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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2001
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-28030
i2 Technologies, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware |
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75-2294945 |
| (State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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| One i2 Place |
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75234 |
| 11701 Luna Road |
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(Zip code) |
| Dallas, Texas |
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| (Address of principal executive offices) |
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Registrant’s telephone number, including area code: (469) 357-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.00025 par value
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based upon the closing sale price of Common Stock on March 19, 2002 as reported on the Nasdaq National Market, was approximately $1.9 billion (affiliates being, for these purposes only, directors, executive officers
and holders of more than 5% of the Registrant’s Common Stock).
As of March 19, 2002, the Registrant had 425,343,186
outstanding shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant’s 2002 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
i2 TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
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| PART I |
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| Item 1. |
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2
The disclosures set forth in this report are qualified by
the sections captioned “Forward-Looking Statements” and “Factors That May Affect Future Results” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report, and other
cautionary statements set forth elsewhere in this report.
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.
Our Company
i2 is a leading provider of enterprise software applications and solutions for dynamic value chain management. A value chain is an extended supply chain that encompasses the demand chain
and other activities that add value. Dynamic value chain management is a business approach to manage variability and increase efficiency in the value chain by reducing complexity, increasing visibility and increasing transaction velocity. Our
product suites may be used by enterprises to align their value chains to better serve their customers and to help optimize business processes both internally and across the value chain. Our solutions are designed to help enterprises improve
operating efficiencies, collaborate with suppliers and customers, respond to market demands and engage in business interactions over the Internet. Our product suites include software solutions for supply chain management, supplier relationship
management and customer relationship management. We provide content and content management solutions as well as integration services to enable our products to work with other applications. We also provide services such as consulting, training and
maintenance in support of these offerings.
We provide our customers with dynamic value chain software solutions and services
designed to help companies plan, execute and monitor processes not only across functions within a single company, but also across multiple companies. Our solutions are capable of web-based, real-time collaboration and order fulfillment capabilities.
Customers are using our solutions to design or re-engineer their business processes in pursuit of enhanced competitiveness and improved operating efficiencies.
Our products are built upon our foundation of advanced planning, optimization and execution capabilities. Our products can help build competitive advantage and profitability by increasing operational efficiencies and
improving customer interactions.
Our approach to customer relationships is centered on the creation of value for our customers.
Globally, we have over 1,400 customers in a wide variety of industries including:
| High–Tech: |
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Pharmaceuticals and Healthcare |
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| Original Equipment Manufacturing |
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Metals |
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| Contract Manufacturing |
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Chemicals, Oil and Gas |
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| Semiconductor |
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Automotive and Industrial |
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| Consumer Electronics |
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Paper |
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| Telecommunications |
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Utilities |
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| Consumer Products |
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Third-party Logistics and Transportation |
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| Retail |
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Aerospace and Defense |
No individual customer accounted for more than 10% of total revenues during 2001.
Our executive offices are located at One i2 Place, 11701 Luna Road, Dallas, Texas 75234, and our telephone number is (469)
357-1000.
3
2001 Developments
During 2001, we incurred a significant loss from operations. While this loss included large, non-cash charges primarily related to intangible assets and goodwill, the sharp decline in our revenues combined with an
operating cost structure that was designed to support higher levels of revenue growth led to our failure to achieve profitability. Our revenues and profitability depend on the overall demand for enterprise application software, particularly in the
product and industry segments in which we compete. The decline in demand for enterprise application software, caused by a weakening of the economy in 2001, resulted in decreased revenues and may continue to inhibit future revenue growth. We were
particularly affected because we have historically derived a large percentage of our revenues from the high-tech industry, which appears to have been adversely impacted to a greater extent by the weakened economic conditions. As discussed below, we
implemented various strategic initiatives designed to strengthen our operations in order to return to profitability. A more detailed discussion of our operating results is presented in Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, set forth elsewhere in this report.
During the second quarter of 2001, our President, Greg
Brady, was promoted to Chief Executive Officer. Shortly after his promotion, and in response to the weakening economy, we initiated a plan to strengthen our operations by maximizing our capacities at a competitively advantaged cost structure.
Initiatives that are a part of this plan include:
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Achieving organizational alignment around our business objectives, the core of which is customer success. As a part of this initiative, we formed a new centralized product
marketing organization to focus on designing and positioning our products to meet the needs of our customers. We also regionalized our reporting structure and began shifting a larger proportion of our research and development personnel resources to
India to leverage cost efficiencies. |
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Creating a more efficient cost structure. We initiated a global restructuring plan with the objective of creating a more efficient cost structure by maximizing productivity in
our sales, development, services and administrative functions to lower costs. Our cost control initiatives are focused on virtually every facet of our business and continue to be an ongoing process. See Note 12 — Strategic Restructuring in the
Notes to Consolidated Financial Statements included elsewhere in this report. |
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Realigning our sales force to deliver greater unit volumes with the goal of achieving greater market penetration for our technologies. |
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Increasing our efforts to utilize business partners to enhance demand for our products and market awareness for the i2 brand. |
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Increasing demand generation programs through a series of seminars and events that feature leading industry professionals and experts sharing their experiences and best
practices for gaining a competitive advantage through dynamic value chain management. |
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Creating and marketing technologies that are designed for higher volume sales. In the fourth quarter of 2001, we released i2 Five.Two, which provides a platform for our
solutions and helps enterprises monitor, plan and execute across their value chain. |
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Focusing on marketing customer successes through go-lives. During 2001, we announced 480 go-lives. We believe that the faster a customer implements and begins using our
solutions and realizing value, the more likely that customer is to purchase additional solutions and to provide positive references for new customers. In connection with this effort, we introduced solution templates and “quick-start”
applications, which can help to reduce implementation times. During the second half of 2002, we expect to introduce solution bundles, or integrated value chain management suites, with our anticipated 6.0 release.
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As part of our strategic plan, we have acquired companies from time to time to obtain software and other technologies that
complement our products. On March 23, 2001, we completed our acquisition of Trade Service
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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, procurement and supplier syndication. Also, on August 22, 2001, we completed our acquisition of RightWorks Corporation, a developer of software that is designed to help companies to manage procurement activities across multiple
enterprises and support corporate buying models. Details of these acquisitions are presented in Note 2 — Business Combinations in the Notes to Consolidated Financial Statements included elsewhere in this report.
Industry Background
Today’s increasingly
competitive business environment has forced many companies in diverse industries to increase efficiencies while improving flexibility and responsiveness to changing market conditions. In addition to facing higher competitive standards with respect
to meeting customer demands for product quality, variety and price, businesses also recognize the need to improve asset utilization, reduce the cost of goods, reduce inventories, shorten lead times and reduce the costs of fulfilling orders.
Furthermore, a company’s value chain may span multiple continents, requiring suppliers in one part of the world to collaborate with a plant in another to serve customers in yet a third location. These forces are prompting companies to
collaborate with a broad range of suppliers and customers to improve efficiencies across multi-enterprise value chains and marketplaces.
In the past, companies have sought to address the changing business environment by investing in enterprise resource planning (ERP) systems and first generation electronic commerce systems; however, these systems do not provide both the
forward visibility across divisions or enterprises and the high-speed decision-support capabilities that we believe are necessary to quickly plan and execute decisions. To increase competitiveness, we believe many companies are looking for solutions
that can be integrated with their existing systems to provide tools for managing the variability in their value chains allowing them to monitor changes in key areas, weigh tradeoffs for fast and accurate decision-making and execute their plans
across the critical processes in their value chains.
The growth of the Internet and the proliferation of software applications,
such as applications for supply chain management, supplier relationship management and customer relationship management, have accelerated many companies’ efforts to increase efficiencies by enabling a platform-independent communications
network. We believe this platform independence has prompted demands for a dynamic, open and integrated environment among customers, suppliers and designers. In response to these evolving market forces, many companies have sought to re-engineer their
business processes to reduce manufacturing cycle times, shift from mass production to order-driven manufacturing, increase the use of outsourcing and share information more readily with vendors and customers over the Internet.
Development of the i2 Solution
Advance Planning and Scheduling. We have offered an expanding set of supply chain management solutions since the company was founded nearly 14 years ago. Our founders, Sanjiv Sidhu and Ken Sharma, sought to
expand enterprise application software beyond the traditional ERP systems, which were basically transaction accounting and processing systems that did not consider production constraints or offer more sophisticated monitoring, decision-support and
execution capabilities. We took the first step beyond ERP with the development of an advanced planning and scheduling application that took into account actual constraints to optimize the flow of materials within a factory. That solution, Factory
Planner, has assisted many of our customers in improving the efficiency and profitability of their factories while reducing their materials and inventory costs.
Supply Chain Planning/Supply Chain Management. Our applications evolved into solutions for supply chain planning that encompassed constraint-based planning
and scheduling for multiple factories, distribution centers and warehouses. With the addition of supply chain design and execution capabilities for logistics, demand planning and fulfillment, we became a leader in enterprise solutions for supply
chain management.
5
Supplier Relationship Management/Customer Relationship
Management. We continued to expand our product base by applying our solutions for the extended supply chain to the supplier relationship and customer relationship management processes and functions. To facilitate the
design of new products by our customers, we acquired and developed technologies that help customers to more efficiently source, negotiate the pricing of and procure materials and components from suppliers, thereby enabling them to make design
decisions while cognizant of the effect on the supply chain of existing products and the total product portfolio. We also developed solutions for managing the order cycle in customer relationship management, aimed at customer concerns regarding
product selection, pricing, availability of products and order management. In response to the increasing complexities of customer and business channels, we developed technology to help in forecasting demand and managing orders across multiple
enterprises. In short, we extended the concept of supply chain management, which is designed to optimize performance within an enterprise, to value chain management, which is designed to improve efficiency and profitability for all participants
through a higher level of collaboration.
Dynamic Value Chain Management. Today, our solutions
continue to help maximize efficiencies across multi-division value chains. Inefficiency is caused by a variety of factors, including variability in supply and demand, complex customer and business channels and poor visibility. Our solutions for
dynamic value chain management are designed to help companies monitor changes in key areas, weigh tradeoffs for fast and accurate decision-making and execute across critical processes in their value chain. Dynamic value chain management is a
business approach to manage variability and increase efficiency in the value chain by reducing complexity, increasing visibility and increasing transaction velocity. The ability to manage variability in the value chain can be enhanced by linking
decision-making workflows across companies, closing the gap between planning and execution to as close to real-time as possible.
Network Services. We are in the process of expanding our network services, which consist of a portfolio of shared information services based on many of our existing technologies and technologies currently being
developed to help trading partners to improve their operations and service levels through greater visibility, collaboration and execution across their operations.
Products
Our solutions link certain aspects of planning and decision-making to execution
and the monitoring of changing conditions across value chain processes. Our solutions are intended to assist our customers in improving current business processes, return on assets, profitability and customer service levels. When properly
implemented and used, our solutions are designed to help customers increase market share, enhance their competitive advantage and deliver on their promises to their customers. Our primary products are contained in the following product suites: i2
Supply Chain Management, i2 Supplier Relationship Management, i2 Customer Relationship Management, i2 Content and TradeMatrix Open Commerce Network.
i2 Supply Chain Management™
(SCM). The i2 SCM suite helps businesses coordinate the movement of goods and materials through the supply chain, to product delivery and to the customer. i2 SCM can provide multi-enterprise visibility, collaboration,
decision-support and execution capability. Using i2 SCM, a business may estimate future demand for its products to help planners to more accurately estimate future supply needs. As a result, businesses can make better decisions about how much of
what products to make, when, and what parts to pull through the chain to make those products. The i2 SCM suite also extends to the planning of procurement, production, logistics and services.
i2 Supplier Relationship Management™ (SRM). The i2 SRM suite helps companies and their suppliers collaborate on sourcing and procurement for supply management. i2 SRM bridges product development, sourcing, supply planning and
procurement across the value chain, providing the ability to create, execute and sustain global sourcing strategies. i2 SRM provides decision-support and optimization tools that help companies improve decision-making on supplies and the parts to use
in products. During product development, i2 SRM helps to optimize designs by considering sourcing and supply chain constraints, as well as allowing design
6
collaboration when outsourcing manufacturing or custom parts. During procurement, i2 SRM helps companies to define sourcing strategies to reduce supply risks and costs, negotiate terms and
streamline the requisitioning and buying of materials.
i2 Customer Relationship Management™ (CRM). The i2 CRM suite helps businesses optimize and execute customer
orders across the value chain. i2 CRM helps drive the order management and fulfillment processes of managing customer relationships, providing visibility into inventory so a company can make accurate promises and deliver in a faster way at a lower
cost. i2 CRM also provides solutions for marketing, sales and service, including such functionality as product configuration, pricing, order management, service asset management, service scheduling and dispatch.
i2 Content.™ Content is information about items and suppliers that can be used to describe, search, compare, buy or select an item. The i2 Content solution consists of content management software, content
services and reference content. Our content management software provides publication, subscription, management and syndication functionality for marketplaces and helps the searching of multiple marketplaces, the identification of parts or services
that match both technical and price criteria and the delivery of content services via the Internet. Additionally, our content management software provides a standards-based method for content exchange and collaboration among trading partners and
marketplaces. Content services provided with i2 Content include legacy data conversion services and custom content creation-capabilities that help enterprises and marketplaces to access needed part, component and supplier data. Our reference content
contains part, component and item-specific records and provides technical and pricing information about the available products and the suppliers that are connected to marketplaces.
TradeMatrix Open Commerce Network (OCN).™ OCN is intended to be a collaborative network that helps buyers, suppliers and marketplaces to connect to each other, access content, collaborate and conduct commerce. OCN connects trading partners
across a range of platforms and technology standards to facilitate the creation of collaborative communities that increase visibility and velocity throughout the entire value chain. OCN extends the i2 SRM, SCM and CRM solutions to gain access to
real-time information from trading partners and marketplaces.
Product Development
We focus our ongoing product development efforts on enhancing, broadening and deepening the functionality of our core products and services to address new industries, marketplaces and
geographic markets. These products and services are evolving and have been developed using an architecture that is intended to be (i) modular, so components may be substituted, (ii) flexible, to respond to changing business conditions,
(iii) open, to support multiple protocols, and (iv) scalable, to handle queries and transactions that are typical in a complex business environment.
Our development staff has developed our products (and made improvements to products offered by acquired companies) utilizing project teams focused on independent components of the software under development. We
maintain product release planning procedures to ensure integration, testing and version control among the different project development teams. We maintain our primary development centers in North America and India. Research and development expenses
totaled $290.4 million in 2001, $217.9 million in 2000 and $132.3 million in 1999.
Customer Service and Support
We maintain a technical support team that operates through our global service and support centers. Our customer service and support activities consist
of the following:
Consulting. We offer our customers on-site consulting services aimed at
assisting in the implementation of our solutions and services and integration with the customers’ existing systems. We also use third-party consulting firms.
7
Training. We offer education and training programs for our
customers and third-party implementation providers with classes offered at our offices or at customer locations. We also offer web-based and self-paced learning programs. These classes focus on the fundamental principles of our software products as
well as implementation and use.
Maintenance and Product Updates. We provide ongoing product
support services for our solution suites. Maintenance contracts are typically sold to customers at the time of the initial license and may be renewed for additional periods. Our maintenance agreements with our customers provide product updates and
enhancements to the products purchased by the customer. Our support services are packaged into three tiers (silver, gold and platinum), which offer customers the ability to choose the level of service they desire.
Hosting Services. Customers can choose to have various i2 software hosted through one of our current third-party
authorized hosting providers. We offer services to our customers using third-party hosting providers, including the initial configuration, upgrades and managed services for the hosted environment.
Sales and Marketing
We sell our software and
services through our direct sales organization augmented by other sales channels, including systems consulting and integration firms and other industry-related partners. Our direct sales organization consists of sales representatives and pre-sales
consultants supported by personnel with experience within the industries we serve.
We currently have joint marketing agreements
with software vendors and other industry-related businesses. Additionally, we have alliances with top global and regional systems consulting and integration firms, including Accenture, A. T. Kearney, Cap Gemini Ernst & Young, Deloitte &
Touche, IBM Global Services and PricewaterhouseCoopers, among others. These joint marketing agreements and alliances generally provide the vendors with non-exclusive rights to market our products and access to our marketing materials and product
training. By using these indirect sales channels, we seek to capitalize on the installed base of other companies and obtain favorable product recommendations from the business partners, thereby increasing the market coverage of our products.
International Operations
We have international offices in Australia, Belgium, Brazil, Canada, China, Finland, France, Germany, India, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, Singapore, South Africa, Spain, Sweden, Taiwan, Thailand and the
United Kingdom. Total assets related to our international operations accounted for 15.1% of our total consolidated assets as of December 31, 2001. In 2001, international revenues accounted for 37.5% of total revenues.
Competition
The markets in which we operate are
highly competitive. Our competitors are diverse and offer a variety of solutions targeting various segments of the extended supply chain as well as the enterprise as a whole. Some competitors compete with suites of applications, while most offer
solutions designed specifically to target particular functions or industries. We believe our principal competitors are as follows:
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ERP Software Vendors. These include companies such as Oracle and SAP, who have added or are attempting to add capabilities for supply chain
planning or collaboration capabilities to their transaction system products. |
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Other Software Vendors. These include companies such as Adexa and Manugistics who compete principally with our supply chain management
applications; companies such as Agile and Ariba who
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compete principally with our supplier relationship management applications; and companies such as Trilogy and Yantra who compete principally with our customer relationship management
applications.
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Custom Development. To a lesser degree, we compete with independent developers of enterprise application software as well as internal development
efforts by corporate information technology departments. |
Proprietary Rights and Licenses
We regard our trademarks, copyrights, patents, trade secrets, technology and other proprietary rights as critical to our business. To protect our
proprietary rights, we primarily rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures, license agreements and contractual provisions. We license our software products in object code (machine-readable)
format to customers under license agreements and we do not sell or otherwise transfer title of our software products to our customers. Our non-exclusive license agreements generally allow the use of our software products solely by the customer for
specified purposes without the right to sublicense or transfer our software products.
Trademarks are important to our business
as we use them in our marketing and promotional activities as well as with the delivery of our software products. Our registered trademarks include i2, i2 Technologies & Design, RHYTHM, PLANET, TRADEMATRIX and GLOBAL SUPPLY CHAIN MANAGEMENT.
Other trademarks of i2 include POWERING THE BOTTOM LINE.
We hold a number of U.S. patents that predominantly relate to planning
systems and interactive report generation. These patents expire at various times through 2019. We also depend on trade secrets and proprietary know-how for certain unpatented aspects of our business. To protect our proprietary information, we enter
into confidentiality agreements with our employees, consultants and licensees, and generally control access to and distribution of our proprietary information. We resell some software that we license from third parties and incorporate in, or sell in
conjunction with, our products.
Employees
As of February 28, 2002, we had approximately 4,800 full-time employees, including approximately 1,800 primarily engaged in research and development activities and approximately 1,000 engaged in sales and marketing
activities. Our future success depends in significant part upon the continued service of our key technical, sales and managerial personnel and our ability to attract and retain highly qualified technical, sales and managerial personnel. None of our
employees are represented by collective bargaining agreements and we have never experienced a work stoppage. We believe employee relations are good.
Our primary offices are located in Dallas, Texas and are
held under lease contracts that expire at various dates through 2011. These facilities house our executive and primary administrative offices as well as sales, marketing, research and development and consulting personnel. We also lease space for our
other offices in the U.S., Australia, Belgium, Brazil, Canada, China, Finland, France, Germany, India, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, Singapore, Spain, South Africa, Sweden, Thailand, Taiwan and the United Kingdom
primarily to provide sales, customer support, consulting services and research and development activities. We consider our properties to be suitable and adequate for our present needs.
ITEM 3. LEGAL PROCEEDINGS
Certain employees of a company we acquired in 1998
are currently disputing the cancellation of unvested stock options received at the time of the acquisition. Vesting of the options was dependent upon continued employment and the employees were terminated in 2000. We maintain the former employees
were not entitled to unvested stock options.
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A former executive officer has made certain claims against us related to his termination and
his ability to exercise and sell certain stock options. Our position is that the former executive officer was terminated for cause and we dispute his other claims and therefore we intend to vigorously defend against this lawsuit.
Since March 2001, a number of purported class action complaints have been filed in the United States District Court for the Northern District
of Texas (Dallas Division) against us and certain of our officers and directors. The cases have been consolidated, and in August 2001, plaintiffs filed a consolidated amended complaint. The consolidated amended complaint alleges that we and certain
of our officers violated the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making purportedly false and misleading statements concerning the characteristics and implementation of certain of
our software products. The consolidated amended complaint seeks unspecified damages on behalf of a purported class of purchasers of our common stock during the period between May 4, 2000 and February 26, 2001. We are vigorously defending against
this lawsuit and we filed a motion to dismiss the consolidated amended complaint in September 2001. The motion has been fully briefed and is currently pending before the court.
In April 2001, a purported shareholder derivative lawsuit was filed in Dallas County, Texas, against certain of our officers and directors, naming i2 as a nominal defendant. The suit
claims that certain of our officers and directors breached their fiduciary duties to us and our stockholders by: (i) selling shares of our common stock while in possession of material adverse non-public information regarding our business and
prospects, and (ii) disseminating inaccurate information regarding our business and prospects to the market and/or failing to correct such inaccurate information. As stated, the complaint is derivative in nature and does not seek relief from i2
itself. However, we have entered into indemnification agreements in the ordinary course of business with certain of the defendant officers and directors and may be obligated throughout the pendency of this action to advance payment of legal fees and
costs incurred by the defendants pursuant to our obligations under the indemnification agreements and/or applicable Delaware law. This suit has since been removed to the United States District Court for the Northern District of Texas (Dallas
Division). We intend to vigorously defend against this lawsuit and filed a motion to dismiss the action on February 19, 2002.
We are subject to various other claims and legal actions, including claims and legal actions from former employees and certain customers. We have accrued for estimated losses in the accompanying financial statements for those matters where
we believe the likelihood of an adverse outcome is probable and the amount of the loss is reasonably estimable. Although we currently believe the outcome of the outstanding legal proceedings, claims and litigation involving us will not have a
material adverse effect on our business, financial condition or results of operation, the outcome is inherently uncertain, and it is possible that some of these matters may be resolved adversely to us. The adverse resolution of any one or more of
these matters could have a material adverse effect on our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were
submitted to a vote of security holders during the fourth quarter of 2001.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol “ITWO.” The following table lists the high and low per share
intra-day sales prices for our common stock as reported by the Nasdaq National Market for the periods indicated. All share and per share data in this report reflect the two-for-one stock splits of our common stock paid as 100% stock dividends on
June 2, 1998, February 17, 2000 and December 5, 2000.
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High
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Low
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| 2001 |
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| Fourth quarter |
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$ |
8.59 |
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$ |
3.10 |
| Third quarter |
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20.05 |
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2.98 |
| Second quarter |
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28.20 |
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12.88 |
| First quarter |
|
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61.00 |
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12.56 |
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| 2000 |
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| Fourth quarter |
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$ |
96.13 |
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$ |
36.00 |
| Third quarter |
|
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99.44 |
|
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49.13 |
| Second quarter |
|
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71.38 |
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34.50 |
| First quarter |
|
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111.75 |
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35.08 |
As of March 19, 2002, there were 425,343,186 shares of our common stock
outstanding held by 1,187 holders of record.
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future. Future dividends, if any, will be determined by our Board of Directors.
In March 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 so elected 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. Our employees elected to voluntarily cancel 39.3
million stock options in connection with this program. On October 17, 2001, we completed our voluntary stock option exchange program and we granted 38.2 million new stock options to participating employees with an exercise price of $4.29 per
share, which was the closing sales price of our common stock on that day as reported by the Nasdaq National Market. Under the terms of the program, participating employees received 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 were recognized. Members of our Board of Directors, executive officers, and various other members of our senior
management team were not eligible to participate in this program.
In October 2001, we announced a voluntary “cash
compensation for stock options” program whereby employees were given the opportunity to elect to receive a reduction in annual base salary for a twelve-month period in exchange for stock options. The number of options granted to each
participant was based upon the amount of annual base salary reduction they elected to forego. A total of 7.8 million stock options were granted to participating employees on November 16, 2001 and December 21, 2001. The exercise price of the options
was either $7.27 per share or $6.58 per share, the closing sales prices of our common stock on each of the respective grant dates. The options will vest in 24 equal monthly increments from the date of grant.
During the fourth quarter of 2001, we issued an aggregate of 5,500 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 $0.08 to $1.09 per share. These issuances were deemed exempt from registration under Section 5 of the Securities Act of 1933 in reliance upon Rule 701 thereunder and appropriate
legends were affixed to the share certificates issued in each such transaction.
11
As of December 31, 2001, we had $410.9 million of outstanding debt that is convertible into
shares of our common stock. Details of this debt are presented in Note 8 — Borrowings in the Notes to Consolidated Financial Statements included elsewhere in this report. As of December 31, 2001, none of the notes has been converted to common
stock.
On January 17, 2002, our Board of Directors approved adoption of a stockholder rights plan and declared a dividend of
one preferred share purchase right for each outstanding share of common stock. Stockholders of record on January 28, 2002 received, for each share of common stock then owned, one right to purchase a unit of one one-thousandth of a share of Series A
junior participating preferred stock at a price of $75.00 per unit. The rights, which expire on January 17, 2012, will only become exercisable upon distribution. Distribution of the rights will not occur until ten days after the earlier of (i) the
public announcement that a person or group has acquired beneficial ownership of 15.0% or more of our outstanding common stock or (ii) the commencement of, or announcement of an intention to make, a tender offer or exchange offer that would result in
a person or group acquiring the beneficial ownership of 15.0% or more of our outstanding common stock.
Shares of Series A
preferred stock purchasable upon exercise of the rights are not redeemable. Each share of Series A preferred stock will be entitled to a dividend of 1,000 times the dividend declared per share of common stock. In the event of liquidation, each share
of Series A preferred stock will be entitled to a payment of the greater of (i) 1,000 times the payment made per share of common stock or (ii) $1,000. Each share of Series A preferred stock will have 1,000 votes, voting together with the common
stock. Finally, in the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each share of Series A preferred stock will be entitled to receive 1,000 times the amount received per share of common
stock. Because of the nature of the dividend, liquidation and voting rights, the value of each unit of Series A preferred stock purchasable upon exercise of each right should approximate the value of one share of common stock.
The rights have significant anti-takeover effects by causing substantial dilution to a person or group that attempts to acquire us on terms
not approved by our Board of Directors. The rights should not interfere with any merger or other business combination approved by the Board of Directors since the rights may be redeemed by us at the redemption price prior to the occurrence of a
distribution date. Additional details of this stock rights plan are presented in Note 17 — Subsequent Events in the Notes to Consolidated Financial Statements included elsewhere in this report and in our Current Report on Form 8-K filed on
January 22, 2002.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following summary of
consolidated financial data is derived from our audited financial statements as of and for the five years ended December 31, 2001. The following consolidated financial data should be read in conjunction with Management’s Discussion and Analysis
of Financial Condition and Results of Operations and our Consolidated Financial Statements and related notes included elsewhere in this report. As discussed in Note 2 — Business Combinations in the Notes to Consolidated Financial
Statements, our acquisitions in 2001 and 2000 were accounted for using the purchase method. Accordingly, the operating results of the acquired companies are included with our results of operations since their respective dates of acquisition. Amounts
shown are in thousands, except per share data.
| |
|
Year Ended December 31,
|
|
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
1998
|
|
1997
|
|
| Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Software licenses |
|
$ |
457,674 |
|
|
$ |
709,177 |
|
|
$ |
352,597 |
|
$ |
234,316 |
|
$ |
141,766 |
|
| Services |
|
|
320,926 |
|
|
|
271,009 |
|
|
|
147,893 |
|
|
91,726 |
|
|
58,218 |
|
| Maintenance |
|
|
206,999 |
|
|
|
146,139 |
|
|
|
70,620 |
|
|
43,115 |
|
|
21,792 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues |
|
|
985,599 |
|
|
|
1,126,325 |
|
|
|
571,110 |
|
|
369,157 |
|
|
221,776 |
|
| Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of software licenses |
|
|
66,572 |
|
|
|
53,331 |
|
|
|
17,981 |
|
|
7,967 |
|
|
2,746 |
|
| Amortization of acquired technology |
|
|
48,046 |
|
|
|
29,054 |
|
|
|
— |
|
|
— |
|
|
— |
|
| Cost of services and maintenance |
|
|
298,318 |
|
|
|
234,191 |
|
|
|
125,934 |
|
|
77,459 |
|
|
48,422 |
|
| Sales and marketing |
|
|
465,861 |
|
|
|
390,111 |
|
|
|
194,752 |
|
|
129,978 |
|
|
77,071 |
|
| Research and development |
|
|
290,419 |
|
|
|
217,938 |
|
|
|
132,278 |
|
|
94,199 |
|
|
57,392 |
|
| General and administrative |
|
|
107,992 |
|
|
|
86,888 |
|
|
|
53,188 |
|
|
38,191 |
|
|
24,984 |
|
| Amortization of intangibles |
|
|
2,792,793 |
|
|
|
1,724,551 |
|
|
|
— |
|
|
— |
|
|
— |
|
| In-process research and development and acquisition-related expenses |
|
|
12,700 |
|
|
|
102,373 |
|
|
|
6,552 |
|
|
7,618 |
|
|
9,306 |
|
| Impairment of intangibles |
|
|
4,740,519 |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
— |
|
| Restructuring charges |
|
|
116,541 |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total costs and expenses |
|
|
8,939,761 |
|
|
|
2,838,437 |
|
|
|
530,685 |
|
|
355,412 |
|
|
219,921 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income (loss) |
|
& |
