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The Wall Street Journal: Shell In Dispute With i2 Tech, Seeks To End Contract

April 6, 2004 12:32 p.m.

NEW YORK -- Shell Global Solutions is seeking to terminate a contract with i2 Technologies Inc. (ITWOE) amid a dispute over the two-year-old software project's delays.

Shell told i2 Technologies last Thursday it is ending a license and development agreement because the software company failed to meet a key development milestone, i2 disclosed in a filing Monday with Securities & Exchange Commission.

"Shell confirms termination of the contract in accordance with its terms and conditions as an important delivery date has been missed," the Houston company said in a statement. The unit of Royal Dutch/Shell Group (RD, SC) added "a fallback plan is being implemented."

Dallas-based i2, however, said it doesn't believe Shell has a "valid legal basis" to terminate the partnership. Melaine Ofenloch, an i2 spokeswoman, said the company intends to "take any and all actions to vigorously defend its position."

The two companies have been developing a supply chain software package for the downstream, or refining, transportation and marketing, oil and gas industry since at least March 2002. The first components of the software suite were announced last September, but the project has had problems.

In an annual report filed last month, i2 disclosed it had incurred "significant losses on one contract due to delays in achieving milestones." Ofenloch said Tuesday the unnamed customer was Shell .

i2 hasn't determined the "future direction of its downstream oil and gas" business, but some employees in that division will be dismissed as part of a recently announced restructuring, Ofenloch said. i2 had about 2,450 workers at the end of December.

The dispute with Shell is a black eye for i2, whose complex software has prompted several disagreements with customers, including a public spat with Nike Inc. (NKE) in 2001. The company has struggled with a sharp drop in sales and accounting problems. It's the target of an ongoing SEC investigation.

The prospects for i2's downstream oil and gas software suite have "dimmed" and i2 could lose millions of dollars in development services revenue, said Pat Walravens of JMP Securities.

However, he added, these negatives may be offset by two factors: the Shell project was unprofitable for i2 and it may have distracted i2 from its core markets, including high-tech and retail.

"Given the number of challenges currently facing i2, we would prefer to see it focus on its core competencies," Walravens wrote in a note. He rates i2 at strong buy and doesn't own the stock. JMP doesn't have investment-banking ties with i2. Shares of i2, which were delisted by Nasdaq and are quoted on the Pink Sheets, were recently down 5 cents, or 4%, to $1.20.

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