i2 Technologies, Inc. Settles Fraud Charges Involving Misstatement of Approximately $1 Billion in Revenues
FOR IMMEDIATE RELEASE
Company Will Pay $10 Million to Injured Investors
Washington, D.C., June 9, 2004 - The Securities and Exchange Commission today brought enforcement proceedings against i2 Technologies, Inc. for misstating approximately $1 billion of software license revenues, including over $125 million of revenues it should never have recognized, over a nearly five-year period that ended in 2002. As a result of the misstatement, i2's periodic filings with the Commission and press releases - which portrayed i2's revenue and pro forma income positively - were false. Had i2, a Dallas-based developer and marketer of enterprise supply chain software and management solutions, accurately presented its financial condition for these periods, it would have disclosed increasingly negative results.
i2 agreed to settle the enforcement proceedings by consenting to a cease-and-desist order finding that the company violated the antifraud, internal controls, record-keeping and reporting provisions of the federal securities laws, and to pay a $10 million penalty in a related civil action filed in U.S. District Court. The entire penalty proceeds will be distributed to injured i2 shareholders. i2 also has undertaken to continue cooperating with the Commission's ongoing investigation. The company settled without admitting or denying the Commission's substantive findings against it.
"i2's revenue recognition problems were endemic and were triggered in certain instances to meet analysts' revenue and earnings expectations. Schemes of this nature and magnitude adversely impact investors and warrant significant penalties against the company responsible for having created and fostered the environment in which the misconduct occurred," said Harold F. Degenhardt, Administrator of the Commission's Fort Worth Office.
"This case sends the message to public software companies that they must ensure that the realities of their business support their accounting treatment of license revenues," said Spencer C. Barasch, enforcement head in the Commission's Fort Worth Office. "Trying to squeeze square pegs into round holes for the sake of inflating revenues, as i2 did here, is a deceptive and unsustainable practice that will be firmly punished."
Historically, i2 favored up-front recognition of software license revenue, purportedly in accordance with generally accepted accounting principals (GAAP). However, as i2 knew or was reckless in not knowing, immediate recognition of revenue was inappropriate for some of i2's software licenses because they required lengthy and intense implementation and customization efforts to meet customer needs. In some cases, i2 shipped certain products and product lines that lacked functionality essential to commercial use by a broad range of users. In other cases, the company licensed certain software that required additional functionality to be usable by particular customers. On still other occasions, i2 exaggerated certain product capabilities, or entered into side agreements with certain customers that were not properly reflected in the accounting for those transactions. In each case, significant modification and customization efforts were necessary to provide the required functionality.
i2 also improperly recorded revenue from four barter transactions during the relevant period. These transactions involved third-party purchases of software licenses from i2, from which i2 recognized revenue immediately, in exchange for i2's agreement to purchase from the other parties in the future a comparable amount of products or services. In some of these transactions, i2 paid a premium over the prevailing rates for those products or services, in an effort to equalize both sides of the deal. When i2 recorded revenue from these transactions, it could not determine the fair value of the items exchanged within reasonable limits. Accordingly, i2's up-front recognition of license revenue from these transactions was improper under GAAP.
These improper and deceptive means of recognizing revenue up-front enabled i2 to meet analysts' revenue and earnings expectations for certain reporting periods. In July 2003, i2 restated its financial results for the four years ended December 31, 2001, and the first three quarters of 2002. The restatement involved approximately $1 billion of revenues, and included revenue write-offs of over $125 million.
As noted above, the Commission's investigation is continuing.
For further information contact:
Harold F. Degenhardt: 817/978-6469
Spencer C. Barasch: 817/978-6425See Also: Litigation Release; Administration Proceeding