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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-28030
i2 TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2294945
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE i2 PLACE 75234
11701 LUNA ROAD (Zip code)
DALLAS, TEXAS
(Address of principal executive offices)
(469) 357-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 2001, the Registrant had outstanding 411,069,326 shares of
Common Stock, $0.00025 par value.
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i2 TECHNOLOGIES, INC.
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000....................................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2001 and 2000.................. 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2000.................. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 31
Item 2. Changes in Securities and Use of Proceeds................... 31
Item 3. Defaults upon Senior Securities............................. 31
Item 4. Submission of Matters to a Vote of Security Holders......... 31
Item 5. Other Information........................................... 31
Item 6. Exhibits and Reports on Form 8-K............................ 32
SIGNATURES........................................................... 33
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PAR VALUE)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 706,286 $ 739,241
Short-term investments.................................... 94,488 84,086
Accounts receivable, net of allowance for doubtful
accounts of $39,869 and $31,329........................ 303,590 298,465
Deferred income taxes, prepaids and other current
assets................................................. 122,202 76,989
----------- -----------
Total current assets.............................. 1,226,566 1,198,781
Premises and equipment, net................................. 151,778 124,852
Deferred income taxes and other assets...................... 435,517 410,026
Intangibles and goodwill, net............................... 6,816,559 7,492,167
----------- -----------
Total assets...................................... $ 8,630,420 $ 9,225,826
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 50,745 $ 49,628
Accrued liabilities....................................... 138,283 111,739
Accrued compensation and related expenses................. 92,806 84,942
Deferred revenue.......................................... 182,720 165,689
Income taxes payable...................................... 11,451 10,056
----------- -----------
Total current liabilities......................... 476,005 422,054
Other long-term liabilities................................. 288 325
Long-term debt.............................................. 406,139 350,000
----------- -----------
Total liabilities................................. 882,432 772,379
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000 shares
authorized, none issued................................ -- --
Common stock, $0.00025 par value, 2,000,000 shares
authorized, 410,798 and 405,840 shares issued and
outstanding............................................ 103 102
Additional paid-in capital................................ 10,251,049 10,174,012
Accumulated other comprehensive loss...................... (15,028) (6,694)
Accumulated deficit....................................... (2,488,136) (1,713,973)
----------- -----------
Total stockholders' equity........................ 7,747,988 8,453,447
----------- -----------
Total liabilities and stockholders' equity........ $ 8,630,420 $ 9,225,826
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
---------- --------
Revenues:
Software licenses......................................... $ 211,132 $113,584
Services.................................................. 93,223 46,870
Maintenance............................................... 52,203 25,826
---------- --------
Total revenues.................................... 356,558 186,280
Costs and expenses:
Cost of software licenses................................. 21,811 5,366
Cost of services and maintenance.......................... 83,085 41,072
Sales and marketing....................................... 140,629 66,210
Research and development.................................. 75,236 39,846
General and administrative................................ 29,699 16,607
Amortization of intangibles............................... 768,958 --
In-process research and development and
acquisition-related expenses........................... 4,700 557
---------- --------
Total costs and expenses.......................... 1,124,118 169,658
---------- --------
Operating income (loss)..................................... (767,560) 16,622
Other income (expense), net................................. (13,537) 2,499
---------- --------
Income (loss) before income taxes........................... (781,097) 19,121
Provision (benefit) for income taxes........................ (6,946) 7,380
---------- --------
Net income (loss)........................................... $ (774,151) $ 11,741
========== ========
Basic and diluted earnings (loss) per common share:
Basic earnings (loss) per common share.................... $ (1.90) $ 0.04
Diluted earnings (loss) per common share.................. $ (1.90) $ 0.03
Weighted-average common shares outstanding.................. 408,074 313,000
Weighted-average diluted common shares outstanding.......... 408,074 366,050
Comprehensive income (loss):
Net income (loss)......................................... $ (774,151) $ 11,741
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities
arising during the period............................. (24,312) --
Reclassification adjustment for net realized losses on
available-for-sale securities included in income...... 18,229 --
---------- --------
Net unrealized loss............................... (6,083) --
Foreign currency translation adjustments............... (6,797) (133)
Tax effect of other comprehensive income............... 4,546 50
---------- --------
Total other comprehensive loss.................... (8,334) (83)
---------- --------
Total comprehensive income (loss)................. $ (782,485) $ 11,658
========== ========
See accompanying notes to condensed consolidated financial statements.
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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------
2001 2000
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(774,151) $ 11,741
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-off of in-process research and development....... 4,700 577
Depreciation and amortization.......................... 780,386 4,593
Provision for bad debts charged to costs and
expenses.............................................. 12,465 1,844
Amortization of deferred compensation.................. 645 1,129
Loss on equity investments............................. 18,229 --
Deferred income taxes and disqualifying dispositions... (45,960) (44,253)
Tax benefit from stock option exercises................ 31,750 39,399
Changes in operating assets and liabilities:
Accounts receivable, net............................. (16,746) (31,323)
Prepaids and other assets............................ (1,257) (15,924)
Accounts payable..................................... (132) 2,426
Accrued liabilities.................................. 17,512 32,215
Accrued compensation and related expenses............ 6,575 861
Deferred revenue..................................... 2,982 61,302
Income taxes payable................................. 1,683 2,073
--------- --------
Net cash provided by operating activities......... 38,681 66,660
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid in purchase of Trade Service Corporation and
ec-Content............................................. (4,772) --
Direct costs of purchase transactions..................... (695) --
Short-term loan to RightWorks............................. (3,300) --
Purchases of premises and equipment....................... (24,316) (13,955)
Net change in short-term investments...................... (10,402) (56,658)
Purchases of equity investments........................... (5,000) (5,583)
Purchases of long-term debt securities.................... (30,131) --
--------- --------
Net cash used in investing activities............. (78,616) (76,196)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of note acquired in acquisition of Trade Service
Corporation and ec-Content............................. (24,698) --
Net proceeds from sale of common stock to employees and
exercise of stock options.............................. 32,217 11,898
--------- --------
Net cash provided by financing activities......... 7,519 11,898
--------- --------
Effect of exchange rates on cash.......................... (539) (11)
Net change in cash and cash equivalents..................... (32,955) 2,351
Cash and cash equivalents at beginning of period............ 739,241 454,585
--------- --------
Cash and cash equivalents at end of period.................. $ 706,286 $456,936
========= ========
See accompanying notes to condensed consolidated financial statements.
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i2 TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(TABLES IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying condensed consolidated financial
statements have been prepared without audit and reflect all adjustments that, in
the opinion of management, are necessary to present fairly our financial
position at March 31, 2001, and our results of operations and cash flows for the
periods presented. All such adjustments are normal and recurring in nature. The
accompanying condensed consolidated financial statements have been prepared in
accordance with the instructions of Form 10-Q as prescribed by the Securities
and Exchange Commission (SEC) and, therefore, do not purport to contain all
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances, and should be
read in conjunction with our consolidated financial statements, and notes
thereto, for the year ended December 31, 2000, included in our annual report on
Form 10-K filed with the SEC on March 29, 2001 (the "2000 Form 10-K"). Refer to
our accounting policies described in the notes to financial statements contained
in the 2000 Form 10-K. We consistently followed these policies in preparing this
Form 10-Q. Operating results for the three months ended March 31, 2001 are not
necessarily indicative of the results for the year ended December 31, 2001.
Nature of Operations. We are a leading provider of supply chain and
marketplace software solutions that may be used by enterprises to optimize
business processes both internally and among trading partners. Our solutions are
designed to help enterprises improve efficiencies, collaborate with suppliers
and customers, respond to market demands and engage in dynamic business
interactions over the Internet. Our product suites include software solutions
for supply chain management, supplier relationship management and customer
relationship management. In addition, we provide content and content management
solutions as well as a platform for integration and administration of private
and public electronic marketplaces. We also provide services such as consulting,
training and maintenance in support of these offerings.
Principles of Consolidation. The condensed consolidated financial
statements include the accounts of i2 Technologies, Inc. and its majority owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
All prior share and per share data reflect the two-for-one stock split of
our common stock paid as a 100% stock dividend on December 5, 2000.
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.
Reclassifications. Some items in prior year financial statements have been
reclassified to conform to the current year presentation.
2. BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
On March 23, 2001, we completed our acquisition of Trade Service
Corporation, a leading provider of maintenance, repair and overhaul (MRO)
content and its affiliate ec-Content, Inc. (collectively, "TSC"), which develops
and manages content for digital marketplaces, e-procurement and supplier
syndication. We purchased all the outstanding stock of both companies for
approximately $74.1 million, including acquisition related costs. The total
purchase price includes $5.0 million in cash, 800,000 shares of our common stock
with a fair market value of $12.4 million, a convertible promissory note
currently valued at $56.1 million and approximately $0.6 million in acquisition
costs. This acquisition was accounted for as a purchase business combination;
accordingly, the results of operations of TSC have been included with our
results of operations since March 23, 2001.
The convertible promissory note issued in connection with our acquisition
of TSC will mature on September 23, 2003. Interest of 7.5% per annum is payable
in annual installments on each anniversary date of
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the note and upon maturity. At any time on or after March 23, 2002, we may
convert the note into shares of our common stock based upon the "trading
average" of our stock. The trading average is the average of the last sale
prices of our common stock as reported on the Nasdaq National Market for the
three consecutive trading days immediately prior to the conversion date. If the
trading average is $60.00 per share or less, then the number of shares issued
upon conversion will be determined by dividing the outstanding principal balance
and accrued interest by the trading average. If the trading average is greater
than $60.00 per share, then the number of shares issued upon conversion will be
the average of (a) the quotient derived by dividing the outstanding principal
balance and accrued interest by the average of $60.00 and the trading average
and (b) the average of (i) the quotient derived by dividing the outstanding
principal balance and accrued interest by $60.00 and (ii) the quotient derived
by dividing the outstanding principal balance and accrued interest by the
trading average. The note is convertible by the holder at any time the trading
average exceeds $60.00 per share using the same conversion formula as set forth
in the previous sentence. Whether the note is converted at our option or at the
option of the holder, the entire outstanding principal balance and accrued
interest payable on the note must be converted. The aggregate number of shares
of our common stock issued pursuant to the conversion of the note cannot exceed
39 million shares. Any portion of the note that may not be converted into shares
of our common stock as a result of this limitation will instead be paid in cash.
The total purchase price paid for the acquisition was allocated based on
the estimated fair values of the assets acquired as follows:
Net liabilities assumed..................................... $(24,345)
Identified intangible assets:
Developed technology...................................... 8,500
Assembled workforce....................................... 600
Relationships............................................. 12,500
Content databases......................................... 14,800
Goodwill.................................................... 57,298
In-process research and development......................... 4,700
--------
Total............................................. $ 74,053
========
Identified intangible assets are being amortized over two to five years,
while goodwill is being amortized over three years.
$4.7 million of the purchase price represents purchased in-process
technology that has not yet reached technological feasibility and has no
alternative future use. Accordingly, this amount was immediately expensed in the
consolidated statement of operations upon consummation of the acquisition. The
value assigned to purchased in-process technology, based on a valuation prepared
by an independent third-party appraisal company, was determined by identifying
research projects in areas for which technological feasibility has not been
established, including web-based content management and e-commerce web
enablement, ranging from 22% to 45% complete. The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the net cash flows from such projects,
and discounting the net cash flows to their present value. A discount rate of
30% was used, which includes a factor that takes into account the uncertainty
surrounding the successful development of the purchased in-process technology.
The purchase price allocation is preliminary and subject to final determination
and valuation of the fair value of assets and liabilities acquired.
Pro forma condensed consolidated results of operations assuming TSC had
been acquired on January 1, 2000 are not presented because the acquisition of
TSC was not considered significant based on SEC rules and regulations regarding
significant subsidiaries.
On March 8, 2001, we entered into a definitive agreement to acquire
RightWorks Corporation, a developer of software that is designed to enable
companies to manage procurement across multiple enterprises for both direct and
indirect materials, and support buying models, from negotiated procurements to
auctions. In connection with the acquisition, we will exchange approximately 5.3
million shares of our common stock for
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all the outstanding stock of RightWorks. The transaction, which is expected to
close in the second quarter of 2001, will be accounted for using the purchase
method. On March 28, 2001, we entered into a loan and security agreement with
RightWorks whereby we agreed to loan them up to $25.0 million to provide
operating capital until our acquisition is closed. The loan is secured by
substantially all of the assets of RightWorks. Principal and interest, accrued
at a rate of 15.0% per annum, are due, upon the termination of the loan
agreement which is the earlier of (i) the date, following the closing of our
acquisition, on which we demand payment, or (ii) the date of termination of our
agreement to acquire RightWorks. As of March 31, 2001, the outstanding balance
of the loan was $3.3 million.
During the three months ended March 31, 2000, we issued $233.7 million (2.6
million shares) of our common stock for various software assets, cross-patent
rights and software licenses.
3. STOCKHOLDERS' EQUITY AND EARNINGS PER COMMON SHARE
Stock Splits. On January 14, 2000, our Board of Directors approved a
two-for-one stock split, which was paid as a 100% dividend on February 17, 2000.
On October 17, 2000, our Board of Directors approved another two-for-one stock
split, which was paid as a 100% stock dividend on December 5, 2000. All share
and per share amounts included herein have been adjusted to reflect the stock
splits.
Basic and Diluted Earnings Per Common Share. Basic and diluted earnings
per common share are computed in accordance with SFAS No. 128, "Earnings Per
Share," which requires dual presentation of basic and diluted earnings per
common share for entities with complex capital structures. Basic earnings per
common share is based on net income divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings per common share
includes the dilutive effect of stock options and warrants granted using the
treasury stock method, the effect of contingently issuable shares earned during
the period and shares issuable under the conversion feature of our convertible
notes using the if-converted method. The following is a reconciliation of the
weighted-average shares used in calculating basic earnings per common share and
the weighted-average common shares used in calculating diluted earnings per
common share for the three months ended March 31, 2001 and 2000.
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
-------- --------
Weighted-average common shares outstanding.................. 408,074 313,000
Effect of dilutive securities:
Stock options............................................. -- 53,050
Convertible debt.......................................... -- --
------- -------
Weighted-average diluted common shares outstanding.......... 408,074 366,050
======= =======
As a result of the net loss incurred during the three months ended March
31, 2001, the effect of dilutive securities would have been anti-dilutive to the
diluted earnings per common share computation and were thus excluded. Dilutive
securities that would have otherwise been included in the determination of the
weighted-average number of common shares outstanding for the purposes of
computing diluted earnings per common share included 43.4 million shares
issuable under stock options and warrants.
Stock Option Exchange Program. On March 9, 2001, we announced a voluntary
stock option exchange program for the benefit of our employees. Under the
program, our employees were offered the opportunity, if they chose by April 15,
2001, to cancel certain outstanding stock options previously granted to them for
new stock options to be granted no earlier than October 16, 2001. The new
options will be granted with a strike price to be set at the fair market value
of our stock at the date of grant. Employees will receive 1.1 new stock options
for each stock option cancelled. The exchange program was organized to comply
with applicable accounting standards and, accordingly, no compensation charges
related to this program will result. Members of our Board of Directors,
executive officers, and certain members of the senior management team are not
eligible to participate in this program.
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4. SEGMENT INFORMATION, INTERNATIONAL OPERATIONS AND CUSTOMER CONCENTRATIONS
We operate our business in one segment, supply chain and marketplace
solutions designed to help enterprises optimize business process both internally
and among trading partners. SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," establishes standards for the reporting
information about operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
We market our software and services primarily through our worldwide sales
organization augmented by other service providers, including both domestic and
international e-business providers and systems consulting and integration firms.
Our chief operating decision maker evaluates resource allocation decisions and
our performance based on financial information, presented on a consolidated
basis, accompanied by desegregated information about revenues by geographic
regions.
Revenues are attributable to regions based on the locations of the
customers' operations. Total revenues by geographic region for the three months
ended March 31, 2001 and 2000 were as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
-------- --------
United States............................................... $220,809 $121,536
Europe...................................................... 84,739 29,753
Asia........................................................ 40,965 28,648
Other....................................................... 10,045 6,343
-------- --------
$356,558 $186,280
======== ========
Total assets related to our international operations accounted for $377.8
million, or 4.4%, of total consolidated assets as of March 31, 2001 and $350.3
million, or 3.8%, of total consolidated assets as of December 31, 2000.
During the three months ended March 31, 2001, one customer accounted for
$42.2 million, or 11.8%, of total revenues. During the three months ended March
31, 2000, no individual customer accounted for more than 10.0% of total
revenues.
5. COMMITMENTS AND CONTINGENCIES
An employee of a company we acquired in 1998 is currently disputing the
cancellation of stock options received at the time of the acquisition. Vesting
of the options was dependent upon continued employment; however, the employment
was terminated in 2000. We maintain the former employee was not entitled to
unvested stock options.
Since March 2, 2001, several class actions have been filed in the United
States District Court, Northern District of Texas, Dallas Division, alleging
that we and certain of our officers have violated federal securities laws. All
of the complaints are virtually identical and allege that we issued a series of
false and misleading statements which failed to disclose, among other things,
that we were experiencing software implementation difficulties with Nike, Inc.
and that these problems were material, severe and damaging our relationship with
Nike. The potential class consists of all persons who purchased our stock during
the period from October 18, 2000 to February 26, 2001. As these suits have just
been filed, we have not had the opportunity to adequately review the claims or
respond. Although the ultimate outcome and liability, if any, cannot be
determined, we believe the facts in these class actions do not support the
plaintiffs' claims and our officers and we have meritorious defenses.
We are subject to various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material effect on our business, financial condition or results of
operations.
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6. FOREIGN CURRENCY RISK MANAGEMENT
On January 1, 2001, we adopted Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended by SFAS 137 and SFAS 138. Adoption of SFAS 133 did not materially
impact our financial statements. SFAS 133 requires all derivatives to be
recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the statement of operations. Fair value changes
involving hedges will generally be recorded by offsetting gains and losses on
the hedge and on the hedged item, even if changes in the fair value of the
hedged item are not otherwise recorded. We account for all of our derivative
instruments in accordance with this standard.
Due to the fact that we conduct business on a global basis in various
foreign currencies, we are exposed to adverse movements in foreign currency
exchange rates. In January 2001, we established a foreign currency hedging
program utilizing foreign currency forward contracts to hedge selected
nonfunctional currency exposures. The objective of this program is to reduce the
effect of changes in foreign currency exchange rates on our results of
operations. Furthermore, our goal is to offset foreign currency transaction
gains and losses recorded for accounting purposes with gains and losses realized
on the forward contracts. We have not used, nor do we expect to use, forward
contracts for trading purposes.
We generally enter into forward contracts to purchase or sell various
foreign currencies as of the last day of each month. These forward contracts
generally have original maturities of one month and are net-settled in U.S.
Dollars. Each forward contract is based on the current market forward exchange
rate as of the contract date and no premiums are paid or received. Accordingly,
these forward contracts have no fair value as of the contract date. Changes in
the applicable foreign currency exchange rates subsequent to the contract date
cause the fair value of the forward contracts to change. These changes in the
fair value of forward contracts are recorded through earnings and the
corresponding assets or liabilities are recorded on our balance sheet. Gains and
losses on the forward contracts are included in other income/expense, net in the
Consolidated Statements of Operations and offset foreign exchange gains and
losses from the revaluation of intercompany balances or other current assets and
liabilities denominated in currencies other than the functional currency of the
reporting entity. During the three months ended March 31, 2001, we recognized
net gains of $2.6 million on foreign currency forward contracts, which partly
offset net foreign currency transaction losses of $4.7 million. Foreign currency
transaction losses totaled $0.5 million during the three months ended March 31,
2000.
Details of our foreign currency forward contracts as of March 31, 2001 are
presented in the following table. All of these contracts were originated,
without premiums, on March 31, 2001 based on market forward exchange rates.
Accordingly, these forward contracts had no fair value on March 31, 2001 and no
amounts related to these forward contracts have been recorded in our financial
statements.
NOTIONAL AMOUNT OF FORWARD NOTIONAL AMOUNT OF FORWARD
CONTRACT IN FOREIGN CURRENCY CONTRACT IN U.S. DOLLARS
---------------------------- --------------------------
Forward contracts to purchase:
British Pounds.................... GBP 647 $ 908
Swiss Francs...................... CHF 22,213 12,901
Danish Kroners.................... DKK 5,671 670
Forward contracts to sell:
Australian Dollars................ AUD 9,089 4,375
Brazilian Reals................... BRL 1,769 807
Canadian Dollars.................. CAD 8,856 5,581
European Euros.................... EUR 20,443 17,792
Indian Rupees..................... INR 119,324 2,524
Japanese Yen...................... JPY 3,248,689 25,655
Our foreign currency forward contracts contain credit risk to the extent
that the bank counterparties may be unable to meet the terms of agreements. We
reduce such risk by limiting our counterparties to major financial institutions.
Additionally, the potential risk of loss with any one party resulting from this
type of credit risk is monitored.
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7. NEW ACCOUNTING STANDARDS
In February 2001, the Financial Accounting Standards Board issued a
revision to a previously issued exposure draft covering business combinations
proposing new accounting guidance related to goodwill. This proposed standard
would not allow for amortization of goodwill. The carrying amount of goodwill
would be reduced only if it was found to be impaired. Goodwill would be tested
for impairment when events or circumstances occur indicating that goodwill might
be impaired. A fair-value based impairment test would be used to measure
goodwill for impairment in lieu of the method for measuring impairment of
long-lived assets set forth in SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As goodwill is
measured as a residual amount in an acquisition, it is not possible to directly
measure the fair value of goodwill. Under this proposed standard, the net assets
of a reporting unit should be subtracted from the fair value of that reporting
unit to determine the implied fair value of goodwill. Impairment loss would be
recognized to the extent the carrying amount of goodwill exceeds the implied
fair value. The provisions of this proposed standard would be effective for
fiscal quarters beginning after the issuance of a final statement. Management
believes the adoption of this standard, as it is proposed, will have a material
non-cash impact on our financial statements if the final statement is issued
prior to the full amortization of our remaining goodwill.
8. SUBSEQUENT EVENTS
On April 2, we announced plans to reduce our workforce by about 10% as part
of an effort to bring our total expenses in line with our current business
outlook. Subsequent to that announcement, we reduced our staff by over 600. As
part of our restructuring, we expect to incur charges related to employee
severance, among other things. We expect to record these charges in the second
quarter of 2001.
On March 4, 2001 and April 12, 2001, our Board of Directors approved two
amendments to our 1995 Stock Option/Stock Issuance Plan that would (i) implement
an automatic share increase feature and (ii) extend the term of the plan from
September 20, 2005 to April 11, 2011. The amendments are subject to approval by
our stockholders at our annual stockholders' meeting on May 31, 2001.
On April 20, 2001, our Board of Directors approved three amendments to our
Employee Stock Purchase Plans that would (i) implement an automatic share
increase feature; (ii) extend the term of the plan until the last business day
in April 2011; and (iii) amend the stockholder approval requirements for future
amendment to the plan. The amendments are subject to approval by our
stockholders at our annual stockholders' meeting on May 31, 2001. In addition to
these changes, the Board also amended the plan to: (i) eliminate the thirty-day
service requirement for participation in the Purchase Plan and (ii) amend the
leave of absence provision to provide a procedure by which a participant resumes
participation in the Purchase Plan. These amendments do not require stockholder
approval.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than historical or current facts,
including, without limitation, statements about our business, financial
condition, business strategy, plans and objectives of management and our future
prospects, are forward-looking statements. Such forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from these expectations. Such risks and uncertainties include,
without limitation, the following:
- Our financial results may vary significantly from quarter to quarter or
we may fail to meet expectations, which could negatively impact the price
of our stock.
- We anticipate seasonal fluctuations in revenues, which may cause
volatility in our stock price.
- Historically, a small number of individual license sales have been
significant in each quarterly period. Therefore, our operating results
for a given period could suffer serious harm if we fail to close one or
more large sales expected for that period.
- We may not remain competitive and increased competition could seriously
harm our business.
- Any decrease in demand for our products and services could significantly
reduce our revenues.
- Other risks listed under the section captioned "Factors that May Affect
Future Results" included elsewhere in this report and in our other
filings with the Securities and Exchange Commission.
These risks and uncertainties are beyond our control and, in many cases, we
cannot predict the risks and uncertainties that could cause our actual results
to differ materially from those indicated by the forward-looking statements.
When used in this document, the words "believes," "plans," "expects,"
"anticipates," "intends," "continue," "may," "will," "should" or the negative of
such terms and similar expressions as they relate to us, our customers, or our
management are intended to identify forward-looking statements.
References in this report to the terms "optimal" and "optimized" and words
to that effect are not necessarily intended to connote the mathematically
optimal solution, but may connote near-optimal solutions, which reflect
practical considerations such as customer requirements as to response time,
precision of the results and other commercial factors.
OVERVIEW
We are a leading provider of supply chain and marketplace software
solutions that may be used by enterprises to optimize business processes both
internally and among trading partners. Our solutions are designed to help
enterprises improve efficiencies, collaborate with suppliers and customers,
respond to market demands and engage in dynamic business interactions over the
Internet. Our product suites include software solutions for supply chain
management, supplier relationship management and customer relationship
management. In addition, we provide content and content management solutions as
well as a platform for integration and administration of private and public
electronic marketplaces. We also provide services such as consulting, training
and maintenance in support of these offerings.
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RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues
represented by selected items reflected in our Consolidated Statements of
Operations. The quarter-to-quarter comparisons of financial results are not
necessarily indicative of future results.
THREE MONTHS
ENDED MARCH 31,
---------------
2001 2000
------ -----
Revenues:
Software licenses......................................... 59.2% 61.0%
Services.................................................. 26.2 25.1
Maintenance............................................... 14.6 13.9
------ -----
Total revenues.................................... 100.0 100.0
Costs and expenses:
Cost of software licenses................................. 6.1 2.9
Cost of services and maintenance.......................... 23.3 22.1
Sales and marketing....................................... 39.5 35.5
Research and development.................................. 21.1 21.4
General and administrative................................ 8.3 8.9
Amortization of intangibles............................... 215.7 --
In-process research and development and
acquisition-related expenses........................... 1.3 0.3
------ -----
Total costs and expenses.......................... 315.3 91.1
------ -----
Operating income (loss)..................................... (215.3) 8.9
Other income (expense), net................................. (3.8) 1.3
------ -----
Income before income taxes.................................. (219.1) 10.2
Provision for income taxes.................................. (2.0) 3.9
------ -----
Net income (loss)........................................... (217.1)% 6.3%
====== =====
REVENUES
Revenues consist of software license revenues, service revenues, and
maintenance revenues, and are recognized in accordance with Statement of
Position (SOP) 97-2, "Software Revenue Recognition," as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions," and SEC Staff Accounting Bulletin (SAB) 101, "Revenue
Recognition."
Software license revenues are recognized upon shipment, provided fees are
fixed and determinable and collection is probable. Revenue for agreements that
include one or more elements to be delivered at a future date is recognized
using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred, and the remaining portion of the agreement fee
is recognized as license revenue. If fair values have not been established for
certain undelivered elements, revenue is deferred until those elements have been
delivered, or their fair values have been determined. Agreements that include a
right to unspecified future elements are recognized ratably over the term of the
agreement. License fees from reseller agreements are generally based on the
sublicenses granted by the reseller and recognized when the license is sold to
the end customer. Licenses to our content databases are recognized over the term
of the agreements. Fees from licenses sold together with services are generally
recognized upon shipment, provided fees are fixed and determinable, collection
is probable, payment of the license fee is not dependent upon the performance of
the consulting services and the consulting services are not essential to the
functionality of the licensed software.
Service revenues are primarily derived from fees for implementation,
consulting and training services and are generally recognized as the services
are performed under service agreements in connection with initial license sales.
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Maintenance revenues are derived from technical support and software
updates provided to customers. Maintenance revenue is recognized ratably over
the term of the maintenance agreement, generally one year.
Payments received in advance of revenue recognized are classified as
deferred revenue in the Consolidated Balance Sheets.
Total revenues increased $170.3 million, or 91.4%, during the three months
ended March 2001 compared to the same period in 2000. These increases resulted
from the expansion of our product offerings; increased demand for our products
and services, particularly from our existing customer base; increased sales
activities resulting from additional sales representatives; and additional
revenues generated by acquired businesses. We derived substantially all of our
revenues from licenses associated with our software products and content
databases and related services and maintenance.
Software Licenses. Software license revenues constituted 59.2% of total
revenues during the three months ended March 31, 2001, compared to 61.0% for the
same period in 2000. Software license revenues increased $97.5 million, or
85.9%, during the three months ended March 31, 2001, compared to the same period
in 2000. The increase in software license revenues over the comparable periods
was due to:
- Expansion of product offerings.
- Increased demand for our products and services from our existing customer
base.
- Increased sales activities resulting from increases in direct sales
representatives and strategic alliances with industry partners.
- Increased customer awareness and interest in our product offerings.
As a result of the above items, the number of recognized software license
transactions increased to 102 transactions for the three months ended March 31,
2001 from 88 transactions for the same period in 2000, an increase of 15.9%.
License revenue generated from our existing customer base totaled 73.6% of total
license revenue for the three months ended March 31, 2001 compared to 42.1% for
the same period in 2000. The average size of individual license transactions
increased 50.1% to $1.9 million for the three months ended March 31, 2001 from
$1.3 million for the same period in 2000. Additionally, the number of individual
software license transactions in excess of $1.0 million increased 7.4% to 29
transactions for the three months ended March 31, 2001 from 27 transactions for
the same period in 2000. Our direct sales channel is responsible for most of our
license revenue.
Although we believe direct sales will continue to account for most of our
software license revenues for the foreseeable future, our strategy is to
continue to increase the level of indirect sales activities. We expect sales of
our software products through, or in conjunction with, sales alliances,
distributors, resellers and other indirect channels to increase as a percentage
of software license revenues; however, there can be no assurance that our
efforts to expand indirect sales will be successful or will continue in the
future.
Services. Service revenues constituted 26.2% of total revenues during the
three months ended March 31, 2001, compared to 25.1% during the same period in
2000. Service revenues as a percentage of total revenues have fluctuated, and
are expected to continue to fluctuate on a year-to-year basis, as revenues from
the implementation of software are not generally recognized in the same period
as the related license revenues. As large licenses or a significant number of
smaller licenses are sold near the end of a given period, the relative
proportion of services revenues to total revenues will increase in subsequent
periods as services related to implementation are performed.
Service revenues increased $46.4 million, or 98.9%, during the three months
ended March 31, 2001, compared to same period in 2000. The increases in service
revenues were due to an increase in the number of marketplace solutions sold and
resulting demand for consulting and implementation services. The increases were
also due to expanded use of third-party consultants as subcontractors to provide
implementation services to our customers. This has allowed us to increase our
penetration into various international and targeted vertical markets.
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Maintenance. Maintenance revenues increased to 14.6% of total revenues
during the three months ended March 31, 2001, from 13.9% during the same period
in 2000. Maintenance revenues increased $26.4 million, or 102.1%, during the
three months ended March 31, 2001, compared to the same period in 2000. In 2000,
we began offering new, tiered levels of maintenance with proportionately higher
fees for higher levels of service. The increases in maintenance revenues were
also due to continued increases in software license sales and renewals of
maintenance agreements from prior license sales.
International Revenues. Our international revenues are primarily generated
from customers located in Europe, Asia, Canada and Latin America. International
revenues totaled $135.7 million, or 38.1% of total revenues, during the three
months ended March 31, 2001, increasing from $64.7 million, or 34.8% of total
revenues, during the same period in 2000. The increase in international revenues
is consistent with our efforts to expand our international presence and sales
efforts. We believe continued growth and profitability will require further
expansion in international markets. We have expended and will continue to expend
substantial resources to expand our international operations.
COSTS AND EXPENSES
Cost of Software Licenses. Cost of software licenses consists of:
- Commissions paid to third parties in connection with joint marketing and
other related agreements.
- Royalty fees associated with third-party software.
- Costs related to user documentation.
- Costs related to reproduction and delivery of software.
Cost of software licenses as a percentage of related revenue was 10.3% and
4.7% during the three months ended March 31, 2001 and 2000. Cost of software
license increased $16.4 million, or 306.5%, during the three months ended March
31, 2001, compared to the same period in 2000. The increases in cost of software
licenses, both as a percentage of software license revenue and in dollar amount,
are due to increases in commissions paid to third parties in connection with
joint marketing efforts and other sales assistance, and increases in the amount
of royalty fees associated with third-party software.
Cost of Services and Maintenance. Cost of services and maintenance
includes costs associated with the implementation of software solutions and
consulting and training services. Cost of services and maintenance also includes
the cost of providing software maintenance to customers such as telephone
support and packaging and shipping costs related to new releases of software and
updated user documentation.
Cost of services and maintenance as a percentage of related revenues was
57.1% and 56.5% during the three months ended March 31, 2001 and 2000. The total
cost of services and maintenance increased $42.0 million, or 102.3%, during the
three months ended March 31, 2001, compared to the same period in 2000. The
increases in both dollar amount and percent of revenue are attributable to
increases in the number of consultants, product support and training staff and
increased use of third-party consultants to provide implementation services. The
accretive effect on service revenues related to newly hired consultants
generally lags behind the immediate cost impact of adding to our headcount.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of personnel costs, commissions, travel, and promotional events such
as trade shows, seminars, technical conferences, advertising and public
relations programs. Sales and marketing expenses increased $74.4 million, or
112.4%, during the three months ended March 31, 2001, compared to the same
period in 2000. The increases were due to:
- An increased number of direct sales representatives to 603 at March 31,
2001, up from 328 at March 31, 2000. This represents an 83.8% increase in
our direct sales force over the comparable periods.
- Increased sales commissions due to higher revenues.
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- Increased marketing and promotional activities due to the expansion of
our suite of supply chain and marketplace solutions and our expansion
into new international markets.
Research and Development Expenses. Research and development expenses
consist of continued software development and product enhancements to existing
software. Software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers. To
date, the establishment of technological feasibility of our products and general
release of such software has substantially coincided. As a result, software
development costs qualifying for capitalization have been insignificant;
therefore, we have not capitalized any software development costs.
Research and development expenses increased $35.4 million, or 88.8%, during
the three months ended March 31, 2001, compared to the same period in 2000.
Research and development expenses as a percentage of total revenues decreased to
21.1% in the first quarter of 2001 from 21.4% in the first quarter of 2000. The
decrease in research and development expenses as a percentage of total revenues
resulted from our ability to leverage our resource base to support a larger
organization. The increases in the dollar amount of research and development
expenses were due to increased research and development personnel by
approximately 97.9% over the comparable periods. As of March 31, 2001, our
research and development headcount totaled approximately 2,000, up from
approximately 1,000 at March 31, 2000. Approximately 600 employees included in
this increase were added as a result of our acquisition of Aspect.
General and Administrative Expenses. General and administrative expenses
include the personnel and other costs of our finance, legal, accounting, human
resources, information systems and executive departments. General and
administrative expenses increased $13.1 million, or 78.8%, during the three
months ended March 31, 2001, compared to the same period in 2000. General and
administrative expenses as a percentage of total revenues decreased to 8.3% in
the first quarter of 2001 from 8.9% in the first quarter of 2000. The increases
in the dollar amounts of general and administrative expenses were primarily due
to the cost of supporting a 90.4% increase in personnel in over the comparable
periods, as well as increases in the number and size of our facilities and
equipment related to our corporate headquarters. The decrease in general and
administrative expenses as a percentage of total revenues resulted from our
ability to leverage our resource base to support a larger organization. We
expect to hold general and administrative expenses relatively flat as a
percentage of revenue and to leverage our existing resource base to support our
current operations.
Amortization of Intangibles. From time to time, we have sought to
supplement the expanding depth and breadth of our product offerings through
technology or business acquisitions. When an acquisition of a business is
accounted for using the purchase method, the amount of the purchase price is
allocated to the fair value of assets acquired, net of liabilities assumed. Any
excess purchase price is allocated to goodwill. Goodwill is amortized over the
life of the asset (typically two to three years). Details of our acquisition of
TSC during the first quarter of 2001 are presented in Note 2 -- Business
Combinations and Asset Acquisitions in the Notes to Condensed Consolidated
Financial Statements included elsewhere in this report.
Amortization of intangibles, including amortization of goodwill, related to
acquisitions totaled $769.0 million during the three months ended March 31,
2001. Under current accounting guidance, amortization of these intangibles will
continue through 2004. In February 2001, the Financial Accounting Standards
Board issued a revision to a previously issued exposure draft covering business
combinations proposing new accounting guidance related to goodwill that would
change the amortization methodology. See Note 7 -- New Accounting Standards in
the Notes to Condensed Consolidated Financial Statements included elsewhere in
this report.
In-Process Research and Development and Acquisition-Related
Expenses. Technology or business acquisitions may include the purchase of
technology that has not yet been determined to be technologically feasible and
has no alternative future use in its then-current stage of development. In such
instances, and in accordance with appropriate accounting guidelines, the portion
of the purchase price allocated to in-process research and development is
expensed immediately upon the consummation of the acquisition. Details of in-
process research and development and acquisition-related expenses related to our
acquisition of TSC are
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presented in Note 2 -- Business Combinations and Asset Acquisitions in the Notes
to Condensed Consolidated Financial Statements included elsewhere in this
report.
The write-off of acquired in-process research and development totaled $4.7
million during the three months ended March 31, 2001. This amount is related to
the acquisition of Trade Service Corporation and ec-Content. We expect to
continue to expand through acquisitions and the resulting write-off of process
research and development could vary significantly from quarter to quarter.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of interest income on investments
partially offset by interest expense, realized gains/losses on equity
investments, foreign currency exchange transaction gains/losses, gains/losses on
foreign currency exchange forward contracts and other miscellaneous income and
expense. During the three months ended March 31, 2001, we recognized net other
expenses of $13.5 million compared to net other income of $2.5 million during
the same period in 2000. Other income (expense), net, for the first quarter of
2001, included net realized losses on equity investments of $18.2 million, which
included the write-down of the carrying basis of certain equity investments as a
result of significant declines in the fair value and expected realizable amounts
of these investments. Excluding these losses, we would have realized net other
income of $4.7 million. The increase in other income, net, excluding losses on
equity investments, was attributable to increased interest income from higher
average investment balances partly offset by an increase in net foreign currency
exchange transaction losses. The interest yields on investments and the relative
exchange values of foreign currencies are influenced by the monetary and fiscal
policies of the governments in the countries we operate. The nature, timing and
extent of any impact on our financial statements resulting from changes in those
governments' policies are not predictable.
PROVISION (BENEFIT) FOR INCOME TAXES
We recognized an income tax benefit of $6.9 million during the three months
ended March 31, 2001, compared to an income tax expense of $7.4 million during
the same period in 2000. Our effective income tax rate in the first quarter of
2001 was 0.9% compared to 38.6% in the first quarter of 2000. The effective
income tax rate during the three months ended March 31, 2001, and to a lesser
extent in the same period in 2000, differed from the U.S. statutory rate
primarily due to the non-deductibility of goodwill, in-process research and
development and acquisition-related expenses. Other items affecting our
effective tax rate during the periods presented include state taxes (net of
federal tax benefits), non-deductible meals and entertainment, deferred tax
asset valuation allowances and research and development tax credits. Excluding
the impact of these and other items, our effective tax rates were 36.0% and
37.5% during the three months ended March 31, 2001 and 2000.
BASIC AND DILUTED EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share are computed in accordance with
SFAS No. 128, "Earnings Per Share," which requires dual presentation of basic
and diluted earnings per common share for entities with complex capital
structures. Basic earnings per common share is based on net income divided by
the weighted-average number of common shares outstanding during the year.
Diluted earnings per common share includes the dilutive effect of stock options
and warrants granted using the treasury stock method, the effect of contingently
issuable shares earned during the year and shares issuable under the conversion
feature of our convertible notes using the if-converted method. Future
weighted-average shares outstanding calculations will be impacted by the
following factors:
- The ongoing issuance of common stock associated with stock option
exercises.
- The issuance of common shares associated with our employee stock purchase
plans.
- Any fluctuations in our stock price, which could cause changes in the
number of common stock equivalents included in the diluted earnings per
common share calculation.
- The issuance of common stock to effect business combinations should we
enter into such transactions.
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- The issuance of common stock or warrants to effect joint marketing, joint
development or other similar arrangements should we enter into such
arrangements.
- Assumed or actual conversions of debt into common stock with respect to
our convertible notes.
PRO FORMA RESULTS OF OPERATIONS
The following summary of unaudited pro forma consolidated selected
statement of operations data presents our results of operations for the three
months ended March 31, 2001 and 2000, excluding: amortization of intangibles,
write-off of in-process research and development and acquisition-related
expenses, employer taxes on stock option exercises and net losses realized on
minority investments. We believe the exclusion of these items provides a more
relevant summary of the results of our operations as they relate to our core
business and we use these measures internally to evaluate our operating
performance. This information is not to be construed as a measurement of
profitability under generally accepted accounting principles. Additionally, the
pro forma results of operations, as presented, may not be consistent with
measures used by other companies. All acquisitions accounted for using the
purchase method are included in the following summary from the date those
entities were acquired. As discussed in Note 2 -- Business Combinations and
Asset Acquisitions in the Notes to Condensed Consolidated Financial Statements,
the acquisition of TSC was completed in the first quarter of 2001 and,
accordingly, the operating results of TSC are included with our results of
operations since the date of acquisition of March 23, 2001. Amounts shown are in
thousands, except per share data.
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
-------- --------
PRO FORMA UNAUDITED SELECTED STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $356,558 $186,280
Costs and expenses.......................................... 349,566 167,928
-------- --------
Operating income............................................ 6,992 18,352
Other income, net........................................... 4,692 2,499
-------- --------
Income before income taxes.................................. 11,684 20,851
Provision for income taxes.................................. 4,206 7,819
-------- --------
Net income.................................................. $ 7,478 $ 13,032
======== ========
Basic earnings per common share............................. $ 0.02 $ 0.04
Diluted earnings per common share........................... $ 0.02 $ 0.04
Weighted-average common shares outstanding.................. 408,074 313,000
Weighted-average diluted common shares outstanding.......... 451,467 366,050
THE ABOVE PRO FORMA AMOUNTS HAVE BEEN ADJUSTED TO EXCLUDE
THE FOLLOWING ITEMS:
Amortization of intangibles................................. $768,958 $ --
In-process research and development and acquisition related
expenses.................................................. 4,700 557
Employer taxes on stock option exercises.................... 894 1,173
Net losses realized on minority investments................. 18,229 --
Income tax effect of excluded items......................... (11,152) (439)
-------- --------
Net effect of pro forma adjustments......................... $781,629 $ 1,291
======== ========
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LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations and met our capital
expenditure requirements primarily through cash flows provided from operations,
long-term borrowings and sales of equity securities. Our liquidity and financial
position at March 31, 2001 showed a 3.5% decrease in working capital in the
first quarter of 2001. Working capital was $750.6 million as of March 31, 2001
compared to $776.7 million as of December 31, 2000. The decrease in working
capital was primarily the result of the investment of $30.1 million in long-term
debt securities. We have historically invested excess cash in short-term
investment instruments; however, as a result of declining market interest rates
during the quarter, we reinvested a portion of our available funds in
higher-yielding, longer-term investment instruments, all of which have original
maturities of less than two years.
During the three months ended March 31, 2001, net cash provided by
operating activities decreased $28.0 million, net cash used in investing
activities increased $2.4 million and net cash provided by financing activities
decreased $4.4 million compared to totals for the same period in 2000. Cash and
cash equivalents were $706.3 million at March 31, 2001, a decrease of $32.9
million, compared to balances at December 31, 2000. The decrease was primarily
the result of $38.7 million in cash generated by operating activities and $7.5
million in cash provided by financing activities, offset by $78.6 million in
cash used in investing activities.
The most significant transactions which adjusted net income to net cash
provided by operations in the first quarter of 2001 were depreciation and
amortization of $780.4 million, deferred income taxes and disqualifying
dispositions of $46.0 million, tax benefits from stock option exercises of $31.8
million, losses on equity investments of $18.2 million, bad debt expense of
$12.5 million, the net change in accounts receivable of $16.7 million and the
net change in accrued liabilities of $17.5 million.
Significant items that affected our net cash used in investing activities
in the first quarter of 2001 were purchases of premises and equipment of $24.3
million, cash paid in purchase transactions of $4.8 million and net purchases of
debt securities and equity investments of $45.5 million.
The $7.5 million in cash provided by financing activities in the first
quarter of 2001 was from $32.2 million in proceeds from the sale of common stock
to employees and exercises of stock options, offset by $24.7 million paid on a
note acquired in the acquisition of TSC.
Accounts receivable, net of allowance for doubtful accounts, increased 1.7%
for the first quarter of 2001. Days sales outstanding (DSO's) in receivables
increased to 77 days as of March 31, 2001 from 73 days as of December 31, 2000.
There is no assurance that DSO performance will remain at this level.
We maintain two, one-year revolving lines of credit of $15.0 million with
separate financial institutions that have an aggregate borrowing capacity of
$30.0 million. There have been no borrowings under these agreements, which are
renewable in August 2001.
On December 10, 1999, we issued an aggregate principal amount of $350.0
million of our 5.25% convertible subordinated notes due in 2006. As of March 31,
2001, none of the notes have been converted to common stock. The notes are
convertible at the option of the holder into shares of our common stock at a
conversion price of $38.00 per share at any time prior to maturity. On or after
December 20, 2002, we have the option to redeem, in cash, all or a portion of
the notes that have not been previously converted.
In connection with our acquisition of TSC on March 23, 2001, we issued a
convertible promissory note currently valued at $56.1 million with a 7.5% coupon
payable in cash annually. The note matures on September 23, 2003. After March
23, 2002 and prior to maturity, we may convert the note into shares of our
common stock. The holder of the note may convert the note into shares of our
common stock at any time prior to maturity provided the average of the last sale
prices of our common stock as reported on the Nasdaq National Market for the
three consecutive trading days immediately prior to the conversion date exceeds
$60.00 per share. Details of the note are presented in Note 2 -- Business
Combinations and Asset Acquisitions in the Notes to Condensed Consolidated
Financial Statements included elsewhere in this report.
In the future, we may pursue acquisition of businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. Any material acquisition or joint
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venture could result in a decrease to our working capital depending on the
nature, timing and amount of consideration to be paid.
We expect future liquidity will be enhanced to the extent that we are able
to realize the cash benefit from utilization of our net operating loss
carryforwards against future tax liabilities. As of March 31, 2001, we had $1.0
billion in net operating loss carryforwards, which represent up to $370.8
million in future tax benefits. The utilization of the net operating loss
carryforwards is subject to limitations and various expiration dates in years
2002 through 2021.
We believe that existing cash and cash equivalent balances, short-term
investment balances, available borrowings under the revolving credit agreements
and our anticipated cash flows from operations will satisfy our working capital
and capital expenditure requirements for the foreseeable future. However, any
material acquisitions of complementary businesses, products or technologies or
joint venture arrangements could require us to obtain additional equity or debt
financing.
SENSITIVITY TO MARKET RISKS
Foreign Currency Risk. Revenues originating outside of the United States
totaled 38.1% of total revenues during the three months ended March 31, 2001.
Due to the fact that we conduct business on a global basis in various foreign
currencies, we are exposed to adverse movements in foreign currency exchange
rates. In January 2001, we established a foreign currency hedging program
utilizing foreign currency forward exchange contracts to hedge various
nonfunctional currency exposures. The objective of this program is to reduce the
effect of changes in foreign currency exchange rates on our results of
operations. Furthermore, our goal is to offset foreign currency transaction
gains and losses recorded for accounting purposes with gains and losses realized
on the forward contracts. Details of our foreign currency risk management
program are presented in Note 6 -- Foreign Currency Risk Management in the Notes
to Condensed Consolidated Financial Statements included elsewhere in this
report.
Interest Rate Risk. Our investments are subject to interest rate risk.
Interest rate risk is the risk that our financial condition and results of
operations could be adversely affected due to movements in interest rates. We
invest our cash in a variety of interest-earning financial instruments,
including bank time deposits, money market funds and taxable and tax-exempt
variable rate and fixed rate obligations of corporations, municipalities and
local, state and national governmental entities and agencies. These investments
are denominated in U.S. Dollars. Cash balances in foreign currencies overseas
are operating balances and are invested in short-term time deposits of the local
operating bank.
Due to the demand nature of our money market funds and the short-term
nature of our time deposits and debt securities portfolio, these assets are
particularly sensitive to changes in interest rates. As of March 31, 2001, 75.1%
of our debt securities and time deposits had original maturities of three months
or less, while 16.8% had original maturities between three months and one year.
If these short-term assets are reinvested in a declining interest rate
environment, we would experience an immediate negative impact on other income.
The opposite holds true in a rising interest rate environment. The Federal
Reserve Board influences the general market rates of interest. Since December
31, 2000, the Federal Reserve Board has decreased the discount rate by 200 basis
points, which has led to a general decline in market interest rates. As a
result, the weighted-average yield on interest-earning investments held as of
March 31, 2001 was 5.40% compared to 6.8% for investments held as of December
31, 2000. The decrease in the weighted-average yield on interest-earning
investments resulted as the majority of the investments held as of December 31,
2000 matured during the first quarter of 2001. Market yields available on
similar investment instruments had declined significantly as a result of the
Federal Reserve Board's recent actions. To partly compensate, we invested a
portion of our available funds in longer-term investment instruments carrying
higher yields in comparison to similar instruments with shorter terms to
maturity.
Market Price Risk. In addition to investments in debt securities, we
maintain minority equity investments in various privately held and publicly
traded companies for business and strategic purposes. Our investments in
publicly traded companies are subject to market price volatility. As a result of
market price volatility, we experienced a $4.0 million net after-tax unrealized
loss during the first quarter of 2001 on these
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investments. We also wrote-down, by $9.8 million, the carrying basis of certain
equity investments in publicly traded companies as a result of significant
declines in the fair value of these investments. Our ability to sell certain
equity positions is restricted because the shares held may not have been
registered or other contractual agreements. We may implement hedging strategies
using put and call options to fix our gains and limit our losses in certain
equity positions until such time as the investments can be sold. During the
first quarter of 2001, we hedged an unrealized gain position in one of our
equity holdings using a combination of put and call options. Subsequent to
placing our hedge, the fair value of this investment declined $2.5 million and
we adjusted its carrying basis accordingly. The fair value of the hedging
instruments, which totaled $2.4 million, was recorded as an asset. A loss of
$0.1 million from hedge ineffectiveness was included in earnings. The fair value
of our investments in publicly traded companies totaled $23.0 million at March
31, 2001. The fair value of these investments would be $20.7 million given 10%
decreases in each stock's price.
We have invested in numerous privately held companies, many of which can
still be considered in the start-up or development stages. These investments are
inherently risky as the market for technologies or products they have under
development are typically in the early stages and may never materialize.
Further, market conditions for these types of investments have been
deteriorating of late. We could lose our entire investments in these companies.
As of March 31, 2001, our investments in privately held companies totaled $32.0
million. During the first quarter of 2001, we wrote-down, by $8.3 million, the
carrying basis of certain equity investments in privately held companies as a
result of significant declines in the expected realizable amounts of these
investments.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties that we do not
presently know or that we currently deem immaterial may also impair our business
operations. This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, they could materially
adversely affect our business, financial condition or results of operations. In
that case, the trading price of our common stock could decline.
OUR FINANCIAL RESULTS MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER OR WE MAY
FAIL TO MEET EXPECTATIONS, WHICH WOULD NEGATIVELY IMPACT THE PRICE OF OUR STOCK.
Our operating results have varied significantly from quarter to quarter in
the past, and we expect our operating results to continue to vary from quarter
to quarter in the future, due to a variety of factors, many of which are outside
of our control. Factors that could affect quarterly operating results include:
- Volume and timing of customer orders.
- Length of the sales cycle.
- Customer budget constraints.
- Announcement or introduction of new products or product enhancements by
our competitors or us.
- Changes in prices of our products and those of our competitors.
- Foreign currency exchange rate fluctuations.
- Market acceptance of new products.
- Mix of direct and indirect sales.
- Changes in our strategic relationships.
- Changes in our business strategy.
- Economic conditions.
- Technological changes.
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We will continue to determine our investment and expense levels based on
expected future revenues. Significant portions of our expenses are not variable
in the short term, and we cannot reduce them quickly to respond to decreases in
revenues. Therefore, if revenues are below expectations, this shortfall is
likely to adversely and disproportionately affect our operating results. In
addition, we may reduce our prices or accelerate investment in research and
development efforts in response to competitive pressures or to pursue new market
opportunities. Any of these activities may further limit our ability to adjust
spending in response to revenue fluctuations. Revenues may not grow at
historical rates in future periods, or they may not grow at all. Accordingly, we
may not maintain positive operating margins in future quarters. In addition,
with our rapid growth, we have set a number of demanding objectives and
commitments that may cause challenges to our operations. Any of these factors
could cause our operating results to be below the expectations of public market
analysts and investors, and negatively affect the price of our common stock.
THE IMPACT OF CHANGES IN GLOBAL ECONOMIC CONDITIONS ON OUR CUSTOMERS MAY CAUSE
US TO FAIL TO MEET EXPECTATIONS, WHICH WOULD NEGATIVELY IMPACT THE PRICE OF OUR
STOCK.
Our operating results can vary significantly based upon the impact of
changes in global economic conditions on our customers. More specifically, the
macro-economic environment entering 2001 is more uncertain than in recent
periods and has the potential to materially and adversely affect us. The revenue
growth and profitability of our business depends on the overall demand for
computer software and services, particularly in the areas in which we compete.
Because our sales are primarily to corporate customers whose businesses
fluctuate with general economic and business conditions, a softening of demand
for computer software caused by a weakening economy may result in decreased
revenues and lower growth rate and may increase the collection risk of our
accounts receivable portfolio. We may be especially prone to this as a result of
the relatively large license transactions we have historically relied upon.
Customers may defer or reconsider purchasing products if they experience a
downturn in their business or if there is a downturn in the general economy.
WE ANTICIPATE SEASONAL FLUCTUATIONS IN REVENUES, WHICH MAY CAUSE VOLATILITY IN
OUR STOCK PRICE.
The market price of our common stock has been volatile in the past, and the
market price of our common stock may be volatile in the future. Historically,
our revenues have tended to be strongest in the fourth quarter of the year. We
believe that our seasonality is due to the calendar year budgeting cycles of
many of our customers and our compensation policy that rewards sales personnel
for achieving annual revenue quotas. In future periods, these seasonal trends
may cause our quarter-to-quarter operating results to vary, which may result in
failing to meet the expectations of public market analysts and investors in any
period.
HISTORICALLY, A SMALL NUMBER OF INDIVIDUAL LICENSE SALES HAVE BEEN SIGNIFICANT
IN EACH QUARTERLY PERIOD. THEREFORE, OUR OPERATING RESULTS FOR A GIVEN PERIOD
COULD SUFFER SERIOUS HARM IF WE FAIL TO CLOSE ONE OR MORE LARGE SALES EXPECTED
FOR THAT PERIOD.
We generally derive a significant portion of revenues in each quarter from
a small number of relatively large license sales with, in some cases, long and
intensive sales cycles. Moreover, due to customer purchasing patterns, we
typically realize a significant portion of our software license revenues in the
last few weeks of a quarter. As a result, we are subject to significant
variations in license revenues and results of operations if we incur any delays
in customer purchases. If in any future period we fail to close one or more
substantial license sales that we have targeted to close in that period, this
failure could seriously harm our operating results for that period.
IMPLEMENTATION OF OUR PRODUCTS IS COMPLEX, TIME-CONSUMING AND EXPENSIVE AND
CUSTOMERS MAY BE UNABLE TO IMPLEMENT OUR PRODUCTS SUCCESSFULLY OR OTHERWISE
ACHIEVE THE BENEFITS ATTRIBUTABLE TO OUR PRODUCTS.
Our products must integrate with the many existing computer systems and
software programs of our customers. This can be complex, time-consuming and
expensive, and may cause delays in the deployment of our products. Our customers
may be unable to implement our products successfully or otherwise achieve the
benefits attributable to our products.
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WE MAY NOT REMAIN COMPETITIVE, AND INCREASED COMPETITION COULD SERIOUSLY HARM
OUR BUSINESS.
Our competitors offer a variety of e-business solutions including
enterprise software. We segment our competition into several main categories,
including:
- Large ERP software vendors, including Oracle and SAP, who have added or
are attempting to add capabilities for supply chain planning or
business-to-business collaboration to their transaction system products.
- Companies such as Adexa, Manugistics and others that compete principally
with our supply chain management applications.
- Companies such as Agile, Commerce One and others that compete principally
with our supplier relationship management applications.
- Companies such as Trilogy and others that compete principally with our
customer relationship management applications.
- Companies such as RTI, Saqqara and others that compete principally with
our content and content management applications.
- Other vendors who establish electronic marketplaces and indirect
procurement capabilities that may compete now or in the future with
marketplaces created or powered by us.
- Other business application software vendors that may offer or partner
with independent developers of advanced planning and scheduling software.
- Internal development efforts by corporate information technology
departments.
Relative to us, our competitors may have one or more of the following
advantages:
- Longer operating history.
- Greater financial, technical, marketing, sales and other resources.
- Superior product functionality in specific areas.
- Greater name recognition.
- A broader range of products to offer.
- A larger installed base of customers.
Current and potential competitors have established, or may establish,
cooperative relationships among themselves or with third parties to enhance
their products, which may result in increased competition. In addition, we
expect to experience increasing price competition as we compete for market
share, and we may not be able to compete successfully with our existing or new
competitors. Any of these conditions could cause substantial harm to our
business, operating results and financial condition.
OUR OBJECTIVE OF INCREASING OUR RECURRING REVENUE STREAMS BY SELLING MARKETPLACE
SERVICES AND CONTENT TO MARKETPLACES AND THEIR PARTICIPANTS IS UNPROVEN AND MAY
BE UNSUCCESSFUL.
As part of our business strategy, we are offering electronic marketplace
services and content to trading communities and participants in digital
marketplaces. We are currently providing only a limited portion of our intended
i2 TradeMatrix solutions in only a relatively small number of digital trading
communities compared to the potential market for digital trading communities. We
cannot be certain that these trading communities will be operated effectively,
that enterprises will join and remain in these trading communities, or that we
will develop and provide successfully all intended i2 TradeMatrix solutions. If
this business strategy is flawed, or if we are unable to execute it effectively,
our business, operating results and financial condition could be substantially
harmed.
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WE DEPEND ON OUR STRATEGIC PARTNERS AND OTHER THIRD PARTIES. IF WE FAIL TO
DERIVE BENEFITS FROM OUR EXISTING AND FUTURE STRATEGIC RELATIONSHIPS, OUR
BUSINESS WILL SUFFER.
From time to time, we have collaborated with other companies, including IBM
and PricewaterhouseCoopers, in areas such as marketing, distribution and
implementation. Maintaining these and other relationships is a meaningful part
of our business strategy. However, some of our current and potential strategic
partners are either actual or potential competitors, which may impair the
viability of these relationships. In addition, some of our relationships have
failed to meet expectations and may fail to meet expectations in the future. We
may not be able to enter into successful new strategic relationships in the
future and our business, operating results and financial condition could be
harmed.
ANY DECREASE IN DEMAND FOR OUR ENTERPRISE PRODUCTS AND SERVICES COULD
SIGNIFICANTLY REDUCE OUR REVENUES.
We derive a substantial portion of our revenues from licenses of our
enterprise products and related services. Our enterprise products principally
include solutions for supply chain management, supplier relationship management,
customer relationship management and other planning products. We expect license
revenues and maintenance and consulting contracts related to these products to
continue to account for a substantial portion of our revenues for the
foreseeable future. As a result, our future operating results will depend upon
continued market acceptance of these applications. However, our enterprise
applications may not achieve continued market acceptance. Competition,
technological change or other factors could decrease demand for, or market
acceptance of these applications. Any decrease in demand or market acceptance of
our enterprise offering could substantially harm our business, operating results
and financial condition.
WE ARE INVESTING SIGNIFICANT RESOURCES IN DEVELOPING AND MARKETING OUR
MARKETPLACE SOLUTIONS. THE MARKET FOR THESE SOLUTIONS IS NEW AND EVOLVING, AND,
IF THIS MARKET DOES NOT DEVELOP AS WE ANTICIPATE, OR, IF WE ARE UNABLE TO
DEVELOP ACCEPTABLE SOLUTIONS, SERIOUS HARM WOULD RESULT TO OUR BUSINESS.
We are investing significant resources in further developing and marketing
enhanced products and services to facilitate conducting business online, within
an enterprise and among many enterprises, including public and private
marketplaces. For the first few months after we introduce new products and
services, the demand for, and market acceptance of, those products and services
are subject to a high level of uncertainty, especially where acquisition of our
products or services requires a large capital commitment or other significant
commitment of resources. Adoption of e-business software solutions, particularly
by those individuals and enterprises that have historically relied upon
traditional means of commerce and communication, will require a broad acceptance
of new and substantially different methods of conducting business and exchanging
information. These products and services are often complex and involve a new
approach to the conduct of business, and, as a result, intensive marketing and
sales efforts may be necessary to educate prospective customers regarding the
uses and benefits of these products and services in order to generate demand.
The market for this broader functionality may not develop, competitors may
develop superior products and services, or we may not develop acceptable
solutions to address this functionality. Any one of these events could seriously
harm our business, operating results and financial condition.
OUR I2 TRADEMATRIX SOLUTIONS ARE HOSTED BY A VARIETY OF THIRD PARTIES AND
CUSTOMERS MAY EXPERIENCE PERFORMANCE PROBLEMS OR DELAYS AS A RESULT OF SERVICE
INTERRUPTIONS.
Our i2 TradeMatrix platform may be hosted by i2 or other companies.
Dissatisfaction or problems with our services or the services of the third
parties that host our i2 TradeMatrix solutions or delays or interruptions or
other problems with service due to mechanical failure, human error, security
breaches, power loss and other facility failures, natural disaster, sabotage,
vandalism, or other similar events could result in a reduction of business
generated by the marketplaces. In addition, failure of any telecommunications
providers to provide consistent data communications capacity could result in
interruptions in services. Each of these service providers could experience
outages, delays and other difficulties due to system failures unrelated to our
products, services and systems. Dissatisfaction with hosting providers could
adversely affect our relationship with our customers resulting in a loss of
future sales of licenses and services to the customer, which could have a
material adverse effect on our business, operating results and financial
condition.
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IF WE PUBLISH INACCURATE CATALOG CONTENT DATA, OUR BUSINESS COULD SUFFER.
The accurate publication of catalog content is critical to our customers'
businesses. Our i2 TradeMatrix suite of products offers content management tools
that help suppliers manage the collection and publication of catalog content.
Any defects or errors in these tools or the failure of these tools to accurately
publish catalog content could deter businesses from participating in the i2
TradeMatrix marketplaces, damage our business reputation and harm our ability to
win new customers. In addition, from time to time some of our customers may
submit inaccurate pricing or other inaccurate catalog information. Even though
such inaccuracies are not caused by our work and are not within our control,
such inaccuracies could deter current and potential customers from using our
products and could harm our business, operating results and financial condition.
THE MARKETS IN WHICH WE COMPETE EXPERIENCE RAPID TECHNOLOGICAL CHANGE. IF WE DO
NOT RESPOND TO THE TECHNOLOGICAL ADVANCES OF THE MARKETPLACE, WE COULD SERIOUSLY
HARM OUR BUSINESS.
Enterprises are increasing their focus on decision-support solutions for
e-business challenges. As a result, they are requiring their application
software vendors to provide greater levels of functionality and broader product
offerings. Moreover, competitors continue to make rapid technological advances
in computer hardware and software technology and frequently introduce new
products, services and enhancements. We must continue to enhance our current
product line and develop and introduce new products and services that keep pace
with the technological developments of our competitors. We must also satisfy
increasingly sophisticated customer requirements. If we cannot successfully
respond to the technological advances of others, or if our new products or
product enhancements and services do not achieve market acceptance, these events
could negatively impact our business, operating results and financial condition.
IF USE OF THE INTERNET FOR COMMERCE AND COMMUNICATION DOES NOT INCREASE AS WE
ANTICIPATE, OUR BUSINESS WILL SUFFER.
We are offering new and enhanced products and services, which depend on
increased acceptance and use of the Internet as a medium for commerce and
communication. Rapid growth in the use of the Internet is a recent phenomenon.
As a result, acceptance and use may not continue to develop at historical rates,
and a sufficiently broad base of business customers may not adopt or continue to
use the Internet as a medium of commerce. Demand and market acceptance for
recently introduced services and products over the Internet are subject to a
high level of uncertainty, and there exist a limited number of proven services
and products.
Our business could be seriously harmed, among other things, if:
- Use of the Internet and other online services does not continue to
increase or increases more slowly than expected.
- The necessary communication and computer network technology underlying
the Internet and other online services does not effectively support any
expansion that may occur.
- New standards and protocols are not developed or adopted in a timely
manner.
- The Internet does not create a viable commercial marketplace, inhibiting
the development of electronic commerce and reducing the need for and
desirability of our products and services due to concerns about security,
reliability, cost, ease of use, accessibility, quality of service or
other reasons.
FUTURE REGULATION OF THE INTERNET MAY SLOW ITS GROWTH, RESULTING IN DECREASED
DEMAND FOR OUR PRODUCTS AND SERVICES AND INCREASED COSTS OF DOING BUSINESS.
Due to increasing popularity and use of the Internet, it is possible that
state, federal and international regulators could adopt laws and regulations
that impose additional burdens on companies conducting business online. For
example, the growth and development of the market for Internet-based services
may prompt calls for more stringent consumer protection laws. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales tax, libel and personal
privacy is uncertain and may take years to resolve. Any new legislation or
regulation, the application of laws and
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regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could inhibit the expansion of the Internet, causing
our costs to increase and our growth to be harmed.
CONCERNS THAT OUR PRODUCTS DO NOT ADEQUATELY PROTECT THE PRIVACY OF CONSUMERS
COULD INHIBIT SALES OF OUR PRODUCTS.
One of the features of our customer management software applications is the
ability to develop and maintain profiles of consumers for use by businesses.
Typically, these products capture profile information when consumers, business
customers and employees visit an Internet web-site and volunteer information in
response to survey questions concerning their backgrounds, interests and
preferences. Our products augment these profiles over time by collecting usage
data. Although our customer management products are designed to operate with
applications that protect user privacy, privacy concerns may nevertheless cause
visitors to resist providing the personal data necessary to support this
profiling capability. If we cannot adequately address consumers' privacy
concerns, these concerns could seriously harm our business, financial condition
and operating results.
IF OUR ENCRYPTION TECHNOLOGY FAILS TO ENSURE THE SECURITY OF OUR CUSTOMERS
ONLINE TRANSACTIONS, SERIOUS HARM TO OUR BUSINESS COULD RESULT.
The secure exchange of value and confidential information over public
networks is a significant concern of consumers engaging in online transactions
and interaction. Our customer management software applications use encryption
technology to provide the security necessary to effect the secure exchange of
value and confidential information. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments could
result in a compromise or breach of the algorithms that these applications use
to protect customer transaction data. If any compromise or breach were to occur,
it could seriously harm our business, financial condition and operating results.
RAPID GROWTH IN OUR OPERATIONS COULD INCREASE DEMANDS ON OUR MANAGERIAL AND
OPERATIONAL RESOURCES.
If rapid growth in the scope of our operating and financial systems and the
geographic distribution of our operations and customers continues, it may
increase demands on our management and operations. Our officers and other key
employees will need to implement and improve our operational, customer support
and financial control systems and effectively expand, train and manage our
employee base. Further, we expect we will be required to manage an increasing
number of relationships with various customers and other third parties. We may
not be able to manage future expansion successfully, and our inability to do so
could harm our business, operating results and financial condition.
WE MAY NOT SUCCESSFULLY INTEGRATE OR REALIZE THE INTENDED BENEFITS OF OUR
ACQUISITIONS.
We have made various acquisitions of businesses and products to help
broaden and strengthen our product portfolio. Continued success of acquisitions
will depend primarily on our ability to:
- Retain, motivate and integrate the acquired personnel.
- Integrate multiple information systems.
- Integrate acquired products and services with our existing products and
services.
We may encounter difficulties in integrating our operations and products
with companies we acquire and we may not realize the benefits that we
anticipated when we make acquisitions. Our failure to successfully integrate our
operations and products with companies we acquire could seriously harm our
business, operating results and financial condition.
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WE MAY MAKE FUTURE ACQUISITIONS OR ENTER INTO JOINT VENTURES THAT MAY NOT BE
SUCCESSFUL.
In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. Management's negotiations of potential acquisitions or
joint ventures and management's integration of acquired businesses, products or
technologies could divert their time and resources. Future acquisitions could
cause us to issue dilutive equity securities, incur debt or contingent
liabilities, negatively impact operating results through amortization of
goodwill and other intangibles, or write off in-process research and development
and other acquisition-related expenses. Further, we may not be able to properly
integrate acquired businesses, products or technology with our existing
operations or train, retain and motivate personnel from the acquired business.
If we are unable to fully integrate an acquired business, product or technology
or train, retain and motivate personnel from the acquired business, we may not
receive the intended benefits of that acquisition. In addition, integration of
our acquisitions may involve employee issues such as changing job roles, titles,
duties, compensation and benefits, terminations, etc., which could lead to
increased exposure to employee claims and litigation.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS THAT COULD HARM
OUR COMPANY.
Our international operations are subject to risks inherent in international
business activities. In addition, we may expand our international operations in
the future, which would increase our exposure to these risks. The risks we face
internationally include:
- Difficulties and costs of staffing and managing geographically disparate
operations.
- Longer accounts receivable payment cycles in certain countries.
- Compliance with a variety of foreign laws and regulations.
- Unexpected changes in regulatory requirements.
- Overlap of different tax structures.
- Greater difficulty in safeguarding intellectual property.
- Meeting import and export licensing requirements.
- Trade restrictions.
- Changes in tariff rates.
- Political instability.
- Changes in economic conditions in international markets.
CHANGES IN THE VALUE OF THE U.S. DOLLAR, AS COMPARED TO THE CURRENCIES OF
FOREIGN COUNTRIES WHERE WE TRANSACT BUSINESS, COULD HARM OUR OPERATING RESULTS.
To date, our international revenues have been denominated primarily in U.S.
Dollars. The majority of our international expenses and some revenues have been
denominated in currencies other than the U.S. Dollar. Therefore, changes in the
value of the U.S. Dollar as compared to these other currencies may adversely
affect our operating results. As our international operations expand, we will
use an increasing number of foreign currencies, causing our exposure to currency
exchange rate fluctuations to increase. Although we have implemented hedging
programs to mitigate our exposure to currency fluctuations, currency exchange
rate fluctuations have caused, and will continue to cause, currency transaction
gains and losses. Future currency transaction gains and losses may adversely
affect our business, results of operations or financial condition in the future.
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THE LOSS OF ANY OF OUR KEY PERSONNEL OR OUR FAILURE TO ATTRACT ADDITIONAL
PERSONNEL COULD SERIOUSLY HARM OUR COMPANY.
We rely upon the continued service of a relatively small number of key
technical and senior management personnel. Our future success depends on
retaining our key employees and our continuing ability to attract, train and
retain other highly qualified technical and managerial personnel. Relatively few
of our key technical or senior management personnel are bound by employment
agreements. As a result, our employees could leave with little or no prior
notice. We may not be able to attract, assimilate or retain other highly
qualified technical and managerial personnel in the future. Our loss of any of
our key technical and senior management personnel or our inability to attract,
train and retain additional qualified personnel could seriously harm our
business, operating results and financial condition.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES.
We rely primarily on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and contractual provisions to protect our
proprietary rights. In addition, we generally license enterprise products to end
users in object code (machine-readable) format, and our license agreements
generally allow the use of enterprise products solely by the customer for
internal purposes without the right to sublicense or transfer the enterprise
products. However, these measures afford only limited protection. Unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Software piracy may be a problem. We
are not able to determine the extent to which piracy of our software products
exists, if any. Policing unauthorized use of our products is difficult, and we
cannot be certain that the steps we have taken will prevent misappropriation of
our technology. This is particularly true in foreign countries where the laws
may not protect proprietary rights to the same extent as the laws of the United
States and may not provide us with an effective remedy against piracy.
As the number of products and competitors continues to grow, the
functionality of products in different industry segments is increasingly
overlapping. As a result, we may be subject to claims of intellectual property
infringement. Although we are not aware that any of our products infringe upon
the proprietary rights of third parties, third parties may claim infringement by
us with respect to current or future products. Any infringement claims, with or
without merit, could be time-consuming, result in costly litigation or damages,
cause product shipment delays or the loss or deferral of sales, or require us to
enter into royalty or licensing agreements. If we enter into royalty or
licensing agreements in settlement of any litigation or claims, these agreements
may not be on terms acceptable to us. Unfavorable royalty and licensing
agreements could seriously harm our business, operating results and financial
condition.
We resell some software that we license from third parties. Although we may
continue this practice, third-party software licenses may not continue to be
available to us on commercially reasonable terms or as a result of infringement
claims. Our inability to maintain or obtain any of these software licenses will
delay or reduce our product shipments until we can identify, license and
integrate equivalent software. Any loss of these licenses or delay or reduction
in product shipments could harm our business, operating results and financial
condition.
OUR PRODUCTS' FAILURE TO REMAIN COMPATIBLE WITH EXISTING AND NEW COMPUTERS AND
SOFTWARE OPERATING SYSTEMS WOULD SERIOUSLY HARM OUR BUSINESS.
Our i2 TradeMatrix software can operate on a variety of hardware platforms
including Digital Equipment/Compaq, Hewlett-Packard, IBM and Sun Microsystems,
and operating systems from Sun Microsystems and Microsoft. i2 TradeMatrix can
access data from most widely-used structured query language databases, including
Informix, Oracle and Sybase. If additional hardware or software platforms gain
significant market acceptance, we may be required to attempt to adapt i2
TradeMatrix to those platforms in order to remain competitive. However, those
platforms may not be architecturally compatible with i2 TradeMatrix software
product design, and we may not be able to adapt i2 TradeMatrix to those
additional
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platforms on a timely basis, or at all. Any failure to maintain compatibility
with existing platforms or to adapt to new platforms that achieve significant
market acceptance would seriously harm our business, operating results and
financial condition.
OUR SOFTWARE IS COMPLEX AND MAY CONTAIN UNDETECTED ERRORS.
Our software programs are complex and may contain undetected errors or
"bugs." Although we conduct extensive testing, we may not discover bugs until
our customers install and use a given product or until the volume of services
that a product provides increases. On occasion, we have experienced delays in
the scheduled introduction of new and enhanced products because of bugs.
Undetected errors could result in loss of customers or reputation, adverse
publicity, loss of revenues, delay in market acceptance, diversion of
development resources, increased insurance costs or claims against us by
customers, any of which could seriously harm our business, operating results and
financial condition.
RELEASES OF AND PROBLEMS WITH NEW PRODUCTS MAY CAUSE PURCHASING DELAYS, WHICH
WOULD HARM OUR REVENUES.
Customers may delay their purchasing decisions in anticipation of our new
or enhanced products, or products of competitors. Delays in customer purchasing
decisions could seriously harm our business and operating results. Moreover,
significant delays in the general availability of new releases, significant
problems in the installation or implementation of new releases, or customer
dissatisfaction with new releases could seriously harm our business, operating
results and financial condition.
OUR FAILURE TO SUCCESSFULLY RECRUIT AND RETAIN TECHNICAL AND IMPLEMENTATION
PERSONNEL COULD REDUCE OUR LICENSE REVENUES OR LIMIT THE GROWTH OF OUR LICENSE
REVENUES.
A shortage of qualified technical sales support personnel could harm our
ability to expand sales and enter into new vertical markets. We depend on our
trained implementation personnel or those of independent consultants to
implement our products and services. A shortage in the number of trained
implementation personnel could limit our ability to implement our software and
services on a timely and effective basis. Delayed or ineffective implementation
of our software and services may limit our ability to expand our revenues and
may result in customer dissatisfaction and harm to our reputation. Any of these
events could seriously harm our business, operating results and financial
condition.
WE MAY BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS.
Our license agreements typically seek to limit our exposure to product
liability claims from our customers. However, these contract provisions may not
preclude all potential claims. Additionally, our general liability insurance may
be inadequate to protect us from all liability that we may face. Product
liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any claim, whether or not
successful, could harm our reputation and business, operating results and
financial condition.
OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE SIGNIFICANT INFLUENCE OVER STOCKHOLDER
VOTES.
On April 30, 2001, our executive officers and directors together
beneficially owned approximately 31.9% of the total voting power of our company.
Accordingly, these stockholders have significant influence in determining the
composition of our Board of Directors and will continue to have significant
influence over our affairs.
FUTURE SALES OF OUR COMMON STOCK COULD DEPRESS OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market after the closing
of our acquisition of RightWorks by us or by our executive officers, directors,
employees or other affiliates. The perception among investors that these sales
will occur could also produce this effect. All of the shares of our common stock
to be exchanged for shares of
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RightWorks capital stock in the merger will be freely transferable without
restriction or further registration under the Securities Act of 1933, except for
any shares that RightWorks' "affiliates," as defined in Rule 145 of the
Securities Act of 1933, receive in the merger.
OUR CHARTER AND BYLAWS HAVE ANTI-TAKEOVER PROVISIONS.
Provisions of our Certificate of Incorporation and our Bylaws as well as
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. We are subject to the
provisions of Section 203 of the Delaware General Corporation Law, which
restricts certain business combinations with interested stockholders. The
combination of these provisions may inhibit a non-negotiated merger or other
business combination.
OUR STOCK PRICE HISTORICALLY HAS BEEN VOLATILE, WHICH MAY MAKE IT MORE DIFFICULT
FOR YOU TO RESELL COMMON STOCK WHEN YOU WANT AT PRICES YOU FIND ATTRACTIVE.
The market price of our common stock has been highly volatile in the past,
and may continue to be volatile in the future. The following factors may
significantly affect the market price of our common stock:
- Quarterly variations in our results of operations.
- Announcement of new products, product enhancements, joint ventures and
other alliances by our competitors or us.
- Technological innovations by our competitors or us.
- General market conditions or market conditions specific to particular
industries.
In particular, the stock prices of many companies in the technology and
emerging growth sectors have fluctuated widely, often due to events unrelated to
their operating performance. These fluctuations may harm the market price of our
common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is included in the section captioned "Sensitivity to
Market Risks," included in Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
An employee of a company we acquired in 1998 is currently disputing the
cancellation of stock options received at the time of the acquisition. Vesting
of these options was dependent upon continued employment; however, the
employment was terminated in 2000. We maintain the former employee was not
entitled to unvested stock options.
Since March 2, 2001, several class action lawsuits have been filed in the
United States District Court, Northern District of Texas, Dallas Division,
alleging that we and certain of our officers have violated federal securities
laws. All of the complaints are virtually identical and allege that we issued a
series of false and misleading statements which failed to disclose, among other
things, that we were experiencing software implementation difficulties with
Nike, Inc. and that these problems were material, severe and damaging our
relationship with Nike. The potential class consists of all persons who
purchased our stock during the period from October 18, 2000 to February 26,
2001. As these suits have just been filed, we have not had the opportunity to
adequately review the claims or respond. Although the ultimate outcome and
liability, if any, cannot be determined, we believe the facts in these class
actions do not support the plaintiffs' claims and we and our officers have
meritorious defenses.
We are subject to various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material effect on our business, financial condition or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first quarter of 2001, we issued an aggregate of 110,000 shares
of our common stock to employees pursuant to exercises of stock options that
were granted prior to April 26, 1996 with exercise prices ranging from $0.0063
to $1.51 per share. These issuances were deemed exempt from registration under
Section 5 of the Securities Act of 1933 in reliance upon Rule 701 thereunder.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to,
or for sale in connection with, any distribution thereof and appropriate legends
were affixed to the share certificates issued in each such transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
During the quarter ended March 31, 2001, we filed no reports on Form
8-K. After March 31, 2001, we filed the following:
- Report on Form 8-K (Item 5) on April 4, 2001, which contained a press
release announcing preliminary financial results for the quarter ended
March 31, 2001.
- Report on Form 8-K (Item 5) on April 19, 2001, which contained a press
release announcing financial results for the quarter ended March 31,
2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on our behalf by the
undersigned, hereunto duly authorized.
i2 TECHNOLOGIES, INC.
May 4, 2001 /s/ WILLIAM M. BEECHER
(Date) --------------------------------------------
William M. Beecher
Executive Vice President and
Chief Financial Officer
(Principal financial officer)
May 4, 2001 /s/ NANCY F. BRIGHAM
(Date) --------------------------------------------
Nancy F. Brigham
Controller (Principal accounting officer)
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