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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
[ ] 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 000-23091
J.D. EDWARDS & COMPANY
(exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
DELAWARE 84-0728700
(state or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
ONE TECHNOLOGY WAY, DENVER, COLORADO
(address of principal executive 80237
offices) (zip code)
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Registrant's telephone number, including area code 303/334-4000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
COMMON STOCK, PAR VALUE $0.001
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 [ ]
Indicated 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. [ ]
As of January 16, 1998, there were 93,979,136 shares of the Registrant's
common stock outstanding, and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on January 16, 1998) was approximately $792
million. Shares of the Registrant's common Stock held by each executive officer
and director and by each entity that owns 5% or more of the Registrant's
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the
1998 Annual Meeting of Stockholders to be held on March 18, 1998 are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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PART I
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about J.D. Edwards' industry, management's beliefs and certain
assumptions made by J.D. Edwards' management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results may differ materially from those expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include those set forth herein under "Factors Affecting the Company's Business,
Operating Results, and Financial Condition" on pages 17 through 25. Unless
required by law, the Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. However, readers should carefully review the risk factors
set forth in other reports and documents that the Company files from time to
time with the Securities and Exchange Commission, particularly the Quarterly
Reports on Form 10-Q and any Current Reports on Form 8-K.
J.D. Edwards & Company, J.D. Edwards and WorldVision are registered
trademarks of the Company. WorldSoftware, OneWorld, Genesis and Configurable
Network Computing are trademarks of the Company. All other trade names and
trademarks referred to in this Annual Report on Form 10-K are the property of
their respective owners.
ITEM 1. BUSINESS.
Overview
J.D. Edwards develops, markets and supports highly functional Enterprise
Resource Planning ("ERP") software solutions that operate on multiple computing
platforms and are designed to accelerate customers' time to benefit, lower
customers' cost of ownership and reduce information systems risks arising from
changes in technology and business practices. The Company's integrated software
application suites support manufacturing, finance, distribution/logistics and
human resources operations for multi-site and multinational organizations.
Through its Configurable Network Computing ("CNC") architecture, the Company's
ERP software is specifically designed to enable customers to change technology
and/or business practices while minimizing costs and business interruptions. The
Company provides implementation, training and support services designed to
enable customers to rapidly achieve the benefits of the Company's ERP solutions.
The Company has developed and marketed ERP solutions for over 20 years,
principally for operation on AS/400 and other IBM mid-range systems and, more
recently, on leading UNIX and Windows NT ("NT") servers through Windows- and
Internet browser-enabled desktop clients.
The Company's family of application suites is designed to improve most
organizations' core business processes. In addition, the Company extends its
application suites to address certain vertical markets with specific
configurations, templates and additional software features designed to meet
these industries' needs. The Company offers two versions of its application
suites -- WorldSoftware and OneWorld. WorldSoftware operates in a host-centric
environment on the AS/400 platform. With the addition of the WorldVision thin
client interface, WorldSoftware applications can be operated through a
Windows-based graphical user interface. OneWorld incorporates the Company's CNC
architecture and operates on leading UNIX and NT servers, as well as the AS/400
platform. The Company believes its network-centric CNC architecture provides a
valuable extension beyond traditional client/server architectures by masking
complexity, lowering cost of change and facilitating greater scalability. In
addition, WorldSoftware and OneWorld are capable of operating together in a
unified enterprise-wide environment. The Company also provides WorldSoftware and
OneWorld toolsets to enable rapid implementation, customization and modification
of its application suites.
The Company distributes, implements and supports its products worldwide
through 48 offices and more than 190 third-party business partners. To date, the
Company has more than 4,300 customers with sites in
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approximately 100 countries. Customers include Amgen, Inc., E&J Gallo Winery,
Harley Davidson Europe Ltd., Lexmark International, Inc., Mobil Corporation,
Samsonite Corporation and SmithKline Beecham plc.
The Company was incorporated in Colorado in March 1977 and was
reincorporated in Delaware in August 1997. The Company's principal executive
office is located at One Technology Way, Denver, Colorado 80237 and its
telephone number is 303/334-4000. The Company's home page can be located on the
World Wide Web at http://www.jdedwards.com. Except as otherwise noted herein,
all references to "J.D. Edwards" or the "Company" shall mean J.D. Edwards &
Company and its subsidiaries.
Recent Developments
Corporate Realignment. The Company recently completed a company-wide
realignment. This realignment is strategically aimed at addressing the Company's
expansion into the open systems market, maintaining its strong position in the
AS/400 market and managing global growth. Four key executives have been promoted
to senior vice president positions as a part of this realignment.
The Company believes that by realigning its corporate structure it will be
able to capitalize on market opportunities in the both the AS/400 and open
systems markets, as well as provide consistency throughout the organization that
will allow the Company to better achieve its goals and objectives.
Industry Background
ERP systems are designed to enhance an organization's ability to manage and
execute business functions such as manufacturing, finance,
distribution/logistics and human resources. These systems manage and store large
amounts of diverse business information, providing continuous and simultaneous
availability of information to geographically dispersed employees, customers and
suppliers.
Historically, ERP solutions have primarily consisted of host-centric
systems that operate on mainframes or mid-range computers. These systems,
developed over many years and representing considerable investments by
customers, provide high levels of performance, scalability, data security and
reliability. In addition, host-centric ERP systems designed as single-vendor
environments offer reduced complexity in implementation and management. However,
such systems generally do not have the flexibility to support diverse and
changing operations within a customer's business or to respond effectively to
changing technologies. Despite these limitations, many host-centric systems are
still being widely deployed for ERP applications because of their strengths.
In recent years, ERP systems have been developed with client/server
architectures. These distributed systems generally offer users easier access to
information, as well as multi-site processing capabilities. Compared to
host-centric systems, client/server environments are better able to accommodate
diverse hardware, software and network technology changes that can result from
rapid organizational growth, acquisitions and consolidations. However, such
systems are inherently complex and generally require lengthy and costly
implementation efforts, extensive user training and substantial ongoing support.
Both host-centric and client/server systems require extensive initial
implementation and ongoing modifications to support an organization's current
and continuously changing business practices. The implementation of a new ERP
system may in some cases require an organization to subordinate or re-engineer
its established business practices to accommodate system or architectural
constraints. These requirements can increase the cost of ownership of an ERP
system and overwhelm organizations with limited internal IT staffs, particularly
rapidly growing and resource-constrained mid-sized organizations. In addition,
the difficulties associated with implementation and modification can put
organizations at risk of costly interruptions to normal business operations.
Accordingly, the Company believes there is a substantial market opportunity for
ERP solutions that offer faster time to benefit, reduce risks associated with
implementation and modification and lower overall cost of ownership. These
solutions should consist of an integrated suite of ERP applications and services
that offer the reliable performance, ease of implementation and ease of
management available in host-centric systems as well as the flexibility to
support multi-site, multi-supplier, multi-platform environments
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found in client/server systems. At the same time, these solutions should mask
the complexities of the underlying hardware, software and network technologies.
The J.D. Edwards Solution
J.D. Edwards develops, markets and supports highly functional ERP software
solutions that operate on multiple computing platforms and are designed to
accelerate customers' time to benefit, lower customers' cost of ownership and
reduce information systems risks arising from changes in technology and business
practices. The Company's integrated software application suites support
manufacturing, finance, distribution/logistics and human resources operations
for multi-site and multinational organizations. Through its CNC architecture,
the Company's ERP software is specifically designed to enable customers to
change technology and/or business practices while minimizing costs and business
interruptions. The Company provides implementation, training and support
services designed to enable customers to rapidly achieve the benefits of the
Company's ERP solutions. The Company has developed and marketed ERP solutions
for over 20 years, principally for operation on AS/400 and other IBM mid-range
systems and, more recently, on leading UNIX and NT servers through Windows- and
Internet browser-enabled desktop clients.
The Company's ERP solutions are designed to offer the following customer
benefits:
Deliver and Support Comprehensive Solutions for Global Enterprises. The
Company's ERP software supports an organization's core business processes
through a family of application suites, including manufacturing, finance,
distribution/logistics and human resources. These application suites are
designed to enable a customer to integrate business information across its
organization and throughout its entire supply chain; accommodate diverse
business practices across a geographically dispersed organization; and support
multiple languages, currencies and jurisdictions. The Company's experienced
service organization provides training, support and a tested methodology to
enable rapid implementation of its ERP solutions.
Facilitate Changes in Technology and Business Practices. The Company's CNC
architecture is designed to mask the complexities of underlying platform
technologies, thus enhancing flexibility and simplifying software modification.
Using the Company's highly flexible software toolset, customers can modify the
Company's application suites to accommodate their business practices without
regard to the underlying hardware, software and network technologies. By masking
the complexity of the underlying technology, the Company's CNC architecture
facilitates the incorporation of new technologies and enables customers to
modify business practices without extensive low-level software code modification
or support.
Offer Technology Choices for Different Market Segments. Customers can
select between two versions of the Company's application suites. The Company
offers its WorldSoftware version to customers who seek the reliable performance
and lower cost of ownership associated with host-centric systems. The Company
provides its OneWorld version to customers who want the accessibility of
information and ease of use typically associated with client/server systems,
without the burdens often associated with these complex systems. OneWorld's
object-based technology is designed to enhance programmer productivity,
facilitate modification of business practices and leverage network scalability.
OneWorld, introduced in late 1996, operates on leading UNIX and NT servers, in
addition to the AS/400 platform. By offering two versions of its software, the
Company addresses different market segments and allows customers to maintain
consistent business functionality while combining different technologies to meet
their specific requirements.
Preserve and Extend Customer Investment. The Company designed OneWorld to
provide customers with a migration path to a network-centric architecture, while
preserving the customers' existing investments in AS/400 platforms. The
Company's CNC architecture enables OneWorld and WorldSoftware application suites
to co-exist on the AS/400 platform, allowing customers to incorporate the new
technologies of OneWorld while maintaining consistent functionality with their
WorldSoftware systems. This architecture minimizes disruptions and reduces the
overall cost of change for customers.
Lower Cost of Ownership. The Company's ERP solutions are designed to reduce
overall cost of ownership through a combination of advanced technology and
comprehensive service and support. The Company's CNC architecture is
specifically designed to enable customers to change business practices or
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technology environments without significant costs or business interruptions. In
addition, the Company's OneWorld software version is platform independent,
allowing customers to select the best price and performance solutions from
multiple hardware and software suppliers. The Company also offers implementation
services and support enabling more rapid deployment of the Company's ERP
solutions, thus reducing customers' overall cost of ownership.
Establish Long-Term Customer Relationships. The Company has designed its
ERP software solutions with broad business functionality and flexibility to
reduce the need for significant custom modifications. By minimizing custom
modifications, the customer's ability to benefit from subsequent releases is
enhanced, as is the Company's ability to support the software as implemented.
The Company believes its investment in worldwide customer support services and
user groups facilitates customer communication and feedback, enhancing customer
satisfaction. The Company believes this focus on standard software functionality
and flexibility, and its investment in customer support and user groups,
contribute to long-term customer relationships.
Strategy
J.D. Edwards' objective is to strengthen and expand its position as a
leading supplier of ERP software and services. The key elements of the Company's
strategy are as follows:
Leverage Leadership Position in Middle Market. The Company believes that
its ERP solutions address the needs of a broad spectrum of organizations,
ranging from organizations with revenue in the tens of millions to the largest
global enterprises. The Company has principally targeted mid-sized
organizations, including divisions and business units of larger companies, with
annual revenues between $100 million and $2 billion. The Company believes the
ease of implementation and lower cost of ownership associated with its
application suites meet important needs of rapidly growing and
resource-constrained mid-sized organizations. The Company's ERP solutions
provide robust functionality, reduced implementation time and ease of use.
Although the Company expects to devote a significant amount of its resources to
further penetrate this market, the Company also intends to leverage its
extensive ERP experience with mid-sized organizations to address the needs of
larger global enterprises.
Leverage Development Resources through Advanced Technologies. The Company
uses advanced technologies to develop highly functional, integrated ERP
solutions in a rapid and efficient manner. The Company's OneWorld toolset is
specifically designed for rapid creation of business functionality and
incorporation of new technologies. The Company uses the OneWorld toolset to
develop OneWorld application suites, thus leveraging the Company's development
resources. Using its OneWorld toolset, the Company has been able to recreate
business functionality in OneWorld application suites in substantially less time
than it took to develop the same application suites for WorldSoftware. The
Company believes that this ability to rapidly create business functionality and
incorporate new technologies is an important competitive advantage in its
market.
Expand Vertical Market Focus. Over the last 20 years, the Company has
acquired significant vertical market experience and expertise through
developing, selling and deploying ERP solutions for over 4,300 customers across
a variety of industries. The Company has leveraged this experience into the
development of customized application suites for a number of vertical markets.
These application suites include configurations and templates designed to
provide more rapid customization, implementation and time to benefit for
customers in these industries. In addition, the Company believes that the
ability to focus its development and sales personnel on the needs of specific
industries has made its sales and marketing efforts more efficient and effective
in these vertical markets. To date, the Company has developed customized
application suites for three vertical markets: (1) architecture, engineering,
construction, mining and real estate; (2) energy and chemical systems; and (3)
public services. The Company is developing additional customized application
suites in vertical markets in which it has significant experience and expertise,
including automotive supply, consumer packaged goods, electronics, industrial
fabrication and assembly and pharmaceuticals.
Provide High Quality Services Directly and Through Third Parties. The
Company believes that its high-quality consulting, implementation, support and
training services enable the Company to achieve a high level
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of customer satisfaction, strong customer references and long-term
relationships, as well as facilitate software improvement based on customer
feedback. The Company is committed to providing efficient, high-quality service.
To this end, the Company offers extensive worldwide implementation, training and
support services for its AS/400 customers directly through its customer service
personnel and through third-party implementation providers to whom the Company
subcontracts such services. The Company intends to rely primarily on third-party
implementation providers to contract directly with customers for the
implementation of the OneWorld version of its application suites. These
relationships will enable the Company to provide implementation services through
third-party personnel with extensive client/server expertise, while
concentrating its own service resources on those activities it can perform most
efficiently. The Company believes that this direct and third-party customer
service strategy will enable it to deliver comprehensive and timely services
worldwide.
Expand Strategic Relationships. The Company intends to expand its existing,
and develop new, strategic relationships with leading hardware and software
suppliers, such as IBM, Hewlett-Packard, Digital Equipment Corporation, Oracle
and Microsoft, as well as with third-party implementation providers, including
global accounting and consulting firms. The Company believes these activities
will provide greater access to a wider variety of potential customers and
leverage the technical expertise of such third parties, allowing the Company to
devote additional resources to product development and marketing activities.
Extend Global Presence. The Company plans to extend its already significant
commitment to international sales and support to take advantage of worldwide ERP
market opportunities. The Company's ERP solutions have been designed to meet the
special requirements of multi-site and multinational organizations. Currently,
the Company employs over 880 international sales and customer service
representatives in 26 international offices. The Company also relies upon its
indirect channel of more than 190 consulting and sales partners with offices
throughout the world. The Company believes that further expansion of its direct
and indirect sales channels will enhance its competitive position, increase
market penetration and achieve greater name recognition.
Products
The Company's family of application suites is designed to improve most
organizations' core business processes. In addition, the Company extends its
application suites to address certain vertical markets with specific
configurations, templates and additional software features designed to meet
these industries' needs. The Company offers two versions of its application
suites -- WorldSoftware and OneWorld. WorldSoftware operates in a host-centric
environment on the AS/400 platform. With the addition of the WorldVision thin
client interface, WorldSoftware applications can be operated through a
Windows-based graphical user interface. OneWorld incorporates the Company's CNC
architecture and operates on leading UNIX and NT servers, as well as the AS/400.
The Company believes its network-centric CNC architecture provides a valuable
extension beyond traditional client/server architectures by masking complexity,
lowering cost of change and facilitating greater scalability. In addition,
WorldSoftware and OneWorld are capable of operating together in a unified
enterprise-wide environment. The Company also provides WorldSoftware and
OneWorld toolsets to enable rapid implementation, customization and modification
of its application suites.
Application Suites
The Company's family of application suites includes manufacturing, finance,
distribution/logistics and human resources. The Company's application suites
accommodate different business practices across a geographically dispersed
organization, as well as multiple languages, currencies and jurisdictions. Each
suite can operate on a stand-alone basis, or can be integrated with other
Company suites and selected third-party applications and systems. The majority
of the Company's customers deploy multiple application suites.
Manufacturing. The Company's manufacturing application suite is designed to
enable organizations to optimize their manufacturing operations resources within
a single plant or across multiple locations and to provide information links to
other departments within the organization.
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Finance. The Company's finance application suite is designed to provide
structure, security and the ability to audit a customer's financial systems
without limiting the customer's ability to respond to operational and market
changes. The application suite provides a central repository of financial
information with simplified transaction processing.
Distribution/Logistics. The Company's distribution/logistics application
suite is designed to provide enterprise-wide distribution chain, supply chain
and logistics management.
Human Resources. The Company's human resources application suite is
designed to address the unique needs of human resource and payroll managers and
offers close integration with the Company's other application suites.
Vertical Market Application Suites
Over the last 20 years, the Company has acquired significant vertical
market experience and expertise through developing, selling and deploying ERP
solutions for over 4,300 customers across a variety of industries. The Company
has leveraged this experience into the development of customized application
suites for a number of vertical markets. To date, the Company has developed
customized application suites for three vertical markets: (1) architecture,
engineering, construction, mining and real estate ("AEC"); (2) energy and
chemical systems ("ECS"); and (3) public services. These industry-specific
configurations are designed to provide more rapid customization and
implementation, accelerating time to benefit for customers in these industries.
Moreover, the Company believes its vertical market strategy has improved the
efficiency and effectiveness of its own sales and service operations. Each of
the current targeted vertical markets is described below:
Architecture, Engineering, Construction, Mining and Real Estate. The
Company's AEC application suite includes templates for such common tasks as job
costing, work order management, contract and service billing and equipment
management, among others, while offering additional industry-specific functions
for each market.
Energy and Chemical Systems. The Company's ECS application suite enables
customers to manage all phases of energy and chemical product and process flow,
which is particularly critical given the regulatory controls and competitive
environment of these industries. This template is used for equipment management,
load and delivery management, procurement planning, bulk inventory management
and other related functions.
Public services. The Company provides its public services application suite
for use by organizations and agencies such as government entities, school
districts and utility companies. In addition to providing such organizations and
agencies with common functions, including financial administration, budgeting
and reporting, and human resources administration, this application suite
provides functionality specific to the needs of each sector.
The Company has significant expertise in the following additional vertical
markets: automotive supply, consumer packaged goods, electronics, industrial
fabrication and assembly and pharmaceuticals. The Company plans to continue its
strategy of customizing application suites and templates for these vertical
markets. As with its existing vertical markets, the Company also plans to offer
industry specific training and services to these new markets. In addition to its
vertical market focus, the Company has developed Genesis, a version of
WorldSoftware targeted for sales to small businesses and distributed exclusively
through business partners.
The Company's application suites are licensed under perpetual, fully paid
licenses. The prices for such licenses are based on the functionality of the
application suite and the number and type of licensed users. Customers pay a
base amount per application suite plus a per user amount. For global
enterprises, the base price per application suite ranges from $16,500 to $38,800
and includes supported languages and localizations. The price per user is
dependent upon volume and type of user and, for global enterprises, generally
begins at $7,900 per user for a concurrent user. Other user types are available
at a lower price.
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Technology Architecture
The Company offers two versions of its application suites -- WorldSoftware
and OneWorld. WorldSoftware operates in a host-centric environment on the AS/400
platform. OneWorld incorporates the Company's CNC architecture and operates on
leading UNIX and NT servers, as well as the AS/400. In addition, WorldSoftware
and OneWorld are capable of operating together in a unified enterprise-wide
environment.
WorldSoftware is a well established, procedural-based technology designed
to take advantage of the security, integrity and easily maintained architecture
of the AS/400 platform. Unlike many host-centric ERP systems, WorldSoftware
provides flexibility to make run-time changes in application suites without the
need to recompile software. WorldSoftware also incorporates features such as an
active data dictionary, user defined codes and a variety of run-time options.
With the addition of the WorldVision thin client interface, WorldSoftware
applications can be operated through a Windows-based graphical user interface.
OneWorld is an object-based, event-driven technology designed to provide
the information access and other user benefits of traditional client/server
systems while masking complexity and accommodating future change. OneWorld's CNC
architecture enables the deployment of a single version of an application across
a network, regardless of the underlying technologies. The CNC architecture
consists of three components: (1) the application layer; (2) the toolset layer;
and (3) the technology layer.
The OneWorld application layer contains the specific business functionality
of the OneWorld manufacturing, finance, distribution/logistics and human
resources application suites. OneWorld application suites are composed of up to
3,000 reusable objects. The applications are distributed by the OneWorld
deployment server in object form to individual platforms where they are compiled
and executed. A customer changes the application logic by modifying the objects
or creating new objects using the OneWorld toolset. Applications containing the
modified or newly created objects are then redistributed to individual
platforms. The Company believes that this single-point-of-change architecture
significantly reduces the cost of change compared to traditional client/server
architectures.
The OneWorld toolset is used to create or modify OneWorld objects, allowing
customers or the Company's developers to quickly create new application
functionality. The toolset also insulates users from lower level technologies.
For example, OneWorld objects exist independent of any specific computer
language. Currently, the OneWorld toolset can generate objects in three computer
languages -- C, C++ and Java. The Company believes it can readily incorporate
new languages in the future as market requirements dictate. The Company also
believes that this unified toolset approach significantly reduces customers'
cost of ownership when compared to traditional client/server systems that
require a variety of tools.
The OneWorld technology layer is designed to mask the differences between
underlying platforms and provide a uniform interface for OneWorld applications.
This uniformity allows a single object to execute on a wide variety of
platforms, a "write once, run anywhere" capability. The technology layer
currently supports IBM's AS/400 platform, Digital Equipment Corporation's Alpha-
and Intel-based NT servers, IBM's RS/6000, Hewlett-Packard's 9000, as well as
other NT servers from NEC and Fujitsu. Supported clients include personal
computers running Windows 95 and Windows NT or any desktop system running an
Internet browser. Supported databases include Oracle databases, the IBM DB2
family and Microsoft's SQL Server. The Company intends to continue to integrate
additional platforms, servers and software as necessary to meet market demands.
The technology layer also integrates a variety of components not typically
integrated in traditional client/server architectures, including an object
request broker, a transaction processing monitor, a workflow engine, a C/C++
generator and a Java generator. In traditional client/server implementations,
customers often have to integrate these components obtained from multiple
suppliers. The Company believes that its architecture and high degree of
integration reduce the cost of ownership and facilitate change when compared to
traditional client/server implementations.
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Toolsets
The Company's software application suites were developed with the Company's
WorldSoftware and OneWorld toolsets. These toolsets are also used for the
ongoing enhancement and modification of the Company's products. The Company
believes the advantages of these toolsets include increased productivity,
increased code consistency, self-documenting code and improved quality.
The WorldSoftware and OneWorld toolsets are bundled with the WorldSoftware
and OneWorld applications, providing customers the same productivity,
consistency and quality benefits enjoyed by the Company's own developers, thus
reducing the complexities typically associated with upgrades to new releases.
Since modifications made by customers to conform the applications to local
business practice and modifications made by the Company in the course of
creating new releases are made with the same toolset, it is easier and faster to
upgrade to new releases while preserving the customers' modifications. The
Company believes that this capability enables customers to incorporate new
functionality more rapidly, while also reducing the Company's support costs,
since fewer customers remain on older releases.
The Company's WorldSoftware toolset provides a high-level architecture,
allowing the Company's development staff to express business practices as an
abstract model. The toolset then uses the model to generate RPG code that runs
on an AS/400 platform in a host-centric, procedural architecture. The Company
continues to use this toolset to add new functionality to the WorldSoftware
application suites.
The Company's OneWorld toolset incorporates more advanced technologies,
including object-based methods and event-driven models. The OneWorld toolset
generates code in C, C++ and Java for a multi-platform, network-centric
environment. Because the OneWorld toolset rigorously separates business logic
from underlying technologies, it also facilitates the incorporation of new
technologies. The Company believes that the ability to incorporate new
technologies by regenerating, rather than rewriting, applications provides a
competitive advantage.
Implementation Services and Training
The Company believes that delivery of its ERP software together with high
quality consulting, implementation, support and training services enables the
Company to achieve a high level of customer satisfaction, strong customer
references and long-term relationships, as well as facilitate software
improvement based on customer feedback. The Company offers extensive
implementation and training services directly and through third parties to
assist customers in rapidly achieving benefits from its ERP solutions. As of
October 31, 1997, the Company had 1,201 employees in its customer services and
training departments, located worldwide, and had relationships with more than
190 business partners with offices throughout the world.
Implementation Services
The Company has designed an implementation process called the REP
methodology ("Rapidly, Economically and Predictably"), which offers a balance of
structure and flexibility for organizations implementing the Company's ERP
solutions. The goal of REP is to accelerate customers' time to benefit by taking
advantage of the Company's technology, business know-how and experience in the
ERP market. REP is a nine-step process designed to enable on-time and on-budget
implementation of the Company's ERP solutions.
In addition to its standard implementation services, the Company also
offers a full range of custom implementation services, including conversion
programs, upgrade assistance, custom modifications and interfaces, and technical
documentation. Implementation services are generally provided on a time and
materials basis.
Third-Party Implementation Providers
The Company seeks to provide its customers with high quality implementation
services in the most efficient and effective manner. In some cases where the
Company does not provide implementation services
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itself, it subcontracts such services through third parties. The Company also
has relationships with a limited number of third-party implementation providers
that contract directly with customers for the implementation of the Company's
software. The Company selects these third-party providers carefully to ensure
that they have the ability and knowledge to represent the Company and implement
its ERP solutions properly. Providers receive intensive training regarding the
Company's application suites and its REP implementation process. In addition,
the Company evaluates these providers on a regular basis to ensure quality
service and support to its customers. In the future, the Company intends to rely
primarily on third-party implementation providers to contract directly with
customers for the implementation of the OneWorld version of its applications
suites. These relationships will enable the Company to provide implementation
services through third-party personnel with extensive client/server expertise,
while concentrating its own service resources on those activities it can perform
most efficiently. The Company believes that this direct and third-party customer
service strategy will enable it to deliver comprehensive and timely services
worldwide.
Education and Training
The Company offers a comprehensive education and training program to its
customers and to the Company's third party implementation providers. Classes are
offered at in-house facilities located throughout the world, as well as at
customer locations. The Company's instructors are certified for each course they
teach, and their backgrounds generally include cross-functional experience in
product testing, customer support and implementation services.
Support
The Company believes that providing business solutions along with a high
level of on-going support to its customers is a critical element in establishing
long-term relationships and maintaining a high level of customer satisfaction.
The Company provides support services for an annual fee, which entitles the
customer to receive telephone customer support, as well as enhancements and
updates to its licensed version of the Company's software. The Company provides
customer support through three customer support centers located in Denver,
London and Singapore, which are connected to each other through a wide area
network. Customer support from these centers is provided in nine languages on a
12-hour-per-day, five-day-per-week basis, and in English-only on a
24-hour-per-day, seven-day-per-week basis. Customer support personnel have the
ability to access customer systems remotely to diagnose and resolve problems. As
of October 31, 1997, the Company had 368 employees in its customer support
department.
Customers
As of October 31, 1997, the Company had licensed its application suites to
over 4,300 customers. During each of the last three fiscal years, no customer
accounted for more than 10% of total revenue. The following is a representative
sample of current customers across various industry groups:
ARCHITECTURE, ENGINEERING, CONSTRUCTION,
MINING AND REAL ESTATE
Benderson Development Company, Inc.
Bovis, Inc.
CBI Industries, Inc.
David Weekley Homes
Foster Wheeler Corporation
Gilbane Building Company
Granite Construction Company
Hensel Phelps Construction Company
Hoffman Corporation
Hubbard Construction Company
Koll Construction Company
PCL Constructors
RE/MAX International Incorporated
Sundt Corporation
The Ryland Group, Inc.
AUTOMOTIVE SUPPLY
ASC, Inc.
B.F. Goodrich Europe Coordination Center
N.V.
Champion Laboratories, Inc.
Dana Corporation
Harley Davidson Europe Ltd.
Lectron Products, Inc.
Saab Automobile AB
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CONSUMER PACKAGED GOODS
American Home Products Corporation
Bacardi Imports, Inc.
Ball Corporation
Beringer Wine Estates Company
Bic SA
Boise Cascade Office Products Corporation
E&J Gallo Winery
Estee Lauder International, Inc.
Libbey Glass, Inc.
Parker Pen USA, Ltd.
Prestone Products Corporation
Rawlings Sporting Goods Company
Regal Ware, Inc.
Robert Mondavi Winery
Rollerblade, Inc.
Rollins, Inc.
Samsonite Corporation
Seiko Corporation of America
Tambrands, Inc.
The Limited
United Merchandising
VANS, Inc.
ELECTRONICS
Emerson Electric Company
General Instrument Corporation
IBM
Lexmark International, Inc.
Medtronic, Inc.
Oki Electric Europe Gmbh
Oki Electronics (Hong Kong) Ltd.
Paradyne Corporation
Philips Electronics Ireland Limited
Simmons Canada, Inc.
ENERGY AND CHEMICAL SYSTEMS
Albright & Wilson Americas, Inc.
Burmah Castrol plc.
Chevron Chemical Company
Elf Oil U.K.
LaRoche Industries, Inc.
Mississippi Chemical Corporation
Mobil Corporation
Praxair, Inc.
Sandoz Technology Limited
Shell International Limited
Unocal Chemicals Division
INDUSTRIAL FABRICATION AND ASSEMBLY
Coachman Industries, Inc.
Electrolux AB
Huffy Corporation
Kawneer Company, Inc.
Krones, Inc.
Mueller Co.
New Holland
Overhead Door Corporation
Parker Hannifin Corporation
Zexel USA Corporation
PHARMACEUTICALS
Amgen, Inc.
Baxter Healthcare Corporation
Lilly Industries Limited
Mallinckrodt Group, Inc.
Sanofi
SmithKline Beecham plc
Sterling Winthrop, Inc.
Warner Lambert Company
PUBLIC SERVICES
City of Battle Creek
City of Calgary -- Land and Housing
Development
City of Falls Church, Virginia
City of Troy, Michigan
Colorado Housing & Finance Authority
Government of Bermuda
Government of the British Virgin Islands --
Ministry of Finance
Idaho Housing Agency
Louisiana Employees' Retirement System
Manchester Airport (UK) plc
McCarran Airport, Las Vegas (Clark County)
The Metropolitan Government of Nashville &
Davidson County
Missouri Department of Corrections
New Jersey Natural Gas
Texas Department of Criminal Justice
GENERAL MANUFACTURING/GENERAL BUSINESS
Alltel Corporation
Blockbuster Entertainment Corporation
British Sky Broadcasting Group Limited
Cementos Mexicanos S.A.
Cox Communications, Inc.
Holiday Inns
The Museum of Modern Art
Royal Caribbean Cruises, Ltd.
Tiffany & Co.
Waste Management International, Ltd.
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Sales and Marketing
Selling the Company's software to multinational organizations typically
requires the Company to engage in a lengthy sales cycle, generally between six
and 15 months, and to expend substantial time, effort and money educating
prospective customers regarding the use and benefits of the Company's products.
See "Factors Affecting the Company's Business, Operating Results and Financial
Condition -- Lengthy Sales Cycles." The Company sells its software and services
through direct sales and business partner channels throughout the world. As of
October 31, 1997, the Company's direct sales force consisted of 534 employees
based at the Company's 48 offices, including 22 offices in the United States and
26 offices located throughout the rest of the world. In addition, the Company
utilizes more than 190 sales and consulting business partners worldwide as an
indirect distribution channel to penetrate certain vertical markets and
geographic areas, in particular those areas in which the Company has not
invested resources to establish a direct presence. The Company expects to
increasingly rely on indirect channels in order to enhance its market
penetration and implementation capabilities. See "Factors Affecting the
Company's Business, Operating Results and Financial Condition -- Management of
Growth; Need For Additional Qualified Personnel." International revenue as a
percentage of total revenue ranged between 35% and 37% from fiscal 1995 through
fiscal 1997, and the Company expects that revenue from international customers
will continue to account for a significant portion of the Company's total
revenue.
The Company's marketing strategy is to position the Company as a premier
provider of ERP solutions and to increase recognition of the J.D. Edwards name.
In support of this strategy, the Company's marketing programs include developing
and maintaining industry analyst and public relations, developing databases of
targeted customers, conducting advertising and direct mail campaigns, and
maintaining a World Wide Web home page.
Product Development
The Company has invested and expects to continue to invest substantial
resources in research and product development. The research and product
development department is organized into three groups that work closely
together: the development technologies group; the application development group;
and the documentation, localization and translations group. The efforts of these
groups is enhanced by cross-functional product management teams, frequent
solicitation of customer feedback and close contact with customers through the
Company's implementation services. As of October 31, 1997, the Company's
research and product development operations included 651 employees, primarily
located in Denver, Colorado. Research and development expenditures, which
include capitalized software development costs, were $62.8 million, $47.6
million and $34.1 million for the fiscal years ended October 31, 1997, 1996 and
1995, respectively. The Company anticipates that research and development
expenditures will increase as a percentage of revenue in the future.
The Company's development technologies group is responsible for both the
toolsets and underlying technologies of WorldSoftware and OneWorld. The
WorldSoftware development technologies team is primarily focused on maintaining
and enhancing the toolset and underlying technologies for WorldSoftware. The
OneWorld development technologies team focuses on enhancing the flexibility,
simplicity and performance of the OneWorld toolset, as well as OneWorld's CNC
technology layer. Both development technologies teams share responsibility for
cross-functional coordination with sales and support, as well as with hardware
and software suppliers with whom the Company has relationships, to identify,
analyze, prioritize and schedule new features and functionalities. As of October
31, 1997, the development technologies group consisted of 185 employees, the
substantial majority of whom are assigned to the OneWorld team.
The application development group is responsible for developing, enhancing
and maintaining the WorldSoftware and OneWorld application suites, including the
vertical market application suites. Separate application development teams use
the toolsets developed by the development technologies group to create and
enhance each application suite. The Company has designed its toolsets to enable
application programming to be performed by nonprogrammers responsible for
business practices. These application development teams also work with customers
and third-party implementation providers to identify, analyze, prioritize and
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schedule new functionality in the Company's existing application suites, as well
as to establish specifications and priorities for new vertical markets. As of
October 31, 1997, the application development group consisted of 327 employees.
The Company's documentation, localization and translations group is
responsible for the documentation, localization and translation of the Company's
application suites for particular foreign markets, as well as the vertical
market application suites and templates, for both WorldSoftware and OneWorld.
The documentation, localization and translations group works closely with
domestic and international customers and third-party implementation providers,
as well as cross-functional Company teams of development, implementation,
support and training professionals, to ensure that appropriate enhancements are
incorporated into products, documentation and implementation processes. The
Company's applications suites are currently translated into and operate in 18
languages. In addition, this group also develops and maintains a single database
for documentation, which is currently translated into eight languages. The
Company intends to offer additional language translations in the future. As of
October 31, 1997, the documentation, localization and translation group
consisted of 139 employees.
The market for the Company's products is characterized by rapid
technological change, evolving industry standards in computer hardware and
software technology, changes in customer requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. The life cycles of the Company's ERP
software are difficult to estimate. As a result, the Company's future success
will depend, in part, upon its ability to continue to enhance existing products
and develop and introduce in a timely manner new products that keep pace with
technological developments, satisfy customer requirements and achieve market
acceptance. There can be no assurance that the Company will successfully
identify new product opportunities and develop and bring new products to market
in a timely and cost-effective manner, or that products, capabilities or
technologies developed by others will not render the Company's products or
technologies obsolete or noncompetitive or shorten the life cycles of the
Company's products. See "-- Competition." Although the Company has addressed the
need to develop new products and enhancements primarily through its internal
development efforts, the Company has also addressed this need through the
licensing of third-party technology. Licensing third-party technology involves
numerous risks. See "-- Proprietary Rights and Licensing." If the Company is
unable to develop on a timely and cost-effective basis new software products or
enhancements to existing products, or if such new products or enhancements do
not achieve market acceptance, the Company's business, operating results and
financial condition may be materially adversely affected.
Historically, the Company has issued significant new releases of its family
of software products periodically, with interim releases issued even more
frequently. As a result of the complexities inherent in software development,
and in particular for multi-platform environments, and the broad functionality
and performance demanded by customers for ERP products, major new product
enhancements and new products can require long development and testing periods
before they are commercially released. The Company has on occasion experienced
delays in the scheduled introduction of new and enhanced products and there can
be no assurance that such delays will not be experienced in the future. The
Company recently released OneWorld, the network-centric version of its
application suites. Because the development of enhancements in network-centric
environments are more complex than in host-centric systems, there can be no
assurance that the introduction of future enhancements will not be delayed.
Complex software products such as those offered by the Company frequently
contain undetected errors or "bugs" when first introduced or as new versions are
released that, despite testing by the Company, are discovered only after a
product has been installed and used by customers. The Company has in the past
discovered software errors in new versions of its ERP software after their
release. To date, the Company's business, operating results or financial
condition have not been materially adversely affected by the release of products
containing errors. There can be no assurance, however, that errors will not be
found in the Company's products or that such errors will not result in delay or
loss of revenue, diversion of development resources, damage to the Company's
reputation, increased service and warranty costs, or impaired market acceptance
of
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these products, any of which could result in a material adverse effect on the
Company's business, operating results or financial condition.
Competition
The market for ERP software solutions is intensely competitive, subject to
rapid technological change and significantly affected by new product
introductions and other market activities of industry participants. The
Company's products are designed and marketed for the AS/400 market and, more
recently, for leading UNIX and NT servers. The Company's primary competition
comes from a large number of independent software vendors including: (i)
companies offering products that run on the AS/400 platform and other mid-range
computers, including System Software Associates, Inc., Marcam Corporation,
Infinium Software, Inc. and JBA Holdings plc; (ii) companies offering products
that run on UNIX- or Windows NT-based systems in a client/server environment,
such as SAP Aktiengesellschaft ("SAP"), Baan Company N.V. ("Baan"), PeopleSoft,
Inc. ("PeopleSoft") and Oracle Corporation ("Oracle"); and (iii) companies
offering either standard or fully customized products that run on mainframe
computer systems, such as SAP. Additionally, the Company faces indirect
competition from suppliers of custom developed business applications software
that focus mainly on proprietary mainframe and mid-range computer-based systems,
such as systems consulting groups of major accounting firms and from IT
departments of potential customers that develop systems internally. The
Company's competitors currently offer products that run on the AS/400 platform
and UNIX and NT servers or have announced their intent to introduce such
products in the near future. As a result, the Company will experience increased
competition. There can be no assurance that the Company will be able to
successfully compete with new or existing competitors or that such competition
will not have a material adverse effect on the Company's business, operating
results or financial condition.
Many of the Company's competitors, and SAP and Oracle in particular, have
significantly greater financial, technical, marketing and other resources than
the Company, as well as wider name recognition and a larger installed customer
base. Moreover, the Company has traditionally competed only in the AS/400
market, which primarily consists of mid-sized organizations, and has only
recently entered the UNIX and NT markets. In contrast, each of SAP, Baan,
PeopleSoft and Oracle, has significantly more experience and name recognition
with UNIX and NT implementations and platforms, name recognition with potential
UNIX and NT customers, and reference accounts with UNIX and NT customers.
Accordingly, such competitors have significantly more customers in the UNIX and
NT markets to use as references when competing against the Company.
Additionally, several of the Company's competitors have well-established
relationships with current and potential customers of the Company. These
relationships may prevent the Company from competing effectively in divisions or
subsidiaries of such customers. Many of the Company's competitors, such as SAP,
Baan, PeopleSoft and Oracle, also offer, or have announced their intention to
offer, vertical applications targeted to mid-sized organizations, which market
comprises a substantial portion of the Company's revenue. Further, several of
the Company's competitors regularly and significantly discount prices on their
products. If these competitors continue to discount or increase the amount or
frequency of such discounts in response to increased competition or other
factors, the Company may be required to similarly discount its products, which
could have an adverse effect on the Company's margins. There can be no assurance
that the Company will be able to compete successfully against any of these
competitors.
The Company relies, and expects to increase its reliance, on a number of
systems consulting and systems integration firms for implementation and other
customer support services, as well as for recommendations of its products during
the evaluation stage of the purchase process. A number of the Company's
competitors, including SAP, Baan, PeopleSoft, and Oracle, have significantly
more well-established relationships with such firms and, as a result, such firms
may be more likely to recommend competitors' products rather than the Company's
products. Furthermore, there can be no assurance that these third parties, many
of which have significantly greater financial, technical, marketing and other
resources than the Company, will not market software products in competition
with the Company in the future. If the Company is unable to maintain or increase
the number and quality of its relationships with third parties who recommend,
implement or support ERP software, the Company's business, operating results and
financial condition will be materially adversely affected.
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The Company believes that the principal competitive factors affecting the
market for the Company's software products are responsiveness to customer needs,
product architecture, functionality, speed of implementation, ease of use,
performance and features, quality and reliability, breadth of distribution,
vendor and product reputation, quality of customer support and price. The
Company believes that it competes favorably with respect to these factors. In
order to be successful in the future, the Company must continue to respond
promptly and effectively to the challenges of technological change and its
competitors' innovations by continually enhancing its own product offerings.
There can be no assurance, however, that the Company's products will continue to
compete favorably or that the Company will be successful in the face of
increasing competition from new products and enhancements introduced by existing
competitors or by new companies entering this market.
Proprietary Rights and Licensing
The Company's ability to compete is dependent in part upon its internally
developed, proprietary intellectual property. Although the Company currently has
no patents, it has five patent applications pending on various aspects of its
application suites. In addition, the Company has applied to register the
trademarks "WorldSoftware" and "OneWorld." The Company also relies on general
trademark and copyright protection for its technology, although it generally
does not register such intellectual property. Furthermore, the Company relies on
trade secret law, confidentiality procedures and licensing arrangements to
establish and protect its rights in its technology. Nevertheless, the Company
believes that factors such as the technological and creative skills of its
personnel, new product developments, frequent product enhancements, name
recognition, customer training and support and reliable product support are more
essential to protect a technology leadership position. There can be no assurance
that others will not develop technologies that are similar or superior to the
Company's technology. The Company typically enters into confidentiality or
license agreements with its employees, consultants and vendors, and typically
controls access to and distribution of its software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products or
technology without authorization, or to develop similar technology independently
through reverse engineering or other means. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights as fully as do
the laws of the United States. There can be no assurance that the Company's
means of protecting its proprietary rights in the United States or abroad will
be adequate or that competitors will not independently develop similar
technology. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Preventing
or detecting unauthorized use of the Company's products is difficult. There can
be no assurance that the steps taken by the Company will prevent
misappropriation of its technology or that its license agreements will be
enforceable. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results or financial condition.
The Company typically licenses its products to end users under the
Company's standard license agreements, although each license is individually
negotiated and may contain variations. The Company's products are not only
licensed to end users, but also to independent, third-party distributors with a
right to sublicense. Although the Company seeks to establish the conditions
under which the Company's products are licensed by such distributors to end
users, the Company cannot ensure that its distributors do not deviate from such
conditions. Moreover, in order to facilitate the customization required by most
of the Company's customers, the Company generally licenses its software products
to end users in both object code (machine-readable) and source code
(human-readable) format. Although this practice facilitates customization,
making software available in source code also makes it easier for third parties
to copy or modify the Company's software for non-permitted purposes.
In the future, the Company may receive notice of claims of infringement of
other parties' proprietary rights. Although the Company does not believe that
its products infringe the proprietary rights of third parties,
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there can be no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company or that any such assertions or prosecutions will
not materially adversely affect the Company's business, operating results or
financial condition. Regardless of the validity or the successful assertion of
such claims, defending against such claims could result in significant costs and
diversion of resources with respect to the defense thereof, which could have a
material adverse effect on the Company's business, operating results or
financial condition. In addition, the assertion of such infringement claims
could result in injunctions preventing the Company from distributing certain
products, which would have a material adverse effect on the Company's business,
operating results or financial condition. If any claims or actions are asserted
against the Company, the Company may seek to obtain a license to such
intellectual property rights. There can be no assurance, however, that such a
license would be available on reasonable terms or at all.
The Company also relies on certain other technology which it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. Most
notably, the Company licenses the graphical user interface to its WorldSoftware
version of its application suites (which the Company markets as WorldVision).
There can be no assurance that these third-party technology licenses will
continue to be available to the Company on commercially reasonable terms. The
loss of, or inability to maintain, any of these technology licenses,
particularly for WorldVision's graphical user interface, would result in delays
or reductions in product shipments until equivalent technology could be
identified, licensed or developed, and integrated. Any such delays or reductions
in product shipments could materially adversely affect the Company's business,
operating results or financial condition. Moreover, although the Company is
generally indemnified by third parties against claims that such third parties'
technology infringes the proprietary rights of others, such indemnification is
not always available for all types of intellectual property rights (for example,
patents may be excluded) and in some cases the geographical scope of
indemnification is limited. The result is that the indemnity that the Company
receives against such claims is often less broad than the indemnity that the
Company provides to its customers. Even in cases in which the indemnity that the
Company receives from a third-party licensor is as broad as the indemnity that
the Company provides to its customers, the third-party licensors from whom the
Company would be receiving indemnity are often not well-capitalized and may not
be able to indemnify the Company in the event that such third-party technology
infringes the proprietary rights of others. Accordingly, the Company could have
substantial exposure in the event that technology licensed from a third party
infringes another party's proprietary rights. The Company currently does not
have any liability insurance to protect against the risk that licensed
third-party technology infringes the proprietary rights of others. There can be
no assurance that infringement or invalidity claims arising from the
incorporation of third-party technology, and claims for indemnification from the
Company's customers resulting from such infringement claims, will not be
asserted or prosecuted against the Company or that any such assertions or
prosecutions will not materially adversely affect the Company's business,
operating results or financial condition. Regardless of the validity or
successful assertion of such claims, the Company could incur significant costs
and diversion of resources with respect to the defense thereof, in addition to
potential product redevelopment costs and delays, all of which could have a
material adverse effect on the Company's business, operating results or
financial condition.
Employees
As of October 31, 1997, the Company had 3,577 full-time employees: 541 in
management and administration; 651 in research and development; 816 in sales and
marketing; 1,201 in customer services and training; and 368 in customer support.
The Company believes that its continuing success will depend, in part, on its
ability to retain a limited number of key employees and other members of senior
management, as well as its ability to attract and retain highly skilled
technical, marketing and management personnel, who are in great demand. See
"Factors Affecting the Company's Business, Operating Results and Financial
Condition -- Management of Growth; Need for Additional Qualified Personnel." The
Company has not had a work stoppage, and no employees are represented under
collective bargaining agreements. The Company considers its employee relations
to be good.
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FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
In addition to other information in this Annual Report on Form 10-K and in
the documents incorporated by reference herein, the following risk factors
should be carefully considered in evaluating the Company and its business
because such factors currently have a significant impact or may have significant
impact in the future on the Company's business, operating results or financial
conditions.
Variability of Quarterly Operating Results; Seasonality. The Company's
quarterly operating results have fluctuated significantly in the past, and will
likely continue to fluctuate in the future, as a result of a number of factors,
many of which are outside the Company's control. These factors include the
demand for the Company's software products and services; the size and timing of
specific sales; the level of product and price competition that the Company
encounters; the length of sales cycles; the timing of new product introductions
and product enhancements by the Company or its competitors; market acceptance of
new products; changes in pricing policies by the Company or its competitors; the
Company's ability to hire sales and consulting personnel to meet the increased
demand for implementations of the OneWorld version of its application suites;
the Company's ability to establish and maintain relationships with third-party
implementation providers; the Company's ability to establish and maintain
relationships with hardware and software suppliers; the announcement of new
hardware platforms that cause delay of customer purchases; variations in the
length of the implementation process for the Company's software products; the
Company's ability to complete fixed-price consulting contracts on budget; the
mix of products and services sold; the mix of distribution channels through
which products are sold; the mix of international and domestic revenue; changes
in the Company's sales incentives; changes in the renewal rate of support
agreements; product life cycles; software defects and other product quality
problems; seasonality of technology purchases; personnel changes; changes in the
Company's strategy; the activities of competitors; the extent of industry
consolidation; expansion of the Company's international operations; general
domestic and international economic and political conditions; and budgeting
cycles of the Company's customers. The timing of large individual sales has been
difficult for the Company to predict, and large individual sales have, in some
cases, occurred in quarters subsequent to those anticipated by the Company.
There can be no assurance that the loss or deferral of one or more significant
sales would not have a material adverse effect on the Company's quarterly
operating results.
The Company's software products are typically shipped when orders are
received, and consequently, license backlog in any quarter has in the past
represented only a small portion of that quarter's revenue. As a result, license
fee revenue in any quarter is difficult to forecast because it is substantially
dependent on orders booked and shipped in that quarter. Moreover, the Company
typically recognizes a substantial amount of its revenue in the last month of
the quarter. Since the Company's operating expenses are based on anticipated
revenue levels and because a high percentage of the Company's expenses are
relatively fixed in the near term, any shortfall from anticipated revenue or any
delay in the recognition of revenue could result in significant variations in
operating results from quarter to quarter. Quarterly license fee revenue is also
difficult to forecast because the Company's sales cycles, from initial
evaluation to delivery of software, vary substantially from customer to
customer. If revenue falls below the Company's expectations in a particular
quarter, the Company's operating results could be materially adversely affected.
See "-- Lengthy Sales Cycle."
The Company has experienced, and is expected to continue to experience, a
high degree of seasonality, with a disproportionately greater amount of the
Company's revenue for any fiscal year being recognized in its fourth fiscal
quarter and an even greater proportion of net income being recognized in such
quarter. For example, in fiscal 1997, 33% of total revenue, 39% of license fee
revenue, 30% of service revenue and 61% of net income were recognized in the
fourth fiscal quarter. In addition, because the Company's operating expenses are
relatively fixed in the near term, the Company's operating margins have
historically been significantly higher in its fourth fiscal quarter than in its
other quarters. The Company believes that such seasonality is primarily the
result of the efforts of the Company's direct sales force to meet or exceed
fiscal year-end sales quotas and the tendency of certain customers to finalize
sales contracts at or near the Company's fiscal year end. Because revenue,
operating margins and net income are greater in the fourth quarter, any
shortfall from anticipated revenue, particularly license fee revenue, in the
fourth quarter would have a disproportionately large adverse effect on the
Company's operating results for the fiscal year. In addition, the Company's
total revenue, license fee revenue, service revenue and net income in its first
fiscal
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quarter have historically been lower than those in the immediately preceding
fourth quarter. For example, total revenue, license fee revenue, service revenue
and net income in the first quarter of fiscal 1997 decreased 20%, 41%, 3% and
87%, respectively, from the fourth quarter of fiscal 1996. The Company's first
quarter revenue has historically slowed during the holiday season in November
and December.
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from quarter to
quarter. As a result, quarter-to-quarter comparisons of operating results are
not necessarily meaningful or indicative of future performance. Furthermore, the
Company believes it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail, or
are perceived to prevail, with respect to the Company's business or generally,
the market price of the Company's Common Stock would likely be materially
adversely affected. See "Item 6: Selected Consolidated Financial Data" and "Item
7: Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Limited Deployment of OneWorld Version; Entering New Markets. The Company
first shipped the OneWorld version of its application suites in late calendar
1996. The Company's future revenue growth is substantially dependent upon the
market acceptance of these OneWorld application suites and the ability of the
Company to license OneWorld application suites to new customers who are not
currently users of the Company's WorldSoftware. The Company does not expect to
generate substantial OneWorld license fee revenue from its existing installed
base of WorldSoftware users. The Company expects that it will take a longer time
to implement the OneWorld version of its application suites than it takes to
implement the WorldSoftware version, which typically takes six to 18 months. To
date, a limited number of the Company's customers have licensed the OneWorld
version of its application suites, and, due to the lengthy implementation
process, only a few have completed implementation of some or all of the licensed
OneWorld applications suites. Potential and existing customers may find it
difficult, or be unable, to successfully implement OneWorld application suites,
or may not purchase OneWorld application suites for a number of reasons,
including a lack of implementation experience by the Company or its third-party
implementation providers in complex multi-platform environments; a customer's
lack of the necessary hardware, software or networking infrastructure; an
absence of required functionality in OneWorld application suites; excessive time
and cost of implementation; the failure of the OneWorld version to be
competitive with other products on the market; defects or "bugs" in OneWorld
application suites; and a failure to meet customer expectations. In addition,
because the Company is using OneWorld application suites to target potential
customers in new markets, the Company must overcome certain significant
obstacles, including new competitors who have significantly more experience and
name recognition with open systems customers, implementations and platforms; the
Company's limited relationships with third-party implementation providers; the
limited experience of the Company's sales and consulting personnel in the open
systems environment; and the Company's limited existing reference accounts in
the open systems market. If, for any reason, the Company is unable to
successfully sell or implement OneWorld in the UNIX or NT markets, the Company's
reputation would be damaged, and such failure would have a material adverse
effect on the Company's business, operating results and financial condition.
Moreover, if the Company fails to meet the expectations of market analysts or
investors with regard to sales or implementations of OneWorld application
suites, the market price of the Company's Common Stock would likely be
materially adversely affected.
Dependence on IBM AS/400 Platform. Although the Company has recently
released the OneWorld version of its application suites to run on leading UNIX
and NT servers, the Company is and, for an extended period, expects to remain
substantially dependent upon the market for software products for the IBM AS/400
platform. All of the Company's revenue in fiscal 1995, 1996 and the substantial
majority of the Company's revenue for fiscal 1997 was derived from its software
products and related services for the AS/400 market. The market for the AS/400
platform is expected to grow at a minimal rate; however, there can be no
assurance that the AS/400 market will grow at all in the future. Similarly,
there can be no assurance that AS/400 customers or prospective customers will
respond favorably to the Company's future or enhanced software products or that
the Company will continue to be successful in selling its software products or
services in the AS/400 market. The Company's future growth will depend in part
on its ability to gain market share in the AS/400 market; however, there can be
no assurance that the Company will be able to achieve any such
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market share gains or maintain its current market share. Moreover, the Company's
goal of gaining market share in the AS/400 market will be more difficult to
achieve since the Company is also focusing on the UNIX and NT markets. See
"-- Management of Growth; Need for Additional Qualified Personnel." If the
Company's AS/400 installed customer base erodes, resulting in a decline in
recurring support and other service revenue, the Company's business, operating
results and financial condition will be materially adversely affected.
Competition. See "Item 1: Business -- Competition."
Lengthy Sales Cycle. The Company's software is generally used for division-
or enterprise-wide, business-critical purposes and involves significant capital
commitments by customers. Potential customers generally commit significant
resources to an evaluation of available enterprise software and require the
Company to expend substantial time, effort and money educating them about the
value of the Company's solutions. Sales of the Company's software products
require an extensive sales effort throughout a customer's organization because
decisions to license such software generally involve the evaluation of the
software by a significant number of customer personnel in various functional and
geographic areas, each often having specific and conflicting requirements. A
variety of factors, including factors over which the Company has little or no
control, may cause potential customers to favor a particular supplier or to
delay or forego a purchase. As a result of these or other factors, the sales
cycle for the Company's products is long, typically ranging between six and 15
months. Moreover, the Company expects that the sales cycle for the recently
released OneWorld version of its application suites may be longer than that of
the WorldSoftware version, at least until the Company's sales force becomes
familiar with the needs of customers operating on UNIX and NT servers. As a
result of the length of the sales cycle for its software products, the Company's
ability to forecast the timing and amount of specific sales is limited, and the
delay or failure to complete one or more large license transactions could have a
material adverse effect on the Company's business, operating results or
financial condition and cause the Company's operating results to vary
significantly from quarter to quarter. See "-- Variability of Quarterly
Operating Results; Seasonality."
Lengthy Implementation Process. The Company's software products are complex
and perform or directly affect business-critical functions across many different
functional and geographic areas of the enterprise. Consequently, implementation
of the Company's software is a complex, lengthy process that involves a
significant commitment of resources by the Company's customers and that is
subject to a number of significant risks over which the Company has little or no
control. The Company expects that implementation of the OneWorld version of its
application suites on UNIX and NT servers is likely to be more complex and
require more time than implementation on the AS/400 platform. In addition, the
Company's lack of experience in implementing the OneWorld version of its
application suites may contribute to the length of the implementation process.
Delays in the completion of implementations of any of its application suites
whether by the Company or its business partners, may result in customer
dissatisfaction or damage to the Company's reputation and could have a material
adverse effect on the Company's business, operating results or financial
condition.
Reliance on Third Parties and Development of Certain Relationships. The
Company intends to rely primarily on third-party implementation providers for
the implementation of the OneWorld version of its application suites. Although
the Company has historically subcontracted a portion of its implementation
services to third parties, the Company has adopted a strategy in which an
increasing number of OneWorld implementations will be performed by third parties
that will contract directly with the Company's customers to provide such
services. Executing this strategy will require that third-party implementation
providers with which the Company has existing relationships allocate additional
resources to OneWorld implementations and that the Company enter into new
relationships with additional third-party implementation providers to provide
such services. Due to the limited resources and capacities of many third-party
implementation providers and the reluctance of such providers to switch partners
or enter into new relationships with additional suppliers, there can be no
assurance that the Company will be able to establish or maintain relationships
with third parties having sufficient resources to provide the necessary
implementation services to support demand, if any, for the OneWorld version. If
such resources are unavailable, the Company will be required to perform such
services internally, and there can be no assurance that the Company will have
sufficient resources available for
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such purposes. In addition, there can be no assurance that any third-party
implementation provider with which the Company has, or intends to establish,
such a relationship will provide the level and quality of service required to
meet the needs and expectations of the Company's customers. If the Company is
unable to establish and maintain effective, long-term relationships with such
providers, or if such providers do not meet customer needs, the Company's
business, operating results or financial condition will be materially adversely
affected.
The Company has established a number of relationships with third parties,
including consulting and systems integration firms, hardware suppliers, and
database, operating system and other independent software vendors, in order to
enhance its sales, marketing and customer service efforts. Many of these third
parties have better established relationships with one or more of the Company's
competitors and may, in specific instances, select or recommend ERP software
offerings of the Company's competitors rather than the Company's software. In
addition, certain of these third parties, including Oracle, compete with the
Company in developing and marketing ERP software applications. Competition
between the Company and these third parties may cause a deterioration in or
termination of such relationships, which could have a material adverse effect on
the Company's business, operating results or financial condition. See "Item 1:
Business -- Competition."
Dependence on Service Revenue. The Company licenses software under
non-cancelable license agreements and provides related services, which consist
of support, training, consulting and implementation. Total revenue from license
fees and services has increased. As a percentage of total revenue, service
revenue has increased from 52% of total revenue in fiscal 1993 to 62% of total
revenue in fiscal 1997 primarily as a result of the Company's continued emphasis
on providing consulting and training services that complement its software
products and increased support revenue resulting from the Company's growing
installed base of customers. Furthermore, the Company has historically
subcontracted a portion of its consulting and training services to third
parties, and, in fiscal 1997, such subcontracted services accounted for
approximately 43% of this revenue. However, the Company is currently pursuing a
strategy of relying on third-party implementation providers to contract directly
with its customers for OneWorld implementation and related services. See
"Business -- Strategy" and "Business -- Implementation Services and Training."
To the extent the Company is successful in implementing this strategy and the
OneWorld version of the Company's application suites achieves market acceptance
in future periods, revenue from subcontracted services and total service revenue
as a percentage of revenue will likely decrease. If such revenue decreases more
than anticipated, the Company's operating results will be materially adversely
affected. There can be no assurance that the Company will be successful in
implementing its strategy or that such products will achieve market acceptance,
the failure of which could have a material adverse effect on its business,
operating results and financial condition. See "Item 7: Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Management of Growth; Need for Additional Qualified Personnel. Although the
Company has experienced significant revenue growth in past years, such growth is
not necessarily indicative of future revenue growth. This growth has resulted in
new and increased responsibilities for management personnel and has placed, and
continues to place, a significant strain upon the Company's management,
operating and financial resources. There can be no assurance that such strain
will not have a material adverse effect on the Company's business, operating
results or financial condition. The rapid growth of the Company's business has
required the Company to make significant recent additions in personnel,
particularly in product development and sales and marketing. The Company
believes that its future operating results depend in significant part on its
ability to attract and retain highly skilled technical, managerial, sales,
marketing, service and support personnel. Although the Company has increased the
number of its sales, services and support personnel in recent years, the Company
has experienced, and expects to continue to experience, difficulty in recruiting
such personnel. The Company anticipates that it will need to continue to
increase the size of its direct sales, services and support personnel in future
periods. If the Company is unable to hire qualified personnel on a timely basis,
the Company's business, operating results and financial condition will be
materially adversely affected.
To manage its operations, the Company must continuously evaluate the
adequacy of its management structure and its existing procedures, including,
among others, its financial and internal controls. There can be no assurance
that management will adequately anticipate all of the changing demands that
growth may impose on the Company's procedures and structure. Any failure to
adequately anticipate and respond to such
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changing demands may have a material adverse effect on the Company's business,
operating results or financial condition. As a result of the Company's
development and release of the OneWorld version of its application suites, a
significant amount of the Company's resources has been focused on the UNIX and
NT markets. To maintain a focus on the AS/400 market, as well as on the UNIX and
NT markets, the Company has recently implemented certain internal organizational
changes. If the Company's efforts to maintain a focus on both markets are
unsuccessful, the Company's business, operating results and financial condition
may be materially adversely affected.
Fixed-Price Service Contracts. The Company offers a combination of ERP
software, implementation and support services to its customers. Typically, the
Company enters into service agreements with its customers that provide for
consulting and implementation services on a "time and materials" basis. Certain
customers have asked for, and the Company has from time to time entered into,
fixed-price service contracts. These contracts specify certain milestones to be
met by the Company regardless of actual costs incurred by the Company in
fulfilling those obligations. The Company believes that fixed-price service
contracts may increasingly be offered by its competitors to differentiate their
product and service offerings. As a result, the Company may enter into more
fixed-price contracts in the future. There can be no assurance that the Company
can successfully complete these contracts on budget, and the Company's inability
to do so could have a material adverse effect on its business, operating results
and financial condition.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. Although the Company currently offers software
products that are designed to be Year 2000 compliant, there can be no assurance
that the Company's software products contain all necessary date code changes.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company. In addition, it is possible that certain of the Company's
customers are purchasing support contracts only to ensure that they become Year
2000 compliant and that, once such customers believe they are Year 2000
compliant, they will not renew support contracts. If a significant number of the
Company's customers do not renew support contracts for this or other reasons,
the Company's business, operating results and financial condition would be
adversely affected. Many potential customers may also choose to defer purchasing
Year 2000 compliant products until they believe it is absolutely necessary, thus
resulting in potentially stalled market sales within the industry. Conversely,
Year 2000 issues may cause other companies to accelerate purchases, thereby
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. Additionally, Year 2000 issues could cause a
significant number of companies, including current Company customers, to
reevaluate their current ERP system needs, and as a result consider switching to
other systems or suppliers. Moreover, the Company believes that some customers
may be purchasing the Company's products as an interim solution to their Year
2000 needs until their current suppliers reach compliance. There can be no
assurance that such customers will purchase support services from the Company or
that they will upgrade beyond their current version of the Company's software
once their current software suppliers reach compliance. Any of the foregoing
could result in a material adverse effect on the Company's business, operating
results and financial condition.
Euro Currency. Beginning in January 1999, a new currency called the ECU or
the "euro" is scheduled to be introduced in certain Economic and Monetary Union
(the "EMU") countries. During 2002, all EMU countries are expected to be
operating with the euro as their single currency. As a result, in less than one
year, computer software used by many companies headquartered or maintaining a
subsidiary in an EMU country will need to be euro currency enabled, and in less
than three years all companies headquartered or maintaining a subsidiary in an
EMU country are expected to need to be euro currency enabled. The transition to
the euro
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currency will involve changing budgetary, accounting and fiscal systems in
companies and public administrations, as well as the simultaneous handling of
parallel currencies and conversion of legacy data. Uncertainty exists as to the
effects the euro currency will have on the marketplace. Additionally, all of the
final rules and regulations have not yet been defined and finalized by the
European Commission with regard to the euro currency. The Company is monitoring
the rules and regulations as they become known in order to make any changes to
the software that the Company deems necessary to comply with such rules and
regulations. Although the Company currently offers software products that are
designed to be euro currency enabled and the Company believes that it will be
able to accommodate any required euro currency changes in its software products,
there can be no assurance that once the final rules and regulations are
completed that the Company's software will contain all of the necessary changes
or meet all of the euro currency requirements.
International Operations and Currency Fluctuations. International revenue
as a percentage of total revenue ranged between 35% and 37% from fiscal 1995
through fiscal 1997, and the Company expects that revenue from international
customers will continue to account for a significant portion of the Company's
total revenue. The Company currently has 26 international sales offices located
throughout Canada, Europe, Asia, Latin America and Africa. To service the needs
of its customers with international operations, the Company and its support
partners must provide worldwide product support services. One of the Company's
strategies is to continue to expand its existing international operations and
enter additional international markets, which will require significant
management attention and financial resources. Traditionally, international
operations are characterized by higher operating expenses and lower operating
margins. As a result, if international revenue increases as a percentage of
total revenue, operating margins may be adversely affected. Costs associated
with international expansion include the establishment of additional foreign
offices, the hiring of additional personnel, the localization and marketing of
its products for particular foreign markets, and the development of
relationships with additional international service providers. If international
revenue is not adequate to offset the expense of expanding foreign operations,
the Company's business, operating results or financial condition could be
materially adversely affected.
A significant portion of the Company's revenue is received in currencies
other than U.S. dollars and, in the past, the Company has engaged in minimal
hedging activities. As a result, the Company is subject to risks associated with
foreign exchange rate fluctuations. In fiscal 1997 and fiscal 1996, the Company
incurred foreign exchange losses of approximately $2.0 million and $1.7 million,
respectively. Accordingly, due to the substantial volatility of foreign exchange
rates, there can be no assurance that foreign exchange rate fluctuations will
not have a material adverse effect on the Company's business, operating results
or financial condition.
The Company's international operations are subject to other risks inherent
in international business activities, such as the imposition of governmental
controls, export license requirements, restrictions on the export of certain
technology, cultural and language difficulties associated with servicing
customers, the impact of a recessionary environment in economies outside the
United States, reduced protection for intellectual property rights in some
countries, the potential exchange and repatriation of foreign earnings,
political instability, trade restrictions, tariff changes, localization and
translation of products for foreign countries, difficulties in staffing and
managing international operations, difficulties in collecting accounts
receivable and longer collection periods, and the impact of local economic
conditions and practices. The Company's success in expanding its international
business will be dependent, in part, on its ability to anticipate and
effectively manage these and other risks. There can be no assurance that these
and other factors will not have a material adverse effect on the Company's
business, operating results or financial condition.
The Company has reassessed, and continues to closely monitor, its
international business risks due to recent economic conditions in the Asian
markets. Although the Company does not anticipate that the Asian conditions will
materially impact its business based upon management's most current evaluation
of the present situation, there can be no assurance that the current economic
conditions in Asia will not worsen or that the situation will not negatively
impact the Company's financial condition or results of operations. Historically,
the Company has recognized a small percentage of its revenue and operating
income from Asian markets, and the Company does not anticipate material changes
in its future revenue or operating income projections as a result of the Asian
economic conditions.
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Risks Associated with New Versions and New Products; Rapid Technological
Change; Risks of Software Defects. The market for the Company's products is
characterized by rapid technological change, evolving industry standards in
computer hardware and software technology, changes in customer requirements and
frequent new product introductions and enhancements. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. The life cycles of the
Company's software products are difficult to estimate. As a result, the
Company's future success will depend, in part, upon its ability to continue to
enhance existing products and develop and introduce in a timely manner new
products that keep pace with technological developments, satisfy customer
requirements and achieve market acceptance. There can be no assurance that the
Company will successfully identify new product opportunities and develop and
bring new products to market in a timely and cost-effective manner, or that
products, capabilities or technologies developed by others will not render the
Company's products or technologies obsolete or noncompetitive or shorten the
life cycles of the Company's products. See "Item 1: Business -- Competition."
Although the Company has addressed the need to develop new products and
enhancements primarily through its internal development efforts, the Company has
also addressed this need through the licensing of third-party technology.
Licensing third-party technology involves numerous risks. See "Item 1:
Business-- Proprietary Rights and Licensing." If the Company is unable to
develop on a timely and cost-effective basis new software products or
enhancements to existing products, or if such new products or enhancements do
not achieve market acceptance, the Company's business, operating results and
financial condition may be materially adversely affected.
Historically, the Company has issued significant new releases of its family
of software products periodically, with interim releases issued even more
frequently. As a result of the complexities inherent in software development,
and in particular for multi-platform environments, and the broad functionality
and performance demanded by customers for ERP products, major new product
enhancements and new products can require long development and testing periods
before they are commercially released. The Company has on occasion experienced
significant delays in the scheduled introduction of new and enhanced products,
and there can be no assurance that such delays will not be experienced in the
future. The Company recently released OneWorld, the network-centric version of
its application suites. Because the development of enhancements in
network-centric environments is more complex than in host-centric systems, there
can be no assurance that the introduction of future enhancements will not be
delayed. See "Business -- Products."
Complex software products such as those offered by the Company frequently
contain undetected errors or "bugs" when first introduced or as new versions are
released that, despite testing by the Company, are discovered only after a
product has been installed and used by customers. The Company has in the past
discovered software errors in new versions of its ERP software after their
release. To date, the Company's business, operating results or financial
condition have not been materially adversely affected by the release of products
containing errors. There can be no assurance, however, that errors will not be
found in the Company's products or that such errors will not result in delay or
loss of revenue, diversion of development resources, damage to the Company's
reputation, increased service and warranty costs, or impaired market acceptance
of these products, any of which could result in a material adverse effect on the
Company's business, operating results or financial condition. See
"Business -- Products."
Dependence on Key Personnel. The Company's success depends to a significant
extent upon a limited number of members of senior management and other key
employees. The loss of one or more key employees could have a material adverse
effect on the Company. Although the Company currently maintains key man life
insurance on C. Edward McVaney, Chairman, President and Chief Executive Officer,
such insurance is minimal and is not maintained on other key personnel. The
Company does not have employment agreements with its executive officers. In
addition, the Company believes that its future success will depend in part on
its ability to attract and retain highly skilled technical, managerial, sales
and marketing personnel. Competition for such personnel in the computer software
industry is intense. There can be no assurance that the Company will be
successful in attracting and retaining such personnel, and the failure to do so
could have a material adverse effect on the Company's business, operating
results or financial condition.
Limited Protection of Proprietary Technology; Risks of Infringement. See
"Item 1: Business -- Proprietary Rights and Licensing."
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Security; Product Liability. The Company has included security features in
certain of its Internet browser-enabled products that are intended to protect
the privacy and integrity of customer data. Despite the existence of these
security features, the Company's software products may be vulnerable to
break-ins and similar disruptive problems caused by Internet users. Such
computer break-ins and other disruptions may jeopardize the security of
information stored in and transmitted through the computer systems of the
Company's customers. Break-ins often involve hackers bypassing firewalls and
misappropriating confidential information. Addressing problems caused by such
third parties may require significant expenditures of capital and resources by
the Company, which may have a material adverse effect on the Company's business,
operating results or financial condition.
Although the Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential
liability for damages arising out of use of or defects in the Company's
products, it is possible that such limitation of liability provisions may not be
effective as a result of existing or future federal, state or local laws or
ordinances or unfavorable judicial decisions. Although the Company has not
experienced any such product liability claims to date, there can be no assurance
that the Company will not be subject to such claims in the future. Because the
Company's software products may be used in business-critical applications, a
successful product liability claim brought against the Company could have a
material adverse effect on the Company's business, operating results or
financial condition. Moreover, defending such a suit, regardless of its merits,
could entail substantial expense and require the time and attention of key
management personnel, either of which could have a material adverse effect on
the Company's business, operating results or financial condition.
General Economic and Market Conditions. Segments of the software industry
have experienced significant economic downturns characterized by decreased
product demand, price erosion, work slowdowns and layoffs. The Company's
operations may in the future experience substantial fluctuations from period to
period as a consequence of general economic conditions affecting the timing of
orders from major customers and other factors affecting capital spending.
Although the Company has a diverse client base, it has targeted certain vertical
markets. Therefore, any economic downturns in general or in the targeted
vertical segments in particular would have a material adverse effect on the
Company's business, operating results and financial condition.
Possible Volatility of Common Stock Prices. The trading prices of the
Company's Common Stock may be subject to wide fluctuations in response to
variations in quarterly operating results, announcements of technological
innovations or new products by the Company or its competitors. In addition, the
stock market has experienced extreme price and volume fluctuations from time to
time in recent years which have often been unrelated or disproportionate to the
operating performance of particular companies and which have particularly
affected the market price for many high technology stocks.
Control by Existing Stockholders. Based on shares outstanding at January
16, 1998, approximately 60% of the outstanding Common Stock was held by the
directors and executive officers of the Company, together with certain entities
affiliated with them, assuming no exercise of outstanding stock options. As a
result, these stockholders, if acting together, would be able to control
substantially all matters requiring approval by the stockholders of the Company,
including the election of all directors and approval of significant corporate
transactions. In addition, C. Edward McVaney, Robert C. Newman and Jack L.
Thompson (the "Founders") have entered into an Amended and Restated Stockholders
Agreement with the Company, which provides that Messrs. Newman and Thompson must
cast their votes in the same proportion as the votes cast by Mr. McVaney with
respect to certain significant corporate issues, such as any revision of the
Company's Certificate of Incorporation; any merger, consolidation, share
exchange or similar event; any sale or other disposition of all or substantially
all of the Company's assets; any dissolution or liquidation of the Company; or
bankruptcy filing for the Company. As a result, Mr. McVaney has substantial
control over the approval of such matters. In addition, each Founder must vote
for the election of each of the other Founders to the Company's Board of
Directors or a designee appointed by such other Founder.
Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware
Law. Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws and certain provisions of
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Delaware law could delay or make difficult a merger, tender offer or proxy
contest involving the Company. The authorized but unissued capital stock of the
Company includes 5,000,000 shares of preferred stock. The Board of Directors is
authorized to provide for the issuance of such preferred stock in one or more
series and to fix the designations, preferences, powers and relative,
participating, optional or other rights and restrictions thereof. Accordingly,
the Company may in the future issue a series of preferred stock, without further
stockholder approval, that will have preference over the Common Stock with
respect to the payment of dividends and upon liquidation, dissolution or
winding-up of the Company. In addition, the Company's Amended and Restated
Certificate of Incorporation includes provisions that create a classified board
of directors. Further, Section 203 of the General Corporation Law of the State
of Delaware (as amended from time to time, the "DGCL"), which is applicable to
the Company, prohibits certain business combinations with certain stockholders
for a period of three years after they acquire 15% or more of the outstanding
voting stock of a corporation. Any of the foregoing could adversely affect
holders of the Common Stock or discourage or make difficult any attempt to
obtain control of the Company.
ITEM 2. PROPERTIES.
The Company's corporate headquarters and executive offices are in Denver,
Colorado, where the Company leases approximately 507,000 square feet of space in
multiple facilities. The leases on these facilities expire at various dates
ranging from 1998 through 2012. The Company also leases approximately 234,000
square feet of space, primarily for regional sales and support offices,
elsewhere in the United States. Additionally, the Company leases approximately
270,000 square feet of office space in countries outside the United States, used
primarily for sales and support offices. Expiration dates on material sales and
support office leases range from fiscal 1998 to 2010. In addition, a second
corporate facility of approximately 200,000 square feet is being built which the
Company will lease upon its completion in late 1998. The Company believes that
its current domestic and international facilities will be sufficient to meet its
needs for at least the next twelve months. See Note 8 of Notes to Consolidated
Financial Statements for information regarding the Company's obligations under
its facilities leases and Note 10 of Notes to Consolidated Financial Statements
for information regarding the Company's recent event.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. While the outcome of
these matters cannot be predicted with certainty, in the opinion of management,
the adverse outcome of any such current legal proceedings would not have a
material adverse effect on the Company's results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders was called and held in accordance with
the Company's Bylaws on August 19, 1997, prior to the Company's initial public
offering. The following matters were voted upon by the shareholders of the
Company: the reincorporation of the Company in the state of Delaware; the
approval of the form of indemnification agreements to be entered into between
the Company and its officers and directors; the ratification and approval of the
appointment of Price Waterhouse LLP as the independent auditors of the Company
for the fiscal year ending October 31, 1997; the approval of the adoption of the
1997 Equity Incentive Plan and the reservation of 10,000,000 shares thereunder;
and the approval of the adoption of the 1997 Employee Stock Purchase Plan and
the 1997 Employee Stock Purchase Plan for Non-U.S. Employees and the reservation
of 2,000,000 shares thereunder. Each matter was passed by a vote of the majority
of the issued shares as of the record date.
Additionally, the following persons were nominated as directors of the
Company to serve until their successors are duly elected and qualified: C.
Edward McVaney, Richard E. Allen, Robert C. Newman, Jack L. Thompson, Gerald
Harrison, Delwin D. Hock, Harry T. Lewis, Jr., Michael J. Maples and Trygve E.
Myhren. There were no other nominations for directors. All nine nominees for
director were elected.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages of January 16, 1998
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS(S)
---- --- ------------
<S> <C> <C>
C. Edward McVaney......... 57 Chairman, President and Chief Executive Officer
Douglas S. Massingill..... 40 Executive Vice President and Chief Operating Officer
Richard E. Allen.......... 40 Senior Vice President, Finance and Administration and
Chief Financial Officer
Paul E. Covelo............ 42 Senior Vice President, AS/400 Line of Business
Michael A. Schmitt........ 40 Senior Vice President, Open Systems Line of Business
David E. Girard........... 42 Senior Vice President, Global Operations, Atlantic
Daniel B. Snyder.......... 40 Senior Vice President, Global Operations, Pacific
Pamela L. Saxton.......... 45 Vice President of Finance, Controller and Chief
Accounting Officer
Richard G. Snow, Jr....... 52 Vice President, General Counsel and Secretary
</TABLE>
C. Edward McVaney is Chairman of the Board of Directors, President and
Chief Executive Officer of the Company, which he co-founded. He has held these
positions since the Company's inception, except that Mr. McVaney was not
President of the Company from September 1987 through September 1991. Prior to
founding the Company, he was partner-in-charge of information technology and
consulting services for the Denver, Colorado office of Alexander, Grant &
Company, a public accounting firm. Mr. McVaney holds a B.S. in mechanical
engineering from the University of Nebraska and an M.B.A. from Rutgers
University.
Douglas S. Massingill has been Executive Vice President and Chief Operating
Officer of the Company since March 1997. From February 1994 to March 1997, he
was Executive Vice President of Worldwide Operations, and from January 1993 to
March 1994, Mr. Massingill was Vice President and General Manager of the South
Area. Mr. Massingill joined the Company in June 1990 as Account Executive for
the Large Accounts Program. Prior to joining the Company, Mr. Massingill was
Regional Sales Vice President for Integral Systems, an applications software
company. Mr. Massingill holds a B.A. in accounting from Shorter College and an
M.B.A. from Georgia Southern University.
Richard E. Allen has been a member of the Board of Directors since
September 1991. Mr. Allen has been Senior Vice President, Finance and
Administration since November 1997. He has been Chief Financial Officer,
Treasurer and Assistant Secretary since January 1990. From January 1990 through
October 1997 he was Vice President, Finance and Administration. From August 1985
to September 1994, Mr. Allen served as Controller of the Company and as
Secretary from March 1986 to January 1990. Prior to joining the Company, he
worked as Controller for Luff Exploration Company, an oil and gas exploration
and production company, and as a senior accountant with Coopers & Lybrand,
L.L.P. Mr. Allen holds a B.S. in business administration from Colorado State
University.
Paul E. Covelo has been Senior Vice President of the AS/400 Line of
Business since November 1997. From August 1994 to October 1997 he was Vice
President of International Operations. Prior to that, he served as Vice
President and General Manager of the West Area from January 1992 to September
1994 and Manager of the Newport Beach Region from July 1988 to January 1992.
Prior to joining the Company in 1988, Mr. Covelo held various positions at IBM
including Account Executive and Advisory Executive. Mr. Covelo holds a B.A. in
marketing from Loyola Marymount University.
Michael A. Schmitt has been Senior Vice President of the Open Systems Line
of Business since November 1997. From September 1994 to October 1997, he held
the position of Vice President and General Manager of Central European
operations and from June 1992 to September 1994 he was director of sales for the
western area. Prior to joining the Company in 1992, Mr. Schmitt held various
positions in sales and marketing with IBM and Spectrum Information Systems. Mr.
Schmitt holds a B.S in Business Administration from California Polytechnic State
University.
26
<PAGE> 27
David E. Girard has been Senior Vice President of Global Operations,
Atlantic since November 1997. Prior to that he was Vice President and General
Manager of the East Area from May 1994 through October 1997. Prior to joining
the Company in May 1994, Mr. Girard served as Vice President and General Manager
of the Northeastern Region of Dun & Bradstreet Software from July 1992 to
November 1993. From March 1990 to July 1992, he served as Vice President of
Product Development, Client Services and Corporate Operations for Information
Associates, Inc., a division of Dun & Bradstreet Software. Mr. Girard holds a
B.S. in marketing from University of Connecticut and attended the Columbia
Executive Marketing Management Program at Columbia University.
Daniel B. Snyder has been Senior Vice President of Global Operations,
Pacific since November 1997. Prior to that he was Vice President and General
Manager of the Midwest Area from March 1992 to October 1997, and from January
1992 to March 1992, he served as Director of Large Accounts for the Midwest
Area. From June 1979 to January 1992, Mr. Snyder held various positions at IBM,
including marketing, field positions and staff management positions. Mr. Snyder
holds a B.S. in business administration from Arizona State University, and an
M.B.A. in finance from University of Southern California.
Pamela L. Saxton has been Vice President of Finance, Controller and Chief
Accounting Officer since joining the Company in September 1994. From 1989 to
1994, she was Vice President, Controller and Secretary for Amax Gold, Inc., a
mining company, and Assistant Controller for Cyprus Amax Minerals Company, a
mining company. Ms. Saxton holds a B.S. in accounting from University of
Colorado.
Richard G. Snow, Jr. has been Vice President, General Counsel and Secretary
since joining the Company in January 1990. From February 1986 to January 1990,
Mr. Snow was Corporate Counsel and Secretary for Hathaway Corporation, a
manufacturer of computer components and power utility monitoring devices. Prior
to that, he was Vice President, General Counsel and Secretary for
Global-Ultimacc Systems, Inc., a systems integrator, and Senior Counsel for
Storage Technology Corporation, a manufacturer of computer storage devices. He
holds a B.S. in business administration from the University of California,
Berkeley and a J.D. from California Western University Law School.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
(a) The Company made its initial public offering on September 23, 1997 at a
price of $23.00 per share The Company's common stock is listed on the Nasdaq
National Market under the symbol "JDEC". The following table sets forth the high
and low closing sale prices per share of the Company's common stock for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- -----
<S> <C> <C>
1997
Fourth Quarter (beginning September 23, 1997)... 40.375 31.00
</TABLE>
As of January 16, 1998, there were 345 holders of record of the Company's
common stock. Because many of the Company's shares of common stock are held by
brokers and other institutions on behalf of stockholders, the Company is unable
to estimate the total number of stockholders represented by these record
holders. The Company has never declared or paid any cash dividend on its common
stock. Since the Company currently intends to retain all future earnings to
finance future growth, it does not anticipate paying any cash dividends in the
foreseeable future.
(b) The effective date of the Company's first registration statement, filed
on Form S-1 under the Securities Exchange Act of 1933 (No. 333-30701), was
September 23, 1997 (the "Registration Statement"). The class of securities
registered was Common Stock. The offering commenced on September 24, 1998 and
all securities were sold in the offering. The managing underwriters for the
offering were Morgan Stanley & Co. Incorporated, Deutsche Morgan Grenfell Inc.
and Robertson, Stephens & Company LLC.
27
<PAGE> 28
A total of 18,170,000 shares were registered pursuant to the Registration
Statement. The Company sold 12,790,004 of its Common Stock for its own account
for an aggregate offering price of $294.2 million, and 5,379,996 shares of its
Common Stock for the account of certain selling shareholders, for an aggregate
offering price of $123.8 million.
The Company incurred expenses of $17.7 million of which $15.5 million
represented underwriting discounts and commissions and $2.2 million represented
estimated other expenses. The net offering proceeds to the Company after total
expenses was $276.5 million.
As of October 31, 1997 the Company had invested all of the net proceeds
from the offering in investment grade, short-term and long-term interest-bearing
securities. The use of proceeds form the offering does not represent a material
change in the use of proceeds described in the Registration Statement.
28
<PAGE> 29
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company should be
read in conjunction with "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations," the consolidated financial
statements and notes thereto and other financial information included elsewhere
in this Annual Report on Form 10-K . The consolidated statements of income data
set forth below for the years ended October 31, 1995, 1996 and 1997 and the
consolidated balance sheet data as of October 31, 1996 and 1997 are derived
from, and are qualified by reference to, the Company's consolidated financial
statements audited by Price Waterhouse LLP, independent accountants, which are
included elsewhere in this Annual Report on Form 10-K. The consolidated
statements of income data for the years ended October 31, 1993 and 1994 and the
consolidated balance sheet data as of October 31, 1993, 1994 and 1995 are
derived from consolidated financial statements audited by Price Waterhouse LLP,
independent accountants, which are not included in this Annual Report on Form
10-K. Historical results are not necessarily indicative of results for any
future period. The Company has never declared or paid any cash dividend on its
Common Stock. See "Consolidated Financial Statements."
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenue:
License fees........................... $ 94,518 $107,561 $134,138 $180,366 $248,707
Services............................... 102,316 133,026 206,628 297,682 399,105
-------- -------- -------- -------- --------
Total revenue.................. 196,834 240,587 340,766 478,048 647,812
Costs and expenses:
Cost of license fees................... 10,401 12,832 18,461 27,443 36,444
Cost of services....................... 65,511 87,826 128,144 184,846 244,640
Sales and marketing.................... 70,662 76,169 102,310 128,759 176,031
General and administrative............. 22,488 27,377 38,677 53,052 69,850
Research and development............... 15,484 18,936 24,296 40,321 60,591
-------- -------- -------- -------- --------
Total costs and expenses....... 184,546 223,140 311,888 434,421 587,556
-------- -------- -------- -------- --------
Operating income......................... 12,288 17,447 28,878 43,627 60,256
Other income (expense):
Interest income........................ 214 483 1,697 629 1,686
Interest expense....................... (142) (101) (576) (899) (829)
Foreign currency losses and other,
net................................. (687) (486) (411) (1,403) (1,787)
-------- -------- -------- -------- --------
Income before income taxes............... 11,673 17,343 29,588 41,954 59,326
Provision for income taxes(1).......... 4,293 5,280 11,379 15,628 22,098
-------- -------- -------- -------- --------
Net income............................... $ 7,380 $ 12,063 $ 18,209 $ 26,326 $ 37,228
======== ======== ======== ======== ========
Earnings per common share(2)............. $ .09 $ .15 $ .22 $ .30 $ .39
======== ======== ======== ======== ========
Weighted average common shares
outstanding(2)......................... 81,986 82,253 82,504 87,667 96,500
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997(3)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $ 12,636 $ 28,615 $ 34,897 $ 25,554 $224,437
Total assets............................. 86,077 127,131 175,191 243,786 643,037
Mandatorily redeemable shares, at
redemption value....................... 12,441 14,290 19,973 47,024 --
Stockholders' equity..................... 1,814 13,612 22,972 22,902 396,861
</TABLE>
- ---------------
(1) A valuation allowance provided against foreign tax loss carryforwards
totaling $2.4 million was eliminated in the year ended October 31, 1994 as a
result of the Company's determination that it would likely realize these
benefits.
(2) See Note 1 of Notes to Consolidated Financial Statements in Item 14 for a
discussion of the computation of earnings per common share and weighted
average common shares outstanding.
(3) The Company completed an initial public offering ("IPO") in September 1997.
Upon closing the IPO, the mandatory redemption feature of the mandatorily
redeemable shares was eliminated.
29
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and notes
thereto included elsewhere in this Annual Report on Form 10-K. This item
contains forward-looking statements that involve risks and uncertainties. Actual
results may differ materially from those indicated in such forward-looking
statements. Factors that may cause such a difference include, but are not
limited to, those discussed in "Item 1. Business -- Factors Affecting the
Company's Business, Operating Results and Financial condition."
OVERVIEW
J.D. Edwards develops, markets and supports highly functional Enterprise
Resource Planning software solutions that operate on multiple computing
platforms and are designed to accelerate customers' time to benefit, lower
customers' cost of ownership and reduce information systems risks arising from
changes in technology and business practices. The Company's integrated software
application suites support manufacturing, finance, distribution/logistics and
human resources operations for multi-site and multinational organizations. The
Company was founded in 1977 as an information consulting firm that developed
business application software.
The Company's software application suites have historically been designed
to operate exclusively on certain midrange computing platforms, most recently
the IBM AS/400 platform. The Company commenced shipment of the WorldSoftware
version of its application suites for use on the AS/400 platform in 1988, and
sales of such applications and related services have accounted for substantially
all of the Company's revenue in recent years. To take advantage of potential
opportunities in the UNIX and NT markets, as well as to enhance its position as
a leader in the AS/400 market, the Company released in late calendar 1996 the
OneWorld version of its application suites. The Company expects to continue to
generate a substantial portion of its revenue, for the foreseeable future, from
customers using the AS/400 platform; although, the Company does not expect to
generate substantial OneWorld license fee revenue from its existing installed
base of WorldSoftware users. The Company's future revenue growth will be
substantially dependent upon the market acceptance of OneWorld and the Company's
ability to license OneWorld applications to new customers.
The Company recognizes revenue in accordance with the provisions of
Statement of Position ("SOP") 91-1, "Software Revenue Recognition." The Company
licenses software under non-cancelable license agreements and provides related
services, including support, training, consulting and implementation. Training,
consulting and implementation services are not essential to the functionality of
the Company's software products, are separately priced and are available from a
number of suppliers. Accordingly, revenue from these services is recorded
separately from the license fee. License fee revenue is recognized when a non-
cancelable license agreement has been signed, the product has been delivered,
collection is probable and all significant contractual obligations relating to
this license have been satisfied. Revenue on all software license transactions
in which there are significant outstanding obligations is deferred and
recognized once such obligations are fulfilled. Typically, the Company's
software licenses do not include significant post-delivery obligations to be
fulfilled by the Company, and payments are due within a twelve-month period from
date of delivery. Where software license contracts call for payment terms in
excess of twelve months from date of delivery, revenue is recognized as payments
become due and all other conditions for revenue recognition have been satisfied.
Revenue from training and consulting and implementation services is recognized
as services are performed. Revenue from agreements for supporting and providing
periodic upgrades to licensed software is recorded as deferred revenue and is
recognized ratably over the support service period, and includes a portion of
the related license fee equal to the fair value of any bundled support services.
Total revenue from license fees and services has increased from year to
year. As a percentage of total revenue, service revenue is higher than license
revenue primarily as a result of the Company's emphasis on providing consulting
and training services that complement its software products and increased
support revenue resulting from the Company's growing installed base of
customers. Gross margins on license fee revenue are generally higher than gross
margins on service revenue. The mix between license fee and service revenue may
change in future periods depending upon a number of factors, particularly the
Company's success in penetrating the UNIX and NT markets with the OneWorld
version of its application suites and its implementation strategy for OneWorld.
The Company has historically subcontracted a portion of its
30
<PAGE> 31
consulting and training services to third parties, and, in fiscal 1997, such
subcontracted services accounted for 43% of this revenue. However, the Company
is currently pursuing a strategy of relying on third-party implementation
providers to contract directly with its customers for OneWorld implementations
and related services. See "Item 1: Business -- Strategy and -- Implementation
Services and Training." To the extent the Company is successful in implementing
this strategy and the OneWorld version of the Company's application suites
achieves market acceptance in future periods, revenue from subcontracted
services and total service revenue as a percentage of revenue will likely
decrease; however, there can be no assurance that the Company will be successful
in implementing its strategy or that such products will achieve market
acceptance.
The Company has experienced, and expects to continue to experience, a high
degree of seasonality, with a disproportionately greater amount of the Company's
revenue for any fiscal year being recognized in its fourth fiscal quarter and an
even greater proportion of net income being recognized in such quarter. For
example, in fiscal 1997, 33% of total revenue, 39% of license fee revenue, 30%
of service revenue and 61% of net income were recognized in the fourth fiscal
quarter. In addition, because the Company's operating expenses are relatively
fixed in the near term, the Company's operating margins have historically been
significantly higher in its fourth fiscal quarter than in its other quarters.
The Company believes that such seasonality is primarily the result of both the
efforts of the Company's direct sales force to meet or exceed fiscal year-end
sales quotas and the tendency of certain customers to finalize sales contracts
at or near the Company's fiscal year end. Because total revenue, operating
margins and net income are greater in the fourth quarter, any shortfall from
anticipated revenue, particularly license fee revenue, in the fourth quarter
would have a disproportionately large adverse effect on the Company's operating
results for the fiscal year. In addition, the Company's total revenue, license
fee revenue, service revenue and net income in its first fiscal quarter have
historically been lower than those in the immediately preceding fourth quarter.
For example, total revenue, license fee revenue, service revenue and net income
in the first quarter of fiscal 1997 decreased 20%, 41%, 3% and 87%,
respectively, from the fourth quarter of fiscal 1996. The Company's first
quarter revenue has historically slowed during the holiday season in November
and December.
The Company distributes its products and services through both direct and
indirect channels. Currently, the Company has 48 direct sales and consulting
offices located throughout the world. The first international office was
established in Europe in 1989, and the Company has since added offices
throughout Canada, Europe, Asia, Latin America and Africa, investing significant
resources in the start-up of these operations. The Company also utilizes more
than 190 outside sales and consulting partners with offices throughout the world
as an indirect distribution channel to penetrate certain vertical markets or
geographic areas. Generally, operating margins are higher on domestic revenue
than on international revenue. International revenue as a percentage of total
revenue ranged between 35% and 37% from fiscal 1995 through fiscal 1997.
The Company has reassessed, and continues to closely monitor, its
international business risks due to recent economic conditions in the Asian
markets. Although the Company does not anticipate that the Asian conditions will
materially impact its business based upon management's most current evaluation
of the present situation, there can be no assurance that the current economic
conditions in Asia will not worsen or that the situation will not negatively
impact the Company's financial condition or results of operations. Historically,
the Company has recognized a small percentage of its revenue and operating
income from Asian markets, and the Company does not anticipate material changes
in its future revenue or operating income projections as a result of the Asian
economic conditions.
Total costs and operating expenses have increased in general due to the
overall growth of the Company, primarily as a result of an increase in headcount
and related costs. The Company's total number of employees grew 122% in the
three-year period from the beginning of fiscal 1995, reaching 3,577 employees as
of October 31, 1997. In addition, the Company opened new offices and expanded
existing offices during this period which increased total facilities costs.
31
<PAGE> 32
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's consolidated statements of income as a percentage of total
revenue (except for gross margin data):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenue:
License fees.............................................. 39.4% 37.7% 38.4%
Services.................................................. 60.6 62.3 61.6
----- ----- -----
Total revenue..................................... 100.0 100.0 100.0
Costs and expenses:
Cost of license fees...................................... 5.4 5.7 5.6
Cost of services.......................................... 37.6 38.7 37.8
Sales and marketing....................................... 30.0 27.0 27.2
General and administrative................................ 11.4 11.1 10.8
Research and development.................................. 7.1 8.4 9.3
----- ----- -----
Total costs and expenses.......................... 91.5 90.9 90.7
Operating income............................................ 8.5 9.1 9.3
Other income (expense), net................................. .2 (.3) (.2)
----- ----- -----
Income before income taxes.................................. 8.7 8.8 9.1
Provision for income taxes................................ 3.4 3.3 3.4
----- ----- -----
Net income.................................................. 5.3% 5.5% 5.7%
===== ===== =====
Gross margin on license fee revenue......................... 86.2% 84.8% 85.3%
Gross margin on service revenue............................. 38.0% 37.9% 38.7%
</TABLE>
Fiscal Years Ended October 31, 1997 and 1996
Revenue. Total revenue increased to $647.8 million for fiscal 1997 from
$478.0 million for fiscal 1996, representing an increase of 36%. This increase
was primarily a result of greater acceptance of the Company's software products
by mid-sized organizations in key domestic and international markets, together
with new releases of the Company's application suites, and enhanced services,
support and custom programming capabilities. International revenue as a
percentage of total revenue was 37.2% of total revenue in fiscal 1997 and 34.9%
in fiscal 1996.
License fee revenue increased to $248.7 million for fiscal 1997 from $180.4
million for fiscal 1996, representing an increase of 38%. The increase was
primarily due to a greater volume of license transactions and an increase in
average transaction size. During fiscal 1996, all license fee revenue was
generated from customers operating on the AS/400 platform. The Company began
generating some of its license fee revenue from customers operating on UNIX and
NT platforms during fiscal 1997; however, the substantial majority of all
license fee revenue was still generated from customers operating on the AS/400
platform.
Service revenue increased to $399.1 million for fiscal 1997 from $297.7
million for fiscal 1996, representing an increase of 34%. This increase was
primarily due to higher revenue from consulting, which is the largest component
of services, although support and training revenue also increased. Total service
revenue is dependent upon the amount and size of consulting engagements, the
number of Company and business partner consultants available to staff
engagements, the number of customers who have contracted for support and the
amount of the related fees, billing rates for consulting services and training
courses, and average training course sizes. Service revenue as a percentage of
total revenue was 61.6% for fiscal 1997 compared to 62.3% for fiscal 1996. The
Company has experienced consistent demand for services resulting from its
continued emphasis on providing consulting and training services that complement
its software products and the growth in its installed base of customers.
However, to the extent the Company is successful in implementing its strategy of
relying on third parties to contract directly with the Company's customers for
the
32
<PAGE> 33
implementation of its OneWorld version of its application suites, service
revenue is likely to decrease as a percentage of total revenue in future
periods.
Cost of license fees. Cost of license fees includes royalties, business
partner commissions, amortization of capitalized software development costs,
documentation costs and software delivery expenses. Cost of license fees
increased to $36.4 million for fiscal 1997 from $27.4 million for fiscal 1996.
Gross margin on license fee revenue increased to 85.3% for fiscal 1997 from
84.8% for fiscal 1996, primarily as a result of lower royalty expense on
complementary third-party software products licensed through the Company in
fiscal 1997 compared to fiscal 1996.
Amortization of capitalized software development costs increased to $6.0
million for fiscal 1997 compared to $2.6 million for fiscal 1996. This increase
was the result of the amortization of capitalized OneWorld development costs,
which began upon the release of the OneWorld version of the Company's
application suites in late calendar 1996. OneWorld development costs will be
amortized through fiscal 1999. Gross margin on license fee revenue varies, in
part, depending upon the proportion of the Company's software products that are
subject to royalty payments. The Company offers certain complementary software
products that are subject to royalties payable by the Company to third parties.
License fees subject to royalties were lower during fiscal 1997 compared to
fiscal 1996 primarily due to declining license fee revenue from application
suites incorporating WorldVision, a graphical user interface for WorldSoftware
that utilizes technology licensed from third parties, as more of the Company's
customers seeking such functionality during the later part of fiscal 1997 chose
to purchase OneWorld. Also affecting license fee margins in fiscal 1997 was an
increase in business partner commissions from fiscal 1996 due primarily to an
increase in license fee revenue from the Company's Genesis version of its
application suites, which is offered exclusively through business partners.
Cost of services. Cost of services includes the personnel and related
overhead costs for training and customer support services, together with fees
paid to third parties for subcontracted services. Cost of services increased to
$244.6 million for fiscal 1997 from $184.8 million for fiscal 1996. This
increase was due to increased personnel and subcontracted services to support
the growing demand for implementation and consulting services. Gross margin on
service revenue increased to 38.7% in fiscal 1997 from 37.9% in fiscal 1996
primarily due to lower compensation costs as a percentage of the related
revenue. Generally, the gross margin on support revenue is higher than on
consulting and training revenue, and any change in the mix in types of services
will affect the gross margin on total service revenue. In particular, the extent
to which the Company is successful in implementing its strategy of relying on
third parties to contract directly with the Company's customers for OneWorld
implementations and related services will affect gross margin on service
revenue.
Sales and marketing. Sales and marketing expense consists of personnel and
related overhead costs, including commissions, for the sales and marketing
activities of the Company, together with advertising and promotion costs. Sales
and marketing expense increased to $176.0 million for fiscal 1997 from $128.8
million for fiscal 1996, representing 27.2% and 27.0% of total revenue,
respectively. The increase was primarily the result of the addition of direct
sales personnel necessary to support the Company's selling efforts, especially
the OneWorld version of its application suites.
General and administrative. General and administrative expense includes
personnel and related overhead costs for the support and administration
functions of the Company. General and administrative expense increased to $69.9
million for fiscal 1997 from $53.1 million for fiscal 1996, representing 10.8%
and 11.1% of total revenue, respectively. Total dollar amount of expense was
higher in fiscal 1997 primarily due to an increase in personnel to support the
growth in the Company's operations.
Research and development. Research and development expense includes
personnel and related overhead costs for product development, enhancements,
upgrades, quality assurance and testing. Research and development expense
increased to $60.6 million for fiscal 1997 from $40.3 million for fiscal 1996.
In addition, capitalized software development costs were $2.2 million for fiscal
1997, down from $7.3 million for fiscal 1996. Total research and development
expenditures, including the capitalized software development costs, were higher
in fiscal 1997 primarily due to a 29% increase in personnel, together with
increases in related
33
<PAGE> 34
facilities and equipment costs. During each period, development resources were
devoted to continued enhancements of the Company's application suites.
Capitalized software development costs for both periods primarily consisted of
OneWorld development costs. Due to the release of the OneWorld version in late
calendar 1996, the Company ceased capitalizing OneWorld development costs during
the first half of fiscal 1997. The Company anticipates that research and
development expense will increase in subsequent quarters. As a percentage of
total revenue, research and development expenditures, including capitalized
software development costs, were relatively consistent at 9.7% in fiscal 1997
and 10.0% in fiscal 1996.
Other income (expense). Other income (expense) includes interest expense on
the Company's bank line of credit, interest income on cash, cash equivalents and
investments, foreign currency gains and losses, and other non-operating income
and expenses. Interest expense decreased to $829,000 for fiscal 1997 from
$899,000 for fiscal 1996 due to lower average borrowings outstanding on the
Company's line of credit during fiscal 1997. Interest income increased to $1.7
million for fiscal 1997 from $629,000 for fiscal 1996 primarily due to interest
earned on the investment of proceeds from the Company's initial public offering
completed in September 1997. Foreign currency losses increased to $2.0 million
for fiscal 1997 from $1.7 million for fiscal 1996 primarily due to the
strengthening of the U.S. dollar against most European currencies.
Provision for income taxes. The Company's effective income tax rate
remained relatively constant at 37.2% for fiscal 1997 and 37.3% for fiscal 1996.
Fiscal Years Ended October 31, 1996 and 1995
Revenue. Total revenue increased to $478.0 million in fiscal 1996 from
$340.8 million in fiscal 1995, representing an increase of 40%. The increase was
primarily a result of greater acceptance of the Company's software products by
mid-sized organizations in key domestic and international markets, together with
new releases of the Company's application suites, and enhanced services, support
and custom programming capabilities. International revenue as a percentage of
total revenue ranged from 34.9% to 36.8% during this period.
License fee revenue increased to $180.4 million in fiscal 1996 from $134.1
million in fiscal 1995, representing an increase of 34%. The increase was
primarily due to the expansion of the Company's domestic and international
direct and indirect sales organizations, a greater volume of license
transactions and an increase in average transaction size. All of the license fee
revenue recognized during the fiscal years 1996 and 1995 were generated from
customers that operate on the AS/400 platform.
Service revenue increased to $297.7 million in fiscal 1996 from $206.6
million in fiscal 1995, representing an increase of 44%. The increase was
primarily due to higher revenue from consulting and support, although training
revenue also increased. Service revenue as a percentage of total revenue was
62.3% and 60.6% in fiscal 1996 and 1995, respectively. This increase was
primarily a result of the Company's continued emphasis on providing consulting
and training services that complement its software products and the growth in
the Company's installed base of customers.
Cost of license fees. Cost of license fees increased to $27.4 million in
fiscal 1996 from $18.5 million in fiscal 1995. Gross margin on license fee
revenue declined to 84.8% for fiscal 1996 from 86.2% for fiscal 1995. These
declines were primarily due to higher royalties on complementary products, in
particular royalties incurred in connection with increased licenses of
applications with WorldVision.
Cost of services. Cost of services increased to $184.8 million in fiscal
1996 from $128.1 million in fiscal 1995. Gross margin on service revenue was
37.9% and 38.0% in fiscal 1996 and 1995, respectively. Generally, gross margin
on support revenue is higher than gross margin on consulting and training
revenue, and any change in the mix in services will affect the gross margin on
service revenue.
Sales and marketing. Sales and marketing expense increased to $128.8
million for fiscal 1996 from $102.3 million for fiscal 1995, representing 27.0%
and 30.0% of total revenue, respectively. The increase in dollar amounts was
primarily the result of an increase in sales and marketing personnel and related
costs, together with increased advertising and promotion costs. The decline in
sales and marketing expense as a
34
<PAGE> 35
percentage of total revenue was primarily the result of growing service revenue,
increased productivity from the direct sales force and an increase in the
average transaction size.
General and administrative. General and administrative expense increased to
$53.1 million for fiscal 1996 from $38.7 million for fiscal 1995, representing
11.1% and 11.4% of total revenue, respectively. The increase in dollar amounts
was primarily the result of additional support and administration personnel
hired throughout this period to support the expansion of the Company's
operations.
Research and development. Research and development expense increased to
$40.3 million for fiscal 1996 from $24.3 million for fiscal 1995. In addition,
capitalized software development costs were $7.3 million for fiscal 1996
compared to $9.8 million for fiscal 1995. Total research and development
expenditures, which include capitalized software development costs, rose 40% in
fiscal 1996 primarily due to increases in personnel, facilities, equipment costs
and professional contract services. During fiscal 1996 and 1995, the Company
increased resources devoted to the development of the OneWorld version of its
application suites as well as continued enhancements of the WorldSoftware
version, including Genesis. Capitalized software development costs for fiscal
1996 primarily represented OneWorld development costs, while, for fiscal 1995,
such costs primarily represented OneWorld and, to a lesser extent, Genesis
development costs. Although research and development expenditures, including
capitalized software development costs, increased in each fiscal year, as a
percentage of total revenue these expenditures remained relatively stable at
10.0% for fiscal 1996 and 1995.
Other income (expense). Interest income was $629,000 for fiscal 1996
compared to interest income of $1.7 million for fiscal 1995. During fiscal 1996,
the Company had lower cash and cash equivalent balances and related interest
income than in prior fiscal years due to a $19.4 million investment in land in
early fiscal 1996. Interest expense was $899,000 and $576,000 for fiscal years
1996 and 1995, respectively. Interest expense increased due to higher borrowings
on the Company's bank line of credit. Foreign currency losses increased to $1.7
million in fiscal 1996 from $237,000 for fiscal 1995. This increase was
primarily due to the strengthening of the U.S. dollar against the Japanese yen
and certain European currencies.
Provision for income taxes. The Company's effective income tax rate was
37.3% in fiscal 1996 and 38.5% in fiscal 1995. The effective income tax rate
decreased in fiscal 1996 from fiscal 1995 primarily due to a reorganization of
the Company's domestic operations.
35
<PAGE> 36
QUARTERLY RESULTS OF OPERATIONS/SUPPLEMENTARY FINANCIAL INFORMATION
The following table sets forth certain unaudited consolidated statements of
income data, both in absolute dollars and as a percentage of total revenue
(except for gross margin data), for each of the Company's last eight quarters.
This data has been derived from unaudited consolidated financial statements that
have been prepared on the same basis as the annual audited consolidated
financial statements and, in the opinion of the Company, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information. These unaudited quarterly results should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Annual Report on Form 10-K. The consolidated results
of operations for any quarter are not necessarily indicative of the results for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Revenue:
License fees.................. $35,201 $ 37,077 $ 38,220 $ 69,868 $ 40,934 $ 51,129 $ 58,983 $ 97,661
Services...................... 62,731 73,133 77,421 84,397 81,887 94,725 103,551 118,942
------- -------- -------- -------- -------- -------- -------- --------
Total revenue........... 97,932 110,210 115,641 154,265 122,821 145,854 162,534 216,603
Costs and expenses:
Cost of license fees.......... 6,705 6,150 6,942 7,646 7,698 9,386 7,900 11,460
Cost of services.............. 40,257 44,732 48,184 51,673 51,493 57,813 64,306 71,028
Sales and marketing........... 27,674 29,927 33,236 37,922 34,706 39,029 44,881 57,415
General and administrative.... 11,858 12,854 12,407 15,933 14,772 16,315 17,352 21,411
Research and development...... 8,207 9,986 9,635 12,493 10,142 14,391 16,567 19,491
------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses.............. 94,701 103,649 110,404 125,667 118,811 136,934 151,006 180,805
Operating income................ 3,231 6,561 5,237 28,598 4,010 8,920 11,528 35,798
Other income (expense), net..... 414 (629) (827) (631) (313) (1,178) (22) 583
------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes...... 3,645 5,932 4,410 27,967 3,697 7,742 11,506 36,381
Provision for income taxes.... 1,370 2,266 1,679 10,313 1,368 2,893 4,286 13,551
------- -------- -------- -------- -------- -------- -------- --------
Net income...................... $ 2,275 $ 3,666 $ 2,731 $ 17,654 $ 2,329 $ 4,849 $ 7,220 $ 22,830
======= ======== ======== ======== ======== ======== ======== ========
Earnings per common share....... $ .03 $ .04 $ .03 $ .20 $ .02 $ .05 $ .07 $ .23
======= ======== ======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding................... 85,507 88,467 88,381 88,313 93,520 95,544 96,799 100,107
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
License fees.................. 35.9% 33.6% 33.1% 45.3% 33.3% 35.1% 36.3% 45.1%
Services...................... 64.1 66.4 66.9 54.7 66.7 64.9 63.7 54.9
------- -------- -------- -------- -------- -------- -------- --------
Total revenue........... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of license fees.......... 6.8 5.6 6.0 5.0 6.3 6.4 4.9 5.3
Cost of services.............. 41.1 40.5 41.7 33.5 41.9 39.6 39.6 32.8
Sales and marketing........... 28.3 27.1 28.8 24.6 28.2 26.8 27.6 26.5
General and administrative.... 12.1 11.7 10.7 10.3 12.0 11.2 10.7 9.9
Research and development...... 8.4 9.1 8.3 8.1 8.3 9.9 10.2 9.0
------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses.............. 96.7 94.0 95.5 81.5 96.7 93.9 93.0 83.5
Operating income................ 3.3 6.0 4.5 18.5 3.3 6.1 7.0 16.5
Other income (expense), net..... .4 (.6) (.7) (.4) (.3) (.8) (.0) .3
------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes...... 3.7 5.4 3.8 18.1 3.0 5.3 7.0 16.8
Provision for income taxes.... 1.4 2.1 1.4 6.7 1.1 2.0 2.6 6.3
------- -------- -------- -------- -------- -------- -------- --------
Net income...................... 2.3% 3.3% 2.4% 11.4% 1.9% 3.3% 4.4% 10.5%
======= ======== ======== ======== ======== ======== ======== ========
Gross margin on license fee
revenue....................... 81.0% 83.4% 81.8% 89.1% 81.2% 81.6% 86.6% 88.3%
Gross margin on service
revenue....................... 35.8% 38.8% 37.8% 38.8% 37.1% 39.0% 37.9% 40.3%
</TABLE>
In the last eight quarters, expenses and operating income as a percentage
of total revenue have varied primarily due to seasonality, which has resulted in
disproportionately higher license fee revenue in the fourth fiscal quarter.
Expenses as a percentage of revenue have decreased in the fourth quarter due to
seasonally higher license fee revenue. Gross margin on license fee revenue has
varied quarterly from 81.0% to 89.1%
36
<PAGE> 37
within the last eight quarters due to fluctuations in license volume and the mix
of fixed and variable costs of licenses. Gross margin on service revenue has
remained stable except for the first quarters of fiscal 1996 and fiscal 1997 due
to lower service revenue during the holiday season in November and December.
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from quarter to
quarter. As a result, quarter-to-quarter comparisons of operating results are
not necessarily meaningful or indicative of future performance. Furthermore, the
Company believes it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail, or
are perceived to prevail, with respect to the Company's business or generally,
the market price of the Company's Common Stock would likely be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and growth to date primarily through
cash generated from operating activities. As of October 31, 1997, the Company's
principal sources of liquidity consisted of $224.4 million of cash and cash
equivalents, $138.6 million of short-term and long-term investments and a $50
million, unsecured, revolving line of credit that it borrows against for working
capital requirements and other general corporate purposes. As of October 31,
1997, no amounts were outstanding under the Company's bank line of credit, and
the Company had working capital of $238.2 million. Included in determining such
amounts is short-term deferred revenue and customer deposits of $67.1 million.
Short-term deferred revenue primarily represents annual support payments billed
to customers which is recognized ratably as revenue over the support service
period. Without the short-term deferred revenue and customer deposits, working
capital would have been $305.3 million.
The Company generated operating cash flow of $74.2 million for fiscal 1997
and $42.4 million and $41.3 million for fiscal 1996 and 1995, respectively. The
increases in operating cash flow from year to year were due primarily to
increasing net income. During these periods, growth in operating assets such as
accounts receivable has been funded by similar growth in operating liabilities,
primarily deferred revenue and accrued liabilities.
In September 1997, the Company completed its initial public offering of
18.2 million shares of common stock, of which 12.8 million were issued by the
Company, generating net proceeds of $276.5 million. Additionally, during fiscal
1997, the Company issued 941,000 shares of common stock upon the exercise of
options and received $3.2 million in proceeds. The Company did not have other
significant net financing activities for fiscal 1997, 1996, or 1995. The Company
utilized its bank line of credit for working capital and other general corporate
purposes but repaid all amounts borrowed within each of these periods.
The Company utilized cash for investing activities of $154.6 million, $51.2
million and $29.2 million for fiscal 1997, 1996 and 1995, respectively. The
increase in fiscal 1997 was due to the investment of cash from the initial
public offering. During each of these fiscal years, the Company purchased
furniture, fixtures and equipment that were necessary to support its expanding
operations. In fiscal 1997, the Company's cash utilized for investing activities
was offset in part by $8.7 million of proceeds from the sale of assets. In
fiscal 1996, the Company invested $19.4 million to purchase land in Denver,
Colorado, a portion of which is being used by the Company for a headquarters
facility.
Management believes its cash and cash equivalents balance, short-term and
long-term investments, amounts available under existing credit facilities and
funds generated from operations will be sufficient to meet its cash needs
through fiscal 1998. Additionally, the Company may also use a portion of its
short and long-term investments to acquire businesses, products or technologies
that are complementary to those of the Company, although no specific
acquisitions are currently planned. There can be no assurance, however, that the
Company will not require additional funds to support its working capital
requirements or for other purposes, in which case the Company may seek to raise
such additional funds through public or private equity financing or from other
sources. There can be no assurance that such additional financing will be
available or that, if available, such financing will be obtained on terms
favorable to the Company and would not result in additional dilution to the
Company's stockholders.
37
<PAGE> 38
IMPACT OF THE YEAR 2000 ISSUE
Many currently installed computer systems and software products currently
in use by businesses and government organizations are coded to accept two
digits, rather than four, to specify the year. As a result, in less than two
years, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance. Although the Company currently offers software products that
are designed to be Year 2000 compliant, there can be no assurance that the
Company's software products contain all necessary date code changes.
While management believes it has successfully addressed this issue in its
proprietary software products, upon which its business operations are
significantly dependent, other third-party software and computer technology used
internally, if not Year 2000 compliant, may materially impact the Company.
Further, the Company's operations may be at risk if its suppliers and other
third-parties fail to adequately address the problem or if software conversions
result in system incompatibilities with these third-parties. This issue could
result in system failures or generation of erroneous information and could
significantly disrupt business activities.
The Company is reviewing what actions will be required to make all software
systems used internally Year 2000 compliant as well as to mitigate its
vulnerability to problems with its suppliers and other third parties' systems.
Such actions will include a review of vendor contracts and formal communication
with suppliers to request certification that products are Year 2000 compliant.
The total cost and time associated with the impact of Year 2000 compliance
cannot presently be determined.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has determined that the adoption of recently issued Statements
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Shares," No.
129, "Disclosure of Information about Capital Structure," No. 130, "Reporting
Comprehensive Income," No. 131, "Disclosures about Segments of an Enterprise and
Related Information," and SOP 97-2, "Software Revenue Recognition," will not
have a material impact on its financial condition or results of operations. SFAS
No. 129 is effective for fiscal 1998 and SOP 97-2, SFAS Nos. 130 and 131 are
effective for fiscal 1999. The pro forma effect of SFAS No. 128 is disclosed in
the notes to the consolidated financial statements included herein.
38
<PAGE> 39
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required pursuant to this item are included in
Item 14 of this Annual Report on Form 10-K and are presented beginning on page
F-1. The supplementary financial information required by this item is included
in "Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the subsection entitled "Quarterly Results of
Operations/Supplementary Financial Information."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the sections entitled
"Proposal 1 -- Election of Directors" and "Compliance with Section 16(a) of the
Exchange Act" in the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended October 31, 1997, except that the information
required by this item concerning the executive officers of the Company is
incorporated by reference to the information set forth in the section entitled
"Executive Officers of the Company" at the end of Part I of this Annual Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Proposal 1 -- Election of Directors" and "Compensation of Executive Officers"
in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to
be filed with the Commission within 120 days after the end of the Company's
fiscal year ended October 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for the 1998
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended October 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days after the end of the Company's fiscal
year ended October 31, 1997.
39
<PAGE> 40
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. Consolidated Financial Statements.
The following consolidated financial statements of J.D. Edwards &
Company are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Income........................... F-3
Consolidated Statements of Changes in Stockholders' F-4
Equity....................................................
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
2. Consolidated Financial Statements Schedules.
The following financial statement schedule of the Company for each of
the years ended October 31, 1997, 1996 and 1995 is filed as part of this
Form 10-K and should be read in conjunction with the Consolidated Financial
Statements, and the related notes thereto, of the Company.
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts........ S-1
</TABLE>
Schedules other than those listed above have been omitted since they
are either not required, not applicable or the information is otherwise
included.
3. Exhibits. The exhibits listed on the accompanying index to exhibits
immediately following the financial statement schedule are filed as part
of, or incorporated by reference into, this Form 10-K.
(b) Reports on Form 8-K: No Current Reports on Form 8-K were filed by the
Company in the fourth quarter ended October 31, 1997.
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized on this
22nd day of January 1998.
J.D. EDWARDS & COMPANY
By: /s/ RICHARD G. SNOW, JR.
----------------------------------
Name: Richard G. Snow, Jr.
Title: Vice President, General
Counsel
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on January 22, 1998 on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ C. EDWARD MCVANEY Chairman of the Board, President and Chief Executive
- ----------------------------------------------------- Officer (principal executive officer)
C. Edward McVaney
/s/ RICHARD E. ALLEN Chief Financial Officer, Senior Vice President,
- ----------------------------------------------------- Finance and Administration and Director (principal
Richard E. Allen financial officer)
/s/ PAMELA L. SAXTON Vice President of Finance, Controller and Chief
- ----------------------------------------------------- Accounting Officer (principal accounting officer)
Pamela L. Saxton
/s/ ROBERT C. NEWMAN Director
- -----------------------------------------------------
Robert C. Newman
/s/ JACK L. THOMPSON Director
- -----------------------------------------------------
Jack L. Thompson
/s/ GERALD HARRISON Director
- -----------------------------------------------------
Gerald Harrison
/s/ DELWIN D. HOCK Director
- -----------------------------------------------------
Delwin D. Hock
/s/ HARRY T. LEWIS, JR. Director
- -----------------------------------------------------
Harry T. Lewis, Jr.
/s/ MICHAEL J. MAPLES Director
- -----------------------------------------------------
Michael J. Maples
/s/ TRYGVE E. MYHREN Director
- -----------------------------------------------------
Trygve E. Myhren
</TABLE>
41
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
J.D. Edwards & Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)1. and 2. on page 40 present fairly, in all material
respects, the financial position of J.D. Edwards & Company and its subsidiaries
at October 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boulder, Colorado
November 24, 1997
F-1
<PAGE> 43
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 25,554 $224,437
Short-term investments.................................... -- 30,464
Accounts receivable, net of allowance for doubtful
accounts of $5,600 and $9,800 at October 31, 1996 and
1997, respectively..................................... 115,729 174,532
Prepaid and other current assets.......................... 25,301 21,436
-------- --------
Total current assets.............................. 166,584 450,869
Long-term investments....................................... -- 108,096
Property and equipment, net................................. 51,355 55,705
Software development costs, net............................. 15,657 11,879
Deposits and other assets................................... 10,190 16,488
-------- --------
$243,786 $643,037
======== ========
LIABILITIES, MANDATORILY REDEEMABLE SHARES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 32,321 $ 34,915
Unearned revenue and customer deposits.................... 44,327 67,104
Accrued liabilities....................................... 69,367 110,565
-------- --------
Total current liabilities......................... 146,015 212,584
Unearned revenue, net of current portion, and other......... 27,845 33,592
-------- --------
Total liabilities................................. 173,860 246,176
Commitments and contingencies (Note 8)...................... -- --
Mandatorily redeemable shares, at redemption value.......... 47,024 --
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized;
none outstanding....................................... -- --
Common stock, $.001 par value; 300,000,000 shares
authorized; 79,093,070 and 92,822,186 issued and
outstanding as of October 31, 1996 and 1997,
respectively........................................... 79 93
Additional paid-in capital................................ 3,669 294,278
Retained earnings......................................... 65,628 102,856
Cumulative translation adjustments and other, net......... 550 (366)
Adjustment for mandatorily redeemable shares.............. (47,024) --
-------- --------
Total stockholders' equity........................ 22,902 396,861
-------- --------
$243,786 $643,037
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 44
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
License fees............................................ $134,138 $180,366 $248,707
Services................................................ 206,628 297,682 399,105
-------- -------- --------
Total revenue................................... 340,766 478,048 647,812
Costs and expenses:
Cost of license fees.................................... 18,461 27,443 36,444
Cost of services........................................ 128,144 184,846 244,640
Sales and marketing..................................... 102,310 128,759 176,031
General and administrative.............................. 38,677 53,052 69,850
Research and development................................ 24,296 40,321 60,591
-------- -------- --------
Total costs and expenses........................ 311,888 434,421 587,556
Operating income.......................................... 28,878 43,627 60,256
Other income (expense):
Interest income......................................... 1,697 629 1,686
Interest expense........................................ (576) (899) (829)
Foreign currency losses and other, net.................. (411) (1,403) (1,787)
-------- -------- --------
Income before income taxes................................ 29,588 41,954 59,326
Provision for income taxes.............................. 11,379 15,628 22,098
-------- -------- --------
Net income................................................ $ 18,209 $ 26,326 $ 37,228
======== ======== ========
Earnings per common share................................. $ 0.22 $ 0.30 $ 0.39
======== ======== ========
Weighted average common shares outstanding................ 82,504 87,667 96,500
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 45
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
(INCLUDING MANDATORILY ADJUSTMENT FOR
REDEEMABLE SHARES) ADDITIONAL MANDATORILY
----------------------- PAID-IN RETAINED REDEEMABLE
SHARES AMOUNT CAPITAL EARNINGS OTHER SHARES
------------ -------- ---------- -------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1994... 81,092,760 $81 $ 7,830 $ 21,093 $(1,102) $(14,290)
Purchase of common stock.... (2,706,690) (3) (6,450) -- -- --
Shares issued to ESOP....... 647,570 1 2,200 -- -- (2,201)
Increase in share redemption
value of mandatorily
redeemable ESOP shares.... -- -- -- -- -- (3,682)
Purchase of founders' stock
by ESOP................... -- -- -- -- -- 200
Net income.................. -- -- -- 18,209 -- --
Change in cumulative
translation adjustment and
other, net................ 5,180 -- 13 -- 1,073 --
---------- --- -------- -------- ------- --------
Balance, October 31, 1995... 79,038,820 79 3,593 39,302 (29) (19,973)
Purchase of common stock.... (25,200) -- (152) -- -- 152
Increase in share redemption
value of mandatorily
redeemable ESOP shares.... -- -- -- -- (23,903)
Increase in founders' stock
purchase obligation....... -- -- -- -- -- (3,300)
Stock option exercises...... 79,450 -- 228 -- -- --
Net income.................. -- -- -- 26,326 -- --
Change in cumulative
translation adjustment and
other, net................ -- -- -- -- 579 --
---------- --- -------- -------- ------- --------
Balance, October 31, 1996... 79,093,070 79 3,669 65,628 550 (47,024)
Purchase of common stock.... (1,403) -- (15)
Issuance of shares in public
offering, net............. 12,790,004 13 276,452
Lapse of mandatorily
redeemable provision on
ESOP shares............... -- -- -- -- -- 47,024
Tax benefit from stock
compensation.............. -- -- 10,137 -- -- --
Stock option exercises...... 940,515 1 3,230 -- -- --
Net income.................. -- -- -- 37,228 -- --
Change in cumulative
translation adjustment and
other, net................ -- -- 805 -- (916) --
---------- --- -------- -------- ------- --------
Balance, October 31, 1997... 92,822,186 $93 $294,278 $102,856 $ (366) $ 0
========== === ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 46
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 18,209 $ 26,326 $ 37,228
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 7,978 13,166 15,649
Amortization of software development costs................ 2,193 2,568 6,022
Provision for deferred income taxes....................... (3,588) (1,854) (6,554)
Other..................................................... 1,195 2,216 1,692
Changes in operating assets and liabilities:
Accounts receivable, net.................................. (21,825) (35,164) (59,398)
Prepaid and other current assets.......................... 3,346 (2,876) (2,790)
Accounts payable.......................................... 5,480 12,138 2,830
Unearned revenue and customer deposits.................... 13,313 13,655 29,669
Accrued liabilities....................................... 15,039 12,185 49,882
-------- -------- ---------
Net cash from operating activities................ 41,340 42,360 74,230
INVESTING ACTIVITIES:
Purchase of investments..................................... -- -- (138,560)
Purchase of property and equipment.......................... (19,454) (41,135) (22,436)
Proceeds from sale of assets................................ -- -- 8,661
Capitalized software development costs...................... (9,763) (7,320) (2,244)
Other....................................................... -- (2,695) --
-------- -------- ---------
Net cash used for investing activities............ (29,217) (51,150) (154,579)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net................. -- -- 279,696
Proceeds from bank line of credit........................... -- 85,100 81,950
Repayment of bank line of credit............................ -- (85,100) (81,950)
Purchase of common stock.................................... (6,452) (152) (15)
Other....................................................... 514 83 --
-------- -------- ---------
Net cash provided by (used for) financing activities... (5,938) (69) 279,681
Effect of exchange rate changes on cash..................... 97 (484) (449)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 6,282 (9,343) 198,883
Cash and cash equivalents at beginning of period............ 28,615 34,897 25,554
-------- -------- ---------
Cash and cash equivalents at end of period.................. $ 34,897 $ 25,554 $ 224,437
======== ======== =========
SUPPLEMENTAL DISCLOSURE OF OTHER CASH AND NON-CASH INVESTING
AND FINANCING TRANSACTIONS
Interest paid............................................. $ 576 $ 899 $ 829
Income taxes paid......................................... 13,452 8,061 17,168
ESOP contribution funded with common stock................ 2,201 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 47
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
J.D. Edwards & Company and Subsidiaries (the "Company") develops, markets
and supports highly functional Enterprise Resource Planning ("ERP") software
solutions that operate on multiple computing platforms and are designed to
accelerate customers' time to benefit, lower customers' cost of ownership and
reduce information systems risks arising from changes in technology and business
practices. The Company's integrated software application suites support
manufacturing, finance, distribution/logistics and human resources operations
for multi-site and multinational organizations. The Company provides
implementation, training and support services designed to enable customers to
rapidly achieve the benefits of the Company's ERP solutions. The Company has
developed and marketed ERP solutions for over 20 years, principally for
operation on AS/400 and other IBM mid-range systems and, more recently, on
leading UNIX and Windows NT servers through Windows- and Internet
browser-enabled desktop clients. The Company operates primarily in the United
States, Canada, Europe, Asia, Latin America and Africa.
Principles of Consolidation and Basis of Presentation
The accounts of the Company have been consolidated. All intercompany
accounts and transactions have been eliminated. The consolidated financial
statements are stated in U.S. dollars and are prepared under U.S. generally
accepted accounting principles.
Reincorporation and Stock Split
In August 1997, the Company reincorporated in Delaware. In connection
therewith, the Company effected a 70-for-one stock split with 300.0 million
authorized shares of $.001 par value common stock and 5.0 million authorized
shares of $.001 par value preferred stock. All references in the consolidated
financial statements to shares, share prices, and per share amounts have been
adjusted retroactively for all periods presented to reflect the stock split.
Initial Public Offering
In September 1997, the Company completed an initial public offering
("IPO"). Of the 18.2 million shares of common stock sold to the public at $23.00
per share, the Company issued 12.8 million shares and selling shareholders sold
5.4 million shares. The Company realized $276.5 million from the offering after
deducting expenses of the offering of approximately $17.7 million.
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 reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position ("SOP") 91-1, "Software Revenue Recognition." The Company
licenses software under non-cancelable license agreements and provides related
services, including support, training, consulting and implementation. Training,
consulting and implementation services are not essential to the functionality of
the Company's software products, are separately priced and are available from a
number of suppliers. Accordingly, revenue from these services is recorded
separately from the license fee. License fee revenue is recognized when a
non-cancelable license agreement has been signed, the product has been
delivered, collection is probable and
F-6
<PAGE> 48
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
all significant contractual obligations relating to this license have been
satisfied. Revenue on all software license transactions in which there are
significant outstanding obligations is deferred and recognized once such
obligations are fulfilled. Typically, the Company's software licenses do not
include significant post-delivery obligations to be fulfilled by the Company and
payments are due within a twelve-month period from date of delivery. Where
software license contracts call for payment terms in excess of twelve months
from date of delivery, revenue is recognized as payments become due and all
other conditions for revenue recognition have been satisfied. Revenue from
training, consulting and implementation services is recognized as services are
performed. Revenue from agreements for supporting and providing periodic
upgrades to the licensed software is recorded as deferred revenue and is
recognized ratably over the support service period, and includes a portion of
the related license fee equal to the fair value of any bundled support services.
The Company does not require collateral for its receivables and reserves are
maintained for potential losses.
In October 1997, the American Institute of Certified Public Accountants
issued SOP 97-2, "Software Revenue Recognition," which provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions and will supersede SOP 91-1. The Company will be required
to apply the provisions of SOP 97-2 to transactions entered into during fiscal
1999. Management anticipates that the adoption of this guidance will not have a
material impact on its financial condition or results of operations.
Software Research and Development Costs
The Company capitalizes internally developed software costs in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalization of development costs of software products begins once the
technological feasibility of the product is established. Based on the Company's
product development process, technological feasibility is established upon
completion of a detailed program design. Capitalization ceases when such
software is ready for general release, at which time amortization of the
capitalized costs begins.
Amortization of capitalized internally developed software costs is computed
as the greater of: (a) the amount determined by ratio of the product's current
revenue to its total expected future revenue or (b) the straight-line method
over the product's estimated useful life, generally three years. During all
periods presented herein, the Company has used the straight-line method to
amortize such capitalized costs.
Research and development costs relating principally to the design and
development of products (exclusive of costs capitalized under SFAS No. 86) are
generally expensed as incurred. The cost of developing routine enhancements are
expensed as research and development costs as incurred because of the short time
between the determination of technological feasibility and the date of general
release of related products.
Foreign Currency Translation
The functional currency of each subsidiary is the local currency.
Translation of balance sheet amounts to U.S. dollars is based on exchange rates
as of each balance sheet date. Income statement and cash flow statement amounts
are translated at the average exchange rates for the period. Cumulative currency
translation adjustments, net of related deferred taxes, are presented in a
separate component of stockholders' equity. Transaction gains and losses and
unrealized gains and losses on short-term intercompany receivables and payables
are included in income as incurred.
Cash and Cash Equivalents, Short-term Investments and Long-term Investments
All highly liquid investments with an original maturity of three months or
less when purchased are considered to be cash equivalents. All cash equivalents
are carried at cost, which approximates fair value. Investments consist of U.S.
dollar denominated foreign and domestic corporate bonds, as well as state and
F-7
<PAGE> 49
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
municipal bonds, with maturities of up to thirty months. All investments are
classified as held-to-maturity as defined in SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" and accordingly are carried
at amortized cost. At October 31, 1997, the amortized cost of investments with
maturities of less than twelve months totaled $30.5 million, and investments
with maturities ranging from greater than twelve months up to thirty months
totaled $108.1 million. The fair value of investments approximated their
amortized cost at October 31, 1997.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables. The Company has cash investment policies that limit investments to
investment grade securities. The Company believes the risk with respect to trade
receivables is mitigated, to some extent, by the fact that the Company's
customer base is widespread geographically and is highly diversified. No single
customer accounted for ten percent or more of revenue for fiscal 1995, 1996 or
1997 or of accounts receivable at October 31, 1996 or 1997.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including
cash, cash equivalents, investments and accounts receivable and payable,
approximate their fair values at October 31, 1996 and 1997.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method. The estimated useful
lives are as follows:
<TABLE>
<S> <C>
Furniture and fixtures.................................... 5-7 years
Computer equipment........................................ 3 years
</TABLE>
Stock-based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in
October 1995. This accounting standard permits the use of either a fair value
based method or the method defined in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") to account for
stock-based compensation arrangements. Companies that elect to use the method
provided in APB No. 25 are required to disclose the pro forma net income and
earnings per share that would have resulted from the use of the fair value based
method. The Company has elected to continue to determine the value of
stock-based compensation arrangements under the provisions of APB No. 25 and,
accordingly, has included the pro forma disclosures required under SFAS No. 123
in Note 7.
Income Taxes
Deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying consolidated balance
sheets, as well as operating loss and tax credit carryforwards. Deferred tax
assets may be reduced by a valuation allowance if current evidence indicates
that it is considered likely that these benefits will not be realized.
Reclassifications
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the fiscal 1997 presentation.
F-8
<PAGE> 50
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Common Share
Earnings per common share ("EPS") are computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of stock options, and the weighted average
shares outstanding for each period have been adjusted to include all common
shares issuable under stock options using the treasury stock method. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin No. 83, such
computations for periods presented prior the completion of the Company's IPO
include all common and common equivalent shares issued within the twelve months
preceding the initial filing date of the Company's Registration Statement as if
they were outstanding for all periods presented, using the treasury stock method
and the IPO price. Such shares were treated as outstanding in computations of
earnings per share for the remainder of the fiscal year using the treasury stock
method and actual market prices. All shares owned by the J.D. Edwards & Company
Employee Stock Ownership Plan (the "ESOP") were included in the weighted average
common shares outstanding.
SFAS No. 128, "Earnings per Share," was issued in February of 1997. The
Company will be required to apply this statement in its consolidated financial
statements for fiscal 1998. This pronouncement establishes new standards for
computing and presenting EPS on a basis that is more comparable to international
standards and provides for the presentation of basic and diluted EPS, replacing
the currently required primary and fully-diluted EPS. The basic EPS will be
computed by dividing net income by the weighted average number of shares
outstanding during the period. Diluted EPS will be computed in a manner similar
to the current method for calculating fully-diluted EPS. Prior period EPS will
be restated to conform with the new statement. The pro forma effect of applying
SFAS No. 128 on the Company's historical consolidated financial statements is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
EPS AS REPORTED
Primary EPS........................................ $ 0.22 $ 0.30 $ 0.39
Weighted average common shares outstanding......... 82,504 87,667 96,500
PRO FORMA EPS
Basic EPS Computation:
Basic EPS....................................... $ 0.23 $ 0.33 $ 0.46
Weighted average common shares outstanding...... 79,139 79,044 80,546
Diluted EPS Computation:
Diluted EPS..................................... $ 0.22 $ 0.30 $ 0.39
Weighted average common shares outstanding...... 82,504 87,667 96,500
</TABLE>
Other Recently Issued Accounting Pronouncements
The Company will be required to apply new recently issued standards in its
future consolidated financial statements. SFAS No. 129, "Disclosures of
Information about Capital Structure," establishes standards for disclosing
information about an entity's capital structure; SFAS No. 130, "Reporting
Comprehensive Income," establishes standards for reporting comprehensive income
in financial statements; and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports. The
Company has determined that the adoption of these recently issued standards will
not have a material impact on its financial condition or results of operations.
SFAS No. 129 is effective for fiscal 1998 and SFAS Nos. 130 and 131 are
effective for fiscal 1999.
F-9
<PAGE> 51
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
PROPERTY AND EQUIPMENT:
Furniture and fixtures.................................... $ 34,519 $ 44,220
Computer equipment........................................ 30,469 38,778
Land...................................................... 16,321 16,559
-------- --------
81,309 99,557
Less: accumulated depreciation............................ (29,954) (43,852)
-------- --------
$ 51,355 $ 55,705
======== ========
SOFTWARE DEVELOPMENT COSTS:
Software development costs................................ $ 24,392 $ 26,636
Less: accumulated amortization............................ (8,735) (14,757)
-------- --------
$ 15,657 $ 11,879
======== ========
ACCRUED LIABILITIES:
Accrued compensation and related expenses................. $ 36,462 $ 68,803
Income taxes payable...................................... 13,869 15,261
Other accrued expenses.................................... 19,036 26,501
-------- --------
$ 69,367 $110,565
======== ========
</TABLE>
(3) BANK LINE OF CREDIT
The Company has a $50 million, unsecured, revolving line of credit (the
"Revolver") with a syndication of banks. The Revolver expires on July 31, 1999.
Borrowings under the Revolver are for working capital requirements and other
general corporate purposes and bear tiered interest rates as determined by the
Company's leverage ratio. The maximum rate of interest is the bank's prime rate
plus .50% or LIBOR plus 1.75% at the option of the Company. The credit agreement
associated with the Revolver requires that the Company remain in compliance with
certain affirmative and negative covenants and representations and warranties.
The financial covenants include liquidity, leverage, and coverage ratios,
capital expenditure limitations and profitability requirements. Non-financial
covenants include, but are not limited to, certain restrictions on additional
indebtedness, contingent liabilities, mergers and acquisitions and investments.
At October 31, 1996 and 1997, the Company was in full compliance with all
covenants under the credit agreement. There were no borrowings outstanding under
any credit agreement at October 31, 1996 and 1997.
(4) ESOP AND ESOP MANDATORILY REDEEMABLE SHARES
Effective January 1, 1989, the Company established the ESOP, subject to the
provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The
Company makes discretionary contributions of cash and/or shares of common stock
of the Company to the ESOP trust fund. The trust fund is maintained in the form
of individual participant accounts that vest over a seven-year period.
Allocations to these accounts are made on the basis of each participant's
proportionate share of total compensation paid by the Company to all ESOP
participants. At the discretion of the Company, unvested shares forfeited by a
terminated participant may be used to offset future Company contributions to the
ESOP or may be reallocated to the remaining participants of the ESOP. With
certain limitations, Company employees in the United States who are at least 21
years old and have completed one year of service are eligible ESOP participants.
F-10
<PAGE> 52
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon termination of employment, the ESOP provides that a terminating
employee will receive his or her vested shares. Prior to the Company's IPO, a
terminating employee could elect to receive a distribution of Company common
stock for shares vested or require the Company to purchase such vested shares.
In the event the Company was required to purchase such shares from a terminating
employee, the Company would purchase the vested shares at the appraised value
for the shares. The Company engaged an independent appraiser to perform an
annual valuation of the Company's common stock for this purpose. In accordance
with the requirements of the SEC, the redemption value of shares held by the
ESOP was reflected in the balance sheet prior to completion of the IPO as
mandatorily redeemable shares with the offsetting adjustments included as a
reduction of stockholders' equity. Upon completion of the IPO, the Company's
obligation to purchase the ESOP shares terminated, and the amount related to the
mandatorily redeemable shares was reclassified to stockholders' equity.
Compensation cost is measured as the estimated fair value of shares
contributed to or committed to be contributed to the ESOP plus the cash
contributed to or committed to be contributed to the ESOP. For the years ended
October 31, 1995, 1996 and 1997, the Company recognized as compensation cost
$4.5 million, $5.9 million and $5.3 million, respectively. The ESOP owned
6,718,040, and 8,558,270 shares of common stock at October 31, 1996 and 1997,
respectively. All shares owned by the ESOP have been allocated to participants.
(5) FOUNDERS' STOCK
The founders of the Company currently own or control a majority of the
Company's issued and outstanding common stock. Under the terms of a shareholder
agreement (the "Original Shareholder Agreement"), the Company had certain
redemption obligations prior to the completion of the Company's IPO. The
Original Shareholder Agreement provided for the Company's repurchase of a
limited amount of the founders' stock in the event of their deaths. This
purchase obligation was limited to proceeds of life insurance policies owned by
the Company on the lives of the founders. Under the Original Shareholder
Agreement, a founder could have also required the Company to purchase a limited
number of shares up to an aggregate amount of $2.2 million at October 31, 1995
and $5.5 million at October 31, 1996. This purchase obligation was at a price
equal to 40% of fair value, as determined by the Company's Board of Directors.
Additionally, if a founder proposed to sell any of his shares, he was required
to offer the shares first to the Company and the Company, at its option, could
have purchased such shares at the lesser of fair value or the price offered by a
third party. The Company could have also allowed the ESOP to purchase any shares
sold pursuant to the Original Shareholder Agreement.
In accordance with the requirements of the SEC, the share redemption
obligations under the Original Shareholder Agreement were reflected in the
accompanying balance sheet at October 31, 1996 as mandatorily redeemable shares
with the offsetting adjustment included as a reduction of stockholders' equity.
In August 1997, the founders of the Company entered into an agreement which
replaced the Original Shareholder Agreement effective upon the completion of the
IPO (the "New Shareholder Agreement"). The New Shareholder Agreement has no
provisions which obligate the Company to purchase any shares of the founders'
stock, and, accordingly, the mandatorily redeemable amounts were reclassified to
stockholders' equity.
During the year ended October 31, 1995, the three founders sold 2.0 million
shares of common stock to the Company for $5.0 million under the terms of the
Original Shareholder Agreement.
Additionally, during the year ended October 31, 1995 one of the founders
exercised his option under the Original Shareholder Agreement to require the
Company to purchase 176,260 shares of common stock. The Company allowed such
shares to be purchased by the ESOP for $200,000.
During the year ended October 31, 1996, the Company was notified of a
contractual arrangement whereby two founders would sell 3.5 million shares of
stock to certain identified third parties. Under the terms
F-11
<PAGE> 53
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Original Shareholder Agreement, such stock was required to be offered to
the Company at the pending sales price prior to the sale to the third parties.
The Company assigned its right-to-purchase these shares to the ESOP, which
purchased the 3.5 million shares of common stock from the founders for $10.4
million.
During fiscal 1997, one of the founders sold 55,440 shares of common stock
to certain members of the Board of Directors and one employee. The Company
recognized as compensation expense $223,000, which represented the difference
between the sales price and the estimated fair value of the Company's common
stock on the date of the sale.
(6) INCOME TAXES
Income before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Domestic............................................. $27,852 $24,770 $34,667
Foreign.............................................. 1,736 17,184 24,659
------- ------- -------
$29,588 $41,954 $59,326
======= ======= =======
</TABLE>
Components of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current provision:
U.S. Federal....................................... $ 7,829 $ 8,737 $ 9,342
State.............................................. 2,044 1,259 1,798
Foreign............................................ 5,094 7,486 17,512
------- ------- -------
14,967 17,482 28,652
------- ------- -------
Deferred provision (benefit):
U.S. Federal....................................... (1,134) (4,951) (6,292)
State.............................................. (425) -- (715)
Foreign............................................ (2,029) 3,097 453
------- ------- -------
(3,588) (1,854) (6,554)
------- ------- -------
Total provision for income taxes........... $11,379 $15,628 $22,098
======= ======= =======
</TABLE>
The provisions for income taxes are different from the amounts computed by
applying the federal statutory rate to income before income taxes. The amounts
are reconciled as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Statutory rate....................................... $10,356 $14,684 $20,764
Foreign income taxed at higher rates................. 1,887 3,018 3,915
Non-deductible expenses.............................. 1,007 1,676 563
State income taxes, net of federal benefit........... 1,052 818 1,431
Income tax credits................................... (2,774) (3,844) (5,796)
Other................................................ (149) (724) 1,221
------- ------- -------
Provision for income taxes........................... $11,379 $15,628 $22,098
======= ======= =======
</TABLE>
F-12
<PAGE> 54
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Revenue deferred for book purposes........................ $ 6,743 $ 9,403
Foreign tax credit carryforwards.......................... 4,639 14,290
Allowance for doubtful accounts........................... 1,677 3,638
Vacation and other accruals............................... 988 2,587
Fixed assets.............................................. 1,424 1,440
Unrealized currency losses................................ 112 536
Foreign income currently subject to U.S. tax.............. 1,986 2,815
Research and development credit carryforward.............. -- 2,636
Net operating loss carryforward........................... -- 3,400
Other..................................................... 1,216 809
------- -------
Total deferred tax assets......................... 18,785 41,554
------- -------
Deferred tax liabilities:
Capitalized software development costs.................... (5,503) (4,425)
Revenue deferred for tax.................................. (1,546) (7,258)
Other..................................................... (332) (877)
------- -------
Total deferred tax liabilities.................... (7,381) (12,560)
------- -------
Less -- valuation allowance for foreign tax credits......... -- (9,651)
------- -------
Net deferred tax asset...................................... $11,404 $19,343
======= =======
Current portion of deferred taxes........................... $ 7,122 $ 8,697
Non-current portion of deferred taxes....................... 4,282 10,646
------- -------
Net deferred tax asset...................................... $11,404 $19,343
======= =======
</TABLE>
The Company has available approximately $14.3 million of foreign tax credit
carryforwards of which $4.6 million will expire in 2001 and $9.7 million will
expire in 2002. The Company has a net operating loss carryforward of
approximately $9.1 million and a research and development credit carryforward of
approximately $2.6 million which both expire in 2012.
At October 31, 1996 and 1997, unremitted earnings of foreign subsidiaries
totaled $7.5 million and $10.3 million, respectively, and were deemed to be
permanently invested. The unrecognized deferred tax liability for such earnings
is immaterial.
The Company has provided a valuation allowance of $9.7 million relating to
foreign tax credits due to the fact that the Company could not utilize such
credits in the current year and there is uncertainty that the credits will be
utilized prior to expiration in 2002. The allowance may be adjusted in future
periods to the extent evidence becomes available that these foreign tax credits
will be utilized before they expire.
(7) EMPLOYEE RETIREMENT SAVINGS PLAN AND STOCK OPTIONS
Employee Retirement Savings Plan
In 1988, the Company established the J.D. Edwards & Company Retirement
Savings Plan (the "401(k) Plan") subject to the provisions of ERISA. The 401(k)
Plan is an Internal Revenue Code Section 401(k) plan, commonly known as a salary
reduction retirement plan. Employees with a minimum of six months of service are
eligible to participate in the 401(k) Plan.
F-13
<PAGE> 55
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company generally matches 50% of an employee's eligible contributions
to the 401(k) Plan, up to a maximum match of 2% of eligible compensation. Both
matching and discretionary contributions are determined in connection with the
determination of contributions to the ESOP. The Company's matching contributions
are fully vested for all participants completing 1,000 hours of service and
employed by the Company on the last day of the calendar year. Discretionary
contributions are subject to a vesting schedule based on number of years of
service with the Company. The Company recognized expense for matching
contributions of $1.8 million, $200,000 and $2.1 million for fiscal 1995, 1996,
and 1997, respectively. There have been no discretionary contributions made by
the Company since the inception of the 401(k) Plan.
Stock Options
In August 1997, the Company established an Equity Incentive Plan (the "1997
Plan"). A total of 10,000,000 shares of common stock are reserved for issuance
under the 1997 Plan, of which 9,940,000 were available for grant as of October
31, 1997. The number of shares of common stock reserved for issuance will be
increased on each anniversary date of the adoption of the 1997 Plan, beginning
in 1998, by a number of shares equal to the number of shares needed to restore
the maximum aggregate number of shares to 10,000,000 or a lesser amount
determined by the Company's Board of Directors. The 1997 Plan provides for the
granting of incentive stock options to employees and the granting of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants.
In November 1992, the Company established an Incentive Stock Option Plan
and a Nonqualified Stock Option Plan (the "1992 Option Plans"). A total of
35,000,000 shares of common stock are authorized for issuance under the 1992
Option Plans, of which 14,980,490 shares and 12,783,350 shares were available
for grant as of October 31, 1996 and 1997, respectively. The Company does not
anticipate granting additional options under the 1992 Option Plans. Options
granted vest over a period of time ranging from four to five years with a term
of not more than ten years.
The Company records compensation expense related to stock options using the
intrinsic value based method and includes a pro forma disclosure in the
footnotes for compensation value measured using the fair value accounting
treatment. Generally, stock options are granted with an exercise price equal to
the fair value at the date of grant, and accordingly no compensation expense was
recognized during fiscal 1995 or 1996. During fiscal 1997, the Company recorded
$581,000 as deferred compensation representing the excess of the estimated fair
value of the Company's common stock over the exercise price of such options.
Such deferred compensation cost is being amortized over the five-year vesting
period of the options. Of the total amount, $192,000 was recognized during
fiscal 1997.
For the fair value disclosure below, compensation value is estimated for
each option grant under the 1992 and 1997 Option Plans on the date of grant
using a minimum value option pricing model with the following assumptions used
for grants in fiscal 1996 and 1997: risk-free rates ranging from 5.1% to 5.8% in
fiscal 1996 and 5.8% to 6.1% in fiscal 1997 and corresponding to government
securities with original maturities similar to the expected option lives;
expected dividend yield of 0% for both periods; and expected lives of one year
beyond vest dates for both periods.
Based on calculations using the minimum value option-pricing model, the
weighted-average grant date fair value of options was $1.12 and $2.67 in fiscal
1996 and 1997, respectively. The pro forma impact on the
F-14
<PAGE> 56
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's net income and net income per share had compensation cost been
recorded as determined under the fair value method is shown below (in thousands,
except per share data).
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Net income:
As reported............................................... $26,326 $37,228
Pro forma................................................. 24,735 33,770
Net income per share:
As reported............................................... 0.30 0.39
Pro forma................................................. 0.28 0.35
</TABLE>
The status of total stock options outstanding and exercisable under the
1992 and 1997 Option Plans as of October 31, 1997 follows:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
- ------------------------------------------ -------------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OF SHARES LIFE (YEARS) PRICE OF SHARES PRICE
- ----------- ---------- ----------------- -------- --------- --------
<C> <C> <C> <C> <C> <C>
$2.66-3.44 13,848,825 6.3 $ 2.89 8,094,895 $2.82
6.24 4,938,200 8.3 6.24 869,800 6.24
10.71 2,397,500 9.0 10.71 -- --
23.00 7,000 9.5 23.00 -- --
38.00 60,000 7.9 38.00 -- --
---------- ---------
$2.66-38.00 21,251,525 7.1 $ 4.66 8,964,695 $3.15
========== =========
</TABLE>
Activity of the 1992 and 1997 Option Plans is summarized in the following
table:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER AVERAGE OPTIONS AVERAGE
OF SHARES EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Options outstanding, October 31,
1994............................... 11,397,120 $ 2.70 728,910 $2.66
Options granted.................... 4,011,000 3.43
Less: options forfeited............ (262,570) 2.86
Less: options exercised............ (5,180) 2.69
----------
Options outstanding, October 31,
1995............................... 15,140,370 2.89 3,046,750 2.70
Options granted.................... 5,572,560 6.18
Less: options forfeited............ (698,600) 4.01
Less: options exercised............ (79,450) 2.87
----------
Options outstanding, October 31,
1996............................... 19,934,880 3.77 5,895,960 2.79
Options granted.................... 2,506,500 11.40
Less: options forfeited............ (249,340) 6.15
Less: options exercised............ (940,515) 3.44
----------
Options outstanding, October 31,
1997............................... 21,251,525 4.66 8,964,695 3.15
==========
</TABLE>
Employee Stock Purchase Plans
In August 1997, the Company established employee stock purchase plans (the
"Employee Stock Purchase Plans") which took effect upon completion of the IPO. A
total of 2,000,000 shares of common stock were reserved for issuance under the
Employee Stock Purchase Plans. An annual increase will be made to the
F-15
<PAGE> 57
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Stock Purchase Plans on each anniversary date of the plans in an amount
equal to the number of shares of common stock required to restore the maximum
number of shares reserved for issuance to 2,000,000, or a lesser amount
determined by the Company's Board of Directors. The Employee Stock Purchase
Plans permit eligible employees to purchase common stock totaling up to 10% of
an employee's compensation through payroll deductions. The Employee Stock
Purchase Plan for U.S. employees is intended to qualify under Section 423 of the
Internal Revenue Code. The price of common stock to be purchased will be 85% of
the lower of the fair market value of the common stock on the first or last day
of each purchase period. At October 31, 1997, a total of $2.3 million had been
withheld from employees' payroll for future purchases.
(8) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases equipment and office space under various long-term
non-cancelable operating leases. Rent expense on these leases for fiscal 1995,
1996 and 1997 was $14.7 million, $21.6 million, and $27.9 million, respectively.
Minimum future non-cancelable commitments under these leases as of October
31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- --------
<S> <C> <C>
1998................................................................ $ 31,276
1999................................................................ 23,104
2000................................................................ 15,500
2001................................................................ 11,045
2002................................................................ 10,816
Thereafter.......................................................... 38,195
--------
$129,936
========
</TABLE>
Legal Matters
The Company is involved in certain disputes and legal actions as a result
of its normal operations. In management's opinion, none of these disputes and
legal actions are expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
F-16
<PAGE> 58
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) GEOGRAPHICAL INFORMATION
The following is an analysis of the Company's operations by geographical
region (in thousands):
<TABLE>
<CAPTION>
EUROPE, ASIA, LATIN
MIDDLE EAST AMERICA
DOMESTIC AND AFRICA AND CANADA TOTAL
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1995
Total revenue........................... $215,201 $ 77,853 $47,712 $340,766
Operating income........................ 24,916 1,004 2,958 28,878
Total assets............................ 108,817 43,176 23,198 175,191
YEAR ENDED OCTOBER 31, 1996
Total revenue........................... 311,238 99,021 67,789 478,048
Operating income........................ 22,307 14,123 7,197 43,627
Total assets............................ 199,489 23,354 20,943 243,786
YEAR ENDED OCTOBER 31, 1997
Total revenue........................... 406,521 128,878 112,413 647,812
Operating income........................ 41,171 11,196 7,889 60,256
Total assets............................ 584,713 26,376 31,948 643,037
</TABLE>
Total revenue for each geographic region represents revenue from
unaffiliated customers only. Operating income includes intercompany royalty and
cost allocation arrangements that were in effect for each year. Total revenue
shown above for the Company's foreign regions includes software that was shipped
from the United States. The total amount of these export sales was $30.5
million, $36.9 million and $50.9 million for Europe, Middle East, and Africa and
$23.5 million, $27.2 million and $59.4 million for Asia, Latin America, and
Canada for fiscal 1995, 1996 and 1997, respectively.
(10) SUBSEQUENT EVENT
In November 1997, the Company entered into a six-year agreement to lease an
office building to be constructed on a portion of land owned by the Company. The
lessor, a wholly-owned subsidiary of a bank, and the bank collectively committed
to finance up to $30.0 million in construction costs through a combination of
equity and debt financing. The Company is acting as agent for the lessor to
design and undertake construction of the building and land improvements. The
Company's rent obligation will be calculated as a return on the lessor's costs
of funding and will be based on a spread over LIBOR, adjusted from time to time
to reflect any changes in the Company's leverage ratio. At any time during the
lease term, in the event the building is sold, the Company will guarantee a
residual value of the building up to approximately 84% of the building's
original cost.
In connection with the above lease transactions, management intends to
collateralize up to 97% of the financing with investments. The Company may
withdraw the funds used as collateral at its sole discretion, provided it is not
in default under the lease agreement.
F-17
<PAGE> 59
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's quarterly financial information for fiscal 1996, and 1997 is
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1996:
Total revenue................................. $ 97,932 $110,210 $115,641 $154,265
Less: costs and expenses.................... 94,701 103,649 110,404 125,667
-------- -------- -------- --------
Operating income.............................. 3,231 6,561 5,237 28,598
-------- -------- -------- --------
Income before income taxes.................... 3,645 5,932 4,410 27,967
Net income.................................... 2,275 3,666 2,731 17,654
Earnings per common share..................... $ 0.03 $ 0.04 $ 0.03 $ 0.20
YEAR ENDED OCTOBER 31, 1997:
Total revenue................................. $122,821 $145,854 $162,534 $216,603
Less: costs and expenses.................... 118,811 136,934 151,006 180,805
-------- -------- -------- --------
Operating income.............................. 4,010 8,920 11,528 35,798
-------- -------- -------- --------
Income before income taxes.................... 3,697 7,742 11,506 36,381
Net income.................................... 2,329 4,849 7,220 22,830
Earnings per common share..................... $ 0.02 $ 0.05 $ 0.07 $ 0.23
</TABLE>
F-18
<PAGE> 60
SCHEDULE II
J.D. EDWARDS & COMPANY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO TRANSLATION END
CLASSIFICATION OF PERIOD OPERATIONS WRITE-OFFS ADJUSTMENT OF PERIOD
- -------------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended:
October 31, 1995 ..................... $ 5,100 $ 2,305 $ (1,713) $ 8 $ 5,700
======== ========== ========== ======= ========
October 31, 1996 ..................... $ 5,700 $ 1,387 $ (1,496) $ 9 $ 5,600
======== ========== ========== ======= ========
October 31, 1997 ..................... $ 5,600 $ 8,434 $ (4,078) $ (156) $ 9,800
======== ========== ========== ======= ========
</TABLE>
S-1
<PAGE> 61
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<S> <C>
3.1(i) -- Amended and Restated Certificate of Incorporation of
Registrant, which is incorporated herein by reference to
Exhibit 3.1(i) to the Registrant's Statement on Form S-1,
Registration No 333-30701, as amended ("Registrant's Form
S-1").
3.1(ii) -- Bylaws of Registrant which, is incorporated herein by
reference to Exhibit 3.1(ii) to the Registrant's Form
S-1.
4.1 -- Specimen stock certificate of Registrant's Common Stock,
which is incorporated herein by reference to Exhibit 4.1
to the Registrant's Form S-1.
10.1 -- Original Software Vendor Marketing and License Agreement
between Seagull Business Software and J.D. Edwards &
Company dated August 19, 1994, which is incorporated
herein by reference to Exhibit 10.1 to the Registrant's
Form S-1.
10.2 -- Amended and Restated Credit Agreement by and Between
Wells Fargo Bank (Colorado), N.A., as Lender and as Agent
Bank, Harris Trust and Savings Bank, as Lender, Key Bank
of Colorado, as Lender, and J.D. Edwards & Company, as a
Borrower, J.D. Edwards World Solutions Company, as a
Borrower, J.D. Edwards World Source Company, as a
Borrower dated as of July 25, 1997, which is incorporated
herein by reference to Exhibit 10.2 to the Registrant's
Form S-1.
10.3 -- Sublease Agreement dated September 13, 1990 between Green
Holdings, Inc., Sublessor, and J.D. Edwards & Company,
Sublessee for an office suite located on the 6th Floor of
Stanford Place I Building, which is incorporated herein
by reference to Exhibit 10.3 to the Registrant's Form
S-1.
10.4 -- Lease Agreement dated September 20, 1990 between Phillips
Petroleum Company, Lessor, and J.D. Edwards & Company,
Lessee, for office suite on the 6th Floor of the Stanford
Place I Building, as amended, which is incorporated
herein by reference to Exhibit 10.4 to the Registrant's
Form S-1.
10.5 -- Lease Agreement dated December 20, 1991 between Samuel
Zell, Lessor, and J.D. Edwards & Company, Lessee, for
office Floors 3, 4, 5, 6 and 7 and office space on Floor
1 for the Denver Corporate Center III located at 7900
East Union Avenue, as amended, which is incorporated
herein by reference to Exhibit 10.5 to the Registrant's
Form S-1.
10.6 -- Sublease Agreement dated July 15, 1993 between Green
Holdings, inc., Sublessor, and J.D. Edwards & Company,
Sublessee, for office suite located on the 8th Floor of
Stanford Place I Building, which is incorporated herein
by reference to Exhibit 10.6 to the Registrant's Form
S-1.
10.7 -- Lease Agreement dated August 23, 1993 between Phillips
Petroleum Company, Lessor, and J.D. Edwards & Company,
Lessee for office suite on the 8th Floor of Stanford
Place I Building, which is incorporated herein by
reference to Exhibit 10.7 to the Registrant's Form S-1.
10.8 -- Sublease Agreement dated October 25, 1993 between Green
Holdings, inc., as Sublessor, and J.D. Edwards & Company,
Sublessee, for office suite located on 7th Floor of
Stanford Place I Building, which is incorporated herein
by reference to Exhibit 10.8 to the Registrant's Form
S-1.
</TABLE>
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<S> <C>
10.9 -- Sublease Agreement dated June 12, 1995 between
Microsolutions Tech Inc., Sublessor and J.D. Edwards &
Company, Sublessee, for office suite located on the 8th
Floor of Stanford Place I Building, which is incorporated
herein by reference to Exhibit 10.9 to the Registrant's
Form S-1.
10.10 -- Agreement of Purchase and Sale between J.D. Edwards &
Company and CarrAmerica Realty, L.P. Dated as of December
11, 1996, which is incorporated herein by reference to
Exhibit 10.10 to the Registrant's Form S-1.
10.11 -- Supplement to Lease Agreement between CarrAmerica Realty,
L.P. and J.D. Edwards & Company dated as of December 30,
1996, which is incorporated herein by reference to
Exhibit 10.11 to the Registrant's Form S-1.
10.12 -- Build-to-Suit Lease Agreement between CarrAmerica Realty,
L.P. and J.D. Edwards & Company dated as of December 30,
1996, which is incorporated herein by reference to
Exhibit 10.12 to the Registrant's Form S-1.
10.13 -- Form of Indemnification Agreement entered into between
the Registrant and each of its officers and directors,
which is incorporated herein by reference to Exhibit
10.13 to the Registrant's Form S-1.
10.14 -- Corporate Plan for Retirement, The Profit Sharing
Plan/401(k) Plan, which is incorporated herein by
reference to Exhibit 10.14 to the Registrant's Form S-1.
10.15 -- Employee Stock Ownership Plan and Trust Agreement of J.D.
Edwards & Company, as amended and restated effective
January 1, 1996, which is incorporated herein by
reference to Exhibit 10.15 to the Registrant's Form S-1.
10.16 -- J.D. Edwards & Company 1992 Incentive Stock Option Plan,
which is incorporated herein by reference to Exhibit
10.16 to the Registrant's Form S-1.
10.17 -- J.D. Edwards & Company 1992 Nonqualified Stock Option
Plan, which is incorporated herein by reference to
Exhibit 10.17 to the Registrant's Form S-1.
10.18 -- Restricted Stock Grant Plan for employees of J.D. Edwards
& Company, which is incorporated herein by reference to
Exhibit 10.18 to the Registrant's Form S-1.
10.19 -- Stock Plan for Employees of J.D. Edwards & Company, which
is incorporated herein by reference to Exhibit 10.19 to
the Registrant's Form S-1.
10.20 -- J.D. Edwards & Company 1997 Employee Stock Purchase Plan,
which is incorporated herein by reference to Exhibit
10.20 to the Registrant's Form S-1.
10.21 -- J.D. Edwards & Company 1997 Equity Incentive Plan, which
is incorporated herein by reference to Exhibit 10.21 to
the Registrant's Form S-1.
10.22 -- Amended and Restated Stockholders Agreement between C.
Edward McVaney, Jack L. Thompson, Robert C. Newman and
the Registrant dated as of August 20, 1997, which is
incorporated herein by reference to Exhibit 10.22 to the
Registrant's Form S-1.
10.23 -- J.D. Edwards & Company 1997 Employee Stock Purchase Plan
for Non-U.S. Employees, which is incorporated herein by
reference to Exhibit 10.23 to the Registrant's Form S-1.
11.1 -- Statement regarding computation of earnings per share
21.1 -- Subsidiaries of Registrant
23.1 -- Consent of Price Waterhouse LLP
27.1 -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
J.D. EDWARDS & COMPANY
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income $ 18,209 $ 26,326 $ 37,228
======== ======== ========
Shares outstanding
Weighted average number of
common shares outstanding 79,139 79,044 80,546
Assuming exercise of stock options 15,140 19,935 21,252
Assuming repurchase of treasury stock (13,083) (12,620) (6,275)
-------- -------- --------
Net incremental shares (1) 2,057 7,315 14,977
Assuming exercise of stock options
considered cheap stock 1,308 1,308 977
-------- -------- --------
Weighted average number of
common shares outstanding as adjusted 82,504 87,667 96,500
======== ======== ========
Primary earnings per common share $ 0.22 $ 0.30 $ 0.39
======== ======== ========
FULLY DILUTED EARNINGS PER SHARE (2)
Net income $ 18,209 $ 26,326 $ 37,228
======== ======== ========
Shares outstanding
Weighted average number of
common shares outstanding 79,139 79,044 80,546
Assuming exercise of stock options 15,140 19,935 21,252
Assuming repurchase of treasury stock (12,726) (11,873) (5,649)
-------- -------- --------
Net incremental shares (1) 2,414 8,062 15,603
Assuming exercise of stock options
considered cheap stock 1,308 1,308 977
-------- -------- --------
Weighted average number of
common shares outstanding as adjusted 82,861 88,414 97,126
======== ======== ========
Fully diluted earnings per common share $ 0.22 $ 0.30 $ 0.38
======== ======== ========
</TABLE>
(1) Application of the treasury stock method results in a repurchase of less
than 20% of weighted average shares outstanding for all periods presented;
therefore, no adjustments to net income or shares outstanding are required
pursuant to the modified treasury stock method as prescribed by APB 15
paragraph 38 and footnote 13.
(2) This calculation is submitted in accordance with Securities Exchange Act
of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of
APB No. 15 because it results in dilution of less than 3%.
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION
- ------------------ ------------
<S> <C>
J.D. Edwards World Solutions Company Colorado
J.D. Edwards World Source Company Colorado
J.D. Edwards Netherlands B.V., Baarn Netherlands
J.D. Edwards (U.K.) Ltd. United Kingdom
J.D. Edwards France SA France
J.D. Edwards Deutschland GmbH Germany
J.D. Edwards Italia S.p.A. Italy
J.D. Edwards (Singapore) Pte. Ltd. Singapore
Nippon J.D. Edwards Japan
J.D. Edwards de Mexico y Compania en N.C. de C.V. Mexico
J.D. Edwards Brasil Limitada Brazil
J.D. Edwards Canada Ltd. Canada
J.D. Edwards S.A. (Proprietary) Limited South Africa
J.D. Edwards (Hong Kong) Limited Hong Kong
J.D. Edwards (China) Software Systems Co., Ltd. China
J.D. Edwards Austria GmbH Austria
J.D. Edwards Shanghai Co., Ltd. Shanghai
J.D. Edwards (Schweiz) AG Switzerland
J.D. Edwards World Solutions Australia Australia
J.D. Edwards & Company Foreign Sales, Inc. Barbados
</TABLE>
World Technology Services LLC (J.D. Edwards & Company is a 50% owner of this
company)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8/S-3 (No. 333-36227) of J.D. Edwards & Company of our
report dated November 24, 1997 appearing on Page F-1 of this Annual Report on
Form 10-K.
PRICE WATERHOUSE LLP
Boulder, Colorado
January 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 1997 AND STATEMENT OF INCOME FOR THE
YEAR ENDED OCTOBER 31, 1997 AS FILED ON FORM 10-K AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 224,437
<SECURITIES> 30,464
<RECEIVABLES> 184,332
<ALLOWANCES> 9,800
<INVENTORY> 0
<CURRENT-ASSETS> 450,869
<PP&E> 99,557
<DEPRECIATION> 43,852
<TOTAL-ASSETS> 643,037
<CURRENT-LIABILITIES> 212,584
<BONDS> 0
0
0
<COMMON> 93
<OTHER-SE> 396,768
<TOTAL-LIABILITY-AND-EQUITY> 643,037
<SALES> 248,707
<TOTAL-REVENUES> 647,812
<CGS> 36,444
<TOTAL-COSTS> 281,084
<OTHER-EXPENSES> 306,472
<LOSS-PROVISION> 8,434
<INTEREST-EXPENSE> 829
<INCOME-PRETAX> 59,326
<INCOME-TAX> 22,098
<INCOME-CONTINUING> 37,228
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,228
<EPS-PRIMARY> .39
<EPS-DILUTED> .38
</TABLE>
