<PAGE> 1
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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 APRIL 30, 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 of (I.R.S. Employer Identification Number)
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 June 1, 1998, there were 99,670,347 shares of the Registrant's Common
Stock outstanding.
================================================================================
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J.D. EDWARDS & COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1997 and April
30, 1998.................................................... 3
Consolidated Statements of Income for the Three Months and
Six Months Ended April 30, 1997 and 1998.................... 4
Consolidated Statements of Cash Flows for the Six Months
Ended April 30, 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........................................... 17
Item 2. Changes in Securities and Use of Proceeds................... 17
Item 3. Defaults upon Senior Securities............................. 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 5. Other Information........................................... 17
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.
2
<PAGE> 3
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, APRIL 30,
1997 1998
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $224,437 $200,120
Short-term investments.................................... 30,464 40,807
Accounts receivable, net of allowance for doubtful
accounts of $9,800 at October 31, 1997 and $12,100 at
April 30, 1998, respectively........................... 174,532 224,310
Prepaid and other current assets.......................... 21,436 26,986
-------- --------
Total current assets.............................. 450,869 492,223
Long-term investments....................................... 108,096 193,154
Property and equipment, net................................. 55,705 52,384
Software development costs, net............................. 11,879 8,637
Non-current portion of deferred income taxes................ 10,646 50,611
Deposits and other assets................................... 5,842 7,448
-------- --------
$643,037 $804,457
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 34,915 $ 37,191
Unearned revenue and customer deposits.................... 67,104 129,244
Accrued liabilities....................................... 110,565 118,812
-------- --------
Total current liabilities......................... 212,584 285,247
Unearned revenue, net of current portion, and other......... 33,592 33,322
-------- --------
Total liabilities................................. 246,176 318,569
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 99,588,046 issued and
outstanding as of October 31, 1997 and April 30, 1998,
respectively........................................... 93 100
Additional paid-in capital................................ 294,278 365,761
Retained earnings......................................... 102,856 121,615
Cumulative translation adjustments and other, net......... (366) (1,588)
-------- --------
Total stockholders' equity........................ 396,861 485,888
-------- --------
$643,037 $804,457
======== ========
</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 SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
License fees..................................... $ 51,129 $ 76,424 $ 92,063 $144,414
Services......................................... 94,725 132,567 176,612 242,833
-------- -------- -------- --------
Total revenue............................ 145,854 208,991 268,675 387,247
Costs and expenses:
Cost of license fees............................. 9,386 8,185 17,084 19,304
Cost of services................................. 57,813 84,559 109,306 155,147
Sales and marketing.............................. 39,029 61,440 73,735 111,861
General and administrative....................... 16,315 18,211 31,087 36,650
Research and development......................... 14,391 20,640 24,533 40,578
-------- -------- -------- --------
Total costs and expenses................. 136,934 193,035 255,745 363,540
Operating income................................... 8,920 15,956 12,930 23,707
Other income (expense):
Interest income.................................. 70 3,749 163 7,408
Interest expense................................. (225) (119) (500) (664)
Foreign currency losses and other, net........... (1,023) (10) (1,154) (675)
-------- -------- -------- --------
Income before income taxes......................... 7,742 19,576 11,439 29,776
Provision for income taxes....................... 2,893 7,243 4,261 11,017
-------- -------- -------- --------
Net income......................................... $ 4,849 $ 12,333 $ 7,178 $ 18,759
======== ======== ======== ========
Net income per common share:
Basic............................................ $ .06 $ .13 $ .09 $ .20
======== ======== ======== ========
Diluted.......................................... $ .05 $ .11 $ .08 $ .17
======== ======== ======== ========
Shares used in computing per share amounts:
Basic............................................ 79,112 96,975 79,102 95,194
Diluted.......................................... 95,544 109,525 94,532 108,821
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
--------------------
1997 1998
-------- ---------
<S> <C> <C>
Operating activities:
Net income.................................................. $ 7,178 $ 18,759
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 7,378 12,580
Amortization of software development costs................ 2,617 3,242
Provision for deferred income taxes....................... 568 (2,884)
Other..................................................... (37) 549
Changes in operating assets and liabilities:
Accounts receivable, net.................................. (36,190) (50,502)
Prepaid and other assets.................................. (2,025) (7,516)
Accounts payable.......................................... (3,983) 2,541
Unearned revenue and customer deposits.................... 32,874 62,283
Accrued liabilities....................................... (903) 14,678
-------- ---------
Net cash provided by operating activities......... 7,477 53,730
Investing activities:
Purchase of investments..................................... -- (117,556)
Proceeds from maturities of investments..................... -- 22,155
Purchase of property and equipment.......................... (8,863) (14,943)
Proceeds from sale of assets................................ 8,557 4,938
Capitalized software development costs...................... (2,399) --
-------- ---------
Net cash used for investing activities............ (2,705) (105,406)
Financing activities:
Proceeds from issuance of common stock...................... 120 28,142
Proceeds from bank line of credit........................... 81,950 --
Repayment of bank line of credit............................ (81,950) --
-------- ---------
Net cash provided by financing activities......... 120 28,142
Effect of exchange rate changes on cash..................... (539) (783)
-------- ---------
Net increase (decrease) in cash and cash equivalents........ 4,353 (24,317)
Cash and cash equivalents at beginning of period............ 25,554 224,437
-------- ---------
Cash and cash equivalents at end of period.................. $ 29,907 $ 200,120
======== =========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Interest paid............................................. $ 500 $ 664
Income taxes paid......................................... 10,151 4,630
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 six-month period ended April 30, 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
In November 1997 and March 1998, the Company entered into agreements to
lease two office buildings being constructed on land owned by the Company. The
lessor, a wholly-owned subsidiary of a bank, and the bank are collectively
financing up to $60.0 million in construction costs through a combination of
equity and debt financing. The Company is acting as agent for the lessor to
design and construct the buildings and land improvements. In the event either of
the buildings is sold during the lease term, the Company will guarantee a
residual value of each building up to approximately 84% of its original cost.
The Company's rent obligation is calculated as a return on the lessor's costs of
funding and may be adjusted from time to time to reflect any changes in the
Company's leverage ratio.
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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 financial results for the second quarter of fiscal 1998 reflected a
continuation of the Company's strong position in the middle market. 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 March 1998
the Company released OneWorld version B73.2 for general availability, providing
added functionality including supply chain management capabilities.
The Company's second quarter operating income grew 79% to $16.0 million
compared to $8.9 million for the second quarter last year. Net income for the
quarter increased 154% to $12.3 million compared to $4.8 million last year, and
second quarter diluted EPS increased to $.11 compared to $.05 for the same
period last year. The operating income and net income growth for the second
quarter of fiscal 1998 was primarily the result of a 43% increase in total
revenue.
For the first six months of fiscal 1998, the Company's operating income
grew 83% to $23.7 million compared to $12.9 million for the first six months of
fiscal 1997. Net income increased 161% to $18.8 million compared to $7.2 million
for the same period last year, and diluted EPS increased to $.17 compared to
$.08 for the first six months last year primarily due to the 44% growth in total
revenue for the six-month period. Net income for both the first and second
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.
7
<PAGE> 8
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 SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
--------------- ---------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue:
License fees................................... 35.1% 36.6% 34.3% 37.3%
Services....................................... 64.9 63.4 65.7 62.7
----- ----- ----- -----
Total revenue.......................... 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of license fees........................... 6.4 3.9 6.4 5.0
Cost of services............................... 39.6 40.5 40.7 40.1
Sales and marketing............................ 26.8 29.4 27.4 28.9
General and administrative..................... 11.2 8.7 11.6 9.4
Research and development....................... 9.9 9.9 9.1 10.5
----- ----- ----- -----
Total costs and expenses............... 93.9 92.4 95.2 93.9
Operating income................................. 6.1 7.6 4.8 6.1
Other income (expense), net...................... (.8) 1.7 (0.5) 1.6
----- ----- ----- -----
Income before income taxes....................... 5.3 9.3 4.3 7.7
Provision for income taxes..................... 2.0 3.4 1.6 2.9
----- ----- ----- -----
Net income....................................... 3.3% 5.9% 2.7% 4.8%
===== ===== ===== =====
Gross margin on license fee revenue.............. 81.6% 89.3% 81.4% 86.6%
Gross margin on service revenue.................. 39.0% 36.2% 38.1% 36.1%
</TABLE>
Total Revenue. Total revenue grew by 43% to $209.0 million for the quarter
ended April 30, 1998 from $145.9 million for the quarter ended April 30, 1997.
For the six-month period in fiscal 1998, total revenue grew by 44% to $387.2
million from $268.7 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 37% and 63%,
respectively, for the second quarter of fiscal 1998 compared to 35% and 65%,
respectively, for the same quarter last year. For the first half of fiscal 1998,
the revenue mix between license fees and services was consistent with the second
quarter at 37% and 63%, respectively, compared to 34% and 66%, respectively, for
the first half of fiscal 1997. The Company achieved greater license fee growth
compared to services primarily due to a greater number of large license
transactions from new and existing customers during both the quarter and
six-month period in fiscal 1998 compared to the same periods last year. For the
year-to-date period, the relatively greater increase in license fee revenue was
also due in part to new sales territory assignments which were phased in through
the first quarter to allow account executives an adequate transition period to
close pending license transactions under previous territories. Management
believes the transition period provided additional sales incentives that
contributed to the increase in license fee revenue during the first quarter of
fiscal 1998 compared to the same period last year. Operations in Europe, the
Middle East and Africa ("EMEA") also contributed to the shift in revenue mix for
the first half of fiscal 1998 due to a comparably weak first quarter in fiscal
1997. Additionally, the Company expanded its installed base of customers by 11%
to approximately 4,550 compared to the end of the second quarter last year.
Geographically, the overall growth was led by strong performance in the
United States, with a 55% increase in total revenue for the second 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 63%, 22% and 15%
of total revenue, respectively, for the quarter and 65%, 21% and 14% of total
revenue, respectively, for the six-month period ended April 30, 1998.
Comparatively, the United States, EMEA and the rest of the world accounted for
59%, 21% and 20% of total revenue, respectively, for the quarter and 63%, 20%
and 17% of total revenue, respectively, for the six-month period ended April 30,
1997. The larger percentage last year from the
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countries included in the rest of the world was primarily due to a comparably
stronger second quarter in Canada in fiscal 1997.
License fees. License fee revenue grew by 49% to $76.4 million for the
quarter ended April 30, 1998 from $51.1 million for the quarter ended April 30,
1997. The number of license transactions closed during the second quarter that
exceeded $1.0 million increased by approximately 30% from the second quarter of
the prior year. In addition to the new customers added during the quarter, 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. For the six months ended April 30, 1998,
license fee revenue grew by 57% to $144.4 million from $92.1 million for the six
months ended April 30, 1997. The number of license transactions during the first
half of fiscal 1998 that exceeded $1.0 million increased by approximately 70%
from the same period last year. During both the quarter and the six-month period
ended April 30, 1998, the Company continued to experience increasing market
acceptance of its software products particularly with targeted middle market
customers with revenues between $100 million and $2 billion. During the first
half of fiscal 1998, the Company continued to increase its capacity to reach
this market and expanded its direct sales force by 45% as of April 30, 1998
compared to a year ago.
The Company also expanded its channel opportunities during the first half
of fiscal 1998. The Company's distribution channel which focuses on companies
with revenues of less than $100 million has expanded to include international
partners. A new distribution channel has also been established to focus on
companies with revenues of less than $35 million. The Company is also partnering
with established software development vendors in key niche markets to expand
penetration outside the traditional ERP market.
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 April 30, 1998, 13% of
license fee revenue was generated from customers using either Windows NT or UNIX
platforms compared to 7% in the prior year quarter. For the six-month period
ended April 30, 1998, 12% of total license revenue was from customers using
either Windows NT or UNIX platforms compared to 6% 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. However, there can be no assurance that
the Company will be successful in implementing its strategy or that OneWorld
will achieve substantial market acceptance.
Services. Service revenue grew by 40% to $132.6 million for the quarter
ended April 30, 1998 from $94.7 million for the quarter ended April 30, 1997.
This increase was primarily due to higher revenue from consulting, which is the
largest component of services, although training and support revenue also
increased. 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 average training course sizes. Service revenue grew by 37%
to $242.8 million for the six-month period ended April 30, 1998 from $176.6
million for the six-month period ended April 30, 1997. The Company continued to
experience increased demand for services in both the quarter and first six
months of fiscal 1998 compared to the same periods last year. As a percentage of
total revenue, services 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. Additionally, support
revenue increased as a result of the Company's growing installed base of
customers.
The Company has historically subcontracted a portion of its consulting and
training services to third parties. The portion of such services revenue
generated through subcontracted work accounted for 45% for the quarter and 44%
for the six-month period ended April 30, 1998 compared to 41% for both the
quarter and six-month period in fiscal 1997. Additionally, the Company is
implementing a strategy of utilizing third parties to contract directly with its
customers to implement the OneWorld version of its applications suites. New
business alliances were established to achieve this objective, including an
alliance with Arthur Andersen to
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jointly market implementation solutions to the middle market and the addition of
Deloitte & Touche as a consulting alliance partner. To date, the Company has
referred only a limited number of its implementations to such third parties.
However, 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.
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 has 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 royalties, business
partner commissions, amortization of capitalized software development costs,
documentation costs and software delivery expenses. The total dollar amount of
cost of license fees decreased 12% to $8.2 million for the quarter ended April
30, 1998 from $9.4 million for the quarter ended April 30, 1997 primarily due to
lower royalties. For the six-month period, the total dollar amount for the cost
of license fees increased 13% to $19.3 million from $17.1 million for the same
period last year primarily due to increased revenue volume from indirect
channels, offset by lower royalties. The decrease in cost of license fees as a
percentage of the related revenue for both the quarter and six months ended
April 30, 1998 compared to the same periods last year was primarily the result
of the Company's renegotiation of certain royalty agreements effective in fiscal
1998 which lowered royalty expense in the current year compared to last year.
The amount of amortization on capitalized software development costs was
comparable for the second quarters of fiscal 1998 and fiscal 1997. However, for
the six-month period ended April 30, 1998, amortization of capitalized software
development increased to $3.2 million compared to $2.6 million for the same
period last year as the result of the timing of the amortization of capitalized
OneWorld development costs which will continue to be amortized through the first
quarter of fiscal 2000. Business partner costs grew due to an increase in the
related revenue together with the structure of new alliances in fiscal 1998. In
future quarters, business partner costs may represent a larger percentage of
revenue compared to the previous year if the Company is successful in its
expanded channel initiatives and business alliances.
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
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license fees. Both the second quarter and six-month period in fiscal 1998 were
positively impacted by the increase in revenue volume and a decrease in royalty
expense, with the gross margin on license fee revenue increasing to 89.3% for
the second quarter of 1998 from 81.6% for the second quarter of last year. For
the first half of fiscal 1998, the gross margin on license fee revenue increased
to 86.6% from 81.4% for the same period in fiscal 1997.
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
$84.6 million for the quarter ended April 30, 1998 from $57.8 million for the
quarter ended April 30, 1997, representing an increase of 46%. For the six-month
period, cost of services increased to $155.1 million in fiscal 1998 from $109.3
million in fiscal 1997, representing 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 OneWorld applications during the quarter and the
six-month period. As a result, the gross margin on service revenue decreased to
36.2% for the quarter and 36.1% for the six-month period ended April 30, 1998
from 39.0% and 38.1% for the quarter and six-month period ended April 30, 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 $61.4 million for the quarter ended April 30, 1998 from
$39.0 million for the quarter ended April 30, 1997, representing 29.4% and 26.8%
of total revenue, respectively. For the six-month period, sales and marketing
expense increased to $111.9 million in fiscal 1998 from $73.7 million in fiscal
1997, representing 28.9% and 27.4% of total revenue, respectively. The increase
in the total dollar amount was primarily the result of additional direct sales
personnel and related costs to meet the Company's sales goals as well as to
address the Windows NT and UNIX markets and the growth from the OneWorld version
of its application suites. Additional personnel were also hired to support the
Company's marketing and promotion efforts. Increased license fee revenue during
the quarter and six-month period also resulted in higher sales commission
expense as compared to the same periods last year.
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 $18.2
million for the quarter ended April 30, 1998 from $16.3 million for the quarter
ended April 30, 1997, representing 8.7% and 11.2% of total revenue,
respectively. For the six-month period, general and administrative expense
increased to $36.7 million in fiscal 1998 from $31.1 million in fiscal 1997,
representing 9.4% and 11.6% of total revenue, respectively. The total dollar
amount of expense was higher in the quarter and six-month period ended April 30,
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 April 30, 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 and may represent a larger percentage of total revenue than in
the second quarter and six-month period of fiscal 1998.
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 $20.6 million for the quarter ended April 30, 1998 from $14.4
million for
11
<PAGE> 12
the quarter ended April 30, 1997, representing 9.9% of total revenue in both
fiscal 1998 and 1997. For the six-month period, research and development expense
increased to $40.6 million in fiscal 1998 from $24.5 million in fiscal 1997,
representing 10.5% and 9.1% of total revenue, respectively. Total research and
development expenditures were higher in the quarter and six-month period ended
April 30, 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. 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. 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 six-month period ended April 30, 1997,
capitalized software development costs were $2.4 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 $3.7 million and $7.4 million, respectively, for the quarter and
six-month periods ended April 30, 1998, respectively, and from $70,000 and
$163,000, respectively, for the quarter and six-month period ended April 30,
1997, primarily due to interest earned on the investment of proceeds from the
Company's IPO. Foreign currency losses decreased to $79,000 for the quarter
ended April 30, 1998 compared to $1.0 million for the quarter ended April 30,
1997. For the six-month period ended April 30, 1998, the Company incurred
foreign currency losses of $826,000 compared to $1.3 million during the same
period last year. The losses were primarily due to the strengthening of the U.S.
dollar against Asian and many European currencies during both fiscal 1998 and
1997. The decrease in the amount of losses was primarily the result of foreign
currencies changing by a lesser degree in relation to the U.S. dollar during the
first six months of fiscal 1998 compared to last year.
Additionally, 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 half of fiscal 1998 compared to 37.3%
for the first half 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 120% to $.11 for the quarter
ended April 30, 1998 from $.05 for the quarter ended April 30, 1997 as a result
of net income growth of 154% to $12.3 million from $4.8 million. For the six
months ended April 30, 1998, diluted EPS increased 113% to $.17 from $.08 for
the same period last year as a result of net income growth of 161% to $18.8
million from $7.2 million. The growth in earnings per share was reduced by an
increase in the Company's diluted weighted average number of shares outstanding
to 109.5 million for the quarter and 108.8 million for the six-month period
ended April 30, 1998, from 95.5 million for the quarter and 94.5 million for the
six-month period ended April 30, 1997. The Company issued 12.8 million
additional shares to the public through its IPO in September 1997, representing
most 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.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1998, the Company's principal sources of liquidity
consisted of $200.1 million of cash and cash equivalents, $234.0 million of
short-term and long-term investments and a $50 million, unsecured,
12
<PAGE> 13
revolving line of credit. No amounts were outstanding under the Company's bank
line of credit during the six-month period ended April 30, 1998. The Company had
working capital of $207.0 million at April 30, 1998 and a current ratio of 1.7
to one. Included in determining such amounts are short-term unearned revenue and
customer deposits of $129.2 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 $336.2
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 93 days as of the quarter ended April 30, 1998
compared to 90 days as of the quarter ended April 30, 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 $53.7 million during the
six-month period ended April 30, 1998 compared to $7.5 million during the
six-month period ended April 30, 1997. The increase in operating cash flow was
due to the increased net income and higher unearned revenue which was partially
offset by increased accounts receivable. Tax deductions associated with stock
option exercises during the first half of fiscal 1998 generated a deferred
income tax asset and increased additional paid in capital as of April 30, 1998.
Financing activities provided $28.1 million in cash from exercises of
common stock options, together with the ESPP and ESOP activity. The Company
issued a total of 6.6 million shares of common stock during the first six months
of fiscal 1998. The Company did not have other significant net financing
activities for the first half of fiscal 1998 or during the same period last
year.
The Company used $105.4 million in cash for investing activities for the
six-month period ended April 30, 1998 compared to $2.7 million for the six-month
period ended April 30, 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 six 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 six 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 six
months ended April 30, 1998 and 1997, respectively.
In November 1997 and March 1998, the Company entered into agreements to
lease office buildings to be constructed on land owned by the Company. The
lessor, a wholly-owned subsidiary of a bank, and the bank collectively committed
to finance up to $60.0 million in construction costs through a combination of
equity and debt financing. 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 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.
13
<PAGE> 14
IMPACT OF THE YEAR 2000 ISSUE
Many currently installed computer systems and software products are
designed and coded to accept only two digit entries in the date code fields and
the databases on which they rely. These date code fields and databases 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's business operations are significantly dependent upon the same
proprietary software products licensed to its customers. While management
believes it has successfully addressed this issue in its proprietary software
products, the Company also uses third-party software and computer technology
internally which may materially impact the Company if not Year 2000 compliant.
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 has initiated correspondence with suppliers and is continuing
to review 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 the systems used by its suppliers and other third parties. Such
actions 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 SFAS 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. SOP 97-2 and SFAS Nos. 130 and 131 are effective for
fiscal 1999.
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
14
<PAGE> 15
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 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. To
date, a limited number of the Company's customers have licensed the OneWorld
version of its application suites, and, due to the lengthy implementa-
15
<PAGE> 16
tion process, a small number 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 half 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 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.
16
<PAGE> 17
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 April 30, 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
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on March 18, 1998
(the "Annual Meeting"). At the Annual Meeting, stockholders voted on two
matters: (1) the election of Class I directors for a term of three years
expiring in 2001 and (2) the ratification of the appointment of Price Waterhouse
LLP as the Company's independent accountants. The stockholders elected
management's nominees as Class I directors in an uncontested election and
ratified the appointment of the independent accountants by the following votes,
respectively:
(1) Election of Class I directors for a term expiring in 2001:
<TABLE>
<CAPTION>
VOTES BROKER
VOTES FOR WITHHELD NON-VOTES
---------- -------- ---------
<S> <C> <C> <C>
Gerald Harrison...................................... 81,768,809 365,992 0
Delwin D. Hock....................................... 81,765,976 368,825 0
Jack L. Thompson..................................... 81,776,195 358,606 0
</TABLE>
The Company's Board of Directors is currently comprised of nine members who
are divided into three classes with overlapping three-year terms. The term for
Class II directors (Richard E. Allen, Robert C. Newman and Harry T. Lewis, Jr.)
will expire at the meeting of stockholders to be held in 1999, and the term for
Class III directors (C. Edward McVaney, Michael J. Maples and Trygve E. Myhren)
will expire at the annual meeting of stockholders to be held in 2000.
(2) Ratification of Appointment of Price Waterhouse LLP as independent
accounts:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
- --------- ------------- ----------- ----------------
<S> <C> <C> <C>
81,852,484.. 94,252 188,065 0
</TABLE>
ITEM 5. OTHER INFORMATION
None.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
11.1 -- Computation of Earnings Per Share
27.1 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
18
<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: June 5, 1998
By: /s/ PAMELA L. SAXTON
----------------------------------
Name: Pamela L. Saxton
Title: Vice President of Finance,
Controller and
Chief Accounting Officer
(principal accounting officer)
Dated: June 5, 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
CLASSIFICATION PERIOD OPERATIONS WRITE-OFFS ADJUSTMENTS END OF PERIOD
-------------- ------------ ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Six Months Ended:
April 30, 1997................... $ 5,600 $1,984 $ (726) $(158) $ 6,700
April 30, 1998................... 9,800 4,612 (2,439) 127 12,100
</TABLE>
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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 SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------ ------------------
1997 1998 1997 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income........................................... $ 4,849 $ 12,333 $ 7,178 $ 18,759
======= ======== ======= ========
Weighted average number of common shares
outstanding........................................ 79,112 96,975 79,102 95,194
Basic earnings per common share...................... $ 0.06 $ 0.13 $ 0.09 $ 0.20
======= ======== ======= ========
DILUTED EARNINGS PER SHARE
Net income........................................... $ 4,849 $ 12,333 $ 7,178 $ 18,759
======= ======== ======= ========
Shares outstanding
Weighted average number of common shares
outstanding........................................ 79,112 96,975 79,102 95,194
Assuming exercise of stock options................... 22,200 17,563 22,173 19,111
Assuming repurchase of treasury stock................ (5,768) (5,013) (6,743) (5,484)
------- -------- ------- --------
Net incremental shares............................. 16,432 12,550 15,430 13,627
Weighted average number of common shares outstanding
as adjusted........................................ 95,544 109,525 94,532 108,821
======= ======== ======= ========
Diluted earnings per common share.................... $ 0.05 $ 0.11 $ 0.08 $ 0.17
======= ======== ======= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT APRIL 30, 1998 AND STATEMENT OF INCOME FOR THE SIX MONTHS ENDED APRIL
30 ,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> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<CASH> 200,120
<SECURITIES> 40,807
<RECEIVABLES> 236,410
<ALLOWANCES> 12,100
<INVENTORY> 0
<CURRENT-ASSETS> 492,223
<PP&E> 107,264
<DEPRECIATION> 54,880
<TOTAL-ASSETS> 804,457
<CURRENT-LIABILITIES> 285,247
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 485,788
<TOTAL-LIABILITY-AND-EQUITY> 804,457
<SALES> 144,414
<TOTAL-REVENUES> 387,247
<CGS> 19,304
<TOTAL-COSTS> 174,451
<OTHER-EXPENSES> 189,089
<LOSS-PROVISION> 4,612
<INTEREST-EXPENSE> 664
<INCOME-PRETAX> 29,776
<INCOME-TAX> 11,017
<INCOME-CONTINUING> 18,759
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,759
<EPS-PRIMARY> .20
<EPS-DILUTED> .17
</TABLE>
