-----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, NuVyojeBf+ptxF5RaqPoMvo3A5FNUK3GRQKayuucbLe/kCaBViSvCDxf8vfALBdI KrtoFRjoiaGZpYGrnF21yA== 0000950134-98-005445.txt : 19980624 0000950134-98-005445.hdr.sgml : 19980624 ACCESSION NUMBER: 0000950134-98-005445 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19980619 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980623 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: 8-K SEC ACT: SEC FILE NUMBER: 000-28030 FILM NUMBER: 98652666 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 8-K 1 FORM 8-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): JUNE 19, 1998 i2 TECHNOLOGIES, INC. (Exact name of registrant as specified in charter) DELAWARE 0-28030 75-2294945 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 909 E. LAS COLINAS BLVD., 16TH FLOOR, 75039 IRVING, TEXAS (Zip Code) (Address of principal executive offices)
Company's telephone number, including area code: (214) 860-6000 ------------------------------------------------------------------ (Former name or former address, if changed since last report) ================================================================================ 2 ITEM 5. OTHER EVENTS. In April 1998, i2 Technologies, Inc. (the "Registrant") acquired InterTrans Logistics Solutions Limited ("ITLS") of Markham, Ontario. The Registrant is currently undertaking to file a Form S-3 registration statement under the Securities Act of 1933 to register the shares issued in connection with the acquisition. Additional information regarding the acquisition is presented in the Registrant's previously filed Current Reports on Form 8-K, dated March 24, 1998 and May 5, 1998. The acquisition was accounted for as a pooling of interests. In accordance with Securities and Exchange Commission requirements, the Registrant is providing supplemental selected financial data, supplemental management's discussion and analysis of financial condition and results of operations and supplemental consolidated financial statements which give retroactive effect to the acquisition and include the combined operations of the Registrant and ITLS for all periods presented. The supplemental consolidated financial statements will become the historical financial statements of the Registrant after financial statements that include the date of consummation of the acquisition are issued. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (c) Exhibits.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 23.1 Consent of Ernst & Young LLP. 27.1 Restated Financial Data Schedule for the Year Ended December 31, 1997. 27.2 Restated Financial Data Schedule for the Nine Months Ended September 30, 1997. 27.3 Restated Financial Data Schedule for the Six Months Ended June 30, 1997. 27.4 Restated Financial Data Schedule for the Three Months Ended March 31, 1997. 27.5 Restated Financial Data Schedule for the Year Ended December 31, 1996. 27.6 Restated Financial Data Schedule for the Nine Months Ended September 30, 1996. 27.7 Restated Financial Data Schedule for the Six Months Ended June 30, 1996. 27.8 Restated Financial Data Schedule for the Three Months Ended March 31, 1996. 27.9 Restated Financial Data Schedule for the Year Ended December 31, 1995. 99.1 Supplemental Selected Financial Data of the Registrant as of and for the Years ended December 31, 1993, 1994, 1995, 1996 and 1997. 99.2 Supplemental Management's Discussion and Analysis of Financial Condition and Results of Operations of the Registrant for the Years ended December 31, 1995, 1996 and 1997.
2 3
EXHIBIT NUMBER DESCRIPTION ------- ----------- 99.3 The following Supplemental Consolidated Financial Statements of the Registrant:
PAGE ---- 1. Report of Independent Auditors........................... F-1 2. Supplemental Consolidated Balance Sheets as of December 31, 1996 and 1997........................................ F-2 3. Supplemental Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997............. F-3 4. Supplemental Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997..................................................... F-4 5. Supplemental Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997......... F-5 6. Notes to Supplemental Consolidated Financial Statements............................................... F-6 99.4 Supplemental Consolidated Financial Statement Schedules: Schedule II -- Valuation and Qualifying Accounts Schedules other than the one listed above are omitted as the required information is inapplicable or the information is presented in the supplemental consolidated financial statements or related notes.
3 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. i2 TECHNOLOGIES, INC. By: /s/ DAVID F. CARY ---------------------------------- David F. Cary, Vice President and Chief Financial Officer Dated: June 19, 1998 4 5 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 23.1 Consent of Ernst & Young LLP. 27.1 Restated Financial Data Schedule for the Year Ended December 31, 1997. 27.2 Restated Financial Data Schedule for the Nine Months Ended September 30, 1997. 27.3 Restated Financial Data Schedule for the Six Months Ended June 30, 1997. 27.4 Restated Financial Data Schedule for the Three Months Ended March 31, 1997. 27.5 Restated Financial Data Schedule for the Year Ended December 31, 1996. 27.6 Restated Financial Data Schedule for the Nine Months Ended September 30, 1996. 27.7 Restated Financial Data Schedule for the Six Months Ended June 30, 1996. 27.8 Restated Financial Data Schedule for the Three Months Ended March 31, 1996. 27.9 Restated Financial Data Schedule for the Year Ended December 31, 1995. 99.1 Supplemental Selected Financial Data of the Registrant as of and for the Years ended December 31, 1993, 1994, 1995, 1996 and 1997. 99.2 Supplemental Management's Discussion and Analysis of Financial Condition and Results of Operations of the Registrant for the Years ended December 31, 1995, 1996 and 1997. 99.3 The following Supplemental Consolidated Financial Statements of the Registrant:
PAGE ---- 1. Report of Independent Auditors........................... F-1 2. Supplemental Consolidated Balance Sheets as of December 31, 1996 and 1997........................................ F-2 3. Supplemental Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997............. F-3 4. Supplemental Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997..................................................... F-4 5. Supplemental Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997......... F-5 6. Notes to Supplemental Consolidated Financial Statements............................................... F-6 99.4 Supplemental Consolidated Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts Schedules other than the one listed above are omitted as the required information is inapplicable or the information is presented in the supplemental consolidated financial statements or related notes. EX-23.1 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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, 333-28147 and 333-53667) and on Form S-3 (File Nos. 333-29339 and 333-29341) of i2 Technologies, Inc. of our report dated June 19, 1998, with respect to the supplemental consolidated financial statements of i2 Technologies, Inc. included in this Current Report on Form 8-K dated June 19, 1998. /s/ ERNST & YOUNG LLP Dallas, Texas June 19, 1998 EX-27.1 3 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 127,433 14,538 75,037 4,263 0 225,764 31,545 10,650 250,263 64,205 0 0 0 17 183,743 250,263 139,798 213,692 2,744 206,131 (3,353) 3,903 43 10,914 6,916 3,998 0 0 0 3,998 0.06 0.06 INCLUDES THE EFFECT OF A TWO-FOR-ONE STOCK SPLIT WHICH WAS EFFECTIVE JUNE 2, 1998.
EX-27.2 4 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 38,770 22,934 54,686 2,584 0 123,113 27,887 8,733 146,748 59,529 0 0 0 16 85,670 146,748 96,024 147,571 2,604 144,748 (2,231) 2,826 34 5,054 2,349 2,705 0 0 0 2,705 0.04 0.04 INCLUDES THE EFFECT OF A TWO-FOR-ONE STOCK SPLIT WHICH WAS EFFECTIVE JUNE 2, 1998.
EX-27.3 5 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 30,184 23,343 48,823 1,822 0 110,025 24,598 7,193 130,566 50,117 0 0 0 16 78,609 130,566 57,817 89,475 2,522 91,924 (1,454) 1,257 33 (995) (433) (562) 0 0 0 (562) (0.01) (0.01) Includes the effect of a two-for-one stock split which was effective June 2, 1998.
EX-27.4 6 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 42,558 24,794 34,017 1,294 0 105,419 18,411 6,521 119,670 41,067 0 0 0 15 76,932 119,670 23,517 38,498 1,304 38,006 (752) 772 14 1,244 486 758 0 0 0 758 0.01 0.01 INCLUDES THE EFFECT OF A TWO-FOR-ONE STOCK SPLIT WHICH WAS EFFECTIVE JUNE 2, 1998.
EX-27.5 7 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 41,390 18,031 36,270 1,401 0 99,050 15,191 4,853 111,789 35,022 0 0 0 15 75,199 111,789 61,073 100,469 260 90,647 (1,681) 1,085 261 11,503 4,705 6,798 0 0 0 6,798 0.12 0.10 INCLUDES THE EFFECT OF A TWO-FOR-ONE STOCK SPLIT WHICH WAS EFFECTIVE JUNE 2, 1998.
EX-27.6 8 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 32,867 26,484 28,090 775 0 90,690 12,818 4,548 100,407 34,259 0 0 0 15 64,614 100,407 41,098 66,292 199 61,161 (1,113) 203 93 6,244 2,747 3,497 0 0 0 3,497 0.06 0.05 INCLUDES THE EFFECT OF A TWO-FOR-ONE STOCK SPLIT WHICH WAS EFFECTIVE JUNE 2, 1998.
EX-27.7 9 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 27,167 28,933 18,045 769 0 77,384 10,851 3,773 85,822 25,200 0 0 0 15 58,389 85,822 24,291 39,122 150 35,235 (547) 115 80 4,434 1,652 2,782 0 0 0 2,782 0.05 0.04 Includes the effect of a two-for-one stock split which was effective June 2, 1998.
EX-27.8 10 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 13,182 2,459 11,791 838 0 29,281 9,259 3,231 36,447 21,786 0 0 0 14 12,261 36,447 11,786 17,869 20 15,397 (105) 210 40 2,577 960 1,617 0 0 0 1,617 0.03 0.03 Includes the effect of a two-for-one stock split which was effective June 2, 1998.
EX-27.9 11 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 8,122 0 12,654 947 0 22,914 6,817 2,405 28,251 15,506 0 0 0 13 10,365 28,251 24,162 38,461 390 32,267 167 508 271 6,027 2,054 3,973 0 0 0 3,973 0.09 0.07 Includes the effect of a two-for-one stock split which was effective June 2, 1998.
EX-99.1 12 SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA 1 EXHIBIT 99.1 SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA The following supplemental selected consolidated financial data should be read in conjunction with the "Supplemental Management's Discussion and Analysis of Financial Condition and Results of Operations" included as Exhibit 99.2 of this Current Report on Form 8-K dated June 19, 1998. The statement of income data for the years ended December 31, 1995, 1996 and 1997, and the balance sheet data at December 31, 1996 and 1997 are derived from the Supplemental Consolidated Financial Statements included in Exhibit 99.3 of this Current Report on Form 8-K dated June 19, 1998 which have been audited by Ernst & Young LLP, independent auditors. The statement of income data for the years ended December 31, 1993 and 1994 and the balance sheet data at December 31, 1993, 1994 and 1995 are derived from unaudited financial statements.
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues: Software licenses..................... $ 5,092 $11,178 $24,162 $ 61,073 $139,798 Services.............................. 2,773 5,013 10,837 30,515 53,437 Maintenance........................... 359 1,168 3,462 8,881 20,457 ------- ------- ------- -------- -------- Total revenues................ 8,224 17,359 38,461 100,469 213,692 ------- ------- ------- -------- -------- Costs and expenses: Cost of software licenses............. 151 366 390 260 2,744 Cost of services and maintenance...... 1,995 3,196 7,601 21,761 46,004 Sales and marketing................... 1,791 4,780 10,487 35,182 73,526 Research and development.............. 1,689 3,644 8,503 21,886 52,741 General and administrative............ 1,325 2,188 5,286 10,425 21,810 In-process research and development and acquisition costs(1)........... -- -- -- 1,133 9,306 ------- ------- ------- -------- -------- Total costs and expenses...... 6,951 14,174 32,267 90,647 206,131 ------- ------- ------- -------- -------- Operating income(1)..................... 1,273 3,185 6,194 9,822 7,561 Other income (expense), net............. (41) (127) (167) 1,681 3,353 ------- ------- ------- -------- -------- Income before income taxes.............. 1,232 3,058 6,027 11,503 10,914 Provision for income taxes.............. 483 1,306 2,054 4,705 6,916 ------- ------- ------- -------- -------- Net income.............................. $ 749 $ 1,752 $ 3,973 $ 6,798 $ 3,998 ======= ======= ======= ======== ======== Net income per share(1)(2).............. $ 0.02 $ 0.04 $ 0.09 $ 0.12 $ 0.06 Net income per share, assuming dilution(1)(2)........................ $ 0.02 $ 0.03 $ 0.07 $ 0.10 $ 0.06 Shares used in computing net income per share(1)(2)........................... 40,866 41,940 43,538 58,000 62,652 Shares used in computing net income per share, assuming dilution(1)(2)........ 48,938 53,178 58,752 65,974 70,932
DECEMBER 31, ------------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital......................... $ 139 $ 1,814 $ 7,408 $ 64,028 $161,559 Total assets............................ 4,687 11,366 28,251 111,789 250,263 Total stockholders' equity.............. 846 2,598 10,378 75,214 183,760
1 2 - --------------- (1) InterTrans Logistics Solutions Limited ("ITLS") purchased a software product from Strategic Decision Systems in 1996, and $1.1 million of the purchase price was recorded as in-process research and development and expensed during 1996. 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. (2) All references in this table to the number of shares and income per share amounts have been adjusted on a retroactive basis to reflect the two-for-one stock split declared by the Company's Board of Directors effective June 2, 1998 and the Company's acquisition of ITLS. 2 EX-99.2 13 SUPPLEMENTAL MANAGEMENT'S DISCUSSION & ANALYSIS 1 EXHIBIT 99.2 i2 TECHNOLOGIES, INC. SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis below contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties, such as statements of the plans, objectives, expectations and intentions of i2 Technologies, Inc. (the "Company"). Such forward-looking statements are generally accompanied by words such as "plan," "estimate," "expect," "believe," "should," "would," "could," "anticipate," "may" or other words that convey uncertainty of future events or outcomes. The forward-looking statements in this discussion and analysis are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The section below entitled "Factors That May Affect Future Results" sets forth certain factors that could cause actual future results of the Company to differ materially from those statements. 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 and the costs and expenses related to acquisitions, the Company has experienced decreases in operating margins in 1996 and 1997. 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. In May 1997, the Company acquired Think Systems Corporation ("Think"). Approximately 7.7 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 ("Optimax"). Approximately 2.7 million shares of Common Stock have been issued or are issuable to the former Optimax 1 2 stockholders and optionholders in 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 give retroactive effect to the Think and Optimax acquisitions and include the combined operations of the Company, Think and Optimax for all periods presented. 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. 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. 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. In April 1998, the Company acquired InterTrans Logistics Solutions Limited ("ITLS") of Markham, Ontario. ITLS provides software designed to manage both the daily operations and the tactical and strategic planning aspects of transportation and logistics activities across the supply chain. Approximately 3.3 million shares of Common Stock have been issued or are issuable to the former ITLS shareholders and optionholders in exchange for all of the capital stock and all unexpired and unexercised options to acquire ITLS capital stock. The Company expects to incur approximately $3 million in expenses related to this acquisition. These expenses include, among other things, investment banking, legal and accounting fees and expenses. Such expenses will be recorded in the second quarter of 1998. For accounting purposes, the ITLS acquisition was treated as a pooling of interests. Accordingly, the Supplemental Consolidated Financial Statements and Supplemental Selected Financial Data included elsewhere as exhibits to this Form 8-K give retroactive effect to the acquisition and include the combined operations of the Company and ITLS for all periods presented. The following discussion and analysis should be read in conjunction with such Supplemental Consolidated Financial Statements. ITLS purchased a software product from Strategic Decision Systems in 1996, and $1.1 million of the purchase price was recorded as in-process research and development and expensed during 1996. This acquisition was accounted for under the purchase accounting method. In May 1998, the Company acquired a software vendor in exchange for approximately 77,000 shares of the Company's common stock and $1.8 million in cash. This acquisition will be accounted for under the purchase accounting method, and a substantial portion of the purchase price is expected to be recorded as in-process research and development and expensed during the second quarter of 1998. On April 22, 1998, the Company's Board of Directors approved a two-for-one stock split of the Company's Common Stock. The stock split was paid as a stock dividend on June 2, 1998 to stockholders of record on May 26, 1998. Share and per share amounts included in this Form 8-K have been restated to reflect the stock split. 2 3 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 supplemental consolidated statements of income:
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 1997 ----- ----- ----- Revenues: Software licenses......................................... 62.8% 60.8% 65.4% Services.................................................. 28.2 30.4 25.0 Maintenance............................................... 9.0 8.8 9.6 ----- ----- ----- Total revenues.................................... 100.0 100.0 100.0 Costs and expenses: Cost of software licenses................................. 1.0 0.2 1.3 Cost of services and maintenance.......................... 19.8 21.7 21.5 Sales and marketing....................................... 27.3 35.0 34.4 Research and development.................................. 22.1 21.8 24.7 General and administrative................................ 13.7 10.4 10.2 In-process research and development and acquisition costs.................................................. -- 1.1 4.4 ----- ----- ----- Total costs and expenses.......................... 83.9 90.2 96.5 ----- ----- ----- Operating income............................................ 16.1 9.8 3.5 Other income (expense), net................................. (0.4) 1.7 1.6 ----- ----- ----- Income before income taxes.................................. 15.7 11.5 5.1 Provision for income taxes.................................. 5.4 4.7 3.2 ----- ----- ----- Net income.................................................. 10.3% 6.8% 1.9% ===== ===== =====
REVENUES The Company's revenues consist of software license revenues, service revenues and maintenance revenues. Software license revenues consisted 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 limited 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 112.7% to $213.7 million in 1997 from $100.5 million in 1996, and increased 161.2% in 1996 from $38.5 million in 1995. The Company currently derives substantially all of its revenues 3 4 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. SOFTWARE LICENSES. Revenues from software licenses increased 128.9% to $139.8 million in 1997 from $61.1 million in 1996, and increased 152.8% in 1996 from $24.2 million in 1995. Software license revenues constituted 65.4%, 60.8% and 62.8% 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. SERVICES. Revenues from services increased 75.1% to $53.4 million in 1997 from $30.5 million in 1996, and increased 181.6% in 1996 from $10.8 million in 1995. Service revenues constituted 25.0%, 30.4% and 28.2% 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 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 130.3% to $20.5 million in 1997 from $8.9 million in 1996, and increased 156.5% in 1996 from $3.5 million in 1995. Maintenance revenues constituted 9.6%, 8.8% and 9.0% 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 1995 and 1997, no individual customer accounted for more than 10% of total revenues. During 1996, one customer accounted for approximately 11% of total revenues. The Company believes that the loss of this customer would not have a material adverse effect upon the Company's business, operating results or financial condition. INTERNATIONAL REVENUES. The Company recognized $66.7 million, $21.8 million and $3.4 million of revenues from international sources in 1997, 1996 and 1995, representing approximately 31%, 22% and 9% of total revenues, respectively. The Company's revenues from international sources were primarily generated from customers located in Asia, Canada and Europe. In 1997 and 1996, revenues from customers located in Europe accounted for approximately 16% and 11% of total revenues, respectively. 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. 4 5 In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires that all items that are recognized under accounting standards as components of comprehensive income be reported in the financial statements. The provisions of SFAS No. 130 are effective for the Company beginning in 1998. The Company anticipates that the adoption of SFAS No. 130 will not have a material effect on the Company's financial statement presentation in the future. 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. 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 $2.7 million, $260,000 and $390,000 in 1997, 1996 and 1995, representing 2.0%, 0.4% and 1.6% 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 AG ("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 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 $46.0 million, $21.8 million and $7.6 million in 1997, 1996 and 1995, representing 62.3%, 55.2% and 53.2% 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 $73.5 million, $35.2 million and $10.5 million in 1997, 1996 and 1995, representing 34.4%, 35.0% and 27.3% 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 Company expects to continue to increase its sales 5 6 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 $52.7 million, $21.9 million and $8.5 million in 1997, 1996 and 1995, representing 24.7%, 21.8% and 22.1% of total revenues, respectively. The increases in the dollar amount of research and development expenses were primarily due to the hiring of additional research and development personnel and other related costs incurred 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. General and administrative expenses were $21.8 million, $10.4 million and $5.3 million in 1997, 1996 and 1995, representing 10.2%, 10.4% and 13.7% 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. ITLS purchased a software product from Strategic Decision Systems in 1996, and $1.1 million of the purchase price was recorded as in-process research and development and expensed during the third quarter of 1996. 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 $3.4 million, $1.7 million and ($167,000) in 1997, 1996 and 1995, representing 1.6%, 1.7% 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. 6 7 PROVISION FOR INCOME TAXES The Company recorded income tax expense of $6.9 million, $4.7 million and $2.1 million in 1997, 1996 and 1995, respectively. The Company's effective income tax rates were 63.4%, 40.9% 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 certain of the acquisition expenses, 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 $3.0 million for 1997 as compared to $8.0 million for 1996. 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. 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 $75.0 million at December 31, 1997 from $36.3 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. Average days' sales outstanding was 85 days for 1997 as compared to 78 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 $11.3 million for 1997 as compared to $28.0 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 $94.3 million for 1997 as compared to $53.3 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 $161.6 million of working capital, including $127.4 million in cash and cash equivalents and $14.5 million in short-term investments as compared to $64.0 million of working capital as of December 31, 1996, including $41.4 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. 7 8 ITLS has a revolving credit agreement (the "Agreement") with a lender which is due on demand, is secured by the assets of ITLS and contains customary restrictive covenants, including covenants requiring ITLS to maintain certain financial ratios. Borrowings under the Agreement bear interest at the lender's prime lending rate plus 1%. At December 31, 1997, ITLS had $657,000 of borrowings outstanding under the Agreement. 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. Management has not yet determined the cost of achieving Year 2000 compliance. The Company believes that existing cash and cash equivalent balances, short-term investment balances 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, if at all. FACTORS THAT MAY AFFECT FUTURE RESULTS In addition to the other information in this Form 8-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 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 8 9 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. 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, Inc., Oracle Corporation ("Oracle") and Baan Company N.V., 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, during 1997, the Company and SAP terminated a license and distribution agreement, and SAP 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. MANAGEMENT OF GROWTH The Company's business has grown rapidly in recent years, with revenues increasing from $38.5 million in 1995 to $100.5 million in 1996 and to $213.7 million in 1997. The Company's recent expansion has resulted in substantial growth in the number of its employees (from 330 at December 31, 1995 to 721 at December 31, 1996 to 1,191 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 9 10 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. 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"). In April 1998, the Company acquired InterTrans Logistics Solutions Limited ("ITLS") of Markham, Ontario, and in May 1998, the Company acquired a software vendor. ITLS purchased a software product from Strategic Decision Systems in 1996. 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 and the recently acquired companies, or that the benefits expected from such integration will be realized. Failure to successfully integrate the recently acquired companies' 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 10 11 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 9%, 22% and 31% 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 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 System Software Associates, Inc., 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. 11 12 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 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. 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 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. 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, 12 13 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 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. Based on the Company's assessment, the Company believes that its current versions of its software products are Year 2000 compliant. However, the Company believes some customers are running earlier versions of the software products developed by acquired companies that are not Year 2000 compliant, and the Company has been encouraging such customers to migrate to current product versions. Moreover, the Company's products are generally integrated into enterprise systems involving complicated software products developed by other vendors. Year 2000 problems inherent in a customer's transactional software programs might significantly limit that customer's ability to realize the intended benefits offered by RHYTHM. The Company may in the future be subject to claims based on Year 2000 problems in others' products, custom scripts created by third parties to interface with the Company's products or issues arising from the integration of multiple products within an overall system. Although the Company has not been a party to any litigation or 13 14 arbitration proceeding to date involving its products or services and related to Year 2000 compliance issues, there can be no assurance that the Company will not in the future be required to defend its products or services in such proceedings, or to negotiate resolutions of claims based on Year 2000 issues. The costs of defending and resolving Year 2000-related disputes, and any liability of the Company for Year 2000-related damages, including consequential damages, could have a material adverse effect on the Company's business, operating results and financial condition. The Company believes that 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. Management has not yet determined the cost of achieving Year 2000 compliance. 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 May 31, 1998, the Company's executive officers beneficially owned approximately 56.6% 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 14 15 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. 15 EX-99.3 14 REPORT OF INDEPENDENT AUDITORS 1 EXHIBIT 99.3 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders i2 Technologies, Inc. We have audited the accompanying supplemental consolidated balance sheets of i2 Technologies, Inc. (formed as a result of the merger of i2 Technologies, Inc. and InterTrans Logistics Solutions Limited) as of December 31, 1996 and 1997, and the related supplemental consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. The supplemental consolidated financial statements give retroactive effect to the merger of i2 Technologies, Inc. and InterTrans Logistics Solutions Limited in April 1998, which has been accounted for using the pooling of interests method as described in the notes to the supplemental consolidated financial statements. These supplemental financial statements are the responsibility of the management of i2 Technologies, Inc. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 supplemental consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of i2 Technologies, Inc. at December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, after giving retroactive effect to the merger of i2 Technologies, Inc. and InterTrans Logistics Solutions Limited, as described in the notes to the supplemental consolidated financial statements, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Dallas, Texas June 19, 1998 F-1 2 i2 TECHNOLOGIES, INC. SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 31, -------------------- 1996 1997 -------- -------- Current assets: Cash and cash equivalents................................. $ 41,390 $127,433 Short-term investments.................................... 18,031 14,538 Accounts receivable, net of allowance for doubtful accounts of $1,401 and $4,263, respectively............ 36,270 75,037 Notes receivable -- stockholders.......................... 1,000 -- Prepaid and other current assets.......................... 2,359 3,836 Income tax receivable..................................... -- 1,097 Deferred income taxes..................................... -- 3,823 -------- -------- Total current assets.............................. 99,050 225,764 Furniture and equipment, net................................ 10,338 20,895 Deferred income taxes and other assets...................... 2,401 3,604 -------- -------- Total assets...................................... $111,789 $250,263 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 4,958 $ 7,712 Accrued liabilities....................................... 5,637 11,054 Accrued compensation and related expenses................. 3,905 15,357 Revolving line of credit.................................. -- 657 Current portion of deferred revenue....................... 19,469 29,195 Income taxes payable...................................... 996 -- Deferred income taxes..................................... 57 230 -------- -------- Total current liabilities......................... 35,022 64,205 Long-term debt.............................................. 100 -- Deferred revenue............................................ 266 518 Deferred income taxes....................................... 1,187 1,780 -------- -------- Total liabilities................................. 36,575 66,503 -------- -------- Stockholders' equity: Preferred Stock, $0.001 par value, 5,000,000 shares authorized, none issued................................ -- -- Common Stock, $0.00025 par value, 200,000,000 shares authorized, 60,925,986 and 67,810,274 shares issued and outstanding, respectively.............................. 15 17 Additional paid-in capital................................ 64,046 167,852 Deferred compensation..................................... (1,865) (1,125) Retained earnings......................................... 13,018 17,016 -------- -------- Total stockholders' equity........................ 75,214 183,760 -------- -------- Total liabilities and stockholders' equity........ $111,789 $250,263 ======== ========
See accompanying notes. F-2 3 i2 TECHNOLOGIES, INC. SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ----------------------------- 1995 1996 1997 ------- -------- -------- Revenues: Software licenses......................................... $24,162 $ 61,073 $139,798 Services.................................................. 10,837 30,515 53,437 Maintenance............................................... 3,462 8,881 20,457 ------- -------- -------- Total revenues.................................... 38,461 100,469 213,692 ------- -------- -------- Costs and expenses: Cost of software licenses................................. 390 260 2,744 Cost of services and maintenance.......................... 7,601 21,761 46,004 Sales and marketing....................................... 10,487 35,182 73,526 Research and development.................................. 8,503 21,886 52,741 General and administrative................................ 5,286 10,425 21,810 In-process research and development and acquisition costs.................................................. -- 1,133 9,306 ------- -------- -------- Total costs and expenses.......................... 32,267 90,647 206,131 ------- -------- -------- Operating income............................................ 6,194 9,822 7,561 Other income (expense), net................................. (167) 1,681 3,353 ------- -------- -------- Income before income taxes.................................. 6,027 11,503 10,914 Provision for income taxes.................................. 2,054 4,705 6,916 ------- -------- -------- Net income.................................................. $ 3,973 $ 6,798 $ 3,998 ======= ======== ======== Net income per share........................................ $ 0.09 $ 0.12 $ 0.06 Net income per share, assuming dilution..................... $ 0.07 $ 0.10 $ 0.06 Weighted average common shares outstanding.................. 43,538 58,000 62,652 Weighted average common shares outstanding, assuming dilution.................................................. 58,752 65,974 70,932
See accompanying notes. F-3 4 i2 TECHNOLOGIES, INC. SUPPLEMENTAL 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............ 39,858 $10 $ 171 $ -- $ 2,417 $ 2,598 Exercise of stock options............. 11,406 3 321 -- -- 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 i2 common stock in merger...... 1,304 -- 2,871 -- -- 2,871 Distributions to Think stockholders... -- -- -- -- (170) (170) Issuance of ITLS common stock which was exchanged for i2 common stock in merger.......................... 1,200 -- 711 -- -- 711 Net income............................ -- -- -- -- 3,973 3,973 ------ --- -------- ------- ------- -------- Balance at December 31, 1995............ 53,768 13 5,884 (1,739) 6,220 10,378 Exercise of stock options and issuance under stock purchase plan.......... 1,038 -- 1,816 -- -- 1,816 Common stock issued, net of offering costs of $4,288.................... 4,780 2 43,714 -- -- 43,716 Tax benefit of stock options.......... -- -- 1,353 -- -- 1,353 Deferred compensation related to stock options............................ -- -- 910 (910) -- -- Amortization of deferred compensation....................... -- -- -- 784 -- 784 Issuance of Think preferred stock which was exchanged for i2 common stock in merger.................... 554 -- 5,100 -- -- 5,100 Issuance of ITLS preferred stock which was exchanged for i2 common stock in merger.......................... 786 -- 5,269 -- -- 5,269 Net income............................ -- -- -- -- 6,798 6,798 ------ --- -------- ------- ------- -------- Balance at December 31, 1996............ 60,926 15 64,046 (1,865) 13,018 75,214 Exercise of stock options and issuance under stock purchase plan.......... 2,884 1 4,273 -- -- 4,274 Common stock issued, net of offering costs of $3,573.................... 4,000 1 89,427 -- -- 89,428 Tax benefit of stock options.......... -- -- 10,106 -- -- 10,106 Amortization of deferred compensation....................... -- -- -- 740 -- 740 Net income............................ -- -- -- -- 3,998 3,998 ------ --- -------- ------- ------- -------- Balance at December 31, 1997............ 67,810 $17 $167,852 $(1,125) $17,016 $183,760 ====== === ======== ======= ======= ========
See accompanying notes. F-4 5 i2 TECHNOLOGIES, INC. SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 ------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 3,973 $ 6,798 $ 3,998 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 1,241 3,052 5,194 Provision for losses on receivables.................... 508 1,085 3,903 Amortization of deferred compensation.................. 71 784 740 Deferred income taxes.................................. (640) (348) (4,169) Tax benefit of stock options........................... -- 1,353 10,106 Changes in operating assets and liabilities: Accounts receivable.................................. (8,687) (24,701) (42,670) Income tax receivable................................ (1,151) 1,151 (1,097) Prepaid and other assets............................. (581) (1,397) (1,568) Accounts payable..................................... 974 3,107 2,754 Accrued liabilities.................................. 610 3,967 5,417 Accrued compensation and related expenses............ 444 2,594 11,452 Income taxes payable................................. 799 99 (996) Deferred revenue..................................... 5,812 10,470 9,978 ------- -------- -------- Net cash provided by operating activities......... 3,373 8,014 3,042 ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Notes receivable -- stockholders.......................... -- (1,000) 1,000 Purchases of furniture and equipment...................... (3,706) (8,978) (15,751) 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............. (3,706) (28,009) (11,258) ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit.................... 500 -- 1,542 Payments on revolving line of credit...................... (850) -- (885) Proceeds from long-term debt.............................. 3,110 400 -- Payments on long-term debt................................ (2,642) (1,653) (100) Advances from stockholders, net........................... 535 (1,385) -- Distributions to stockholders............................. (170) -- -- Issuance of Think and Optimax preferred stock which was exchanged for i2 common stock in merger................ 2,871 5,100 -- Issuance of ITLS common stock which was exchanged for i2 common stock in merger................................. 711 -- -- Issuance of ITLS preferred stock which was exchanged for i2 common stock in merger.............................. -- 5,269 -- Net proceeds from sale of common stock and exercise of stock options.......................................... 324 45,532 93,702 ------- -------- -------- Net cash provided by financing activities......... 4,389 53,263 94,259 ------- -------- -------- Net increase in cash and cash equivalents................... 4,056 33,268 86,043 Cash and cash equivalents at beginning of period............ 4,066 8,122 41,390 ------- -------- -------- Cash and cash equivalents at end of period.................. $ 8,122 $ 41,390 $127,433 ======= ======== ========
See accompanying notes. F-5 6 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL 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. In April 1998, the Company acquired InterTrans Logistics Solutions Limited ("ITLS"), a transportation and logistics software company. Each of these business combinations was accounted for as a pooling of interests, and accordingly, the accompanying supplemental consolidated financial statements give retroactive effect to the combinations and include the combined operations of i2 Technologies, Think, Optimax and ITLS for all periods presented (see Note 3). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The accompanying supplemental 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 ======= ========
F-6 7 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 equivalents, respectively. Interest income earned in 1995, 1996 and 1997 was $182,000, $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 29% 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 consisted 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 limited 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 F-7 8 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) customer. As of December 31, 1997, the Company had not incurred any significant expenses related to warranty claims. 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. Share and per share amounts for all periods presented have also been adjusted to reflect a stock split during 1998 (see Note 7). The computations give retroactive effect to the exchange of common shares in connection with the Think, Optimax and ITLS acquisitions (see Note 3). Reconciliations of the net income per share computations for the years ended December 31, 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 7.7 million shares and approximately 2.7 million shares of its common stock for all the outstanding capital stock and all unexpired and unexercised options of Think and Optimax, respectively. 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 F-8 9 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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. In April 1998, the Company acquired ITLS. ITLS provides software designed to manage both the daily operations and the tactical and strategic planning aspects of transportation and logistics activities across the supply chain. Under the terms of the agreement, the Company will issue up to 3.3 million shares of its common stock for all of the outstanding capital stock and all unexpired and unexercised options of ITLS. ITLS purchased a software product from Strategic Decision Systems in 1996, and $1.1 million of the purchase price was recorded as in-process research and development and expensed during 1996. This acquisition was accounted for under the purchase accounting method. F-9 10 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The ITLS acquisition was accounted for as a pooling of interests, and accordingly, the supplemental consolidated financial statements give retroactive effect to the acquisition and include the combined operations of i2 Technologies and ITLS for all periods presented. The following is a summary of the results of operations of the separate entities for periods prior to the acquisition (in thousands):
i2 TECHNOLOGIES POOLING (PRIOR TO ACQUISITION) ITLS ADJUSTMENTS COMBINED ---------------------- ------- ----------- -------- 1997: Revenues......................... $200,706 $13,691 $(705) $213,692 Net income (loss)................ 7,221 (3,223) -- 3,998 1996: Revenues......................... $ 87,916 $12,553 $ -- $100,469 Net income (loss)................ 7,202 (404) -- 6,798 1995: Revenues......................... $ 30,527 $ 7,934 $ -- $ 38,461 Net income....................... 3,065 908 -- 3,973
Pooling adjustments have been recorded to eliminate revenues and expenses associated with software license royalties resulting from transactions between i2 Technologies and ITLS. The Company expects to incur approximately $3 million in expenses related to this acquisition. These expenses include, among other things, investment banking, legal and accounting fees and expenses. Such expenses will be recorded in the second quarter of 1998. In May 1998, the Company acquired a software vendor in exchange for approximately 77,000 shares of the Company's common stock and $1.8 million in cash. This acquisition will be accounted for under the purchase accounting method, and a substantial portion of the purchase price is expected to be recorded as in-process research and development and expensed during the second quarter of 1998. 4. FURNITURE AND EQUIPMENT Furniture and equipment consists of the following (in thousands):
DECEMBER 31, ------------------- 1996 1997 ------- -------- Computer equipment.......................................... $12,062 $ 26,289 Furniture and fixtures...................................... 3,129 5,256 ------- -------- 15,191 31,545 Less accumulated depreciation............................... (4,853) (10,650) ------- -------- $10,338 $ 20,895 ======= ========
5. BORROWINGS The Company had a revolving credit agreement with NationsBank of Texas, N.A. (the "Lender") which expired in June 1998, was unsecured and contained customary restrictive covenants, including covenants requiring the Company to maintain certain financial ratios. The revolving credit agreement was not subject to a borrowing base limitation and the borrowings thereunder bore 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. F-10 11 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ITLS has a revolving credit agreement (the "Agreement") with a lender which is due on demand, is secured by the assets of ITLS and contains customary restrictive covenants, including covenants requiring ITLS to maintain certain financial ratios. Borrowings under the Agreement bear interest at the lender's prime lending rate plus 1%. At December 31, 1997, ITLS had $657,000 of borrowings outstanding under the Agreement. Cash paid for interest in 1995, 1996 and 1997 was approximately $271,000, $266,000 and $42,000, respectively. 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 $741,000, $2.4 million and $4.9 million, respectively. Future minimum lease payments under all noncancellable operating leases as of December 31, 1997 are as follows (in thousands): 1998........................................................ $ 6,751 1999........................................................ 6,159 2000........................................................ 4,268 2001........................................................ 2,232 2002........................................................ 1,955 Thereafter.................................................. 3,297 ------- Total minimum lease payments........................... $24,662 =======
7. STOCKHOLDERS' EQUITY PUBLIC OFFERINGS. In May 1996, the Company completed the initial public offering of 5,060,000 shares of its common stock. A total of 4,780,800 of those shares of common stock were sold by the Company resulting in net proceeds to the Company of $43.7 million after deducting offering expenses and the underwriting discount of $4.3 million. In December 1997, the Company completed a public offering of 6,000,000 shares of its common stock. A total of 4,000,000 of those shares of common stock were sold by the Company resulting in net proceeds to the Company of $89.4 million after deducting offering expenses and the underwriting discount of $3.6 million. 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. On April 22, 1998, the Company's Board of Directors approved a two-for-one stock split of the Company's common stock. The stock split was paid as a stock dividend on June 2, 1998 to stockholders of record on May 26, 1998. All share and per share amounts included in this Form 8-K have been restated to reflect the stock split as though it had occurred at the beginning of the initial period presented. F-11 12 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL 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............ 41,458 58,000 62,652 Common shares related to SAB No. 98(2)................ 2,080 -- -- ------- ------- ------- Weighted-average common shares outstanding, adjusted for common shares related to SAB No. 98............. 43,538 58,000 62,652 ======= ======= ======= Net income............................................ $ 3,973 $ 6,798 $ 3,998 ======= ======= ======= Net income per share.................................. $ 0.09 $ 0.12 $ 0.06 ======= ======= ======= NET INCOME PER SHARE, ASSUMING DILUTION: Weighted-average common shares outstanding............ 41,458 58,000 62,652 Common shares issuable on exercise of stock options, net of shares assumed to be repurchased at the average market price(1)............................. 15,214 7,974 8,280 Common shares related to SAB No. 98(2)................ 2,080 -- -- ------- ------- ------- Weighted-average common shares outstanding, assuming dilution............................................ 58,752 65,974 70,932 ======= ======= ======= Net income............................................ $ 3,973 $ 6,798 $ 3,998 ======= ======= ======= Net income per share, assuming dilution............... $ 0.07 $ 0.10 $ 0.06 ======= ======= =======
- --------------- (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 and the tax effects of nonqualified stock options. (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 1,000,000 shares of Common Stock for issuances under the Purchase Plans. Payroll deductions may not exceed the lesser of 15% of a participant's base salary or $25,000 per year, and employees may purchase a maximum of 2,000 shares per purchase period under the Purchase Plans. The purchase price per share will be 85% of the lesser of the fair market value of the Common Stock on the start of the purchase period or the fair market value at the end of the purchase period. Participation may be terminated at any time by the employee and automatically ends upon termination of employment with the Company. 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, 120,290; 65,996; and 87,924 shares were issued in connection with the offering periods ended October 31, 1996, April 30, 1997 and October 31, 1997, respectively. F-12 13 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 20,000,000 shares which was subsequently increased to 24,000,000 shares in 1996. The amount of shares of Common Stock reserved for issuance was again increased to 31,000,000 shares in 1997. The 1995 Plan is divided into the following three equity programs: (i) the Discretionary Option Grant Program, (ii) the Stock Issuance Program and (iii) the Automatic Option Grant Program. The Discretionary Option Grant Program provides for the grant of incentive stock options ("Incentive Options") to employees of the Company and for the grant of nonqualified stock options to employees, directors and consultants of the Company. Exercise prices may not be less than 100% and 85% of the fair market value at the date of grant for Incentive Options and nonqualified options, respectively. Options granted under the Discretionary Option Grant Program generally vest in four equal annual increments and expire after ten years. Some options granted under the Discretionary Option Grant Program are immediately exercisable, subject to a right of repurchase by the Company at the original exercise price for all unvested shares. Under the Stock Issuance Program, the Board or a committee of the Board (the "Plan Administrator") may grant shares of the Company's Common Stock to any person at any time, at such price and on such terms as established by the Plan Administrator. The purchase price per share cannot be less than 85% of the fair market value of the Company's Common Stock on the issuance date. Under the Automatic Option Grant Program, each person who is first elected or appointed as a non-employee Board member shall automatically be granted a nonqualified option to purchase 2,000 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 2,000 shares of the Company's Common Stock, subject to certain conditions. THINK STOCK OPTION PLANS. Think's Board of Directors adopted and its shareholders approved stock option plans for employees, directors and consultants of Think (the "Think Plans"). Under the Think Plans, the Think Board of Directors granted incentive and nonqualified stock options to employees, directors and consultants at prices not less than the estimated fair market value of Think's common stock at the date of grant. In connection with the acquisition of Think, all of the options outstanding under the Think Plans were assumed by the Company. OPTIMAX STOCK OPTION PLAN. During 1996, Optimax's Board of Directors adopted and its shareholders approved the Optimax Systems Corporation Stock Option Plan (the "Optimax Stock Option Plan"). Under the Optimax Stock Option Plan, the Optimax Board of Directors granted nonqualified stock options to employees of Optimax at prices equal to the estimated fair market value of Optimax's common stock on the date of grant. The options generally vest over a five-year period commencing on or before the date of grant. In connection with the acquisition of Optimax, all such options were assumed by the Company. ITLS STOCK OPTION PLAN. During 1997, ITLS' Board of Directors adopted and its shareholders approved the ITLS 1997 Stock Option Plan (the "ITLS Stock Option Plan"). Under the ITLS Stock Option Plan, the ITLS Board of Directors granted incentive and nonqualified stock options to employees of ITLS at prices equal to the estimated fair market value of ITLS' common stock on the date of grant. The options generally vest over a four-year period commencing on date of grant. In connection with the acquisition of ITLS, all such options were assumed by the Company. F-13 14 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Option activity under the Company's stock option plans, including the Think, Optimax and ITLS plans, is as follows:
OPTIONS OUTSTANDING SHARES ------------------------------ AVAILABLE NUMBER WEIGHTED-AVERAGE FOR GRANT OF SHARES EXERCISE PRICE ---------- ----------- ---------------- Balance, December 31, 1994.................. 293,072 16,500,624 $ 0.02 Authorized................................ 3,206,304 -- -- Granted................................... (2,251,334) 2,251,334 0.31 Exercised................................. -- (11,406,484) 0.03 Canceled.................................. 46,600 (46,600) 0.03 ---------- ----------- Balance, December 31, 1995.................. 1,294,642 7,298,874 0.09 Authorized................................ 5,366,250 -- -- Granted................................... (3,212,634) 3,212,634 4.86 Issued.................................... (1,230) -- 7.17 Exercised................................. -- (916,116) 0.83 Canceled.................................. 175,344 (175,344) 5.86 ---------- ----------- Balance, December 31, 1996.................. 3,622,372 9,420,048 1.54 Authorized................................ 7,706,698 -- -- Granted................................... (6,241,990) 6,241,990 15.37 Exercised................................. -- (2,744,388) 0.62 Canceled.................................. 565,272 (565,272) 15.21 ---------- ----------- Balance, December 31, 1997.................. 5,652,352 12,352,378 8.11 ========== ===========
OPTIONS EXERCISABLE ---------------------------- NUMBER WEIGHTED-AVERAGE OF SHARES EXERCISE PRICE --------- ---------------- December 31, 1995.......................................... 4,934,344 $0.08 ========= December 31, 1996.......................................... 6,104,824 0.54 ========= December 31, 1997.......................................... 6,061,520 0.89 =========
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 2,891,814 options which are nonqualified options. F-14 15 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL 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 REMAINING WEIGHTED CONTRACTUAL WEIGHTED RANGE OF NUMBER OF AVERAGE LIFE NUMBER OF AVERAGE EXERCISE PRICES SHARES EXERCISE PRICE (YEARS) SHARES EXERCISE PRICE --------------- ---------- -------------- ----------- --------- -------------- $ 0.01-$ 6.06................ 6,636,294 $ 0.67 6.10yrs. 5,950,998 $ 0.67 10.08- 17.88................ 3,663,896 14.60 9.33 108,522 12.84 18.00- 26.38................ 2,052,188 20.56 9.90 2,000 18.63 ---------- --------- Total.............. 12,352,378 8.11 7.69 6,061,520 0.89 ========== =========
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 values of stock options issued under the Optimax Stock Option Plan and the ITLS Stock Option Plan are not presented as the impact is immaterial. The fair value for the shares issued under the Purchase Plans was estimated as of the initial day of the purchase period using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 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-15 16 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL 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 (loss)............................... $3,991 $5,877 $(1,683) Pro forma net income (loss) per share..................... 0.09 0.10 (0.03) Pro forma net income (loss) per share, assuming dilution................................................ 0.07 0.09 (0.03)
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............................................. 363,600 2,592,094 6,241,990 Weighted-average exercise price per share........... $0.07 $5.58 $15.37 Weighted-average fair value of options.............. 0.03 2.28 8.45 Number of options issued at less than fair market value of stock.................................... 1,887,734 620,540 -- Weighted-average exercise price per share........... $0.36 $1.85 -- Weighted-average fair value of options.............. 1.05 2.11 --
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................................................. 501 414 158 Deferred Federal................................................. (477) 272 (1,629) State................................................... (101) (79) (40) Foreign................................................. (54) 78 (2,499) ------ ------ ------- Total........................................... $2,054 $4,705 $ 6,916 ====== ====== =======
F-16 17 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL 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......................... $2,050 $3,911 $3,820 Non-deductible in-process research and development and acquisition costs........................................ -- 385 3,164 State taxes, net of federal tax benefit.................... 139 266 770 Stock option compensation.................................. -- 215 200 Research and development tax credits....................... (126) (414) (584) Other...................................................... (9) 342 (454) ------ ------ ------ Provision for income taxes....................... $2,054 $4,705 $6,916 ====== ====== ======
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...................... 348 868 Net operating losses...................................... 199 1,712 Other..................................................... 648 295 ------- ------- Total deferred tax asset.......................... 3,020 5,989 ------- ------- Deferred tax liabilities: Depreciation.............................................. (127) (379) State income taxes........................................ (28) -- Cash method of accounting, net............................ (1,212) -- Other..................................................... (875) (663) ------- ------- Total deferred tax liability...................... (2,242) (1,042) ------- ------- Net deferred tax asset............................ $ 778 $ 4,947 ======= =======
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. At December 31, 1997, certain subsidiaries of the Company had $2.4 million of federal net operating loss carryforwards and $2.0 million of foreign net operating loss carryforwards available to offset future taxable income of the subsidiaries. The federal net operating loss carryforwards expire in the years 2010 through 2012 and are subject to certain annual limitations. Approximately $1.4 million of the foreign net operating loss carryforwards expire in the years 2004 through 2013 while the remaining net operating loss carryforwards have no expiration. The Company paid income taxes of approximately $3.1 million, $2.0 million and $2.8 million in 1995, 1996 and 1997, respectively. F-17 18 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 $3.4 million, $21.8 million and $66.7 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 and 1997, revenues from customers located in Europe accounted for 11% and 16% of total revenues, respectively. Total assets from international operations, composed primarily of accounts receivable, were $21.6 million or 19% of total assets as of December 31, 1996 and were $42.3 million or 17% 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 and 1997, no individual customer accounted for more than 10% of total revenues. During 1996, one customer accounted for approximately 11% 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-18 19 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. QUARTERLY INFORMATION (UNAUDITED) Summarized quarterly supplemental 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 Revenues: Software licenses........................... $11,786 $12,505 $16,807 $19,975 Services.................................... 4,553 6,817 8,051 11,094 Maintenance................................. 1,530 1,931 2,312 3,108 ------- ------- ------- ------- Total revenues......................... 17,869 21,253 27,170 34,177 ------- ------- ------- ------- Costs and expenses: Cost of software licenses................... 20 130 49 61 Cost of services and maintenance............ 3,135 4,665 6,377 7,584 Sales and marketing......................... 6,118 7,971 9,578 11,515 Research and development.................... 4,191 4,651 5,870 7,174 General and administrative.................. 1,933 2,421 2,919 3,152 In-process research and development and acquisition costs......................... -- -- 1,133 -- ------- ------- ------- ------- Total costs and expenses............... 15,397 19,838 25,926 29,486 ------- ------- ------- ------- Operating income............................... 2,472 1,415 1,244 4,691 Other income................................... 105 442 566 568 ------- ------- ------- ------- Income before income taxes..................... 2,577 1,857 1,810 5,259 Provision for income taxes..................... 960 692 1,095 1,958 ------- ------- ------- ------- Net income..................................... $ 1,617 $ 1,165 $ 715 $ 3,301 ======= ======= ======= ======= Net income per share........................... $ 0.03 $ 0.02 $ 0.01 $ 0.05 Net income per share, assuming dilution........ $ 0.03 $ 0.02 $ 0.01 $ 0.05 Weighted average common shares outstanding..... 53,970 57,846 59,292 60,674 Weighted average common shares outstanding, assuming dilution........................... 61,050 65,894 67,616 69,118
F-19 20 i2 TECHNOLOGIES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 1997 Revenues: Software licenses........................... $23,517 $34,300 $38,207 $43,774 Services.................................... 10,961 12,305 14,119 16,052 Maintenance................................. 4,020 4,372 5,770 6,295 ------- ------- ------- ------- Total revenues......................... 38,498 50,977 58,096 66,121 ------- ------- ------- ------- Costs and expenses: Cost of software licenses................... 1,304 1,218 82 140 Cost of services and maintenance............ 9,053 10,874 12,819 13,258 Sales and marketing......................... 14,183 17,743 19,016 22,584 Research and development.................... 9,183 12,638 15,122 15,798 General and administrative.................. 4,283 5,796 5,785 5,946 In-process research and development and acquisition costs......................... -- 5,649 -- 3,657 ------- ------- ------- ------- Total costs and expenses............... 38,006 53,918 52,824 61,383 ------- ------- ------- ------- Operating income (loss)........................ 492 (2,941) 5,272 4,738 Other income................................... 752 702 777 1,122 ------- ------- ------- ------- Income (loss) before income taxes.............. 1,244 (2,239) 6,049 5,860 Provision (benefit) for income taxes........... 486 (919) 2,782 4,567 ------- ------- ------- ------- Net income (loss).............................. $ 758 $(1,320) $ 3,267 $ 1,293 ======= ======= ======= ======= Net income (loss) per share.................... $ 0.01 $ (0.02) $ 0.05 $ 0.02 Net income (loss) per share, assuming dilution.................................... $ 0.01 $ (0.02) $ 0.05 $ 0.02 Weighted average common shares outstanding..... 61,174 61,678 62,724 64,824 Weighted average common shares outstanding, assuming dilution........................... 69,848 61,678 71,028 72,596
F-20 EX-99.4 15 SCHEDULE II 1 EXHIBIT 99.4 i2 TECHNOLOGIES, INC. SCHEDULE II TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS 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..................... 1,401 3,903 (1,041) 4,263 Year Ended December 31, 1996..................... 947 1,085 (631) 1,401 Year Ended December 31, 1995..................... 449 508 (10) 947
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