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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[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)
<Table>
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)
</Table>
(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
<Table>
<Caption>
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................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 30
Item 2. Changes in Securities and Use of Proceeds................... 30
Item 3. Defaults upon Senior Securities............................. 30
Item 4. Submission of Matters to a Vote of Security Holders......... 30
Item 5. Other Information........................................... 30
Item 6. Exhibits and Reports on Form 8-K............................ 30
SIGNATURES........................................................... 31
</Table>
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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)
<Table>
<Caption>
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
=========== ===========
</Table>
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)
<Table>
<Caption>
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 revenues:
Cost of software licenses.............................. 21,811 5,366
Amortization of acquired technology.................... 12,258 --
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............................... 756,700 --
In-process research and development and
acquisition-related expenses........................... 4,700 557
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Total costs and expenses.......................... 1,124,118 169,658
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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
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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 (loss)........ 4,546 50
---------- --------
Total other comprehensive loss.................... (8,334) (83)
---------- --------
Total comprehensive income (loss)................. $ (782,485) $ 11,658
========== ========
</Table>
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)
<Table>
<Caption>
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
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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) --
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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
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Net cash provided by financing activities......... 7,519 11,898
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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
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Cash and cash equivalents at end of period.................. $ 706,286 $456,936
========= ========
</Table>
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/A filed with the SEC on August 7, 2001 (the "2000 Form 10-K/A"). Refer
to our accounting policies described in the notes to financial statements
contained in the 2000 Form 10-K/A. We consistently followed these policies in
preparing this Form 10-Q/A. 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 dynamic value-chain
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 products consider the conditions of companies to optimize
key business processes -- from product design to customer relationships. Our
products are designed to help customers, partners, suppliers and service
providers conduct business together and offer a technology infrastructure
supporting collaboration, commerce and content. Our product suites include
software solutions for supply chain management, supplier relationship management
and customer relationship management. We also provide content and content
management solutions as well as a platform for integration and administration of
private and public electronic marketplaces. Our product suites may be used by
our customers to align their value chain to serve their customers. 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 using the purchase method;
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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 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 common 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 on
the note 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 on the note 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 on the note
by the trading average. The note is also 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:
<Table>
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
========
</Table>
Identified intangible assets are being amortized over two to five years,
while goodwill is being amortized over three years.
In connection with our acquisition of TSC, we allocated $4.7 million, or
6.3%, of the purchase price to in-process research and development projects in
connection with our acquisition of TSC. As of the acquisition date, TSC was
conducting design, development, engineering and testing activities associated
with the completion of its ec-Central and eTRA-SER development programs. The
web-based content management and e-commerce web enablement projects under
development at the valuation date represented next-generation technologies that
were expected to address emerging market demands for business-to-business (B2B)
e-commerce content management.
At the acquisition date, the technologies under development ranged from
22.0% to 45.0% complete based on engineering man-month data and technological
progress. TSC had spent $4.1 million on the in-process projects, and expected to
spend approximately $6.8 million to complete all phases of the research and
development. Anticipated completion dates ranged from three to six months.
Aggregate revenues for the developmental TSC products were estimated to
grow at a compounded annual growth rate of approximately 47.0% from 2001 to
2003, assuming the successful completion and market acceptance of the major
research and development programs. The estimated revenues for the in-
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process projects were expected to peak within three years of acquisition and
then decline sharply as other new products and technologies enter the market.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the successful development of the
projects, a discount rate of 30.0% was used to value the in-process research and
development. The discount rate utilized was higher than our weighted average
cost of capital due to the inherent uncertainties surrounding the successful
development of the purchased in-process technology, the useful life of such
technology, the profitability levels of the technology, and the uncertainty of
technological advances that are unknown at this time.
If these projects are not successfully developed, our revenues and
operating results could be adversely affected in future periods. Additionally,
the value of other acquired intangible assets may become impaired. We do not
believe the impact to our operating results and financial condition would be
significant.
As of March 31, 2001, the eTRA-SER project was placed on hold pending a
technology review to ascertain if there is any complementary or substitute i2
technology that could reduce development time and cost, or eliminate this
development project. As a result of the delay, realization of revenue from this
project is not expected to begin until the fourth quarter of 2001 and we expect
actual results to be less than our initial forecasts for 2001 and 2002. The
ec-Central project has also been delayed. We expect to evaluate the ec-Central
software applications, some of which are complete, and will also evaluate the
ec-Central database design. Based on this review, certain software applications
and the database may be incorporated into other platforms.
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 all the outstanding stock of RightWorks.
The transaction, which is expected to close in the third 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
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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.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
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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
======= =======
</Table>
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.
4. SEGMENT INFORMATION, INTERNATIONAL OPERATIONS AND CUSTOMER CONCENTRATIONS
We operate our business in one segment, value-chain solutions designed to
help enterprises optimize business processes 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 disaggregated information by geographic regions. Sales to
our customers generally include products from some or all of our product suites.
We do not allocate revenues from such sales to individual product lines for
internal or general-purpose financial statements.
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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:
<Table>
<Caption>
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
======== ========
</Table>
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 directors 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.
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
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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.
<Table>
<Caption>
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
</Table>
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.
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.
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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, 2001, 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. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, 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 would 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 indicated below under the caption "Factors that May Affect
Future Results" 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 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 dynamic value-chain 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
products consider the conditions of companies to optimize key business
processes -- from product design to customer relationships. Our products are
designed to help customers, partners, suppliers and service providers conduct
business together and offer a technology infrastructure supporting
collaboration, commerce and content. Our product suites include software
solutions for supply chain management, supplier relationship management and
customer relationship management. We also provide content and content management
solutions as well as a platform for integration and administration of private
and public electronic marketplaces. Our product suites may be used by our
customers to align their value chain to serve their customers. 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.
<Table>
<Caption>
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 revenues:
Cost of software licenses.............................. 6.1 2.9
Amortization of acquired technology.................... 3.4 --
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............................... 212.3 --
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 (loss) before income taxes........................... (219.1) 10.2
Provision (benefit) for income taxes........................ (2.0) 3.9
------ -----
Net income (loss)........................................... (217.1)% 6.3%
====== =====
</Table>
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 products 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 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.
Amortization of Acquired Technology. In connection with our acquisitions
in 2000, we acquired developed technology that we offer as a part of our
integrated solutions. Amortization of the capitalized acquired technology
totaled $12.3 million during the three months ended March 31, 2001. In
accordance with SFAS No. 86, "Accounting for Computer Software to Be Sold,
Leased, or Otherwise Marketed," the amortization expense is included as a part
of our cost of revenues because it relates to software products that are
marketed to others.
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
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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.
- 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 other than
those recorded in connection with our acquisitions.
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 $756.7 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
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Accounting Standards in the Notes to Condensed Consolidated Financial Statements
included elsewhere in this report.
All of our goodwill is associated with the entire company rather than any
specific identifiable asset or product line. Each quarter we evaluate whether an
impairment of this enterprise goodwill may exist by comparing the book value of
the our common stock to the product of (i) the number of shares of common stock
issued and outstanding at the end of the quarter and (ii) the market price of
the common stock at the end of the quarter. If the product of shares and market
price exceeds the book value, impairment does not exist. If the product of
shares and market price is less than book value, we evaluate whether the
condition is other than temporary based (i) primarily on whether fluctuations in
the company's stock price subsequent to the quarter-end result in a product of
shares and market price that exceeds book value and (ii) on all other available
evidence. If the product of shares and market price is continuously less than
book value based on daily closing market prices for the prior six months, we
evaluate whether the condition is other than temporary considering all other
available evidence. If we determine the condition is other than temporary,
additional amortization is recorded for the impairment, equal to the excess book
value at the end of the quarter.
We may record an additional goodwill amortization charge as of the end of
any quarter, when the product of the number of shares issued and outstanding and
the closing market price of our common stock is less than the book value of our
common stock. We do not believe that we can predict our common stock price and
accordingly, are unable to predict when, if ever, such additional goodwill
amortization might be recorded. At March 31, 2001, we had 410.8 million common
shares issued and outstanding with a book value of $7.7 billion. Therefore, our
common stock price would had to have been below $18.86 per share before
consideration would have been given to recording additional goodwill
amortization. At March 31, 2001, our common stock price was $14.50. No
impairment loss was recognized because we believed, after considering all
available evidence, the condition to be a temporary decline in the price of our
stock caused by market volatility as prior to March 31, 2001, the product of
shares and market price exceeded book value for substantially the entire
preceding six months and subsequent to March 31, 2001 the product of shares and
market price exceeded book value on numerous occasions. Future calculations of
whether an impairment may exist will be affected by any future issuances or
purchases of common stock, by amortization of existing goodwill, by any goodwill
recorded in connection with future acquisitions, by any other changes to the
book value of our common stock, and by our future common stock price.
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. The
portion of the purchase price allocated to in-process research and development
is expensed immediately upon the consummation of the acquisition. In making the
purchase price allocation, we consider present value calculations of income, an
analysis of project accomplishments and remaining outstanding items, an
assessment of overall contributions, as well as project risks. The value
assigned to purchased in-process technology is determined by estimating the
costs to develop the acquired technology into commercially viable products,
estimating the resulting net cash flows from the projects, and discounting the
net cash flows to their present value. The revenue projection used to value the
in-process research and development is based on estimates of relevant market
sizes and growth factors, expected trends in technology, and the nature and
expected timing of new product introductions by our competitors and us. The
resulting net cash flows from such projects are based on our estimates of cost
of sales, operating expenses, and income taxes from such projects. Details of
in-process research and development and acquisition-related expenses related to
our acquisition of TSC are 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 TSC. 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.
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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.
As of March 31, 2001 and December 31, 2000, we had net deferred tax assets
totaling $391.8 million and $356.5 million. Realization of our deferred tax
asset is dependent upon the U.S. consolidated tax group of companies having
sufficient federal taxable income in future years to utilize our net operating
loss carryforwards before they expire from 2002 through 2021. In 2000, we
recognized a significant tax benefit from the exercise of stock options, which
was reflected as an increase to additional paid-in capital in our financial
statements. We have not realized a significant tax benefit from stock option
exercises in 2001 and believe it is unlikely a similar annual tax benefit of
this relative magnitude from stock option exercises will be realized this year
or in a future year. Considering our current level of taxable income without a
stock option tax benefit of this magnitude, we believe it is more likely than
not that the deferred tax asset will be realized during the net operating loss
carryforward period. A reduction in our federal taxable income could cause a
portion or all of our net operating loss carryforwards to expire with a
corresponding loss of the related deferred tax asset.
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
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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.
- 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.
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
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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 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.
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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 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.
RISKS RELATED TO OUR BUSINESS
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.
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Although our revenues are subject to fluctuation, 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. Accordingly, we may not maintain positive
operating margins in future quarters. Any of these factors could cause our
operating results to be below the expectations of securities analysts and
investors, which likely would 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
macroeconomic 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 major 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 rates. 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.
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. In addition, our expectations of financial results for a
particular quarter frequently assume the successful closing of multiple
substantial license sales that we have targeted to close in that period.
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. Delayed or ineffective implementation of
our software and services may limit our ability to expand our revenues and may
result in customer dissatisfaction, harm to our reputation and cause partial
non-payment of fees.
WE MAY NOT REMAIN COMPETITIVE, AND INCREASED COMPETITION COULD SERIOUSLY HARM
OUR BUSINESS.
Our competitors offer a wide variety of e-business solutions including
enterprise software. 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.
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- 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.
WE DEPEND ON OUR STRATEGIC PARTNERS AND OTHER THIRD PARTIES FOR SALES AND
IMPLEMENTATION OF OUR PRODUCTS. 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. A
failure by us to maintain existing strategic relationships or enter into
successful new strategic relationships in the future could seriously harm our
business, operating results and financial condition.
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. However, 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 offerings 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 on-line, within
an enterprise and among many enterprises, including public and private
marketplaces. The demand for, and market acceptance of, these products and
services are subject to a high level of uncertainty, especially where
development of our products or services requires a large
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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. 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.
IF WE PUBLISH INACCURATE CATALOG CONTENT DATA, OUR CONTENT SALES 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 seriously harm our business, operating results and financial
condition.
BECAUSE OUR PRODUCTS COLLECT AND ANALYZE STORED CUSTOMER INFORMATION, 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 nevertheless may cause
visitors to resist providing the personal data necessary to support this
profiling capability. Any inability to adequately address consumers' privacy
concerns could seriously harm our business, financial condition and operating
results.
BECAUSE OUR PRODUCTS REQUIRE THE TRANSFER OF INFORMATION OVER THE INTERNET,
SERIOUS HARM TO OUR BUSINESS COULD RESULT IF OUR ENCRYPTION TECHNOLOGY FAILS TO
ENSURE THE SECURITY OF OUR CUSTOMERS' ONLINE TRANSACTIONS.
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
valuable 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.
OUR INTERNAL PERFORMANCE OBJECTIVES AND ANY SIGNIFICANT GROWTH IN OUR BUSINESS
AND OPERATIONS LIKELY WOULD 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 would
increase demands on our management and operations. Our officers and other key
employees would need to implement and improve our operational, customer support
and financial control systems and effectively expand, train and manage our
employee base. Further, irrespective of growth, we expect that we will be
required to manage an increasing number of relationships with various customers
and other third parties, and we have set a number of demanding performance
objectives and
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commitments that challenges our operations. We may not be able to manage future
expansion or execute our objectives successfully, and our inability to do so
could seriously harm our business, operating results and financial condition.
WE MAY NOT SUCCESSFULLY INTEGRATE OR REALIZE THE INTENDED BENEFITS OF RECENT
ACQUISITIONS, AND WE MAY MAKE FUTURE ACQUISITIONS OR ENTER INTO JOINT VENTURES
THAT ARE NOT SUCCESSFUL.
In the future, we plan to 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 equity securities that would dilute your ownership of us,
incur debt or contingent liabilities, amortize goodwill and other intangibles,
or write off in-process research and development and other acquisition-related
expenses that could seriously harm our financial condition and operating
results. Further, we may not be able to properly integrate acquired businesses,
products or technology with our existing operations, train, retain and motivate
personnel from the acquired business, or combine potentially different corporate
cultures. For example, we currently are integrating Trade Service Corporation
and ec-Content, Inc., which acquisitions closed in March 2001, and we are
preparing to integrate RightWorks Corporation, which acquisition we anticipate
closing in the third quarter of 2001. 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, which could seriously harm our business, operating results and
financial condition.
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 resign 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. However, unauthorized parties may attempt to copy aspects of
our products or to obtain and use information that we regard as proprietary.
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.
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. 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.
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WE CURRENTLY FACE MATERIAL LITIGATION AND ARE MORE LIKELY TO CONTEND WITH
ADDITIONAL LITIGATION IN THE FUTURE DUE TO THE VOLATILITY OF OUR STOCK PRICE.
We face litigation that could have a material adverse effect on our
business, financial condition and results of operations. We and certain of our
directors and executive officers are named as defendants in several private
securities class action lawsuits relating to our alleged failure to disclose
material information regarding a customer implementation. While we intend to
vigorously dispute these allegations, it is possible that we may be required to
pay substantial damages or settlement costs which could have a material adverse
effect on our financial condition or results of operation. Regardless of the
outcome of these matters, it is likely that we will incur substantial defense
costs and such actions may cause a diversion of management time and attention.
Due to the volatility of the stock market and particularly the stock prices of
Internet-related companies, it is more likely that we will face additional class
action lawsuits in the future.
BECAUSE OF OUR SIGNIFICANT INTERNATIONAL OPERATIONS, 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.
- Overlap of different tax structures.
- Meeting import and export licensing requirements.
- Trade restrictions.
- Changes in tariff rates.
- Changes in general 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. However, the majority of our international expenses, including the
wages of approximately 2,000 non-U.S. employees, and an increasing percentage of
international 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 expect to use an increasing number of
foreign currencies, causing our exposure to currency exchange rate fluctuations
to increase. We have implemented limited hedging programs to mitigate our
exposure to currency fluctuations affecting international accounts receivable,
cash balances and intercompany accounts, but we do not hedge our exposure to
currency fluctuations affecting international expenses and other commitments.
For the foregoing reasons, currency exchange rate fluctuations have caused, and
likely will continue to cause, variability in our cost to settle foreign
currency denominated liabilities, which could seriously harm our future
business, results of operations 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
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development resources, increased insurance costs or claims against us by
customers, any of which could seriously harm our business, operating results and
financial condition.
WE MAY BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD SERIOUSLY HARM OUR
BUSINESS.
Our software products generally are used by our customers only in mission
critical applications where component failures could cause significant damages.
To mitigate this exposure, 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. We have not experienced any product liability claims to date. 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.
As of 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 other significant matters presented to
a vote of stockholders, including amendments to our certificate of
incorporation, a substantial sale of assets or other major corporate transaction
or a non-negotiated takeover attempt. Such concentration of ownership may
discourage a potential acquirer from making an offer to buy our company that
other stockholders might find favorable which, in turn, could adversely affect
the market price of our common stock.
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. For example, since December 31,
2000 through April 30, 2001, the market price of our common stock on the Nasdaq
National Market has fluctuated between $12.56 and $61.00 per share. 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.
- Perceptions in the marketplace of performance problems involving our
products and services.
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.
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RISKS RELATED TO OUR INDUSTRY
THE CUSTOMERS IN THE MARKETS IN WHICH WE COMPETE DEMAND RAPID TECHNOLOGICAL
CHANGE, INCLUDING THE EXPECTATION THAT OUR EXISTING OFFERINGS WILL CONTINUE TO
PERFORM MORE EFFICIENTLY AND THAT WE WILL CONTINUE TO INTRODUCE NEW PRODUCT
OFFERINGS. IF WE DO NOT RESPOND TO THE TECHNOLOGICAL ADVANCES REQUIRED BY 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.
OUR OFFERINGS REQUIRE THE USE OF THE INTERNET TO TAKE FULL ADVANTAGE OF THE
FUNCTIONALITY THAT THEY PROVIDE, AND SO, 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.
RELEASES OF AND PROBLEMS WITH NEW PRODUCTS MAY CAUSE PURCHASING DELAYS, WHICH
WOULD HARM OUR REVENUES.
Our practice and the practice in the industry is to periodically develop
and release new products and enhancements. As a result, 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.
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 and
directors 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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
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(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.
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.
<Table>
August 7, 2001 /s/ WILLIAM M. BEECHER
(Date) --------------------------------------------
William M. Beecher
Executive Vice President and
Chief Financial Officer
(Principal financial officer)
August 7, 2001 /s/ NANCY F. BRIGHAM
(Date) --------------------------------------------
Nancy F. Brigham
Principal Accounting Officer
</Table>
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