations between RHYTHM and disparate enterprise software systems, provide a multi-dimensional, uniform user interface and enable a greater level of collaborative planning across the supply chain. i2 believes that customers must be able to integrate the variety of applications that they use to run their business and that, over time, application integration and collaborative, multi-enterprise planning will be critical to enable customers to derive significant additional value from supply chain management. BUILD STRATEGIC ALLIANCES AND BROADEN DISTRIBUTION CHANNELS The Company intends to expand and seek additional strategic relationships with MRP and ERP vendors to integrate RHYTHM with their software products to create joint-marketing opportunities. In addition, the Company intends to augment its sales efforts by establishing and expanding relationships with other complementary business application software vendors and systems consulting and integration firms. The Company is leveraging third-party implementation services with large, international consulting firms such as Andersen Consulting, Deloitte & Touche, Ernst & Young, KPMG Peat Marwick and Price Waterhouse to enable it to more rapidly penetrate its target market. In addition, the Company has established direct sales offices in international markets and intends to continue to expand its United States and international sales forces. ACQUIRE COMPLEMENTARY BUSINESSES, PRODUCTS AND TECHNOLOGIES The Company believes that certain acquisitions will provide the opportunity to broaden its product offerings and provide more comprehensive decision support and supply chain management solutions. For example, the Company's acquisition in May 1997 of Think Systems Corporation and Optimax Systems Corporation significantly extended its capabilities in demand planning and manufacturing scheduling. The Company may in the future pursue additional acquisitions of businesses, products and technologies, or enter into joint venture arrangements, which complement or expand its business. 5 7 PRODUCTS RHYTHM operates as a flexible, integrated supply chain management solution and is available in single-site and multi-site configurations. RHYTHM is currently composed of the following modules and extensions: MODULES SUPPLY CHAIN PLANNER(TM). Supply Chain Planner ("SCP") is the base product required for all RHYTHM applications. It coordinates and optimizes all planning and scheduling scenarios and holds the object framework. SCP contains the logic common to all RHYTHM modules and extensions and provides the means to control them concurrently. DEMAND PLANNER(TM). Demand Planner is used to forecast customer demand. It uses many statistical techniques and multiple forecast approaches to anticipate changes in demand, including changes as a result of promotions, advertising campaigns, pricing policies or market perceptions. FACTORY PLANNER(TM). Factory Planner ("FP") is designed to perform single-site planning. FP manages complex manufacturing operations involving large numbers of resources and operational steps, and is engineered to solve common factory planning problems such as managing complex bills of materials and alternate routings. Through FP, users can input their manufacturing forecast, desired levels of finished goods, back-orders and other demands or constraints, set tolerances for changes in the levels of the manufacturing forecast and set target inventory levels. Through an interactive user interface, FP allows the user to reallocate materials, change quantities, expedite purchases, move quantities and perform "what if" simulations under modified constraints to produce a master production schedule. MASTER PLANNER(TM). Master Planner ("MP") integrates two or more Factory Planner modules implemented at multiple sites. MP controls and enables multi-site scheduling, sourcing, allocation and forecasting. MP facilitates the development of an optimal solution for multi-site installations. ADVANCED SCHEDULER(TM). Advanced Scheduler ("AS") provides additional scheduling functionality for plans produced by Factory Planner or Master Planner. AS outputs a detailed schedule and sequencing plan which considers set-up times, material availability and other user-defined constraints. AS' planning algorithms include constraint-based routines to recommend sequencing of work loads to optimize the user's key resources. SEQUENCER(TM). Sequencer is used to schedule assembly lines and other sequential production facilities. Sequencer utilizes genetic algorithms to optimize the sequence of orders through manufacturing operations to increase throughput, balance workloads and achieve other optimization goals. DISTRIBUTION PLANNER(TM). Distribution Planner ("DP") integrates manufacturing and distribution planning and scheduling. DP enables implementation of automated allocation, sourcing and transportation solutions and provides planners with the ability to manipulate distribution requirements to achieve strategic customer service goals. TRANSPORTATION PLANNER(TM). Transportation Planner ("TP") determines the most feasible plan of utilizing transportation resources to move inventory from one location in the supply chain to another. TP allows users to consolidate orders or shipments into loads, select the appropriate mode and carrier, as well as schedule and route the loads in order to determine the most efficient method of shipping inventory. TP is currently provided by a third-party software provider. EXTENSIONS AVAILABLE-TO-PROMISE(TM). Available-to-Promise ("ATP") automatically determines the quantity of goods deliverable by a requested date, as well as the date upon which a complete order may be delivered based upon materials, capacity, distribution capability, customer allocations, supplier allocations and related business constraints. ATP is used to quote delivery dates to customers on a real-time basis. 6 8 STRATEGY-DRIVEN PLANNER(TM). Strategy-Driven Planner ("SDP") allows users to specify business rules on how RHYTHM will resolve problems found within the supply chain. SDP incorporates "trade-off" logic which takes into account the users' preferences regarding operational, financial and other measures. RHYTHMLINK(TM). RhythmLink facilitates communication and data exchange between RHYTHM and other applications such as databases, report writers and ERP solutions by using industry accepted standard technologies and interfaces. RhythmLink is designed to enable companies to rapidly integrate and implement the RHYTHM products with its existing information resources. All of the Company's products are currently available in English and many of the products are available in German, French, Japanese and Spanish. During the last twelve months, the sales prices for RHYTHM software packages, other than for three significantly large sales, generally ranged from approximately $100,000 to approximately $5.5 million. The price for an individual RHYTHM product package is determined based upon a number of factors, including the RHYTHM modules and extensions purchased, the number of servers, users and sites in the customer's system, as well as the complexity of the customer's supply chain. RHYTHM is a client/server solution which can operate on hardware platforms from Digital Equipment, Hewlett-Packard, IBM and Sun Microsystems using Microsoft's Windows NT operating system or the UNIX variant supported by each hardware platform. RHYTHM is written in C++ language and utilizes a fully object-oriented data structure for representing operations, resources and constraints in supply chains. Once a model is defined, the entire representation is loaded into random access memory ("RAM") and all processing by RHYTHM takes place in RAM. A typical supply chain model implemented in the Company's system may occupy as much as two gigabytes of RAM. RHYTHM reads and writes data to a wide variety of databases and data structures, and is operable in conjunction with a wide variety of ERP systems. The Company believes that the combination of its object-oriented and memory-resident technologies permit RHYTHM to achieve accuracy and speed advantages over traditional planning and scheduling solutions. PRODUCT DEVELOPMENT The Company originally introduced its RHYTHM software in 1992 and has subsequently released a number of product enhancements as well as acquired significant products. The Company has adopted a strategy of periodically reinventing its products in order to meet its customers' needs, and strives to ensure that each new generation of RHYTHM is compatible with previous releases. On-going product development efforts are focused on broadening the functionality of RHYTHM to more fully address certain areas of supply chain management, including transportation logistics. The Company also licenses certain third-party software including an advanced transportation module. In October 1997, the Company announced several products in various stages of development, each of which is designed for multi-enterprise supply chain collaboration. Within this broader line of products under development, the Company has released a decision support architecture that will enable customers to implement comprehensive planning and decision support solutions that exchange information in diverse environments regardless of data structures and platforms employed. The Company also has released a product which will provide a single graphical model of an organization's entire supply chain and present a real-time view of the performance of individual elements of the supply chain as well as the supply chain as a whole. There can be no assurance that the Company will be successful in further developing these or any other new products, that the Company will not experience difficulties that could delay or prevent successful development, introduction and sales of these products, or that its new products and enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. RHYTHM products have been developed by the Company's internal developmental staff through small project teams focused on independent components of the software under development. The Company maintains product release planning procedures to ensure integration, testing and version control among the different project development teams. The Company operates its research and development department in a "technology neutral" environment which makes it possible to operate within industry standards and yet be 7 9 independent of particular database formats, hardware platforms, network protocols and interfaces. The Company maintains significant development centers in Bangalore and Mumbai, India; Cambridge, Massachusetts; Dallas, Texas; Parsippany, New Jersey; and Toronto, Ontario. Research and development expenses have increased significantly in recent periods as the Company has continued to focus on development of new and enhanced products. Research and development expenses were $5.5 million, $17.0 million and $44.1 million in 1995, 1996 and 1997, representing 18.0%, 19.3% and 22.0% of total revenues, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Costs and Expenses -- Research and Development" in Item 7 of this Form 10-K. CUSTOMER SERVICE AND SUPPORT The Company believes that providing a high level of customer service and technical support is necessary to achieve rapid product implementation which, in turn, is essential to customer satisfaction and continued license sales and revenue growth. During 1996 and 1997, the Company expanded its service and support centers geographically and now has support centers across the United States and in Australia, Belgium, Canada, Denmark, France, Germany, India, Japan, Mexico, Singapore and the United Kingdom. Accordingly, the Company is committed to continue recruiting and maintaining a high-quality technical support team. The Company's customer service and support activities consist of the following: TRAINING The Company offers an intensive education and training program for its customers and its third-party implementation providers. Classes are offered at in-house facilities at certain of the Company's offices and at customer locations. These classes focus on supply chain management principles as well as the implementation and use of RHYTHM products. CONSULTING The Company offers its customers on-site consulting services aimed at assisting in the implementation of RHYTHM and integration with the customers' existing systems. The Company receives hourly fees for these services. These consulting services are concentrated on making implementation cost-effective for customers by enabling them to independently perform as many of the integration tasks as possible. The Company also leverages the use of third-party consulting firms to more rapidly penetrate its target market. MAINTENANCE AND PRODUCT UPDATES The Company provides ongoing product support services under its license agreements. Maintenance contracts are typically sold to customers for a one-year term at the time of the initial RHYTHM license and may be renewed for additional periods. Under its maintenance agreements with its customers, the Company provides, 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 the Company at market prices. Ongoing support and maintenance services are provided on up to a seven-day week, 24-hour day basis. SALES AND MARKETING The Company markets its software and services primarily through its direct sales organization augmented by other sales channels, including business application software vendors and systems consulting and integration firms. At December 31, 1997, the Company conducted sales and other activities through several offices in the United States and additional offices in Australia, Belgium, Brazil, Canada, Denmark, France, Germany, Italy, Japan, Korea, Singapore and the United Kingdom. The Company's direct sales organization consists of regionally based sales representatives and sales engineers supported by personnel with experience in 8 10 the aerospace, apparel, automotive, consumer products, furniture, high-tech, industrial, metals, paper, pharmaceuticals, process, retail and textiles industries. The Company currently has joint-marketing agreements with a number of business application software vendors, including SAP and System Software Associates, Inc. ("SSA"), and several systems consulting and integration firms. These joint-marketing agreements generally provide the vendors with non-exclusive rights to market RHYTHM products and access to marketing materials and product training. Furthermore, the vendors receive a specified commission for license revenues generated by the vendor during the term of the agreement, which commissions vary from zero to 40% of the sales price of the license. In addition, the Company and Oracle recently entered into a development and distribution agreement pursuant to which the parties will jointly develop an enhanced interface between RHYTHM and Oracle's enterprise resource planning solutions. Under this agreement, the Company also granted to Oracle a non-exclusive right to sublicense i2's RHYTHM products to end users as standard Oracle applications. By using these indirect sales channels, the Company is seeking to capitalize on the installed base of other software vendors and obtain favorable product recommendations from systems consulting and integration firms, thereby increasing RHYTHM's market coverage. There can be no assurance that any of these joint-marketing and development agreements will be beneficial to the Company or that such relationships will be sustained. CUSTOMERS As of December 31, 1997, the Company had licensed RHYTHM products to approximately 220 customers. The following is a partial list of companies that have licensed more than $750,000 of RHYTHM products since December 31, 1994: CONSUMER ELECTRONICS/ METALS PAPER HIGH TECHNOLOGY Altos Hornos Mexico CSS Industries American Microsystems Bethlehem Steel Fletcher Challenge AST Research British Steel Sonoco AVEX Electronics Broken Hill Proprietary Compaq Computer Iscor Limited CONSUMER PACKAGED GOODS Dell Computer Mannesmann 3M Digital Equipment Sidmar British American Tobacco Fujitsu Timken Consumer Packaging Hewlett-Packard US Steel E&J Gallo Winery IBM Wheeling Pittsburgh EMI Compact Disk Integrated Device Technology Komag MEDICAL/PHARMACEUTICAL OTHER Lucent Technologies Abbot Laboratories Baker Hughes INTEQ Motorola Bristol-Myers Squibb Ford Motor Company Philips Semiconductors Johnson & Johnson Medical GE Capital Samsung Leiner Health Products Haworth SGS Thomson Microelectronics Rhone Poulenc Rorer Herman Miller Siemens Semiconductors US Surgical Newport News Shipbuilding Texas Instruments Occidental Chemical Toshiba Sara Lee Knit Products VF Services
The Company provides its software products to customers under non-exclusive, non-transferable license agreements. As is customary in the software industry, in order to protect its intellectual property rights, the Company does not sell or transfer title to its products to its customers. Under the Company's current standard form of license agreement, licensed software may be used solely for the customer's internal operations. 9 11 COMPETITION The markets in which the Company operates are highly competitive. The Company's 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: (i) enterprise resource application software vendors such as SAP, PeopleSoft, Oracle and Baan, each of which currently offers sophisticated ERP solutions that currently or may in the future incorporate supply chain management modules or advanced planning and scheduling software; (ii) other suppliers of supply chain software including Manugistics Group, Inc. and Logility, Inc.; (iii) other business application software vendors who may broaden their product offerings by internally developing, or by acquiring or partnering with independent developers of, advanced planning and scheduling software; (iv) internal development efforts by corporate information technology departments; and (v) 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 the Company's products as a complement to their own systems. The Company believes that as its market share increases, and as the ranges of products offered by the Company and these ERP vendors expand and increasingly overlap, relationships which were cooperative in the past will become more competitive, thereby increasing the overall level of competition the Company faces. Specifically, the Company and SAP recently terminated a license and distribution agreement, and SAP has announced its intention to develop a suite of advanced planning and scheduling products which are expected to be directly competitive with RHYTHM. The Company believes that additional ERP vendors are focusing significant resources on increasing the functionality of their own planning and scheduling modules, and at least two ERP vendors have recently acquired independent developers of advanced planning and scheduling software which compete with RHYTHM. Many of the Company's 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 than the Company, each of which could provide them with a significant competitive advantage over the Company. In addition, the Company expects to experience increasing price competition as the Company and its competitors compete for market share. There can be no assurance that the Company will be able to compete successfully with existing or new competitors or that competition will not have a material adverse effect on the Company's business, operating results and financial condition. PROPRIETARY RIGHTS AND LICENSES The Company relies primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect its proprietary rights. In addition, the Company generally licenses RHYTHM products to end users in object code (machine-readable) format, and the Company's license agreements generally allow the use of RHYTHM products solely by the customer for internal purposes without the right to sublicense or transfer the RHYTHM products. However, the Company believes that the foregoing measures afford only limited protection. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exist, software piracy can be expected to be a problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States. Furthermore, there can be no assurance that the Company's competitors will not independently develop technology similar to that of the Company. The Company may increasingly be subject to claims of intellectual property infringement as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Although the Company is not aware that any of its products infringes upon the proprietary rights of third parties, there can be no assurance that third parties will not claim infringement by the Company with respect to current or future products. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or 10 12 licensing agreements, if required, may not be available on terms acceptable to the Company, which could have a material adverse effect upon the Company's business, operating results and financial condition. The Company has in the past and may in the future resell certain software which it licenses from third parties. There can be no assurance that these third-party software licenses will continue to be available to the Company on commercially reasonable terms. The loss of or inability to maintain or obtain any of these software licenses could result in delays or reductions in product shipments until equivalent software could be identified, licensed and integrated, which could adversely affect the Company's business, operating results and financial condition. EMPLOYEES As of December 31, 1997, the Company had 1,006 full-time employees, including 397 primarily engaged in research and development activities and 258 engaged in sales and marketing activities. The Company's future success depends in significant part upon the continued service of its key technical and senior management personnel and its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense and there can be no assurance that the Company can retain its key managerial and technical employees or that it can attract, assimilate or retain other highly qualified technical and managerial personnel in the future. None of the Company's employees are represented by collective bargaining units and the Company has never experienced a work stoppage. The Company believes that its employee relations are very good. ADDITIONAL 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 the Company and its business. POTENTIAL FOR SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS; DEPENDENCE ON SIGNIFICANT INDIVIDUAL SALES The Company's quarterly revenues, expenses and operating results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future. Because the purchase of a supply chain management software solution generally involves a significant commitment of capital, the sales cycle associated with the purchase of the Company's products varies substantially and is subject to a number of significant risks, including customers' budgetary constraints, timing of budget cycles and concerns about the pricing or introduction of new products by the Company or its competitors, factors over which the Company has little or no control. Additional factors include foreign currency exchange rate fluctuations, the mix of direct or indirect sales, changes in joint-marketing relationships, and changes in the Company's strategy. Furthermore, purchases of the Company's products may be deferred or canceled in the event of a downturn in any potential customer's business or the economy in general. The amount of revenues associated with particular licenses can vary significantly based upon the number of software modules purchased and the number of sites and users involved in the installation. The Company generally derives a significant portion of its software license revenues in each quarter from a small number of relatively large sales. For example, in each quarter of 1996 and 1997, one or more customers each accounted for at least 15% of total software license revenues in such quarter. While the Company believes that the loss of any of these particular customers would not have an adverse effect, an inability to consummate one or more substantial license sales in any future period could have a material adverse effect on the Company's operating results for that period. Moreover, similar to many other software companies, the Company typically realizes a significant portion of its software license revenues in the last month or even the last week of a quarter. The Company also believes that the tendency of customers to delay placing orders for software products until near the end of a quarter has become more pronounced in recent periods. As a result, small delays in customer orders can cause significant variability in the Company's license revenues and results of operations for any particular period. For all of the foregoing reasons, revenues are difficult to forecast. The Company intends to continue to invest heavily in its sales and marketing, consulting and research and development organizations, and sets investment and expense levels based on expected future revenues. If 11 13 revenues are below expectations, operating results and net income are likely to be adversely and disproportionately affected because a significant portion of the Company's expenses are not variable in the short term, and cannot be quickly reduced to respond to decreases in revenues. In addition, the Company may reduce prices or accelerate its investment in research and development efforts in response to competition or to pursue new market opportunities. Any one of these activities may further limit the Company's ability to adjust spending in response to fluctuations in revenue levels. There can be no assurance that revenues will grow in future periods, that they will grow at historical rates, or that the Company will maintain positive operating margins in future quarters. The Company's quarterly results of operations are subject to certain seasonal fluctuations. Historically, the Company's revenues have tended to be strongest in the fourth quarter of the year and to increase only modestly in the first quarter of the following year. The Company believes that this seasonality is due to the calendar year budgeting cycles of many of its customers and to compensation policies that tend to compensate sales personnel for achieving annual revenue quotas. The Company expects that in future periods these seasonal trends may cause first quarter revenues to remain consistent with, or decrease from, the level achieved in the preceding quarter. MANAGEMENT OF GROWTH The Company's business has grown rapidly in recent years, with revenues increasing from $30.5 million in 1995 to $87.9 million in 1996 and to $200.7 million in 1997. The Company's recent expansion has resulted in substantial growth in the number of its employees (from 260 at December 31, 1995 to 582 at December 31, 1996 to 1,006 at December 31, 1997), the scope of its operating and financial systems and the geographic distribution of its operations and customers. This recent rapid growth has placed, and if continued will continue to place, a significant strain on the Company's management and operations. Accordingly, the Company's future operating results will depend on the ability of its officers and other key employees to continue to implement and improve its operational, customer support and financial control systems, and to effectively expand, train and manage its employee base. There can be no assurance that the Company will be able to manage any future expansion successfully, and any inability to do so would have a material adverse effect on the Company's business, operating results and financial condition. PRODUCT CONCENTRATION; DEPENDENCE ON PRODUCT LINE EXPANSION The Company currently derives all of its revenues from RHYTHM licenses and related services. The Company expects that RHYTHM-related revenues, including maintenance and consulting contracts, will continue to account for substantially all of the Company's revenues for the foreseeable future. As a result, the Company's future operating results are dependent upon continued market acceptance of RHYTHM and enhancements thereto. There can be no assurance that RHYTHM will achieve continued market acceptance. A decline in demand for, or market acceptance of, RHYTHM as a result of competition, technological change or other factors would have a material adverse effect on the Company's business, operating results and financial condition. As enterprises increasingly focus on decision support for supply chain management challenges, they are requiring greater levels of functionality and broader product offerings from their application software vendors. Moreover, the market for the Company's software products is characterized by rapid technological advances, evolving industry standards in computer hardware and software technology, and frequent product introductions and enhancements. The Company's future success will depend upon its ability to continue to enhance its current product line and to develop and introduce new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance. There can be no assurance that the Company will be successful in developing and marketing, on a timely and cost- effective basis, fully functional product enhancements or new products that respond to technological advances by others, or that its new products will achieve market acceptance. The Company's failure to successfully develop and market product enhancements or new products could have a material adverse effect on the Company's business, operating results and financial condition. 12 14 INTEGRATION OF RECENT ACQUISITIONS; POTENTIAL FUTURE ACQUISITIONS In April 1997, the Company completed the acquisition of the Operations Planning Group ("OPG"), a business activity of Computer Sciences Corporation. In May 1997, the Company acquired Think Systems Corporation, a New Jersey corporation ("Think"), and Optimax Systems Corporation, a Delaware corporation ("Optimax"). In November 1997, the Company acquired the remaining interest in a minority owned subsidiary, M-Star Systems Limited ("M-Star"). The success of acquisitions depends primarily on the Company's ability to (i) retain, motivate and integrate the acquired personnel with the Company's operations, (ii) integrate multiple information systems and (iii) integrate acquired software with RHYTHM. No assurance can be given that the Company will not encounter difficulties in integrating the respective operations and products of the Company, OPG, Think, Optimax and M-Star or that the benefits expected from such integration will be realized. Failure to successfully integrate OPG's, Think's, Optimax's and M-Star's respective operations and products into the Company's operations and products could have a material adverse effect on the Company's business, operating results and financial condition. The Company may in the future pursue additional acquisitions of businesses, products and technologies, or enter into joint venture arrangements, that could complement or expand the Company's business. The negotiation of potential acquisitions or joint ventures as well as the integration of an acquired business, product or technology could cause diversion of management's time and resources. Future acquisitions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, amortization of goodwill and other intangibles, research and development write-offs and other acquisition-related expenses. Further, no assurances can be given that any acquired business will be successfully integrated with the Company's operations. If any such acquisition were to occur, there can be no assurance that the Company will receive the intended benefits of the acquisition. Future acquisitions, whether or not consummated, could have a material adverse effect on the Company's business, operating results and financial condition. INTERNATIONAL OPERATIONS AND CURRENCY FLUCTUATIONS The Company derived approximately 7%, 23% and 33% of its total revenues from customers located outside of the United States in 1995, 1996 and 1997, respectively. The Company believes that continued growth and profitability will require expansion of its sales in international markets. Further penetration of international markets will require the Company to expand existing foreign operations, to establish additional foreign operations and to translate its software and manuals into additional foreign languages. This expansion may be costly and time-consuming and may not generate returns for a significant period of time, if at all. To the extent that the Company is unable to expand its international operations or translate its software and manuals into foreign languages in a timely manner, the Company's ability to further penetrate international markets would be adversely affected, which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's international operations are subject to risks inherent in international business activities, including: difficulty in staffing and managing geographically disparate operations; longer accounts receivable payment cycles in certain countries; compliance with a variety of foreign laws and regulations; unexpected changes in regulatory requirements; overlap of different tax structures; greater difficulty in safeguarding intellectual property; import and export licensing requirements; trade restrictions; changes in tariff rates; and general economic conditions in international markets. In particular, countries in the Asia Pacific region have recently experienced weaknesses in their currency, banking and equity markets. In the future, these weaknesses could adversely affect the demand for the Company's products, the U.S. dollar value of the Company's foreign currency denominated sales and ultimately the Company's results of operations. There can be no assurance that the Company's business, results of operations or financial condition will not be adversely affected by these or other factors that may affect international operations. To date, the Company's revenues from international operations have primarily been denominated in United States dollars. As a result, the Company's sales in international markets may be adversely affected by a strengthening United States dollar. Certain sales and the majority of the expenses incurred by the Company's 13 15 international operations are denominated in currencies other than the United States dollar. In addition, with the expansion of international operations, the number of foreign currencies in which the Company must operate will increase, resulting in increased exposure to exchange rate fluctuations. The Company has implemented limited hedging programs to mitigate its exposure to currency fluctuations. Notwithstanding these hedging programs, exchange rate fluctuations have caused and will continue to cause currency transaction gains and losses. While such currency transaction gains and losses have not been material to date, there can be no assurance that currency transaction losses will not have a material adverse effect on the Company's business, results of operations or financial condition in future periods. RISKS ASSOCIATED WITH STRATEGIC RELATIONSHIPS The Company has from time to time established relationships with other companies, including Oracle and SSA, involving collaboration in areas such as product development, marketing, distribution and implementation. The maintenance of these relationships and the development of other such relationships is a meaningful part of the Company's business strategy. However, most of the Company's current and potential strategic partners are either potential competitors of the Company or are currently competitive with the Company to some degree. In addition, certain of the Company's cooperative relationships have failed to meet expectations, such as the Company's terminated license and distribution relationship with SAP. There can be no assurance that the Company's current collaborative relationships will be beneficial to the Company, that such relationships will be sustained, or that the Company will be able to enter into successful new strategic relationships in the future. DEPENDENCE UPON KEY PERSONNEL The Company's future operating results depend in significant part upon the continued service of a relatively small number of key technical and senior management personnel, few of whom are bound by an employment agreement. The Company's future success also depends on its continuing ability to attract, train and retain other highly qualified technical and managerial personnel. Competition for such personnel is intense, and the Company has at times in the past experienced difficulty in recruiting qualified personnel. There can be no assurance that the Company will retain its key technical and managerial employees or that it will be successful in attracting, assimilating and retaining other highly qualified technical and managerial personnel in the future. Kanna (Ken) N. Sharma, the Company's Vice Chairman of the Board and Executive Vice President, has recently been diagnosed with a brain tumor. While Mr. Sharma is currently providing services to the Company, there can be no assurance as to how long he will be able to continue to do so. The loss of any member of the Company's key technical and senior management personnel or the inability to attract and retain additional qualified personnel could have a material adverse effect on the Company's business, operating results and financial condition. COMPLEXITY OF SOFTWARE PRODUCTS; RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS RHYTHM is a client/server solution which can operate on hardware platforms from Digital Equipment, Hewlett-Packard, IBM and Sun Microsystems and operating systems from Sun Microsystems and Microsoft, and can access data from most widely used SQL (structured query language) databases, including Informix, Oracle and Sybase. To the extent that additional hardware or software platforms gain significant market acceptance, the Company may be required to port RHYTHM to such platforms in order to remain competitive. Such platforms may not be architecturally compatible with RHYTHM's software product design, and there can be no assurance that the Company will be able to port RHYTHM to such additional platforms on a timely basis or at all. Any failure to maintain compatibility with existing platforms or to port to new platforms that achieve significant market acceptance would have a material adverse effect on the Company's business, operating results and financial condition. As a result of the complexities inherent in client/server computing environments and the broad functionality and performance demanded by customers for supply chain management products, major new products and product enhancements can require long development and testing periods. In addition, software programs as complex as those offered by the Company may contain undetected errors or "bugs" when first 14 16 introduced or as new versions are released that, despite testing by the Company, are discovered only after a product has been installed and used by customers. While the Company has on occasion experienced delays in the scheduled introduction of new and enhanced products and products containing bugs, to date the Company's business has not been materially adversely affected by delays or the release of products containing errors. There can be no assurance, however, that errors will not be found in future releases of the Company's software, or that any such errors will not impair the market acceptance of these products and adversely affect the Company's business, operating results and financial condition. While the Company generally takes steps to avoid interruptions of sales often associated with the pending availability of new products, customers may delay their purchasing decisions in anticipation of the general availability of new or enhanced RHYTHM products, which could have a material adverse effect on the Company's business and operating results. Moreover, significant delays in the general availability of such new releases, significant problems in the installation or implementation of such new releases, or customer dissatisfaction with such new releases, could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON TECHNICAL AND IMPLEMENTATION PERSONNEL The sales of RHYTHM typically involve the utilization of highly qualified technical sales support personnel. A limitation on the number of qualified technical sales support personnel could have a material adverse effect on the Company's ability to expand sales and enter into new vertical markets. The implementation of RHYTHM requires the services of highly trained implementation personnel working directly for the Company or for independent consultants. A shortage in the number of trained implementers, either within the Company or with third-party consulting firms, could limit the Company's ability to implement its software on a timely and effective basis. Delayed or ineffective implementation of the Company's software may limit the Company's ability to expand its revenues and may result in customer dissatisfaction and damage the Company's reputation, each of which could have a material adverse effect on the Company's business, operating results and financial condition. YEAR 2000 COMPLIANCE Many older computer systems and software products currently in use are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. Although the Company currently offers software products that are designed to be Year 2000 compliant, Year 2000 problems inherent in a customer's transactional software programs might significantly limit that customer's ability to realize the intended benefits offered by RHYTHM. The Company believes that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues in a variety of ways. Many companies are expending significant resources to correct or patch their current hardware and software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and financial condition. The Company utilizes third-party vendor equipment, telecommunication products and software products which may or may not be Year 2000 compliant. Although the Company is currently taking steps to address the impact, if any, of the Year 2000 compliance issue surrounding such third-party products, failure of any critical technology components to be Year 2000 compliant may have an adverse impact on business operations or require the Company to incur unanticipated expenses to remedy any problems. 15 17 PRODUCT LIABILITY While the Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims, it is possible that such limitation of liability provisions may not be effective under the laws of certain jurisdictions. Although the Company has not experienced any product liability claims to date, there can be no assurance that the Company will not be subject to such claims in the future. A successful product liability claim brought against the Company could have a material adverse effect on the Company's business, operating results and financial condition. Moreover, defending such a suit, regardless of its merits, could entail substantial expense and require the time and attention of key management personnel, either of which could have a material adverse effect on the Company's business, operating results and financial condition. VOLATILITY OF STOCK PRICE The market price of the Common Stock has been volatile at times and in the future can be expected to be significantly affected by factors such as quarterly variations in the Company's results of operations, the announcement of new products or product enhancements by the Company or its competitors, technological innovations by the Company or its competitors, and general market conditions or market conditions specific to particular industries. In particular, the stock prices for many companies in the technology and emerging growth sectors have experienced wide fluctuations which have often been unrelated to the operating performance of such companies. Such fluctuations may adversely affect the market price of the Common Stock. CONTROL BY MANAGEMENT As of December 31, 1997, the Company's executive officers beneficially owned approximately 58.3% of the Company's outstanding Common Stock. Consequently, the Company's executive officers are able to control the outcome of all matters submitted for stockholder action, including the election of members to the Company's Board of Directors and the approval of significant change in control transactions, and effectively control the management and affairs of the Company, which may have the effect of delaying or preventing a change in control of the Company. In addition, Messrs. Sanjiv S. Sidhu, Chairman of the Board and Chief Executive Officer, Kanna (Ken) N. Sharma, Vice Chairman of the Board, Executive Vice President and Secretary and Sandeep (Sandy) R. Tungare, President, Demand Management, constitute three of the five members of the Board of Directors and, therefore, have significant influence in directing the actions of the Board of Directors. ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation, as amended (the "Charter"), and Bylaws, as amended (the "Bylaws"), contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals that a stockholder might consider favorable, including provisions: authorizing the issuance of "blank check" preferred stock; providing for a Board of Directors with staggered, three-year terms; requiring super-majority voting to effect certain amendments to the Charter and Bylaws; limiting the persons who may call special meetings of stockholders; prohibiting stockholder action by written consent; and establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon at stockholder meetings. Certain provisions of Delaware law and the Company's stock incentive plans may also have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals. ITEM 2. PROPERTIES The Company's primary offices are located in approximately 91,000 square feet of space in Irving, Texas and approximately 23,000 square feet in Dallas, Texas under leases expiring in October 2000 and December 1998, respectively. The Company also leases space for its other offices in the United States, Australia, 16 18 Belgium, Canada, Denmark, France, Germany, India, Japan, Singapore and the United Kingdom. These leases expire at various dates through 2003. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 17 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock has been quoted on the Nasdaq National Market under the symbol "ITWO" since its initial public offering on April 25, 1996. Prior to the initial public offering, there had been no public market for the Common Stock. The following table lists the high and low per share sales prices for the Common Stock as reported by the Nasdaq National Market for the periods indicated:
HIGH LOW ---- --- Fourth quarter of 1997............................. $55.63 $40.25 Third quarter of 1997.............................. 56.00 31.50 Second quarter of 1997............................. 50.00 26.00 First quarter of 1997.............................. 45.75 25.75 Fourth quarter of 1996............................. $44.50 $33.00 Third quarter of 1996.............................. 43.50 23.75 Second quarter of 1996............................. 58.50 20.00
As of February 27, 1998, there were 32,690,164 shares of the Common Stock outstanding held by 394 stockholders of record. The Company believes there are approximately 4,000 beneficial owners of the Common Stock. The Company has never declared or paid cash dividends on its capital stock. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. Future dividends, if any, will be determined by the Company's Board of Directors. During 1997, the Company issued an aggregate 890,260 shares of its Common Stock to employees pursuant to exercises of stock options (with exercise prices ranging from $0.0175 to $12.11 per share) under the Company's 1992 Stock Plan and 1995 Stock Option/Stock Issuance Plan 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. 18 20 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" in Item 7 of this Form 10-K and the consolidated financial statements and notes thereto included in Item 14 of this Form 10-K.
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1993 1994 1995 1996 1997 ------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues: Software licenses.......................... $ 4,324 $ 9,833 $20,535 $57,508 $134,725 Services................................... 1,957 3,334 6,767 22,230 46,673 Maintenance................................ 318 1,036 3,225 8,178 19,308 ------- ------- ------- ------- -------- Total revenues..................... 6,599 14,203 30,527 87,916 200,706 ------- ------- ------- ------- -------- Costs and expenses: Cost of software licenses.................. 76 95 135 151 3,384 Cost of services and maintenance........... 1,360 2,200 5,606 18,631 41,509 Sales and marketing........................ 1,529 4,381 9,866 33,724 69,928 Research and development................... 1,251 2,483 5,506 17,005 44,120 General and administrative................. 1,144 1,931 4,628 8,734 18,645 In-process research and development and acquisition costs....................... -- -- -- -- 9,306(1) ------- ------- ------- ------- -------- Total costs and expenses........... 5,360 11,090 25,761 78,245 186,892 ------- ------- ------- ------- -------- Operating income............................. 1,239 3,113 4,766 9,671 13,814(1) Other income (expense), net.................. (74) (83) (117) 1,805 3,068 ------- ------- ------- ------- -------- Income before income taxes................... 1,165 3,030 4,649 11,476 16,882 Provision for income taxes................... 456 1,294 1,584 4,274 9,661 ------- ------- ------- ------- -------- Net income................................... $ 709 $ 1,736 $ 3,065 $ 7,202 $ 7,221(1) ======= ======= ======= ======= ======== Net income per share......................... $ 0.04 $ 0.09 $ 0.15 $ 0.26 $ 0.24(1) Net income per share, assuming dilution...... $ 0.03 $ 0.07 $ 0.11 $ 0.23 $ 0.21(1) Shares used in computing net income per share...................................... 19,846 20,383 20,582 27,714 29,746 Shares used in computing net income per share, assuming dilution................... 23,882 26,002 28,189 31,701 33,852
DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996 1997 ------ ------ ------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital............................... $ 265 $1,900 $ 6,185 $ 58,824 $162,444 Total assets.................................. 3,844 9,597 23,322 101,133 239,202 Total stockholders' equity.................... 780 2,516 8,677 68,648 180,417
- --------------- (1) During 1997, the Company incurred approximately $9.3 million in certain acquisition-related expenses in connection with the business combinations involving Optimax Systems Corporation, Think Systems Corporation, the Operations Planning Group of Computer Sciences Corporation and M-Star Systems Limited, of which $4.6 million represents the write-off of in-process research and development. The remaining costs include, among other things, investment banking, legal and accounting fees and expenses. The acquisition-related expenses resulted in a one-time charge to the Company's operating results. 19 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is the leading provider of client/server-based decision support software products for supply chain management and related applications. The Company also provides services such as consulting, training and maintenance related to these products. Supply chain management encompasses the planning and scheduling of manufacturing and related logistics, including demand forecasting, raw materials procurement, work-in-process, distribution and transportation across multiple enterprises. i2's client/server software solution, RHYTHM, is designed to provide customers with an end-to-end supply chain management solution, enabling customers to model complex, multi-enterprise supply chains to rapidly generate integrated solutions to supply chain challenges such as demand volatility, production bottlenecks, supply interruptions and distribution alternatives. RHYTHM utilizes a unique, constraint-based methodology which simultaneously considers a broad range of factors -- from changing revenue forecasts to machine capabilities to individual customer commitments -- to optimize all aspects of the supply chain. Since inception, the Company has significantly increased its investment in sales and marketing, service and support, research and development and general and administrative staff and accelerated such investment beginning in the last quarter of 1995. As a result of the increased staffing, the Company has experienced decreases in operating margins in 1995 and 1996. Operating margins for 1997 decreased primarily due to costs and expenses related to acquisitions. As a result of these investments, together with the increasing awareness of the benefits of supply chain management in general and increased market acceptance of the Company's products in particular, the Company's revenues in 1996 and the 1997 were substantially higher than the levels achieved in prior years. In order to capture additional market share, the Company expects to continue to increase staffing levels and incur additional associated costs in future periods through both direct efforts and potential acquisitions. However, there can be no assurance that the Company's revenues will grow in future periods or that the Company will maintain the substantial growth rates in revenues it realized in 1996 and 1997. The sales cycle for the Company's products is typically six to nine months, and license fee revenues for a particular period are substantially dependent on orders received and software functionality delivered in that period. Furthermore, the Company has experienced, and expects to continue to experience, significant variation in the size of individual sales. As a result of these and other factors, the Company's results have varied significantly in the past and are likely to be subject to significant fluctuations in the future. Accordingly, the Company believes that period-to-period comparisons of its results of operations are not necessarily indicative of the results to be expected for any future period. See "Business -- Additional Factors That May Affect Future Results -- Potential for Significant Fluctuations in Quarterly Results; Dependence on Significant Individual Sales" in Item 1 of this Form 10-K. In May 1997, the Company acquired Think Systems Corporation, a New Jersey corporation ("Think"). Think provides premium demand chain solutions, including an integrated line of flexible, client/server-based software applications, for sales, marketing and logistics departments representing a variety of industries, including consumer packaged goods, high technology, pharmaceutical, apparel, automotive and other product-driven specializations. The Think merger culminates an ongoing relationship commenced pursuant to a January 1996 agreement between the Company and Think to integrate Think's demand management decision support software and the Company's RHYTHM suite of planning and optimization software products. Approximately 3.8 million shares of Common Stock have been issued or are issuable to the former Think shareholders and optionholders in exchange for all of the capital stock of Think and all unexpired and unexercised options to acquire Think capital stock. Also in May 1997, the Company acquired Optimax Systems Corporation, a Delaware corporation ("Optimax"). Optimax develops, markets and implements supply chain sequencing software using unique genetic algorithms for customer-driven, make-to-order manufacturing. Approximately 1.4 million shares of Common Stock have been issued or are issuable to the former Optimax stockholders and optionholders in 20 22 exchange for all of the capital stock of Optimax and all unexpired and unexercised options to acquire Optimax capital stock. For accounting purposes, the Think and Optimax acquisitions were each treated as a pooling of interests. Accordingly, the Company's consolidated financial statements have been restated to give retroactive effect to the Think and Optimax acquisitions and include the combined operations of the Company, Think and Optimax for all periods presented. The following discussion and analysis should be read in conjunction with such consolidated financial statements. In April 1997, the Company acquired the Operations Planning Group ("OPG"), a business activity of Computer Sciences Corporation, for a cash purchase price of $1.0 million. OPG provides operation planning environment optimization software for planning and scheduling for customers in the consumer packaged goods industry. In November 1997, the Company acquired the remaining interest in a minority owned subsidiary, M-Star Systems Limited ("M-Star"), for an aggregate purchase price of $3.75 million. M-Star provides logistics software designed to present a global view of a company's supply network on a real-time basis by accessing the company's existing data resources. The acquisitions of OPG and M-Star were accounted for under the purchase accounting method. In the second quarter of 1997, the Company incurred approximately $5.6 million in certain expenses related to the Think, Optimax and OPG acquisitions. In the fourth quarter of 1997, the Company incurred approximately $3.7 million in certain expenses related to the acquisition of M-Star. Of these expenses, $4.6 million represents the write-off of in-process research and development. The remaining costs included, among other things, investment banking, legal and accounting fees and expenses. See "Business -- Additional Factors That May Affect Future Results -- Integration of Recent Acquisitions; Potential Future Acquisitions" in Item 1 of this Form 10-K. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages of total revenues represented by certain items reflected in the Company's consolidated statements of income:
YEAR ENDED DECEMBER 31, ------------------------ 1995 1996 1997 ------ ------ ------ Revenues: Software licenses......................................... 67.2% 65.4% 67.1% Services.................................................. 22.2 25.3 23.3 Maintenance............................................... 10.6 9.3 9.6 ----- ----- ----- Total revenues.................................... 100.0 100.0 100.0 Costs and expenses: Cost of software licenses................................. 0.5 0.2 1.7 Cost of services and maintenance.......................... 18.4 21.2 20.7 Sales and marketing....................................... 32.3 38.4 34.8 Research and development.................................. 18.0 19.3 22.0 General and administrative................................ 15.2 9.9 9.3 In-process research and development and acquisition costs.................................................. -- -- 4.6 ----- ----- ----- Total costs and expenses.......................... 84.4 89.0 93.1 ----- ----- ----- Operating income............................................ 15.6 11.0 6.9 Other income (expense), net................................. (0.4) 2.1 1.5 ----- ----- ----- Income before income taxes.................................. 15.2 13.1 8.4 Provision for income taxes.................................. 5.2 4.9 4.8 ----- ----- ----- Net income.................................................. 10.0% 8.2% 3.6% ===== ===== =====
21 23 REVENUES The Company's revenues consist of software license revenues, service revenues and maintenance revenues. Software license revenues consist of sales of software licenses which 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. As discussed in the following paragraph, software license revenue recognition for future periods has been revised. Service revenues are primarily derived from fees for implementation, consulting and training services and are recognized as the services are performed. Maintenance revenues are derived from customer support agreements generally entered into in connection with initial license sales and subsequent renewals. Maintenance revenues are recognized ratably over the term of the maintenance period. Payments for maintenance fees are generally made in advance. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition," which provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. Under SOP 97-2, software license revenues will be 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. The provisions of SOP 97-2 are effective for the Company for transactions entered into after December 31, 1997. The Company does not currently believe that the application of SOP 97-2 will have a material impact on its consolidated financial statements. However, because SOP 97-2 does not give specific implementation guidance and no industry practice has been established regarding the provisions of SOP 97-2, there can be no assurance that SOP 97-2 will not have a material impact on the Company's revenue recognition practices, which could be material to the Company's consolidated financial statements. Total revenues increased 128.3% to $200.7 million in 1997 from $87.9 million in 1996, and increased 188.0% in 1996 from $30.5 million in 1995. The Company currently derives substantially all of its revenues from RHYTHM licenses and related services and maintenance. The Company expects that RHYTHM related revenues will continue to account for substantially all of the Company's revenues in the foreseeable future. As a result of the Company's dependence on the continued market acceptance of RHYTHM and enhancements thereto, there can be no assurance that total revenues will continue to increase at the rates experienced in prior periods, if at all. See "Business -- Additional Factors That May Affect Future Results -- Product Concentration; Dependence on Product Line Expansion" in Item 1 of this Form 10-K. SOFTWARE LICENSES. Revenues from software licenses increased 134.3% to $134.7 million in 1997 from $57.5 million in 1996, and increased 180.0% in 1996 from $20.5 million in 1995. Software license revenues constituted 67.1%, 65.4% and 67.2% of total revenues in 1997, 1996 and 1995, respectively. The significant increases in the dollar amount of software license revenues were primarily due to an increased awareness of the benefits of supply chain management, growing market acceptance of the Company's software products, a substantial investment in the Company's infrastructure and continued expansion into new geographic and vertical markets. To date, sales of software licenses have principally been derived from direct sales to customers. Although the Company believes that direct sales will continue to account for a majority of software license revenues, the Company's strategy is to increase the level of indirect sales activities. The Company expects that sales of its software products through sales alliances, distributors, resellers and other indirect channels will increase as a percentage of software license revenues. However, there can be no assurance that the Company's efforts to expand indirect sales will be successful. See "Business -- Sales and Marketing" in Item 1 of this Form 10-K. SERVICES. Revenues from services increased 110.0% to $46.7 million in 1997 from $22.2 million in 1996, and increased 228.5% in 1996 from $6.8 million in 1995. Service revenues constituted 23.3%, 25.3% and 22.2% of total revenues in 1997, 1996, and 1995, respectively. The significant increases in the dollar amount of service revenues were primarily due to the significant increase in the number of RHYTHM licenses sold and a significant investment in the Company's consulting organization as a result of the increased demand for the Company's products. The increases were also due to an increase in the use of third-party consultants to 22 24 provide implementation services to the Company's customers which has allowed the Company 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 136.1% to $19.3 million in 1997 from $8.2 million in 1996, and increased 153.6% in 1996 from $3.2 million in 1995. Maintenance revenues constituted 9.6%, 9.3% and 10.6% of total revenues in 1997, 1996 and 1995, respectively. The significant increases in the dollar amount of maintenance revenues were primarily due to the continued increase in the number of RHYTHM licenses sold and a high percentage of maintenance agreement renewals. The Company expects that the dollar amount of maintenance revenues will continue to increase, but maintenance revenues as a percentage of total revenues should not vary significantly from the percentage of total revenues achieved in 1997. CONCENTRATION OF REVENUES. During 1997, no individual customer accounted for more than 10% of total revenues. During 1996, one customer accounted for approximately 13% of total revenues. During 1995, this same customer accounted for approximately 11% of total revenues, while one other customer accounted for approximately 10% of total revenues. The Company believes that the loss of any of these particular customers would not have a material adverse effect upon the Company's business, operating results or financial condition. INTERNATIONAL REVENUES. The Company recognized $65.4 million, $20.6 million and $2.2 million of revenues from international sources in 1997, 1996 and 1995, representing approximately 33%, 23% and 7% of total revenues, respectively. The Company's revenues from international sources were primarily generated from customers located in Asia, Canada and Europe. In 1997, revenues from customers located in Europe and Asia accounted for approximately 17% and 10% of total revenues, respectively. In 1996, revenues from customers located in Europe accounted for approximately 13% of total revenues. The significant increases in revenues from international sources were primarily due to the continued expansion of the Company's international sales and consulting operations as well as software localization efforts. The Company believes that continued growth and profitability will require expansion of its sales in international markets. In order to successfully increase international sales, the Company has utilized and will continue to utilize substantial resources to expand existing international operations, establish additional international operations and hire additional personnel. See "Business -- Additional Factors That May Affect Future Results -- International Operations and Currency Fluctuations" in Item 1 of this Form 10-K. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments and for related disclosures about products and services, geographic areas and major customers. The provisions of SFAS No. 131 are effective for the Company beginning in 1998. Although the Company currently operates in only one industry segment, the Company is evaluating the potential impact of SFAS No. 131 on its reporting requirements. COSTS AND EXPENSES COST OF SOFTWARE LICENSES. Cost of software licenses consists primarily of (i) commissions paid to third parties in connection with joint marketing and other related agreements, (ii) royalty fees associated with third-party software included with the sales of RHYTHM, (iii) the cost of user documentation and (iv) the cost of reproduction and delivery of the software. Cost of software licenses was $3.4 million, $151,000 and $135,000 in 1997, 1996 and 1995, representing 2.5%, 0.3% and 0.7% of software license revenues, respectively. The significant increase in cost of software licenses in 1997, both in dollar amount and as a percentage of software license revenues, was primarily due to an increase in commissions paid to third parties in connection with joint marketing and other related agreements. Cost of software licenses decreased significantly in the second half of 1997 as compared to the first half of 1997 as a result of the termination of the license and distribution agreement with SAP pursuant to which the Company was required to pay SAP a commission on RHYTHM products sold to SAP's customers. The Company expects cost of software licenses to vary in the future depending upon the amount of commissions due to other third parties in connection with joint 23 25 marketing and other related agreements and the amount of royalty fees associated with third-party software included with the sales of RHYTHM. COST OF SERVICES AND MAINTENANCE. Cost of services and maintenance consists primarily of costs associated with implementation, consulting and training services. Cost of services and maintenance also includes the cost of providing software maintenance to customers such as hotline telephone support and packaging and shipping costs related to new releases of software and updated user documentation, none of which costs have been significant to date. Cost of services and maintenance was $41.5 million, $18.6 million and $5.6 million in 1997, 1996 and 1995, representing 62.9%, 61.3% and 56.1% of total services and maintenance revenues, respectively. The increases in cost of services and maintenance both in dollar amount and as a percentage of total services and maintenance revenues were primarily due to the increase in the number of consultants, product support and training staff and the increased use of third-party consultants to provide implementation services. In addition, consulting and support centers were established and expanded in Canada, Europe and Japan in the last three months of 1996 and during 1997. The Company expects to continue to increase the number of its consulting, product support and training personnel in the foreseeable future as a means to expand into different geographic and vertical markets. To the extent that the Company's license sales do not increase at anticipated rates, the hiring of additional personnel could adversely affect the Company's gross margins. SALES AND MARKETING. Sales and marketing expenses consist primarily of personnel costs, commissions, office facilities, travel, promotional events such as trade shows, seminars and technical conferences, advertising and public relations programs. Sales and marketing expenses were $69.9 million, $33.7 million and $9.9 million in 1997, 1996 and 1995, representing 34.8%, 38.4% and 32.3% of total revenues, respectively. The increases in the dollar amount of sales and marketing expenses were primarily due to (i) increased staffing as the Company established new domestic and international sales offices and expanded its existing direct sales force, (ii) increased sales commissions as a result of significantly higher revenues and (iii) increased marketing and promotional activities. The decrease in sales and marketing expenses as a percentage of total revenues in 1997 as compared to 1996 was primarily due to the Company's ability to leverage its growing base of sales and marketing resources to significantly increase revenues. The Company expects to continue to increase its sales and marketing activities in order to expand its international sales operations and to enter into new vertical markets. As a result, the Company believes that the dollar amount of sales and marketing expenses will continue to increase. RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of the personnel and related costs associated with the Company's research and development activities. Research and development expenses were $44.1 million, $17.0 million and $5.5 million in 1997, 1996 and 1995, representing 22.0%, 19.3% and 18.0% of total revenues, respectively. The increases in research and development expenses both in dollar amount and as a percentage of total revenues were primarily due to the hiring of additional research and development personnel and other related costs incurred in connection with expanding the Company's research and development centers, particularly its international development facilities. The Company expects that the dollar amount of research and development expenses will continue to increase as the Company continues to invest in developing new products, applications and product enhancements for new vertical markets. In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. To date, the establishment of technological feasibility of the Company's products and general release of such software have substantially coincided. As a result, software development costs qualifying for capitalization have been insignificant, and therefore, the Company has not capitalized any software development costs. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of the personnel and other costs of the finance, human resources, information systems, administrative and executive departments of the Company and the fees and expenses associated with legal, accounting and other services. 24 26 General and administrative expenses were $18.6 million, $8.7 million and $4.6 million in 1997, 1996 and 1995, representing 9.3%, 9.9% and 15.2% of total revenues, respectively. The increases in the dollar amount of general and administrative expenses were primarily the result of increased staffing and related costs associated with the growth of the Company's business during these periods. The decreases in general and administrative expenses as a percentage of total revenues were primarily due to the substantial increase in total revenues and the Company's ability to leverage its base of resources to support a larger organization. The Company expects that the dollar amount of general and administrative expenses will continue to increase in the foreseeable future. IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION COSTS. The Company incurred approximately $9.3 million in certain acquisition-related expenses in connection with the acquisitions of Think, Optimax and OPG which were recorded in the second quarter of 1997 and in connection with the acquisition of M-Star which was recorded in the fourth quarter of 1997. Of these expenses, $4.6 million represents the write-off of in-process research and development. The remaining costs included, among other things, investment banking, legal and accounting fees and expenses. OTHER INCOME (EXPENSE) Other income (expense) consists primarily of interest income on short-term investments and overnight repurchase agreements offset by interest expense on the Company's debt. Other income (expense) was $3.1 million, $1.8 million and ($117,000) in 1997, 1996 and 1995, representing 1.5%, 2.1% and (0.4%) of total revenues, respectively. The increases in the dollar amount of other income (expense) were primarily due to interest earned on higher balances of cash, cash equivalents and short-term investments resulting from net proceeds of the public offerings of the Company's common stock which were completed in May 1996 and December 1997, and a decrease in interest expense due to the repayment of a majority of the Company's outstanding debt in June 1996. PROVISION FOR INCOME TAXES The Company recorded income tax expense of $9.7 million, $4.3 million and $1.6 million in 1997, 1996 and 1995, respectively. The Company's effective income tax rates were 57.2%, 37.2% and 34.1% in 1997, 1996 and 1995, respectively. The Company's effective income tax rate was higher in 1997 than in 1996 primarily due to the non-deductibility of certain of the acquisition-related expenses. The Company's effective income tax rate was higher in 1996 than in 1995 due to the non-deductibility of the amortization of deferred compensation expense and higher effective state income tax rates. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has primarily financed its operations and met its capital expenditure requirements through cash flows from operations, long-term borrowings and sales of equity securities. Cash flows from operations were $5.8 million, $6.7 million and $3.4 million in 1997, 1996 and 1995, respectively. Operating cash flows decreased in 1997 as compared to 1996 primarily due to an increase in accounts receivable partially offset by increases in the tax benefit from stock option activity, accrued liabilities and accrued compensation and related expenses. Operating cash flows increased in 1996 as compared to 1995 primarily due to the tax benefit from stock option activity and increases in net income, accounts payable, accrued liabilities, accrued compensation and related expenses and deferred revenue, partially offset by an increase in accounts receivable. The tax benefit from stock option activity is primarily the result of disqualifying dispositions of stock acquired under the Company's stock plans. Accounts receivable, net of allowance for doubtful accounts, increased to $71.2 million at December 31, 1997 from $33.6 million at December 31, 1996, primarily due to a continued significant increase in revenues. Based upon the nature of the Company's customers and its past collection experience, the Company does not expect to encounter collection difficulties with respect to such accounts that would have a material effect on the Company's financial position or results of operations. 25 27 Average days' sales outstanding was 85 days for 1997 as compared to 76 days for 1996. The increase in days' sales outstanding was primarily due to a significant increase in receivables from international customers which tend to have longer payment terms compared to customers located in the United States. Additionally, the Company continues to experience larger sales for which some amounts are not due upon execution of the contract. Average days' sales outstanding can fluctuate for a variety of reasons including the timing and billing of receivables for which the related revenues may not yet be recognizable. Cash used in investing activities was $9.7 million for 1997 as compared to $26.9 million for 1996. Cash used in investing activities was higher in 1996 than in 1997 primarily due to the initial investment of the net proceeds from the initial public offering of the Company's common stock which was completed in May 1996. Proceeds from the public offering of the Company's common stock which was completed in December 1997 were invested primarily in financial instruments classified as cash equivalents. At December 31, 1997, the Company did not have any material commitments for capital expenditures. Cash provided by financing activities was $93.6 million for 1997 as compared to $48.9 million for 1996. Cash provided by financing activities for 1997 includes the Company's net proceeds of $89.4 million from its December 1997 public offering of common stock. Cash provided by financing activities for 1996 includes the Company's net proceeds of $43.7 million from its initial public offering of common stock which was completed in May 1996. As of December 31, 1997, the Company had $162.4 million of working capital, including $125.9 million in cash and cash equivalents and $14.5 million in short-term investments as compared to $58.8 million of working capital as of December 31, 1996, including $36.1 million in cash and cash equivalents and $18.0 million in short-term investments. The Company may in the future pursue additional acquisitions of businesses, products and technologies, or enter into joint venture arrangements, that could complement or expand the Company's business. Any material acquisition or joint venture could result in a decrease to the Company's working capital depending on the amount, timing and nature of the consideration to be paid. The Company has a revolving credit agreement with NationsBank of Texas, N.A. (the "Lender") which expires in June 1998, is unsecured and contains customary restrictive covenants, including covenants requiring the Company to maintain certain financial ratios. The revolving credit agreement is not subject to a borrowing base limitation and the borrowings thereunder bear interest at the Lender's prime lending rate. At December 31, 1997, the Company had no borrowings outstanding under the revolving credit agreement. The Company is currently evaluating what actions, if any, will be necessary to make its internal systems Year 2000 compliant. Although any expenses associated with these actions cannot presently be determined, the Company does not currently expect such expenses to materially adversely affect its financial position or results of operations. The Company believes that existing cash and cash equivalent balances, short-term investment balances, available borrowings under the revolving credit agreement and potential cash flow from operations will satisfy the Company's working capital and capital expenditure requirements for at least the next 12 months. However, any material acquisitions of complementary businesses, products or technologies could require the Company to obtain additional equity or debt financing. There can be no assurance that such financing will be available on acceptable terms, it at all. ITEM 8. CONSOLIDATED 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. 26 28 PART III Certain information required by Part III is omitted from this Form 10-K because the Company will file a definitive Proxy Statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Form 10-K, 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 Director," "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." 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." 27 29 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 Auditors.............................. F-1 Covered by Report of Independent Auditors: Consolidated Balance Sheets at December 31, 1996 and 1997... F-2 Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997.......................... F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997.............. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997.......................... F-5 Notes to Consolidated Financial Statements (except Note 13)....................................................... F-6 Not Covered by Report of Independent Auditors: Note 13 of the Notes to Consolidated Financial Statements... F-18 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 the Company and payment of a reasonable fee.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1* -- Agreement and Plan of Merger, dated May 15, 1997, by and among the Company, TSC Acquisition Corporation and Think Systems Corporation (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated May 15, 1997 (the "May 1997 8-K")) 2.2* -- Agreement and Plan of Merger, dated May 15, 1997, by and among the Company, OSC Acquisition Corporation and Optimax Systems Corporation (filed as Exhibit 2.2 to the May 1997 8-K) 3.1* -- Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Reg. No. 333-1752) (the "Form S-1") 3.2 -- Bylaws, as amended 4.1* -- Specimen Common Stock certificate (filed as Exhibit 4.1 to the Form S-1) 10.1* -- Form of Registration Rights Agreement, dated April 1, 1996, among the Company, 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 10.3 to the Form S-1) 10.3* -- Form of Indemnification Agreement between the Company and each of its officers and directors (filed as Exhibit 10.4 to the Form S-1) 10.4* -- Loan Agreement, dated August 11, 1994, between the Company and NationsBank of Texas, N.A. (filed as Exhibit 10.5 to the Form S-1)
28 30
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.5* -- Loan Increase and First Modification Agreement, between the Company and NationsBank of Texas, N.A., and acknowledged and consented to by Sanjiv S. Sidhu and Lekha Singh (filed as Exhibit 10.6 to the Form S-1) 10.6* -- Second Modification Agreement, dated December 31, 1995, between the Company and NationsBank of Texas, N.A., and acknowledged and consented to by Sanjiv S. Sidhu and Lekha Singh (filed as Exhibit 10.7 to the Form S-1) 10.7* -- Form of Employee Proprietary Information Agreement between the Company and each of its employees (filed as Exhibit 10.9 to the Form S-1) 10.8* -- Lease Agreement, dated July 14, 1995, between the Company and TRST Irving, Inc. (filed as Exhibit 10.10 to the Form S-1) 10.9* -- Lease Agreement, dated June 29, 1990, as amended, between the Company and Park West E-2 Associates (filed as Exhibit 10.11 to the Form S-1) 10.10*# -- Software License Agreement, dated August 31, 1995, between the Company and Minnesota Mining and Manufacturing (filed as Exhibit 10.12 to the Form S-1) 10.11* -- Second Amendment of Lease Agreement between the Company and TRST Irving, Inc. dated as of February 23, 1996 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996) 10.12* -- Third Modification Agreement, dated April 26, 1996, between the Company and NationsBank of Texas, N.A. (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (the "June 1996 10-Q")) 10.13* -- Fourth Modification Agreement, dated June 26, 1996, between the Company and NationsBank of Texas, N.A. (filed as Exhibit 10.2 to the June 1996 10-Q) 10.14* -- Fifth Extension and Modification Agreement, dated June 30, 1996, between the Company and NationsBank of Texas, N.A. (filed as Exhibit 10.3 to the June 1996 10-Q) 10.15* -- Third Amendment to Lease Agreement between the Company and TRST Irving, Inc. dated as of July 25, 1996 (filed as Exhibit 10.1 to the Company's Quarterly Report for the quarter ended September 30, 1996 (the "September 1996 10-Q")) 10.16* -- Fifth Amendment to Lease Agreement between the Company and Principal Mutual Life Insurance Company dated as of August 29, 1996 (filed as Exhibit 10.2 to the September 1996 10-Q) 10.17* -- Fourth Amendment to Lease Agreement between the Company and TRST Irving, Inc. dated as of December 19, 1996 (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 10.18* -- Registration Rights Agreement, dated May 15, 1997, by and among the Company and each of the former shareholders of Think Systems Corporation (filed as Exhibit 99.3 to the May 1997 8-K) 10.19* -- Registration Rights Agreement, dated May 15, 1997, by and among the Company and each of the former shareholders of Optimax Systems Corporation (filed as Exhibit 99.4 to the May 1997 8-K) 10.20* -- Employee Stock Purchase Plan (filed as Exhibit 99.8 to the Company's Registration Statement on Form S-8 (Reg. No. 333-03703)) 10.21* -- International Employee Stock Purchase Plan (filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Reg. No. 333-27009))
29 31
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.22* -- Think Systems Corporation 1996 Incentive Stock Plan (filed as Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Reg. No. 333-28147) (the "Think/Optimax S-8")) 10.23* -- Think Systems Corporation 1997 Incentive Stock Plan (filed as Exhibit 99.1 to the Think/Optimax S-8) 10.24* -- Optimax Systems Corporation Stock Option Plan (filed as Exhibit 99.10 to the Think/Optimax S-8) 21.1 -- List of subsidiaries 23.1 -- Consent of Ernst & Young LLP 24.1 -- Power of Attorney, pursuant to which amendments to this Form 10-K may be filed, is included on the signature page contained in Part IV of this Form 10-K. 27.1 -- Financial Data Schedule
- --------------- * Incorporated herein by reference to the indicated filing. + Management contract or compensation plan. # Confidential treatment previously granted. (b) Reports on Form 8-K. During the quarter ended December 31, 1997, the Company filed the following Current Reports on Form 8-K: 1. The Company filed a Form 8-K dated November 21, 1997 (Item 5) reporting the execution of a Development and Distribution Agreement between the Company and Oracle Corporation. 2. The Company filed a Form 8-K dated December 5, 1997 (Item 5) reporting the pricing of a public offering of 3,000,000 shares of its common stock. 30 32 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 10, 1998 By: /s/ DAVID F. CARY ---------------------------------- David F. Cary 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 David F. Cary, and each or any of them, his true and lawful attorney-in-fact and agent, 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 (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 and Chief March 10, 1998 - ----------------------------------------------------- Executive Officer (Principal Sanjiv S. Sidhu executive officer) /s/ KANNA N. SHARMA Vice Chairman of the Board, March 10, 1998 - ----------------------------------------------------- Executive Vice President and Kanna N. Sharma Secretary /s/ SANDEEP R. TUNGARE Director and President, Demand March 10, 1998 - ----------------------------------------------------- Management Sandeep R. Tungare /s/ DAVID F. CARY Vice President and Chief March 10, 1998 - ----------------------------------------------------- Financial Officer (Principal David F. Cary finance and accounting officer) /s/ HARVEY B. CASH Director March 10, 1998 - ----------------------------------------------------- Harvey B. Cash /s/ THOMAS J. MEREDITH Director March 10, 1998 - ----------------------------------------------------- Thomas J. Meredith
31 33 REPORT OF INDEPENDENT AUDITORS The Board of Directors i2 Technologies, Inc. We have audited the accompanying consolidated balance sheets of i2 Technologies, Inc. and its subsidiaries (the Company) as of December 31, 1996 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of i2 Technologies, Inc. and its subsidiaries at December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Dallas, Texas January 21, 1998 F-1 34 i2 TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, -------------------- 1996 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 36,078 $125,853 Short-term investments.................................... 18,031 14,538 Accounts receivable, net of allowance for doubtful accounts of $1,269 and $4,059, respectively............ 33,615 71,209 Notes receivable -- stockholders.......................... 1,000 -- Prepaid and other current assets.......................... 2,219 3,363 Income tax receivable..................................... -- 1,097 Deferred income taxes..................................... -- 3,823 -------- -------- Total current assets.............................. 90,943 219,883 Furniture and equipment, net................................ 8,934 18,592 Deferred income taxes and other assets...................... 1,256 727 -------- -------- Total assets...................................... $101,133 $239,202 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 4,583 $ 6,855 Accrued liabilities....................................... 4,390 10,412 Accrued compensation and related expenses................. 3,794 13,575 Current portion of deferred revenue....................... 18,932 26,367 Income taxes payable...................................... 363 -- Deferred income taxes..................................... 57 230 -------- -------- Total current liabilities......................... 32,119 57,439 Long-term debt.............................................. 100 -- Deferred revenue............................................ 266 518 Deferred income taxes....................................... -- 828 -------- -------- Total liabilities................................. 32,485 58,785 -------- -------- Stockholders' equity: Preferred Stock, $0.001 par value, 5,000,000 shares authorized, none issued................................ -- -- Common Stock, $0.00025 par value, 50,000,000 shares authorized, 28,883,410 and 32,325,554 shares issued and outstanding, respectively.............................. 7 8 Additional paid-in capital................................ 58,074 161,881 Deferred compensation..................................... (1,865) (1,125) Retained earnings......................................... 12,432 19,653 -------- -------- Total stockholders' equity........................ 68,648 180,417 -------- -------- Total liabilities and stockholders' equity........ $101,133 $239,202 ======== ========
See accompanying notes. F-2 35 i2 TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1996 1997 ------- ------- -------- Revenues: Software licenses......................................... $20,535 $57,508 $134,725 Services.................................................. 6,767 22,230 46,673 Maintenance............................................... 3,225 8,178 19,308 ------- ------- -------- Total revenues.................................... 30,527 87,916 200,706 ------- ------- -------- Costs and expenses: Cost of software licenses................................. 135 151 3,384 Cost of services and maintenance.......................... 5,606 18,631 41,509 Sales and marketing....................................... 9,866 33,724 69,928 Research and development.................................. 5,506 17,005 44,120 General and administrative................................ 4,648 8,734 18,645 In-process research and development and acquisition costs.................................................. -- -- 9,306 ------- ------- -------- Total costs and expenses.......................... 25,761 78,245 186,892 ------- ------- -------- Operating income............................................ 4,766 9,671 13,814 Other income (expense), net................................. (117) 1,805 3,068 ------- ------- -------- Income before income taxes.................................. 4,649 11,476 16,882 Provision for income taxes.................................. 1,584 4,274 9,661 ------- ------- -------- Net income.................................................. $ 3,065 $ 7,202 $ 7,221 ======= ======= ======== Net income per share........................................ $ 0.15 $ 0.26 $ 0.24 Net income per share, assuming dilution..................... $ 0.11 $ 0.23 $ 0.21 Weighted average common shares outstanding.................. 20,582 27,714 29,746 Weighted average common shares outstanding, assuming dilution.................................................. 28,189 31,701 33,852
See accompanying notes. F-3 36 i2 TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL ------------------- PAID-IN DEFERRED RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY --------- ------ ----------- ------------ ---------- ------------- Balance at December 31, 1994........ 19,342 $ 5 $ 176 $ -- $ 2,335 $ 2,516 Exercise of stock options......... 5,703 1 323 -- -- 324 Deferred compensation related to stock options................... -- -- 1,810 (1,810) -- -- Amortization of deferred compensation.................... -- -- -- 71 -- 71 Issuance of Think and Optimax preferred stock which was exchanged for common stock in merger.......................... 652 -- 2,871 -- -- 2,871 Distributions to Think stockholders.................... -- -- -- -- (170) (170) Net income........................ -- -- -- -- 3,065 3,065 --------- ----- ----------- ---------- ---------- ----------- Balance at December 31, 1995........ 25,697 6 5,180 (1,739) 5,230 8,677 Exercise of stock options and issuance under stock purchase plan............................ 519 -- 1,816 -- -- 1,816 Common stock issued, net of offering costs of $4,288........ 2,390 1 43,715 -- -- 43,716 Tax benefit of stock options...... -- -- 1,353 -- -- 1,353 Deferred compensation related to stock options................... -- -- 910 (910) -- -- Amortization of deferred compensation.................... -- -- -- 784 -- 784 Issuance of Think preferred stock which was exchanged for common stock in merger................. 277 -- 5,100 -- -- 5,100 Net income........................ -- -- -- -- 7,202 7,202 --------- ----- ----------- ---------- ---------- ----------- Balance at December 31, 1996........ 28,883 7 58,074 (1,865) 12,432 68,648 Exercise of stock options and issuance under stock purchase plan............................ 1,443 -- 4,274 -- -- 4,274 Common stock issued, net of offering costs of $3,573........ 2,000 1 89,427 -- -- 89,428 Tax benefit of stock options...... -- -- 10,106 -- -- 10,106 Amortization of deferred compensation.................... -- -- -- 740 -- 740 Net income........................ -- -- -- -- 7,221 7,221 --------- ----- ----------- ---------- ---------- ----------- Balance at December 31, 1997........ 32,326 $ 8 $ 161,881 $ (1,125) $ 19,653 $ 180,417 ========= ===== =========== ========== ========== ===========
See accompanying notes. F-4 37 i2 TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 ------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................ $ 3,065 $ 7,202 $ 7,221 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................. 1,059 2,611 4,500 Provision for losses on receivables............ 499 971 3,774 Amortization of deferred compensation.......... 71 784 740 Deferred income taxes.......................... (646) (3) (1,911) Tax benefit of stock options................... -- 1,353 10,106 Changes in operating assets and liabilities: Accounts receivable.......................... (6,646) (24,617) (41,368) Income tax receivable........................ (1,151) 535 (1,097) Prepaid and other assets..................... (365) (1,706) (1,526) Accounts payable............................. 561 3,380 2,272 Accrued liabilities.......................... 310 3,396 6,022 Accrued compensation and related expenses.... 905 2,483 9,781 Income taxes payable......................... 324 (59) (363) Deferred revenue............................. 5,384 10,361 7,687 ------- -------- -------- Net cash provided by operating activities.............................. 3,370 6,691 5,838 ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Notes receivable -- stockholders.................. -- (1,000) 1,000 Purchases of furniture and equipment.............. (3,034) (7,819) (14,158) Purchases of short-term investments............... -- (37,531) (27,007) Proceeds from sale of short-term investments...... -- 19,500 30,500 ------- -------- -------- Net cash used in investing activities..... (3,034) (26,850) (9,665) ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit............ 500 -- -- Payments on revolving line of credit.............. (850) -- -- Proceeds from long-term debt...................... 3,110 400 -- Payments on long-term debt........................ (2,642) (1,653) (100) Advances from stockholders, net................... 165 (525) -- Distributions to stockholders..................... (170) -- -- Issuance of Think and Optimax preferred stock which was exchanged for common stock in merger......................................... 2,871 5,100 -- Net proceeds from sale of common stock and exercise of stock options...................... 324 45,532 93,702 ------- -------- -------- Net cash provided by financing activities.............................. 3,308 48,854 93,602 ------- -------- -------- Net increase in cash and cash equivalents........... 3,644 28,695 89,775 Cash and cash equivalents at beginning of period.... 3,739 7,383 36,078 ------- -------- -------- Cash and cash equivalents at end of period.......... $ 7,383 $ 36,078 $125,853 ======= ======== ========
See accompanying notes. F-5 38 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY i2 Technologies, Inc. (the "Company"), incorporated in 1989, develops, markets and sells client/server-based decision support software products for supply chain management and related applications. The Company also provides services such as consulting, training and maintenance. The Company's products and services are primarily provided to large and medium sized manufacturing and distribution companies which operate in many industries located throughout the world. In May 1997, the Company acquired Think Systems Corporation ("Think"), a demand planner software company and Optimax Systems Corporation ("Optimax"), a scheduling and sequencing software company. Each of these business combinations was accounted for as a pooling of interests, and accordingly, the accompanying consolidated financial statements give retroactive effect to the combinations and include the combined operations of i2 Technologies, Think and Optimax for all periods presented (see Note 3). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. Cash equivalents are highly liquid investments with insignificant interest rate risk and original maturities of 90 days or less and are stated at amounts which approximate fair value, based on quoted market prices. Cash equivalents consist principally of overnight repurchase agreements and highly liquid debt securities of corporations, municipalities and the U.S. Government. The Company accounts for its cash equivalents and short-term investments under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each subsequent balance sheet date. The Company considers its debt securities as "available-for-sale" and, in accordance with SFAS No. 115, would record its investments at fair value. However, as the difference between cost and fair value was immaterial at December 31, 1997, no adjustment has been made to the historical carrying value of the investments and no unrealized gains or losses have been recorded as a separate component of stockholders' equity. Realized gains and losses to date have not been material. The cost of debt securities sold is based on the specific identification method. The Company's debt securities include the following (in thousands):
DECEMBER 31, ------------------- 1996 1997 ------- -------- U.S. Government.......................................... $14,500 $ 11,500 State and Local Municipalities........................... 16,700 55,000 Corporations............................................. 9,000 40,600 ------- -------- $40,200 $107,100 ======= ========
Debt securities held at December 31, 1996 and 1997 all had maturity dates within one year. At December 31, 1996 and 1997, $22.2 million and $92.6 million of debt securities were included in cash F-6 39 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) equivalents, respectively. Interest income earned in 1995, 1996 and 1997 was $179,000, $1.9 million and $3.1 million, respectively. FINANCIAL INSTRUMENTS. Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of accounts receivable. As of December 31, 1996, approximately 27% of accounts receivable were concentrated with three customers. As of December 31, 1997, approximately 31% of accounts receivable were concentrated with one of these same customers and two different customers. The Company generally does not require collateral on accounts receivable as the Company's customers are generally large, well established companies. The Company periodically performs credit evaluations of its customers and maintains reserves for potential losses. The Company has used in the past and expects to use in the future foreign exchange contracts to hedge the risk that receivables denominated in foreign currencies may be adversely affected by changes in foreign currency exchange rates. The Company's foreign exchange contracts outstanding at December 31, 1997 are immaterial. Gains and losses on foreign exchange contracts have not been material to date. FURNITURE AND EQUIPMENT. Furniture and equipment are stated at cost. Depreciation expense is calculated using the straight-line method over seven years for office furniture and fixtures and three years for computer equipment. REVENUE RECOGNITION. The Company's revenues consist of software license revenues, service revenues and maintenance revenues. Software license revenues consist of sales of software licenses which 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. As discussed in the following paragraph, software license revenue recognition for future periods has been revised. Service revenues are primarily derived from fees for implementation, consulting and training services and are recognized as the services are performed. Maintenance revenues are derived from customer support agreements generally entered into in connection with initial license sales and subsequent renewals. Maintenance revenues are recognized ratably over the term of the maintenance period. Payments for maintenance fees are generally made in advance. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition," which provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. Under SOP 97-2, software license revenues will be 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. The provisions of SOP 97-2 are effective for the Company for transactions entered into after December 31, 1997. The Company does not currently believe that the application of SOP 97-2 will have a material impact on its consolidated financial statements. However, because SOP 97-2 does not give specific implementation guidance and no industry practice has been established regarding the provisions of SOP 97-2, there can be no assurance that SOP 97-2 will not have a material impact on the Company's revenue recognition practices, which could be material to the Company's consolidated financial statements. Customer payment terms vary. Amounts received in advance of satisfying revenue recognition criteria are classified in current and long-term liabilities as deferred revenue in the accompanying consolidated balance sheets. The Company generally warrants that its products will function substantially in accordance with documentation provided to customers for approximately six to twelve months following initial shipment to the customer. As of December 31, 1997, the Company had not incurred any significant expenses related to warranty claims. F-7 40 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SOFTWARE DEVELOPMENT COSTS. In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. To date, the establishment of technological feasibility of the Company's products and general release of such software have substantially coincided. As a result, software development costs qualifying for capitalization have been insignificant and therefore, the Company has not capitalized any software development costs. NET INCOME PER SHARE. The Company computes net income per share in accordance with the provisions of SFAS No. 128, "Earnings per Share." Net income per share is based upon the weighted average number of common shares outstanding and excludes the effect of dilutive potential common stock from the exercise of stock options. Net income per share, assuming dilution, includes the effect of dilutive potential common stock from the exercise of stock options using the treasury stock method. In accordance with Securities and Exchange Commission Staff Accounting Bulletins and Staff Policy, common shares and potential common shares issued prior to the date of the initial filing of the Company's Registration Statement on Form S-1 have been included in the net income per share calculations for 1995 as if they were outstanding for the entire period. Share and per share amounts for 1995 have been adjusted to reflect two stock splits during 1995 (see Note 7). The computations give retroactive effect to the exchange of common shares in connection with the Think and Optimax acquisitions (see Note 3). Reconciliations of the net income per share computations for the years ended December 31, 1995, 1996 and 1997 are included in Note 7. STOCK-BASED COMPENSATION PLANS. The Company has elected to continue to account for its stock-based compensation plans utilizing the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," because, as discussed in Note 7, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. However, SFAS No. 123 requires disclosure of pro forma information regarding net income and net income per share based on fair value accounting for stock-based compensation plans. FOREIGN CURRENCY TRANSLATION. The Company has determined that the functional currency of the majority of its foreign subsidiaries is the local currency. The financial statements of its foreign subsidiaries are translated into U.S. dollars using the current rate method in accordance with SFAS No. 52, "Foreign Currency Translation." To date, translation adjustments and foreign currency gains and losses have not been significant and accordingly, have not been separately presented. RECLASSIFICATIONS. Certain prior year financial statement items have been reclassified to conform to the current year's format. 3. BUSINESS COMBINATIONS In May 1997, the Company acquired Think and Optimax. Under the terms of these agreements, the Company has agreed to issue up to approximately 3.8 million shares and approximately 1.4 million shares of its common stock for all the outstanding capital stock and all unexpired and unexercised options of Think and Optimax, respectively. Think provides premium demand chain solutions, including an integrated line of flexible, client/server-based software applications, for sales, marketing and logistics departments representing a variety of industries including consumer packaged goods, high technology, pharmaceutical, apparel, automotive and other product driven specializations. Optimax develops, markets and implements supply chain sequencing software using unique genetic algorithms for customer-driven, make-to-order manufacturing. In April 1997, the Company completed the acquisition of the Operations Planning Group ("OPG"), a business activity of Computer Sciences Corporation ("CSC"), for a cash purchase price of $1.0 million. OPG F-8 41 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) provides operation planning environment ("OPE") optimization software for planning and scheduling for customers in the consumer packaged goods industry. The Company assumed the contractual obligations of the OPE customer base in return for $271,000 representing prepaid maintenance revenue. The acquisition was accounted for under the purchase accounting method, and a substantial portion of the purchase price was recorded as in-process research and development and expensed during the second quarter of 1997. Additionally, the Company has agreed to make available a certain amount of consulting revenue opportunities to CSC within a three-year period from the date of the acquisition. If the agreed upon consulting revenue opportunities are not made available to CSC, the Company will be required to make an additional cash payment to CSC at the end of the three-year period equal to the gross profit typically realized on such consulting revenue. Such payment, if any, would be recorded as an increase in the purchase price, a substantial portion of which could be written off as in-process research and development. In November 1997, the Company acquired the remaining interest in a minority owned subsidiary, M-Star Systems Limited ("M-Star"), for an aggregate purchase price of $3.75 million. M-Star provides logistics software which can present a global view of a company's supply network on a real-time basis by accessing the company's existing data resources. The acquisition of M-Star was accounted for under the purchase accounting method, and a substantial portion of the purchase price was recorded as in-process research and development and expensed during the fourth quarter of 1997. During 1997, the Company incurred approximately $9.3 million in certain acquisition-related expenses in connection with the business combinations involving Think, Optimax, OPG and M-Star, of which $4.6 million represents the write-off of in-process research and development. The remaining costs included, among other things, investment banking, legal and accounting fees and expenses. 4. FURNITURE AND EQUIPMENT Furniture and equipment consists of the following (in thousands):
DECEMBER 31, ------------------ 1996 1997 ------- ------- Computer equipment....................................... $10,498 $23,756 Furniture and fixtures................................... 2,563 4,067 ------- ------- 13,061 27,823 Less accumulated depreciation............................ (4,127) (9,231) ------- ------- $ 8,934 $18,592 ======= =======
5. BORROWINGS The Company has a revolving credit agreement with NationsBank of Texas, N.A. (the "Lender") which expires in June 1998, is unsecured and contains customary restrictive covenants, including covenants requiring the Company to maintain certain financial ratios. The revolving credit agreement is not subject to a borrowing base limitation and the borrowings thereunder bear interest at the Lenders' prime lending rate. At December 31, 1996, the Company had $100,000 in borrowings outstanding under the revolving credit agreement. At December 31, 1997, the Company had no borrowings outstanding under the revolving credit agreement. Cash paid for interest in 1995, 1996 and 1997 was approximately $255,000, $248,000 and $15,000, respectively. F-9 42 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. COMMITMENTS The Company leases its office facilities and certain office equipment under operating leases which expire at various dates through 2003. The Company has renewal options for most of its operating leases. Total rent expense incurred during 1995, 1996 and 1997 was approximately $580,000, $2.1 million and $3.9 million, respectively. Future minimum lease payments under all noncancellable operating leases as of December 31, 1997 are as follows (in thousands): 1998............................................... $ 5,726 1999............................................... 4,964 2000............................................... 3,149 2001............................................... 1,378 2002............................................... 1,276 Thereafter......................................... 455 ------- Total minimum lease payments....................... $16,948 =======
7. STOCKHOLDERS' EQUITY PUBLIC OFFERINGS. In May 1996, the Company completed the initial public offering of 2,530,000 shares of its common stock. A total of 2,390,400 of those shares of common stock were sold by the Company resulting in net proceeds to the Company of $43.7 million after deducting offering expenses and the underwriting discount of $4.3 million. In December 1997, the Company completed a public offering of 3,000,000 shares of its common stock. A total of 2,000,000 of those shares of common stock were sold by the Company resulting in net proceeds to the Company of $89.4 million after deducting offering expenses and the underwriting discount of $3.6 million. STOCK SPLITS. In April 1995 and again in December 1995, the Company's common stock was split two-for-one. All share and per share amounts have been adjusted to reflect both stock splits as though they had occurred at the beginning of the initial period presented. F-10 43 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NET INCOME PER SHARE. Reconciliations of the net income per share and net income per share, assuming dilution, computations for the years ended December 31, 1995, 1996 and 1997 are as follows (amounts in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, --------------------------- 1995 1996 1997 ------- ------- ------- NET INCOME PER SHARE: Weighted-average common shares outstanding.................. 19,542 27,714 29,746 Common shares related to SAB No. 98(2)...................... 1,040 -- -- ------- ------- ------- Weighted-average common shares outstanding, adjusted for common shares related to SAB No. 98....................... 20,582 27,714 29,746 ======= ======= ======= Net income.................................................. $ 3,065 $ 7,202 $ 7,221 ======= ======= ======= Net income per share........................................ $ 0.15 $ 0.26 $ 0.24 ======= ======= ======= NET INCOME PER SHARE, ASSUMING DILUTION: Weighted-average common shares outstanding.................. 19,542 27,714 29,746 Common shares issuable on exercise of stock options, net of shares assumed to be repurchased at the average market price(1).................................................. 7,607 3,987 4,106 Common shares related to SAB No. 98(2)...................... 1,040 -- -- ------- ------- ------- Weighted-average common shares outstanding, assuming dilution.................................................. 28,189 31,701 33,852 ======= ======= ======= Net income.................................................. $ 3,065 $ 7,202 $ 7,221 ======= ======= ======= Net income per share, assuming dilution..................... $ 0.11 $ 0.23 $ 0.21 ======= ======= =======
- --------------- (1) In computing these amounts, the funds used in applying the treasury stock method include the compensation related to stock options which will be charged to expense in the future. (2) Common shares and potential common shares issued prior to the initial filing of the Company's Registration Statement on Form S-1 are included in this line item for the year ended December 31, 1995. See Note 2. EMPLOYEE STOCK PURCHASE PLAN. In March 1996, the Board adopted and the stockholders approved an Employee Stock Purchase Plan. In November 1996, the Board adopted an International Employee Stock Purchase Plan for employees of its wholly-owned subsidiaries. The Employee Stock Purchase Plan and the International Employee Stock Purchase Plan (collectively, the "Purchase Plans") are designed to allow eligible employees of the Company to purchase shares of Common Stock through periodic payroll deductions. The Company has reserved 500,000 shares of Common Stock for issuances under the Purchase Plans. Payroll deductions may not exceed the lesser of 15% of a participant's base salary or $25,000 per year, and employees may purchase a maximum of 1,000 shares per purchase period under the Purchase Plans. The purchase price per share will be 85% of the lesser of the fair market value of the Common Stock on the start of the purchase period or the fair market value at the end of the purchase period. Participation may be terminated at any time by the employee and automatically ends upon termination of employment with the Company. Six-month offering periods will commence on each November 1 and May 1, except for the initial offering period which commenced on April 25, 1996 and ended on October 31, 1996. Under the Purchase Plans, 60,145, 32,998 and 43,962 shares were issued in connection with the offering periods ended October 31, 1996, April 30, 1997 and October 31, 1997, respectively. 1992 STOCK PLAN. Under the Company's 1992 Stock Plan, the Company's Board of Directors (the "Board") granted incentive stock options to employees of the Company and nonqualified options to a F-11 44 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) consultant of the Company. The options generally vest over a four-year period commencing on or before the date of grant. 1995 STOCK OPTION/STOCK ISSUANCE PLAN. In September 1995, the stockholder and the Board approved the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan") which replaced the 1992 Stock Plan. All options outstanding under the 1992 Stock Plan were incorporated into the 1995 Plan. Under the 1995 Plan, the amount of shares of Common Stock originally reserved for issuance was 10,000,000 shares which was subsequently increased to 12,000,000 shares. The amount of shares of Common Stock reserved for issuance was increased to 15,500,000 shares, subject to the approval of the Company's 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. The Discretionary Option Grant Program provides for the grant of incentive stock options ("Incentive Options") to employees of the Company and for the grant of nonqualified stock options to employees, directors and consultants of the Company. Exercise prices may not be less than 100% and 85% of the fair market value at the date of grant for Incentive Options and nonqualified options, respectively. Options granted under the Discretionary Option Grant Program generally vest in four equal annual increments and expire after ten years. Some options granted under the Discretionary Option Grant Program are immediately exercisable, subject to a right of repurchase by the Company at the original exercise price for all unvested shares. Under the Stock Issuance Program, the Board or a committee of the Board (the "Plan Administrator") may grant shares of the Company's Common Stock to any person at any time, at such price and on such terms as established by the Plan Administrator. The purchase price per share cannot be less than 85% of the fair market value of the Company's Common Stock on the issuance date. Under the Automatic Option Grant Program, each person who is first elected or appointed as a non-employee Board member shall automatically be granted a nonqualified option to purchase 1,000 common shares of the Company at the fair market value on the date of grant. On the date of each Annual Stockholders Meeting each non-employee Board member shall automatically be granted an additional option to purchase 1,000 shares of the Company's Common Stock, subject to certain conditions. THINK STOCK OPTION PLANS. Think's Board of Directors have adopted and its shareholders have approved stock option plans for employees, directors and consultants of Think (the "Think Plans"). Under the Think Plans, the Think Board of Directors granted incentive and nonqualified stock options to employees, directors and consultants at prices not less than the estimated fair market value of Think's common stock at the date of grant. In connection with the acquisition of Think, all of the options outstanding under the Think Plans were assumed by the Company. OPTIMAX STOCK OPTION PLAN. During 1996, Optimax's Board of Directors adopted and its shareholders approved the Optimax Systems Corporation Stock Option Plan (the "Optimax Stock Option Plan"). Under the Optimax Stock Option Plan, the Optimax Board of Directors granted nonqualified stock options to employees of Optimax at prices equal to the estimated fair market value of Optimax's common stock on the date of grant. The options generally vest over a five-year period commencing on or before the date of grant. In connection with the acquisition of Optimax, all such options were assumed by the Company. F-12 45 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Option activity under the Company's stock option plans, including the Think and Optimax plans, is as follows:
OPTIONS OUTSTANDING ------------------------------ SHARES WEIGHTED- AVAILABLE NUMBER AVERAGE FOR GRANT OF SHARES EXERCISE PRICE ---------- ---------- ---------------- Balance, December 31, 1994................. 146,536 8,250,312 $ 0.03 Authorized............................... 1,603,152 -- -- Granted.................................. (1,125,667) 1,125,667 0.63 Exercised................................ -- (5,703,242) 0.06 Canceled................................. 23,300 (23,300) 0.05 ---------- ---------- Balance, December 31, 1995................. 647,321 3,649,437 0.17 Authorized............................... 2,683,125 -- -- Granted.................................. (1,606,317) 1,606,317 9.71 Issued................................... (615) -- 14.33 Exercised................................ -- (458,058) 1.66 Canceled................................. 87,672 (87,672) 11.71 ---------- ---------- Balance, December 31, 1996................. 1,811,186 4,710,024 3.07 Authorized............................... 3,500,000 -- -- Granted.................................. (3,031,830) 3,031,830 30.98 Exercised................................ -- (1,371,194) 1.24 Canceled................................. 277,076 (277,076) 30.96 ---------- ---------- Balance, December 31, 1997................. 2,556,432 6,093,584 16.10 ========== ==========
OPTIONS EXERCISABLE ----------------------------- WEIGHTED- NUMBER AVERAGE OF SHARES EXERCISE PRICE --------- ---------------- December 31, 1995........................................ 2,467,172 $0.16 ========= December 31, 1996........................................ 3,052,412 1.08 ========= December 31, 1997........................................ 3,017,011 1.69 =========
Under the 1995 Plan, each outstanding option and unvested stock issuance will be subject to accelerated vesting under certain circumstances upon an acquisition of the Company in a merger or asset sale, except to the extent the Company's repurchase rights with respect to the underlying shares are to be assigned to the successor corporation. In addition, the Plan Administrator has the discretion to accelerate vesting of outstanding options upon consummation of any other transaction which results in a change in control of the Company. All options outstanding at December 31, 1997 are Incentive Options except for 1,409,739 options which are nonqualified options. F-13 46 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other information regarding options outstanding and options exercisable as of December 31, 1997 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- -------------------------- WEIGHTED AVERAGE WEIGHTED REMAINING WEIGHTED RANGE OF EXERCISE NUMBER OF AVERAGE CONTRACTUAL NUMBER OF AVERAGE PRICES SHARES EXERCISE PRICE LIFE (YEARS) SHARES EXERCISE PRICE - ----------------- --------- -------------- ------------ --------- -------------- $0.0175 - $12.11 3,318,147 $ 1.34 6.10 yrs. 2,975,499 $ 1.33 24.375 - 35.75 1,749,343 29.42 9.32 40,512 27.57 36.00 - 52.75 1,026,094 41.11 9.90 1,000 37.25 --------- --------- Total 6,093,584 16.10 7.66 3,017,011 1.69 ========= =========
The Company recorded deferred compensation expense of $1.8 million and $910,000 in 1995 and in the first quarter of 1996, respectively, for the difference between the grant price and the deemed fair market value of the Company's Common Stock underlying certain options granted. These amounts are being amortized over the vesting period of the individual options, generally four years. The income tax benefits from disqualifying dispositions related to employee stock transactions have been recorded as an increase in additional paid-in capital. As a result of these disqualifying dispositions, the Company has an income tax receivable balance of $1.1 million at December 31, 1997. PRO FORMA NET INCOME AND NET INCOME PER SHARE. Pro forma information regarding net income and net income per share has been determined as if the Company had accounted for its employee stock options and shares issued under the Purchase Plans using the fair value method of SFAS No. 123. The fair value for the stock options issued under the 1995 Plan was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates of 6.3%, 6.2% and 6.2%; volatility factors of the expected market price of the Company's Common Stock of 0.46, 0.46 and 0.66; a weighted-average expected life of the options of 4 years; and no dividend yields. The fair value of the stock options issued under the Think Plans was estimated at the date of grant using the minimum value method for non-public companies permitted by SFAS No. 123 with the following assumptions for 1996 and 1997, respectively: weighted-average risk-free interest rates of 6.5% and 6.2%; no dividends; and a weighted-average expected life of the options of 7 years. The fair value of stock options issued under the Optimax Stock Option Plan is not presented as the impact is immaterial. The fair value for the shares issued under the Purchase Plans was estimated as of the initial day of the purchase period using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1997, respectively: risk free interest rates of 5.2% and 5.4%; volatility factors of the expected market price of the Company's Common Stock of 0.46 and 0.66; a weighted-average expected life of the purchase right of 0.5 years; and no dividend yields. The weighted-average fair values of the purchase rights granted under the Purchase Plans during 1996 and 1997 were $6.15 and $12.12, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and Purchase Plan shares. F-14 47 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period and the estimated fair value of the Purchase Plan shares is amortized to expense over the purchase period. The Company's pro forma information follows (in thousands, except per share amounts):
1995 1996 1997 ------ ------ ------ Pro forma net income..................................... $3,083 $6,281 $1,540 Pro forma net income per share........................... 0.15 0.23 0.05 Pro forma net income per share, assuming dilution........ 0.11 0.20 0.05
The pro forma disclosures only include the effect of options granted subsequent to January 1, 1995. Accordingly, the effects of applying SFAS No. 123 for the pro forma disclosures are not indicative of future effects of such application. Information regarding exercise prices and fair values of options granted is as follows:
1995 1996 1997 -------- ---------- ---------- Number of options issued at fair market value of stock......................................... 181,800 1,296,047 3,031,830 Weighted-average exercise price per share....... $0.13 $11.15 $30.98 Weighted-average fair value of options.......... 0.06 4.55 17.03 Number of options issued at less than fair market value of stock......................... 943,867 310,270 -- Weighted-average exercise price per share....... $0.72 $ 3.69 -- Weighted-average fair value of options.......... 2.10 4.21 --
8. INCOME TAXES The Company's provision for income taxes consists of the following (in thousands):
1995 1996 1997 ------ ------ ------- Current: Federal............................................... $1,730 $3,630 $ 9,702 State................................................. 455 390 1,224 Foreign............................................... 37 264 646 Deferred Federal............................................... (477) 272 (1,629) State................................................. (101) (79) (40) Foreign............................................... (60) (203) (242) ------ ------ ------- Total......................................... $1,584 $4,274 $ 9,661 ====== ====== =======
F-15 48 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's provision for income taxes reconciles to the amount computed by applying the statutory U.S. federal rate of 34% for 1995 and 1996 and 35% for 1997 to income before income taxes as follows (in thousands):
1995 1996 1997 ------ ------ ------ Expense computed at statutory rate....................... $1,581 $3,902 $5,909 Non-deductible in-process research and development and acquisition costs...................................... -- -- 3,164 State taxes, net of federal tax benefit.................. 139 266 770 Stock option compensation................................ -- 215 200 Research and development tax credits..................... (175) (144) (207) Other.................................................... 39 35 (175) ------ ------ ------ Provision for income taxes..................... $1,584 $4,274 $9,661 ====== ====== ======
Deferred tax assets and liabilities at December 31, 1996 and December 31, 1997 are comprised of the following (in thousands):
1996 1997 ------- ------ Deferred tax assets: Foreign tax credits....................................... $ 612 $ 617 Deferred revenue.......................................... 848 578 Accrued liabilities....................................... 136 570 Bad debt allowance........................................ 229 1,349 Research and development tax credits...................... 78 220 Other..................................................... 648 295 ------- ------ Total deferred tax asset.......................... 2,551 3,629 ------- ------ Deferred tax liabilities: Depreciation.............................................. (127) (379) State income taxes........................................ (28) -- Cash method of accounting, net............................ (1,212) -- Other..................................................... (68) (223) ------- ------ Total deferred tax liability...................... (1,435) (602) ------- ------ Net deferred tax asset............................ $ 1,116 $3,027 ======= ======
The Company considers 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. The Company believes that any United States income taxes due upon the repatriation of such earnings would be fully offset by foreign tax credits. The Company paid income taxes of approximately $3.1 million, $2.0 million and $2.6 million in 1995, 1996 and 1997, respectively. 9. EMPLOYEE RETIREMENT PLAN The Company has established 401(k) retirement plans (the "Retirement Plans") that cover a majority of the Company's employees. Eligible employees may contribute up to 18% of their compensation, subject to certain limitations, to the Retirement Plans. The Company may make contributions to the Retirement Plans at the discretion of the Board. As of December 31, 1997, no contributions had been made by the Company. F-16 49 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS The Company operates in one industry segment, which is the development, marketing, licensing and support of client/server-based decision support software products for supply chain management and related applications. Revenues from international sources were approximately $2.2 million, $20.6 million and $65.4 million in 1995, 1996 and 1997, respectively. The Company's revenues from international sources were primarily generated from customers located in Asia, Canada and Europe. In 1996, revenues from customers located in Europe accounted for 13% of total revenues. In 1997, revenues from customers located in Europe and Asia accounted for approximately 17% and 10% of total revenues, respectively. Total assets from international operations, composed primarily of accounts receivable, were $11.4 million or 11% of total assets as of December 31, 1996 and were $38.0 million or 16% of total assets as of December 31, 1997. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments and for related disclosures about products and services, geographic areas and major customers. The provisions of SFAS No. 131 are effective for the Company beginning in 1998. Although the Company currently operates in only one industry segment, the Company is evaluating the potential impact of SFAS No. 131 on its reporting requirements. 11. MAJOR CUSTOMERS During 1995, two customers accounted for approximately 11% and 10% of total revenues. During 1996, one customer accounted for approximately 13% of total revenues. This customer also accounted for approximately 11% of total revenues in 1995. During 1997, no customer accounted for more than 10% of total revenues. 12. RELATED PARTY TRANSACTIONS As of December 31, 1996, the Company had $1.0 million of notes receivable from certain of its common stockholders. These notes bore interest at 6.78% and were repaid in May 1997. F-17 50 i2 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. QUARTERLY INFORMATION (UNAUDITED) Summarized quarterly consolidated financial information for 1996 and 1997 is as follows (in thousands, except per share amounts):
QUARTER ENDED ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 1996 Total revenues.................................. $15,394 $17,802 $23,967 $30,753 Operating income................................ 2,298 570 2,149 4,654 Net income...................................... 1,526 648 1,714 3,314 Net income per share............................ 0.06 0.02 0.06 0.12 Net income per share, assuming dilution......... 0.05 0.02 0.05 0.10 Shares used in computing net income per share... 25,798 27,736 28,459 28,757 Shares used in computing net income per share, assuming dilution............................ 29,338 31,760 32,621 32,979 1997 Total revenues.................................. $35,765 $48,023 $54,862 $62,056 In-process research and development and acquisition costs............................ -- 5,649 -- 3,657 Operating income (loss)......................... 1,691 (1,033) 7,112 6,044 Net income (loss)............................... 1,491 (390) 4,210 1,910 Net income (loss) per share..................... 0.05 (0.01) 0.14 0.06 Net income (loss) per share, assuming dilution..................................... 0.04 (0.01) 0.12 0.06 Shares used in computing net income (loss) per share........................................ 29,007 29,259 29,782 30,832 Shares used in computing net income (loss) per share, assuming dilution..................... 33,344 29,259 33,878 34,638
F-18 51 i2 TECHNOLOGIES, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF PERIOD EXPENSES WRITE-OFFS OF PERIOD ---------- ---------- ---------- ---------- (IN THOUSANDS) ALLOWANCE FOR DOUBTFUL ACCOUNTS Year Ended December 31, 1997........................ 1,269 3,774 (984) 4,059 Year Ended December 31, 1996........................ 925 971 (627) 1,269 Year Ended December 31, 1995........................ 436 499 (10) 925
S-1 52 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 3.2 -- Bylaws, as amended 21.1 -- List of subsidiaries 23.1 -- Consent of Ernst & Young LLP 24.1 -- Power of Attorney, pursuant to which amendments to this Form 10-K may be filed, is included on the signature page contained in Part IV of this Form 10-K. 27.1 -- Financial Data Schedule
EX-3.2 2 BYLAWS, AS AMENDED 1 EXHIBIT 3.2 BYLAWS OF i2 TECHNOLOGIES, INC. (A DELAWARE CORPORATION) 2 TABLE OF CONTENTS
Page ---- ARTICLE I CORPORATE OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 REGISTERED OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.4 NOTICE OF STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS . . . . . . . . . . . . . . . . . 2 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.7 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.8 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.9 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.10 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . . . . . . . . . . . . . . . 5 2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS . . . . . . . . . . . . . . . . . . . 5 2.13 PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.15 CONDUCT OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.3 ELECTION QUALIFICATION AND TERM OF OFFICE OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . 7 3.4 RESIGNATION AND VACANCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.6 FIRST MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.7 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.8 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.9 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.10 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.11 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.12 CONDUCT OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
-i- 3 3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . . . . . . . . . . . . . . . . . . 11 3.14 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.15 APPROVAL OF LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.16 REMOVAL OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE IV COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.1 COMMITTEES OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.2 COMMITTEE MINUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.3 MEETINGS AND ACTION OF COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE V OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.1 NUMBER OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.2 ELECTION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.3 REMOVAL AND RESIGNATION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.4 CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.5 VICE CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.6 CHIEF EXECUTIVE OFFICER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.7 PRESIDENTS AND VICE PRESIDENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.8 SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.9 CHIEF FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.10 ASSISTANT SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.11 CONTROLLER AND ASSISTANT FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.12 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE VI INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.2 INDEMNIFICATION OF OTHERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.3 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE VII RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.1 MAINTENANCE AND INSPECTION OF RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.2 INSPECTION BY DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE VIII GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8.1 STOCK CERTIFICATES; PARTLY PAID SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8.2 LOST CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8.3 CONSTRUCTION; DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8.4 DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.5 FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.6 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.7 TRANSFER OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
-ii- 4 8.8 STOCK TRANSFER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.9 REGISTERED STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE IX AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE X DISSOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE XI CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 11.2 DUTIES OF CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
-iii- 5 BYLAWS OF i2 TECHNOLOGIES, INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at the principal executive offices of the corporation, or at any other place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive offices of the corporation. 2.2 ANNUAL MEETING An annual meeting of stockholders shall be held for the election of directors at such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the board of directors from time to time. Any other proper business may be transacted at the annual meeting. 6 2.3 SPECIAL MEETINGS A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, by the president or by the chief executive officer, or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent of the votes at that meeting (the "10% Stockholders"); provided that, notwithstanding the above and any provision contained in these Bylaws to the contrary, effective upon the closing of a public offering of the Corporation's Capital Stock pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (a "Public Offering"), the 10% Stockholders shall no longer be entitled to call such meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, chief executive officer, or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5, that a meeting will be held at the time requested by the person or persons who called the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.6 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS To be properly brought before an annual meeting or special meeting, nominations for the election of director or other business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a stockholder. For such nominations or other business to be considered properly brought before the meeting by a stockholder, such stockholder must 2 7 have given timely notice and in proper form of his intent to bring such business before such meeting. To be timely, such stockholder's notice must be delivered to or mailed and received by the secretary of the corporation not less than ninety (90) days prior to the meeting; provided, however, that in the event that less than one-hundred (100) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. To be in proper form, a stockholder's notice to the secretary shall set forth: (i) the name and address of the stockholder who intends to make the nominations or propose the business and, as the case may be, the name and address of the person or persons to be nominated or the nature of the business to be proposed; (ii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice or introduce the business specified in the notice; (iii) if applicable, a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each nominee or each matter of business to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the board of directors; and (v) if applicable, the consent of each nominee to serve as director of the corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the 3 8 transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.7 QUORUM The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provisions of the statutes or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of the question. 2.8 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled vote at the meeting. 2.9 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.12 and Section 2.14 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as may otherwise be provided in the certificate of incorporation or the last paragraph of this Section 2.9, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 4 9 At a stockholders' meeting at which directors are to be elected, or at elections held under special circumstances, a stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast). Each holder of stock of any class or series who elects to cumulate votes shall be entitled to as many votes as equals the number of votes which (absent this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them, as he may see fit, so long as the name of the candidate for director shall have been placed in nomination prior to the voting and the stockholder, or any other holder of the same class or series of stock, has given notice at the meeting prior to the voting of the intention to cumulate votes; provided that, except as may otherwise be provided in the certificate of incorporation, effective upon a Public Offering the cumulative voting rights set forth in this Section 2.9 shall terminate. 2.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time Stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Effective upon a Public Offering, the stockholders of the corporation may not take action by written consent without a meeting but must take any such actions at a duly called annual or special meeting. 2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to express consent or dissent to corporate action in writing without a meeting (it otherwise permitted by these bylaws and the corporation's certificate of incorporation), or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall be not more than 5 10 sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date, the fixing of such record date shall be governed by the provisions of Section 213 of the General Corporation Law of Delaware. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.13 PROXIES Each stockholder entitled to vote at a meeting of stockholders or entitled to express consent or dissent to corporate action in writing without a meeting (if otherwise permitted by these bylaws and the corporation's certificate of incorporation) may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders and of the number of shares held by each such stockholder. 2.15 CONDUCT OF BUSINESS Meetings of stockholders shall be presided over by the chairman of the board, if any, or in his absence by the president, or in his absence by a vice president, or in the absence of the 6 11 foregoing persons by a chairman designated by the board of directors, or in the absence of such designation by a chairman chosen at the meeting. The secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such matters as the regulation of the manner of voting and conduct of business. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation is fixed at three (3). No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, at each annual meeting of stockholders, directors of the corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified; except that if any such election shall not be so held, such election shall take place at a stockholders' meeting called and held in accordance with the Delaware General Corporation Law. At the annual meeting of stockholders following a Public Offering, the directors of the corporation shall be divided into three classes as nearly equal in size as is practicable, hereby designated Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the next succeeding annual meeting of stockholders, the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of stockholders and the term of office of the initial Class III directors shall expire at the third succeeding annual meeting of stockholders. For the purposes hereof, the initial Class I, Class II and Class III directors shall be those directors so designated and elected at the first annual meeting of stockholders following a Public Offering. At each annual meeting after the annual meeting of stockholders scheduled to be held thereafter, directors to replace those of a Class office whose terms, expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting 7 12 and until their respective successors shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Election of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the corporation. Stockholders may remove directors with or without cause. Any vacancy occurring in the board of directors with or without cause may be filled by a majority of the remaining members of the board of directors, although such majority is less than a quorum, or by a plurality of the votes cast at a meeting of stockholders, and each director so elected shall hold office until the expiration of the term of office of the director whom he has replaced. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by 8 13 the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 FIRST MEETINGS The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. 3.7 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place, within or without the State of Delaware, as shall from time to time be determined by the board. 3.8 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors may be held at such time and at such place, within or without the State of Delaware, whenever called by the chairman of the board, the president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone or facsimile to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four 9 14 (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, facsimile or by telegram, it shall be delivered personally or by telephone, facsimile or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.9 QUORUM At all meetings of the board of directors, a majority of the number of authorized directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. 3.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 3.11 ADJOURNED MEETING; NOTICE If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.12 CONDUCT OF BUSINESS Meetings of the board of directors shall be presided over by the chairman of the board, if any, or in his absence by the president, or in their absence by a chairman chosen at the meeting. The secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. The chairman of any meeting shall determine the order of business and the procedures at the meeting. 10 15 3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.14 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 3.15 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.16 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that, so long as stockholders of the corporation are entitled to cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his or her removal would be sufficient to elect him or her if then cumulatively voted at an election of the entire Board of Directors. If at any time a class or series of shares is entitled to elect one or more directors, the provisions of this Article 3.16 shall apply to the vote of that class or series and not to the vote of the outstanding shares as a whole. 11 16 No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares or any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Section 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 12 17 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of adjournment), Section 3.12 (conduct of business) and Section 3.13 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 NUMBER OF OFFICERS The officers of the corporation shall be a chief executive officer, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, a vice chairman of the board, one or more presidents of designated function, one or more vice presidents, assistant vice presidents, assistant secretaries, controllers, assistant financial officers, and any such other officers as may be appointed in accordance with the provisions of Section 5.2 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS Except as otherwise provided in this Section 5.2, the officers of the corporation shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment. The board of directors may appoint, or empower the chief executive officer to appoint (whether or not such officer is described in this Article V), such officers and agents of the business as the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. Any vacancy occurring in any office of the corporation shall be filled by the board of directors or may be filled by the chief executive officer (if the chief executive officer appointed such officer). 13 18 5.3 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors or, in the case of an officer appointed by the chief executive officer, by the chief executive officer. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.4 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no chief executive officer, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.5 of these bylaws. 5.5 VICE CHAIRMAN OF THE BOARD In the absence or disability of the chairman of the board, the vice chairman of the board, if such an officer be elected, shall perform all the duties of the chairman of the board. The vice chairman of the board shall have such other powers and perform such other duties as from time to time may be prescribed by the board of directors, these bylaws or the chairman of the board. 5.6 CHIEF EXECUTIVE OFFICER Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the chief executive officer, unless otherwise determined by the board of directors, shall be the senior executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business, officers and affairs of the corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board and a vice chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of a chief executive officer or president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 14 19 5.7 PRESIDENTS AND VICE PRESIDENTS The board of directors may, in its discretion, designate one or more presidents and one or more vice presidents, and furthermore, may identify in such designation the function of such officers. The presidents and vice presidents, if designated, shall have such powers and perform such duties as from time to time may be prescribed for them, respectively, by the board of directors, these bylaws, the chief executive officer or the chairman of the board. 5.8 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one to be adopted, in a safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.9 CHIEF FINANCIAL OFFICER The chief financial officer shall have the general powers and duties of management usually vested in the office of treasurer of a corporation. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the chief executive officer and directors, whenever they request it, an 15 20 account of all of his transactions as chief financial officer and of the financial condition and affairs of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.10 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. 5.11 CONTROLLER AND ASSISTANT FINANCIAL OFFICER The controller or other assistant financial officer, or, if there is more than one, the controllers and assistant financial officers, in the order determined by the stockholders or the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the chief financial officer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the chief financial officer and shall perform such other duties and have such other powers as the board of directors, the stockholders, the chief executive officer or the chief financial officer may from time to time prescribe. 5.12 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. ARTICLE VI INDEMNITY 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceedings, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the 16 21 corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, including, without limitation, any direct or indirect subsidiary of the corporation, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the extent and in the manner permitted by the General Corporation law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceedings, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including, without limitation, any direct or indirect subsidiary of the corporation, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books, and other records. 17 22 Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or aware such other and further relief as the Court may deem just and proper. 7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the 18 23 corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, or upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefore and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.2 LOST CERTIFICATES Except as provided in this Section 8.2, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claims that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.3 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 19 24 8.4 DIVIDENDS The directors of the corporation, subject to any restrictions contained in the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock pursuant to the General Corporation Law of Delaware. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. 8.5 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.6 SEAL The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 8.7 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.8 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.9 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such 20 25 share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. Notwithstanding any other provision of these bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of the capital stock required by law or by these bylaws, the affirmative vote of at least two-thirds (2/3) of the combined voting power of all of the then- outstanding shares of the corporation entitled to vote shall be required to alter, amend or repeal Article II, Section 2.9 or Section 2.11 of these bylaws or this Article IX or any provision thereof, or to add or amend any other bylaw in order to change or nullify the effect of such provisions, unless such amendment shall be approved by a majority of the directors of the corporation not affiliated or associated with any person or entity holding (or which has announced an intent to obtain) 26% or more of the voting power of the corporation's outstanding capital stock. ARTICLE X DISSOLUTION If it should be deemed advisable in the judgment of the board of directors of the corporation that the corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution. At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in 21 26 accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. ARTICLE XI CUSTODIAN 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES The Court of Chancery, upon application of any stockholder, may appoint one or more persons to be custodians and, if the corporation is insolvent, to be receivers, of and for the corporation when: (i) at any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or (ii) the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or (iii) the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. 11.2 DUTIES OF CUSTODIAN The custodian shall have all the powers and title of a receiver appointed under Section 291 of the General Corporation Law of Delaware, but the authority of the custodian shall be to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the Court of Chancery otherwise orders and except in cases arising under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware. 22 27 i2 TECHNOLOGIES, INC. Amendment to Bylaws Effective as of May 14, 1997 Article III, Section 3.2 of the Bylaws of i2 Technologies, Inc. shall be amended in its entirety to read as follows: "3.2 NUMBER OF DIRECTORS The number of directors of the corporation is fixed at five (5). No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires." EX-21.1 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 i2 TECHNOLOGIES, INC. LIST OF SUBSIDIARIES
JURISDICTION IN WHICH NAME OF SUBSIDIARY 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 i2 Technologies (Cayman Islands) Ltd. Cayman Islands i2 Technologies A/S Denmark i2 Technologies SARL France i2 Technologies, GmbH Germany Think Systems Private Limited India i2 Technologies Srl Italy i2 Technologies Japan, Inc. Japan i2 Technologies (Netherlands) B.V. Netherlands i2 Technologies (N.A.) N.V. Netherlands Antilles i2 Technologies PTE Limited Singapore i2 Technologies, Limited United Kingdom
EX-23.1 4 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-03703, 333-27009 and 333-28147) and on Form S-3 (File Nos. 333-29339 and 333-29341) of i2 Technologies, Inc. of our report dated January 21, 1998, with respect to the consolidated financial statements and schedule of i2 Technologies, Inc. included in its Annual Report (Form 10-K) for the year ended December 31, 1997 filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Dallas, Texas March 5, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 125,853 14,538 75,268 (4,059) 0 219,883 27,823 (9,231) 239,202 57,439 0 0 0 8 180,409 180,417 134,725 200,706 3,384 186,892 (3,068) 3,774 15 16,882 9,661 7,221 0 0 0 7,221 0.24 0.21
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