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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
[ ] 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>
<S> <C>
DELAWARE 84-0728700
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
ONE TECHNOLOGY WAY, DENVER, CO 80237
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (303) 334-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of September 3, 1998, there were 102,034,472 shares of the Registrant's
Common Stock outstanding.
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J.D. EDWARDS & COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1997 and
July 31, 1998......................................... 3
Consolidated Statements of Income for the Three Months
and Nine Months Ended July 31, 1997 and 1998.......... 4
Consolidated Statements of Cash Flows for the Nine
Months Ended July 31, 1997 and
1998................................................. 5
Notes to Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................. 18
Item 2. Changes in Securities and Use of Proceeds......... 18
Item 3. Defaults upon Senior Securities................... 18
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 18
Item 5. Other Information................................. 18
Item 6. Exhibits and Reports on Form 8-K.................. 18
SIGNATURES.................................................. 19
</TABLE>
J.D. Edwards is a registered trademark of J.D. Edwards & Company. OneWorld and
WorldSoftware are trademarks of J.D. Edwards World Source Company. All other
product names used are trademarks or registered trademarks of their respective
owners.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1997 1998
----------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $224,437 $176,743
Short-term investments.................................... 30,464 39,197
Accounts receivable, net of allowance for doubtful
accounts of $9,800 at October 31, 1997 and $13,900 at
July 31, 1998, respectively............................ 174,532 222,697
Prepaid and other current assets.......................... 21,436 26,199
-------- --------
Total current assets.............................. 450,869 464,836
Long-term investments....................................... 108,096 259,228
Property and equipment, net................................. 55,705 58,508
Software development costs, net............................. 11,879 7,144
Non-current portion of deferred income taxes................ 10,646 58,292
Deposits and other assets................................... 5,842 7,473
-------- --------
$643,037 $855,481
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 34,915 $ 37,274
Unearned revenue and customer deposits.................... 67,104 124,187
Accrued liabilities....................................... 110,565 128,171
-------- --------
Total current liabilities......................... 212,584 289,632
Unearned revenue, net of current portion, and other......... 33,592 36,093
-------- --------
Total liabilities................................. 246,176 325,725
Commitments and contingencies (Note 3)
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none outstanding........................... -- --
Common stock, $.001 par value; 300,000,000 shares
authorized; 92,822,186 and 101,649,772 issued and
outstanding as of October 31, 1997 and July 31, 1998,
respectively........................................... 93 102
Additional paid-in capital................................ 294,278 392,911
Retained earnings......................................... 102,856 139,668
Cumulative translation adjustments and other, net......... (366) (2,925)
-------- --------
Total stockholders' equity........................ 396,861 529,756
-------- --------
$643,037 $855,481
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
License fees..................................... $ 58,983 $ 98,122 $151,046 $242,536
Services......................................... 103,551 141,480 280,163 384,313
-------- -------- -------- --------
Total revenue............................ 162,534 239,602 431,209 626,849
Costs and expenses:
Cost of license fees............................. 7,900 11,199 24,984 30,503
Cost of services................................. 64,306 91,283 173,612 246,430
Sales and marketing.............................. 44,881 68,334 118,616 180,195
General and administrative....................... 17,352 20,639 48,439 57,289
Research and development......................... 16,567 22,399 41,100 62,977
-------- -------- -------- --------
Total costs and expenses................. 151,006 213,854 406,751 577,394
Operating income................................... 11,528 25,748 24,458 49,455
Other income (expense):
Interest income.................................. 220 3,970 383 11,378
Interest expense................................. (86) (72) (586) (736)
Foreign currency losses and other, net........... (156) (991) (1,310) (1,666)
-------- -------- -------- --------
Income before income taxes......................... 11,506 28,655 22,945 58,431
Provision for income taxes....................... 4,286 10,602 8,547 21,619
-------- -------- -------- --------
Net income......................................... $ 7,220 $ 18,053 $ 14,398 $ 36,812
======== ======== ======== ========
Net income per common share:
Basic............................................ $ .09 $ .18 $ .18 $ .38
======== ======== ======== ========
Diluted.......................................... $ .07 $ .16 $ .15 $ .34
======== ======== ======== ========
Shares used in computing per share amounts:
Basic............................................ 79,146 100,522 79,120 96,970
Diluted.......................................... 96,799 110,867 95,291 109,503
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
--------------------
1997 1998
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Operating activities:
Net income.................................................. $ 14,398 $ 36,812
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 11,363 17,329
Amortization of software development costs................ 4,319 4,735
Provision for deferred income taxes....................... (4,389) (580)
Other..................................................... 884 1,869
Changes in operating assets and liabilities:
Accounts receivable, net.................................. (47,801) (51,187)
Prepaid and other assets.................................. (571) (8,590)
Accounts payable.......................................... (6,091) 2,809
Unearned revenue and customer deposits.................... 41,072 60,307
Accrued liabilities....................................... 10,251 27,986
-------- ---------
Net cash provided by operating activities......... 23,435 91,490
Investing activities:
Purchase of investments..................................... -- (204,981)
Proceeds from maturities of investments..................... -- 45,116
Purchase of property and equipment.......................... (16,174) (26,551)
Proceeds from sale of assets................................ 8,590 4,931
Capitalized software development costs...................... (2,244) --
-------- ---------
Net cash used for investing activities............ (9,828) (181,485)
Financing activities:
Proceeds from issuance of common stock...................... 306 43,219
Proceeds from bank line of credit........................... 81,950 --
Repayment of bank line of credit............................ (81,950) --
-------- ---------
Net cash provided by financing activities......... 306 43,219
Effect of exchange rate changes on cash..................... (818) (918)
-------- ---------
Net increase (decrease) in cash and cash equivalents........ 13,095 (47,694)
Cash and cash equivalents at beginning of period............ 25,554 224,437
-------- ---------
Cash and cash equivalents at end of period.................. $ 38,649 $ 176,743
======== =========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Interest paid............................................. $ 586 $ 736
Income taxes paid......................................... 20,735 8,333
ESOP contribution funded with common stock................ -- 6,050
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Interim Financial Statements. The accompanying financial statements of J.D.
Edwards & Company (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. The unaudited consolidated financial statements included herein have
been prepared on the same basis as the annual consolidated financial statements
and reflect all adjustments, which include only normal recurring adjustments,
necessary for a fair presentation in accordance with generally accepted
accounting principles. The results for the nine-month period ended July 31, 1998
are not necessarily indicative of the results expected for the full fiscal year.
These consolidated financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended October 31, 1997.
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.
(2) EARNINGS PER COMMON SHARE
The Company was required to apply Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," in its consolidated financial
statements for fiscal 1998. Prior period earnings per common share ("EPS") were
restated to conform with the new statement. This pronouncement established 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 previously required primary and fully-diluted EPS. The basic
EPS was computed by dividing net income by the weighted average number of shares
outstanding during the period. Diluted EPS was 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.
In August 1997, 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.
(3) COMMITMENTS
The Company leases its corporate headquarters office buildings, of which
two are currently being constructed on land owned by the Company. The Company is
acting as construction agent for the lessor. The lessor, a wholly-owned
subsidiary of a bank, and a syndication of banks are collectively financing up
to $94.5 million in purchase and construction costs through a combination of
equity and debt. In the event any of the buildings are sold, the Company will
guarantee a residual value of each building up to approximately 85% of its
original cost. The Company's lease obligations are based on a return on the
lessor's costs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE
PURSUANT TO THE PROVISION 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. THE 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 IN THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997 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 OR DOCUMENTS THE COMPANY
FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION,
PARTICULARLY THE QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT REPORT ON FORM
8-K.
RESULTS OF OPERATIONS
The Company's third quarter operating income grew 123% to $25.7 million
compared to $11.5 million for the third quarter last year. Net income for the
quarter increased 150% to $18.1 million compared to $7.2 million last year, and
third quarter diluted EPS increased to $.16 compared to $.07 for the same period
last year. The operating income and net income growth for the third quarter of
fiscal 1998 was primarily the result of a 47% increase in total revenue. The
financial results reflect a continuation of the Company's strong position with
mid-sized organizations, including divisions and business units of larger
companies, with annual revenues between $100 million and $2.0 billion. The
Company's direct sales force is continuing to focus efforts on this middle
market as well as some larger customers whose needs can also be met by J.D.
Edwards' solutions as evidenced by an increase in the number of larger
transactions as compared to a year ago.
Customers have increasingly accepted the OneWorld(TM) applications
available for Windows NT(R) and UNIX(R) platforms in addition to the AS/400(R)
platform. In the third quarter of fiscal 1998, 20% of license activity was from
customers using the Windows NT or UNIX platforms. The Company released OneWorld
version B73.2 for general availability at the end of March 1998, which provided
enhancements including its supply chain solution, J.D. Edwards SCOREX (supply
chain optimization and real-time extended execution). In July 1998, the Company
began shipping OneWorld B73.2.1, providing further enhancements including
expanded interoperability with third-party applications.
For the first nine months of fiscal 1998, the Company's operating income
grew 102% to $49.5 million compared to $24.5 million for the first nine months
of fiscal 1997. Net income increased 156% to $36.8 million compared to $14.4
million for the same period last year, and diluted EPS increased to $.34
compared to $.15 for the first nine months last year primarily due to the 45%
growth in total revenue for the nine-month period. Net income for the first
three quarters of fiscal 1998 also benefited from an increase in interest income
from the investment of proceeds from the Company's initial public offering
("IPO") in September 1997.
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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>
THREE MONTHS NINE MONTHS
ENDED JULY 31, ENDED JULY 31,
--------------- ---------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
License fees......................................... 36.3% 41.0% 35.0% 38.7%
Services............................................. 63.7 59.0 65.0 61.3
----- ----- ----- -----
Total revenue................................ 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of license fees................................. 4.9 4.7 5.8 4.9
Cost of services..................................... 39.6 38.1 40.3 39.3
Sales and marketing.................................. 27.6 28.5 27.5 28.7
General and administrative........................... 10.7 8.6 11.2 9.1
Research and development............................. 10.2 9.4 9.5 10.1
----- ----- ----- -----
Total costs and expenses..................... 93.0 89.3 94.3 92.1
Operating income....................................... 7.0 10.7 5.7 7.9
Other income (expense), net............................ (.0) 1.2 (0.4) 1.4
----- ----- ----- -----
Income before income taxes............................. 7.0 11.9 5.3 9.3
Provision for income taxes........................... 2.6 4.4 2.0 3.4
----- ----- ----- -----
Net income............................................. 4.4% 7.5% 3.3% 5.9%
===== ===== ===== =====
Gross margin on license fee revenue.................... 86.6% 88.6% 83.5% 87.4%
Gross margin on service revenue........................ 37.9% 35.5% 38.0% 35.9%
</TABLE>
Total Revenue. Total revenue grew by 47% to $239.6 million for the quarter
ended July 31, 1998 from $162.5 million for the quarter ended July 31, 1997. For
the nine-month period in fiscal 1998, total revenue grew by 45% to $626.8
million from $431.2 million for the same period last year. The total increase in
fiscal 1998 was due to growth in both software license transactions and
services. The revenue mix between license fees and services was 41.0% and 59.0%,
respectively, for the third quarter of fiscal 1998 compared to 36.3% and 63.7%,
respectively, for the same quarter last year. For the first nine months of
fiscal 1998, the revenue mix between license fees and services was 38.7% and
61.3%, respectively, compared to 35.0% and 65.0%, respectively, for the first
nine months of fiscal 1997. The Company is continuing to execute its strategy to
change its revenue mix by achieving greater license fee growth compared to
services. During both the quarter and nine-month period in fiscal 1998, the
Company increased the number of large license transactions and added a greater
number of new customers as compared to the same periods last year. The Company
expanded its installed base of customers by 13% compared to the end of the third
quarter last year to approximately 4,700 at July 31, 1998. Additionally, the
Company is pursuing a strategy of relying on third parties to contract directly
with the Company's customers for OneWorld implementations and related services
which may affect the revenue mix in future periods. However, there can be no
assurance that the Company will be successful in implementing this strategy or
that OneWorld will achieve substantial market acceptance.
Geographically, the overall growth was led by strong performance in Europe,
the Middle East and Africa (EMEA), with a 72% increase in total revenue for the
third quarter of fiscal 1998 compared to the same period last year. The
geographic areas defined as United States, EMEA and the rest of the world
accounted for 60%, 24% and 16% of total revenue, respectively, for the quarter
and 63%, 22% and 15% of total revenue, respectively, for the nine-month period
ended July 31, 1998. Comparatively, during fiscal 1997, the United States, EMEA
and the rest of the world accounted for 65%, 21% and 14% of total revenue,
respectively, for the quarter and 64%, 20% and 16% of total revenue,
respectively, for the nine-month period.
License fees. License fee revenue grew by 66% to $98.1 million for the
quarter ended July 31, 1998 from $59.0 million for the quarter ended July 31,
1997. For the nine months ended July 31, 1998, license fee revenue grew by 61%
to $242.5 million from $151.0 million for the nine months ended July 31, 1997.
During
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both the quarter and the nine-month period ended July 31, 1998, the Company
continued to experience increasing market acceptance of its software products,
particularly with targeted middle market customers. During the first nine months
of fiscal 1998, the Company further increased its capacity to reach the market
and had expanded its direct sales force by 31% as of July 31, 1998 compared to a
year ago. In addition to new customers added, the Company continued to generate
significant license revenue from its current installed base of customers whose
needs have grown or who have decided to expand their usage of the Company's
product. Additionally, the number of license transactions closed during the
first nine months of fiscal 1998 that exceeded $1.0 million increased by
approximately 26% compared to the same period last year.
The OneWorld version of application suites expanded the Company's target
market to include customers using Windows NT and UNIX platforms in addition to
those using the AS/400 platform. During the quarter ended July 31, 1998, the
percentage of license activity from customers using either Windows NT or UNIX
platforms increased to 20% compared to 11% in the third quarter of the previous
year. For the nine-month period ended July 31, 1998, 15% of license activity was
from customers using either Windows NT or UNIX platforms compared to 8% for the
same period last year. The Company expects that an increasing portion of the
Company's future license fee revenue will be generated from customers using
Windows NT or UNIX platforms compared to the previous year.
During the first nine months of fiscal 1998, the Company expanded several
channel opportunities in an effort to begin to derive an increasing percentage
of license revenue through indirect channels in future periods. The Company's
Genesis distribution channel, which is focused on companies with revenues of
less than $100 million, broadened to also include international partners. A new
distribution channel was established to focus on companies with revenues of less
than $35 million, and the Company has begun partnering with other established
software development vendors in key niche markets to focus on expansion outside
the traditional ERP market.
Services. Service revenue grew by 37% to $141.5 million for the quarter
ended July 31, 1998 from $103.6 million for the quarter ended July 31, 1997. For
the nine-month period, service revenue grew by 37%, as well, to $384.3 million
from $280.2 million for the same period last year. The Company continued to
experience increased demand for services in both the quarter and first nine
months of fiscal 1998 compared to the same periods last year. The increase was
primarily due to higher revenue from consulting, which is the largest component
of services, although training and support revenue increased by greater
percentages. Support revenue increased primarily as a result of the Company's
growing installed base of customers. Training revenue increased primarily due to
the increase in license transactions, expanded capacity, additional personnel
resources and an increase in prices for certain courses. As a percentage of
total revenue, services revenue declined in the 1998 periods compared to the
same periods in the prior year. However, services revenue as a percentage of
total revenue remained higher than license fee revenue due to continued demand
and the Company's ongoing emphasis on providing consulting and training services
that complement its software products. In any quarter, total service revenue is
dependent upon license transactions closed during the current and proceeding
quarters, the growth in the Company's installed base of customers, 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 the number of customers attending
training courses.
The Company subcontracts a portion of its consulting and training services
to third parties. The portion of such services revenue generated through
subcontracted work accounted for 46% for the quarter and 44% for the nine-month
period ended July 31, 1998 compared to 43% for the quarter and 41% for the
nine-month period in fiscal 1997. While the subcontracted service work to
business partners has increased from the prior year period due to increased
demand for services, the Company is continuing to establish third-party alliance
partners to contract directly with its customers for implementation of the
OneWorld version of its applications suites. During the first nine months of
fiscal 1998, new business alliances were established to achieve this objective,
including an alliance with Arthur Andersen to jointly market implementation
solutions to the middle market and the addition of Deloitte & Touche as a
consulting alliance partner. Several of these partners are providing
significantly more resources to implement OneWorld; however, to date the Company
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has referred only a limited number of its implementations to such third parties.
To the extent the Company is successful in establishing this strategy,
consulting revenue is likely to be a lower percentage of total revenue compared
to the previous fiscal year. However, there can be no assurance that the Company
will be successful in implementing its strategy or that OneWorld will achieve
substantial market acceptance.
Revenue Recognition. The Company licenses software under non-cancelable
license agreements and provides related services, including support, training,
consulting and implementation. Revenue is recognized in accordance with
Statement of Position ("SOP") 91-1, "Software Revenue Recognition." 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, 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 unearned 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
("AICPA") issued SOP 97-2, "Software Revenue Recognition," which provides
guidance on recognizing revenue on software transactions and supersedes SOP
91-1. The Company will apply the provisions of SOP 97-2 on a prospective basis
for new software transactions beginning in the first quarter of fiscal 1999.
However, the AICPA deferred certain provisions of SOP 97-2 for one year. Based
upon the Company's interpretation of the information currently available,
management believes that the adoption of this SOP will not have a material
impact on its financial condition or results of operations and will not have a
significant impact on its current licensing or revenue recognition practices.
Cost of license fees. Cost of license fees includes business partner
commissions, royalties, amortization of capitalized software development costs,
documentation and software delivery expenses. The total dollar amount of cost of
license fees increased 42% to $11.2 million for the quarter ended July 31, 1998
from $7.9 million for the quarter ended July 31, 1997. For the nine-month
period, the total dollar amount of cost of license fees increased 22% to $30.5
million from $25.0 million for the same period last year. The increase in the
dollar amount of costs for both the third quarter and nine months ended July 31,
1998 compared to the same period last year was primarily due to the volume of
license transactions closed through business partners, resulting in higher
commissions to the business partners. In future quarters, business partner costs
may represent a larger percentage of revenue compared to the previous year if
the Company is successful with its expanded channel initiatives and business
alliances that would drive an increase in expense and could reduced margins. The
overall increase in costs for both the quarter and nine-month period were
partially offset by the Company's renegotiation of certain royalty agreements
effective in fiscal 1998 which lowered royalty expense in the current year
compared to last year. Amortization of capitalized software development costs
decreased 12% in the third quarter of fiscal 1998 compared to the third quarter
of fiscal 1997. For the nine-month period ended July 31, 1998, the increase to
$4.7 million compared to $4.3 million for the same period last year was the
result of the timing of the start of amortization of the capitalized OneWorld
development costs last year. The OneWorld costs will continue to be amortized
through the first quarter of fiscal 2000.
Gross margin on license fee revenue varies from quarter to quarter
depending upon the revenue volume in relation to certain fixed costs such as the
amortization of software development costs. Additionally, the proportion of the
Company's software products that are subject to royalty payments affects gross
margin on license fees. Both the third quarter and nine-month period in fiscal
1998 were positively impacted by the
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<PAGE> 11
overall increase in license fee revenue volume and the decrease in royalty
expense. The gross margin on license fee revenue increased to 88.6% for the
third quarter of 1998 from 86.6% for the third quarter of last year. For the
first nine months of fiscal 1998, the gross margin on license fee revenue
increased to 87.4% from 83.5% for the same period in fiscal 1997.
Cost of services. Cost of services includes the personnel and related
overhead costs for services, including support, training, consulting and
implementation, as well as fees paid to third parties for subcontracted
services. Cost of services increased to $91.3 million for the quarter ended July
31, 1998 from $64.3 million for the quarter ended July 31, 1997, representing an
increase of 42%. For the nine-month period in fiscal 1998, cost of services
increased to $246.4 million from $173.6 million for the same period in fiscal
1997, also a 42% increase. The dollar amount increase was primarily due to
additional personnel and subcontracted service costs to support the growth in
demand for implementation and consulting services as well as an increase in
customer support staff. The Company invested additional resources for training
on the OneWorld applications during the third quarter and the nine-month period.
As a result, the gross margin on service revenue decreased to 35.5% for the
quarter and 35.9% for the nine-month period ended July 31, 1998 from 37.9% and
38.0% for the quarter and nine-month period ended July 31, 1997, respectively.
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. However, there can be no assurance that the Company will be successful
in implementing its strategy or that OneWorld will achieve substantial market
acceptance.
Sales and marketing. Sales and marketing expense consists of personnel,
commissions and related overhead costs for the sales and marketing activities of
the Company, together with advertising and promotion costs. Sales and marketing
expense increased to $68.3 million for the quarter ended July 31, 1998 from
$44.9 million for the quarter ended July 31, 1997, representing 28.5% and 27.6%
of total revenue, respectively. For the nine-month period, sales and marketing
expense increased to $180.2 million in fiscal 1998 from $118.6 million in fiscal
1997, representing 28.7% and 27.5% of total revenue, respectively. The increase
in the total dollar of expense was primarily the result of higher commissions
from license revenue volume, additional personnel and increased advertising and
promotion costs for the Company's expanded publicity activities. The total
number of sales and marketing personnel increased 39% at July 31, 1998 compared
to a year ago. The Company is continuing to recruit additional personnel in
direct sales and supporting positions in order to meet the Company's sales goals
and to address the Windows NT and UNIX market opportunities and growth from the
OneWorld version of its application suites. This anticipated growth is expected
to result in an increase in the amount of compensation and other related costs
in future periods and may also result in an increase in sales and marketing
expenses as a percentage of total revenue due to the competitive job market for
needed personnel and potential differences between revenue growth and the timing
of additional expenses.
General and administrative. General and administrative expense includes
personnel and related overhead costs for the support and administrative
functions of the Company. General and administrative expense increased to $20.6
million for the quarter ended July 31, 1998 from $17.4 million for the quarter
ended July 31, 1997, representing 8.6% and 10.7% of total revenue, respectively.
For the nine-month period, general and administrative expense increased to $57.3
million in fiscal 1998 from $48.4 million in fiscal 1997, representing 9.1% and
11.2% of total revenue, respectively. The total dollar amount of expense was
higher in the quarter and nine-month period ended July 31, 1998 compared to the
same periods last year primarily due to an increase in personnel and
subcontracted services to facilitate the growth in the Company's operations.
General and administrative expenses as a percentage of total revenue declined
primarily as a result of the growth in revenue volume and increased efficiencies
within support functions to effectively manage the overall growth in the
Company's operations. The growth in support personnel was less than planned as
of July 31, 1998, and general and administrative expenses are likely to increase
at a rate more comparable to the overall growth of the Company in future
periods. As a result, future general and administrative expenses may represent a
larger percentage of total revenue than in the third quarter and nine-month
period of fiscal 1998.
11
<PAGE> 12
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 $22.4 million for the quarter ended July 31, 1998 from $16.6
million for the quarter ended July 31, 1997, representing 9.4% and 10.2% of
total revenue, respectively. For the nine-month period, research and development
expense increased to $63.0 million in fiscal 1998 from $41.1 million in fiscal
1997, representing 10.1% and 9.5% of total revenue, respectively. Total research
and development expenditures were higher in the quarter and nine-month period
ended July 31, 1998 compared to last year primarily due to a substantial
increase in personnel together with increases in related facilities and computer
systems costs necessary to meet product development objectives. However, these
costs increased at a rate less than the overall growth in revenue during the
third quarter, resulting in lower costs when represented as a percentage of
total revenue. Current undertakings include further enhancements of both the
World and OneWorld software versions. The Company anticipates that the total
dollar amount of research and development expense will continue to increase in
future periods compared to prior year periods and may also increase as a
percentage of total revenue. The Company ceased capitalizing OneWorld
development costs during fiscal 1997 and, as a result, there were no software
development costs capitalized during fiscal 1998. For the nine-month period
ended July 31, 1997, capitalized software development costs were $2.2 million.
Other income (expense). Other income (expense) includes interest income on
cash, cash equivalents and investments, interest expense, foreign currency gains
and losses, and other non-operating income and expenses. Interest income
increased to $4.0 million and $11.4 million, respectively, for the quarter and
nine-month periods ended July 31, 1998 and from $220,000 and $383,000,
respectively, for the quarter and nine-month period ended July 31, 1997,
primarily due to interest earned on the investment of proceeds from the
Company's IPO. Foreign currency losses increased to $796,000 for the quarter
ended July 31, 1998 compared to $299,000 for the quarter ended July 31, 1997.
For the nine-month period, the Company incurred foreign currency losses of $1.6
million during both fiscal 1998 and 1997. The losses were primarily due to the
strengthening of the U.S. dollar against many other currencies during both
fiscal 1998 and 1997.
During the second quarter of fiscal 1997 the Company began engaging in
minimal hedging activities to help offset the effects of exchange rate changes
on cash exposures from receivables denominated in foreign currencies. Such
hedging activities are generally unable to completely protect the Company from
the risk of foreign currency losses as a result of the number of currencies in
which the Company conducts business, the volatility of currency rates, and the
constantly changing currency exposures. Foreign currency gains and losses will
continue to result from fluctuations in the value of the currencies in which the
Company conducts its operations as compared to the U.S. dollar, and future
operating results will be affected to some extent by gains and losses from
foreign currency exposure.
Provision for income taxes. The Company's effective income tax rate
decreased slightly to 37.0% for the first nine months of fiscal 1998 compared to
37.3% for the first nine months of fiscal 1997. For future quarters, the Company
anticipates its effective tax rate will remain relatively stable at this rate,
representing an improvement over the effective tax rate of 37.3% for the fiscal
year ended October 31, 1997.
Earnings per share. Diluted EPS increased 129% to $.16 for the quarter
ended July 31, 1998 from $.07 for the quarter ended July 31, 1997 as a result of
net income growth of 150% to $18.1 million from $7.2 million. For the nine
months ended July 31, 1998, diluted EPS increased 127% to $.34 from $.15 for the
same period last year as a result of net income growth of 156% to $36.8 million
from $14.4 million. The growth in earnings per share was reduced by an increase
in the Company's diluted weighted average number of shares outstanding to 110.9
million for the quarter and 109.5 million for the nine-month period ended July
31, 1998, from 96.8 million for the quarter and 95.3 million for the nine-month
period ended July 31, 1997. The Company issued 12.8 million additional shares to
the public through its IPO in September 1997, representing the majority of the
increase in the number of shares. The remaining increase in shares outstanding
was due to exercises of stock options, shares issued through the Employee Stock
Purchase Plan ("ESPP"), the Employee Stock Ownership Plan ("ESOP") and changes
in the dilutive effect of common stock equivalents.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998, the Company's principal sources of liquidity consisted
of $176.7 million of cash and cash equivalents, $298.4 million of short-term and
long-term investments and a $50.0 million, unsecured, revolving line of credit.
No amounts were outstanding under the Company's bank line of credit during the
nine-month period ended July 31, 1998. The Company had working capital of $175.2
million at July 31, 1998 and a current ratio of 1.6 to one. Included in
determining such amounts are short-term unearned revenue and customer deposits
of $124.2 million. The majority of short-term unearned revenue represents annual
support payments billed to customers, which is recognized ratably as revenue
over the support service period. Without the short-term unearned revenue and
customer deposits, working capital would have been $299.4 million.
The Company calculates accounts receivable days sales outstanding (DSO) by
dividing its accounts receivable balance at the end of the quarter by the sum of
revenue for the quarter plus the net change in unearned revenue divided by 90
days. The net change in unearned revenue is included in the calculation to
better reflect sales activity timing rather than revenue recognition timing.
Calculated as such, DSO was 84 days as of the quarter ended July 31, 1998
compared to 85 days as of the quarter ended July 31, 1997. The Company's DSO can
fluctuate depending upon a number of factors, including the concentration of
transactions that occur toward the end of each quarter and the variability of
quarterly operating results. See "Factors Affecting The Company's Business,
Operating Results and Financial Condition -- Variability of Quarterly Operating
Results; Seasonality."
The Company generated operating cash flow of $91.5 million during the
nine-month period ended July 31, 1998 compared to $23.4 million during the
nine-month period ended July 31, 1997. The increase in operating cash flow was
due to the increased net income and higher unearned revenue, but was partially
offset by increased accounts receivable. Tax deductions associated with stock
option exercises during the first nine months of fiscal 1998 increased the
deferred income tax asset and additional paid in capital on the balance sheet as
of July 31, 1998.
Financing activities provided $43.2 million in cash from exercises of
common stock options and the ESPP activity. The Company issued a total of 8.8
million shares of common stock during the first nine months of fiscal 1998. The
Company did not have other significant net financing activities for the first
nine months of fiscal 1998 or during the same period last year.
The Company used $181.5 million in cash for investing activities for the
nine-month period ended July 31, 1998 compared to $9.8 million for the
nine-month period ended July 31, 1997. The change was primarily due to the
investment of the remaining IPO proceeds during the first quarter of 1998 which
had not been completed by the end of fiscal 1997. During the first nine months
of both fiscal 1998 and 1997, the Company purchased furniture, fixtures and
equipment necessary to support its expanding operations. The Company ceased
capitalizing OneWorld development costs during fiscal 1997 and, as a result,
there were no software development costs capitalized in the first nine months of
fiscal 1998. The Company's cash utilized for investing activities was offset in
part by $4.9 million and $8.6 million of proceeds from the sale of assets in the
first nine months ended July 31, 1998 and 1997, respectively.
The Company leases its corporate headquarters office buildings, of which
two are currently being constructed on land owned by the Company, with financing
up to $94.5 million in purchase and construction costs. In the event any of the
buildings are sold, the Company will guarantee a residual value of each building
up to approximately 85% of its original cost. See "Notes to Consolidated
Financial Statements -- Note (3) Commitments."
Management believes its cash and cash equivalents balance, short-term and
long-term investments, funds generated from operations and amounts available
under existing credit facilities will be sufficient to meet its cash needs for
at least the next twelve months. The Company may 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
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<PAGE> 14
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.
IMPACT OF THE YEAR 2000 ISSUE
The Company's business operations are significantly dependent upon the same
proprietary software products it licenses to customers. Management believes it
has successfully addressed the Year 2000 issues in its proprietary software
products and does not anticipate any business interruptions associated with
these applications. To address the company-wide internal Year 2000 readiness
activities, the Company has implemented a corporate program to coordinate
efforts across all business functions and geographic areas, which includes
addressing risks associated with business partners and other third-party
relationships. The following six-step process is being followed to prepare
internally for the Year 2000: 1) Awareness, 2) Inventory, 3) Assessment, 4)
Resolution, 5) Testing, and 6) Deployment. The Company is approximately halfway
through these steps in addressing the readiness of its information technology
("IT") systems, excluding proprietary software products which management
believes to be generally Year 2000 compliant currently. The Company is in the
"inventory" or "assessment" phase with regard to its state of readiness for
areas classified as non-IT systems and issues related to third parties with
which the Company has a material relationship. Management expects to have
substantially completed all six steps company-wide within the next twelve
months. As of July 31, 1998, the direct costs incurred to remediate Year 2000
issues were not material. The Company is in the process of estimating the total
cost and time associated with the impact of Year 2000 compliance, but it does
not anticipate such costs will have a material impact on its results of
operations.
Significant uncertainty exists in the software industry concerning the
potential effects associated with Year 2000 readiness. Although the Company
currently offers software products that are designed and have been tested to be
ready for the Year 2000, there can be no assurance that the Company's software
products contain all necessary date code changes. Furthermore, it has been
widely reported that a significant amount of litigation surrounding business
interruptions will arise out of Year 2000 issues. It is uncertain whether, or to
what extent, the Company may be affected by such litigation. Additionally,
third-party software and computer technology used internally may materially
impact the Company if not Year 2000 compliant. 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, the generation of
erroneous information, and other significant disruptions of business activities.
To the extent that either the Company or a third-party vendor or service
provider on which the Company relies does not achieve Year 2000 readiness, the
Company's results of operations may be adversely impacted.
As part of the six-step process outlined above, specific contingency plans
are being developed in connection with the assessment and resolution to the
risks identified. The Company has currently established certain IT contingency
plans, and it is continuing to develop such plans regarding each specific area
of risk associated with this issue as part of its Year 2000 program.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has determined that the adoption of recently issued SFAS No.
130, "Reporting Comprehensive Income," No. 131, "Disclosures about Segments of
an Enterprise and Related Information," No. 132, "Employers' Disclosures about
Pensions and Other Post-Retirement Benefits, No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and SOP 97-2, "Software Revenue
Recognition," will not have a material impact on its financial condition or
results of operations. SOP 97-2 and SFAS Nos. 130, 131 and 132 are effective for
fiscal 1999, and SFAS No. 133 is effective for fiscal 2000.
14
<PAGE> 15
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
IN ADDITION TO OTHER INFORMATION CONTAINED IN THIS QUARTERLY REPORT ON FORM
10-Q, 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.
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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<PAGE> 16
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 1998 decreased 18%, 30%, 7% and
72%, respectively, from the fourth quarter of fiscal 1997 and decreased 20%,
41%, 3% and 87%, respectively, in the first quarter of fiscal 1997 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.
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 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. As
of July 31, 1998, less than 20% of the Company's customers have licensed the
OneWorld version of its application suites, and, due to the lengthy
implementation process, less than 10% of those 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 Windows NT or UNIX 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
Windows NT and UNIX 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. The majority of the Company's revenue for fiscal 1997 and
the first nine months of fiscal 1998 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 market share gains or
16
<PAGE> 17
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 Windows NT and UNIX markets. 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.
Other Risks. In addition to the risks presented above, the following risks
should be considered in evaluating the Company and its business: competition,
lengthy sales and implementation processes, reliance on third parties, risks
associated with new products and versions, euro currency, dependence on key
personnel, as well as other factors. For a more complete description of these
risk factors see "Factors Affecting the Company's Business, Operating Results
and Financial Condition" in the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1997.
17
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 1. 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 business, operating results or
financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As of July 31, 1998, the Company had invested all of the net proceeds from
the IPO in investment grade, short-term and long-term interest-bearing
securities. The use of proceeds from the IPO does not represent a material
change in the use of proceeds described in the Company's registration Statement
on Form S-1 effective September 23, 1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Securities and Exchange Commission recently amended Rule 14a-4(c)(1)
promulgated under the Securities Exchange Act of 1934, as amended. As amended
Rule 14a-4(c)(1) provides that a proxy solicited by the Company may confer
discretionary authority upon the Company to vote on a matter for an annual
meeting of stockholders of the Company did not have notice of such matter at
least (i) 45 days prior to the month and day of mailing of the prior year's
proxy statement (the "Proxy Rules Date") or (ii) that amount of time required by
the advance notice provisions of the Company's Bylaws (the "Bylaws Date"). The
proxy statement for the Company's 1998 Annual Meeting of Stockholders was mailed
to stockholders on February 6, 1998; accordingly, the Proxy Rules Date is
December 23, 1998. In addition, the Company's Bylaws establish an advance notice
procedure with regard to stockholder proposals to be brought before an annual
meeting of stockholders. For business to be properly brought before an annual
meeting by a stockholder, the stockholder must give notice not less than 60 days
prior to the meeting; provided, however, that in the event that less than 60
days notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the seventh day following the day on
which such notice of the date of the meeting was mailed or such public
disclosure was made. The Company has not yet announced the date for its 1999
Annual Meeting of Stockholders. Therefore, if a stockholder does not notify the
Company of a proposal for the 1999 Annual Meeting of Stockholders on or before
the earlier of (i) the Proxy Rules Date or (ii) the Bylaws Date, the Company may
use their discretionary voting authority to vote on such proposal, even if the
matter is not discussed in the proxy statement for the 1999 Annual Meeting of
Stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 -- Computation of Earnings Per Share
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
None.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
J.D. EDWARDS & COMPANY
By: /s/ RICHARD E. ALLEN
----------------------------------
Name: Richard E. Allen
Title: Chief Financial Officer,
Senior Vice
President, Finance and
Administration and
Director (principal financial
officer)
Dated: September 8, 1998
By: /s/ PAMELA L. SAXTON
----------------------------------
Name: Pamela L. Saxton
Title: Vice President of Finance,
Controller
and Chief Accounting Officer
(principal
accounting officer)
Dated: September 8, 1998
19
<PAGE> 20
SCHEDULE II
J.D. EDWARDS & COMPANY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additions
Beginning of Charged To Translation Balance At End
Classification Period Operations Write-Offs Adjustments of Period
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance For
Doubtful Accounts
Nine Months Ended:
July 31, 1997 $ 5,600 $ 4,322 $ (3,010) $ (212) $ 6,700
July 31, 1998 9,800 7,211 (3,146) 35 13,900
</TABLE>
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11.1 Computation of Earnings Per Share
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>
Three Months Ended July 31, Nine Months Ended July 31,
------------------------------ ------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income $ 7,220 $ 18,053 $ 14,398 $ 36,812
============ ============ ============ ============
Weighted average number of
common shares outstanding 79,146 100,522 79,120 96,970
Basic earnings per common share $ 0.09 $ 0.18 $ 0.18 $ 0.38
============ ============ ============ ============
DILUTED EARNINGS PER SHARE
Net income $ 7,220 $ 18,053 $ 14,398 $ 36,812
============ ============ ============ ============
Shares outstanding
Weighted average number of
common shares outstanding 79,146 100,522 79,120 96,970
Assuming exercise of stock options 22,122 20,166 22,156 19,041
Assuming repurchase of treasury stock (4,469) (9,821) (5,984) (6,508)
------------ ------------ ------------ ------------
Net incremental shares 17,653 10,345 16,171 12,533
Weighted average number of
common shares outstanding as adjusted 96,799 110,867 96,799 109,503
============ ============ ============ ============
Diluted earnings per common share $ 0.07 $ 0.16 $ 0.15 $ 0.34
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT JULY 31, 1998 AND STATEMENT OF INCOME FOR THE NINE MONTHS ENDED JULY
31, 1998 AS FILED ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 176,743
<SECURITIES> 39,197
<RECEIVABLES> 236,597
<ALLOWANCES> 13,900
<INVENTORY> 0
<CURRENT-ASSETS> 464,836
<PP&E> 116,965
<DEPRECIATION> 58,457
<TOTAL-ASSETS> 855,481
<CURRENT-LIABILITIES> 289,632
<BONDS> 0
0
0
<COMMON> 102
<OTHER-SE> 529,654
<TOTAL-LIABILITY-AND-EQUITY> 855,481
<SALES> 242,536
<TOTAL-REVENUES> 626,849
<CGS> 30,503
<TOTAL-COSTS> 276,933
<OTHER-EXPENSES> 300,461
<LOSS-PROVISION> 7,211
<INTEREST-EXPENSE> 736
<INCOME-PRETAX> 58,431
<INCOME-TAX> 21,619
<INCOME-CONTINUING> 36,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,812
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.34
</TABLE>
