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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, 1999
[ ] 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 incorporation (I.R.S. Employer Identification Number)
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 9, 1999, there were 105,944,529 shares of the Registrant's Common
Stock outstanding.
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J.D. EDWARDS & COMPANY
TABLE OF CONTENTS
<TABLE>
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PAGE
NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements................................................ 3
Consolidated Balance Sheets as of October 31, 1998
and April 30, 1999.................................................. 3
Consolidated Statements of Operations for the Three and
Six Months Ended April 30, 1998 and 1999............................ 4
Consolidated Statements of Cash Flows for the Six Months
Ended April 30, 1998 and 1999....................................... 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................... 24
Item 2. Changes in Securities and Use of Proceeds........................... 24
Item 3. Defaults upon Senior Securities..................................... 24
Item 4. Submission of Matters to a Vote of Security Holders................. 24
Item 5. Other Information................................................... 24
Item 6. Exhibits and Reports on Form 8-K.................................... 25
SIGNATURES
</TABLE>
J.D. Edwards is a registered trademark of J.D. Edwards & Company. The names of
all other products and services of J.D. Edwards used herein are trademarks or
registered trademarks of J.D. Edwards World Source Company. All other product
and service 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, APRIL 30,
1998 1999
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 183,115 $ 114,394
Short-term investments 28,667 55,490
Accounts receivable, net of allowance for doubtful accounts of $12,900
at October 31, 1998 and $10,700 at April 30, 1999, respectively 265,704 253,767
Prepaid and other current assets 32,823 40,601
--------- ---------
Total current assets 510,309 464,252
Long-term investments 322,527 347,143
Property and equipment, net 60,689 75,993
Software development costs, net 5,821 5,852
Non-current portion of deferred income taxes 43,658 55,157
Deposits and other assets 7,469 12,366
--------- ---------
$ 950,473 $ 960,763
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 60,366 $ 49,913
Unearned revenue and customer deposits 121,092 142,340
Accrued liabilities 157,473 132,642
--------- ---------
Total current liabilities 338,931 324,895
Unearned revenue, net of current portion, and other 27,546 24,179
--------- ---------
Total liabilities 366,477 349,074
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;
102,681,608 and 105,796,979 issued and outstanding as of
October 31, 1998 and April 30, 1999, respectively 103 106
Additional paid-in capital 406,886 440,468
Deferred compensation (677) (472)
Retained earnings 177,324 171,192
Accumulated other comprehensive income:
foreign currency translation adjustments 360 395
--------- ---------
Total stockholders' equity 583,996 611,689
--------- ---------
$ 950,473 $ 960,763
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------------ ------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
License fees $ 76,424 $ 67,204 $ 144,414 $ 136,803
Services 132,567 164,387 242,833 317,725
--------- --------- --------- ---------
Total revenue 208,991 231,591 387,247 454,528
Costs and expenses:
Cost of license fees 8,185 7,556 19,304 12,847
Cost of services 84,559 106,663 155,147 206,125
Sales and marketing 61,440 83,458 111,861 152,871
General and administrative 18,211 25,487 36,650 49,876
Research and development 20,640 31,183 40,578 53,898
--------- --------- --------- ---------
Total costs and expenses 193,035 254,347 363,540 475,617
Operating income (loss) 15,956 (22,756) 23,707 (21,089)
Other income (expense):
Interest income 3,749 5,612 7,408 10,956
Interest expense (119) (416) (664) (620)
Foreign currency losses and other, net (10) 1,053 (675) 1,020
--------- --------- --------- ---------
Income (loss) before income taxes 19,576 (16,507) 29,776 (9,733)
Provision for (benefit from) income taxes 7,243 (6,107) 11,017 (3,601)
--------- --------- --------- ---------
Net income (loss) $ 12,333 $ (10,400) $ 18,759 $ (6,132)
========= ========= ========= =========
Net income (loss) per common share:
Basic $ 0.13 $ (0.10) $ 0.20 $ (0.06)
========= ========= ========= =========
Diluted $ 0.11 $ (0.10) $ 0.17 $ (0.06)
========= ========= ========= =========
Shares used in computing per share amounts:
Basic 96,975 105,333 95,194 104,222
Diluted 109,525 105,333 108,821 104,222
</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>
SIX MONTHS ENDED
APRIL 30,
------------------------
1998 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) $ 18,759 $ (6,132)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Depreciation 12,580 11,754
Amortization of software development costs 3,242 2,609
Benefit from deferred income taxes (2,884) (6,347)
Write-off of in-process research and development assets acquired -- 2,141
Other 549 3,316
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable, net (50,502) 5,219
Prepaid and other assets (7,516) (11,252)
Accounts payable 2,541 (8,790)
Unearned revenue and customer deposits 62,283 19,490
Accrued liabilities 14,678 (16,435)
--------- ---------
Net cash provided (used) by operating activities 53,730 (4,427)
Investing activities:
Purchase of investments (117,556) (138,942)
Proceeds from maturities of investments 22,155 87,503
Purchase of property and equipment (14,943) (27,682)
Payment for purchase of acquired company, net of cash balances -- (4,263)
Proceeds from sale of assets and other, net 4,938 (79)
--------- ---------
Net cash used for investing activities (105,406) (83,463)
Financing activities:
Proceeds from issuance of common stock 28,142 20,059
--------- ---------
Net cash provided by financing activities 28,142 20,059
Effect of exchange rate changes on cash (783) (890)
--------- ---------
Net decrease in cash and cash equivalents (24,317) (68,721)
Cash and cash equivalents at beginning of period 224,437 183,115
--------- ---------
Cash and cash equivalents at end of period $ 200,120 $ 114,394
========= =========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Interest paid $ 664 $ 620
Income taxes paid 4,630 10,667
Retirement Savings Plan contribution funded with common stock 6,050 4,694
Common stock issued for acquired company -- 3,166
</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, 1999
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, 1998.
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 and
the 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
Basic earnings (loss) per share excludes the dilutive effect of common stock
equivalents and is computed by dividing net income (loss) by the weighted
average number of shares outstanding during the period. Diluted earnings per
share includes the dilutive effect of common stock equivalents and is 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 the fiscal 1998 periods
have been adjusted to include all common shares issuable under stock options
using the treasury stock method. Diluted loss per share amounts for the fiscal
1999 periods exclude potentially dilutive shares as the result would be
anti-dilutive. All shares owned by the J.D. Edwards & Company Retirement Savings
Plan were included in the weighted average common shares outstanding for all
periods.
The computation of basic and diluted earnings (loss) per share was as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------------- -----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
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Numerator:
Net income (loss) $ 12,333 $ (10,400) $ 18,759 $ (6,132)
========= ========= ========= =========
Denominator:
Basic income (loss) per share -- weighted average shares
outstanding 96,975 105,333 95,194 104,222
Dilutive effect of common stock equivalents 12,550 -- 13,627 --
--------- --------- --------- ---------
Diluted net income (loss) per share -- adjusted weighted average
shares outstanding, assuming conversion of common
stock equivalents, if dilutive to per share amounts 109,525 105,333 108,821 104,222
========= ========= ========= =========
Basic net income (loss) per share $ 0.13 $ (0.10) $ 0.20 $ (0.06)
Diluted net income (loss) per share $ 0.11 $ (0.10) $ 0.17 $ (0.06)
</TABLE>
(3) COMMITMENTS AND CONTINGENCIES
The Company leases three corporate headquarters office buildings and has
entered into an agreement to lease another building currently being constructed
on land owned by the Company once construction is completed. The lessor, a
wholly-owned subsidiary of a bank, and a syndication of banks are collectively
financing up to $127.6 million in purchase and construction costs through a
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combination of equity and debt. The Company guarantees the 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. Management has elected
to reduce the interest rate used to calculate lease expense by collateralizing
up to 97% of the financing arrangements with investments consistent with the
Company's investment policy. The Company may withdraw the funds used as
collateral at its sole discretion, provided it is not in default under the lease
agreement. At April 30, 1999, investments totaling $101.1 million were
designated as collateral for these leases.
(4) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses hedging instruments to mitigate the foreign currency
exchange risk of certain assets and liabilities denominated in foreign currency.
The hedging instruments used are forward foreign exchange contracts with
maturities of generally six months or less in term. All contracts are entered
into with major financial institutions. Gains and losses on these contracts are
recognized as non-operating income or expense in the period in which the gain or
loss is recognized from the settlement or translation of the underlying assets
and liabilities. All gains and losses related to foreign exchange contracts are
included in cash flows from operating activities in the consolidated statements
of cash flows.
At April 30, 1999, the Company had approximately $65.3 million of gross U.S.
dollar equivalent forward foreign exchange contracts outstanding as hedges of
monetary assets and liabilities denominated in foreign currency. Net foreign
exchange transaction losses included in other income and expense totaled $79,000
and $826,000 for the second quarter and six-month period of fiscal 1998,
respectively, and $373,000 and $375,000 for the second quarter and six-month
period of fiscal 1999, respectively.
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and for Hedging Activities," was issued in June 1998
and will require companies to value derivative financial instruments, including
those used for hedging foreign currency exposures, at current market value with
the impact of any change in market value being charged against earnings in each
period. As currently written, SFAS No. 133 will be effective for the Company in
the first quarter of fiscal 2000, although this date may be extended. The
Company currently anticipates that the adoption of SFAS No. 133 will not have a
material impact on its consolidated financial statements.
(5) COMPREHENSIVE INCOME
The Company implemented SFAS No. 130, "Reporting Comprehensive Income," in
the first quarter of fiscal 1999. This standard requires disclosure in the
financial statements of the total changes in equity resulting from revenue,
expenses, and gains and losses, including those which do not affect retained
earnings. The Company's comprehensive income (loss) was comprised of net income
(loss) and foreign currency translation adjustments. For the second quarter and
six-month period ended April 30, 1998, the Company's comprehensive income was
$12.3 million and $17.4 million, respectively. For the second quarter and
six-month period ended April 30, 1999, the Company's comprehensive loss was $9.7
million and $6.1 million, respectively.
(6) ACQUISITIONS
THE PREMISYS CORPORATION. On February 26, 1999, the Company completed an
acquisition of The Premisys Corporation, a privately-held Illinois corporation
in the business of providing visual configuration software and consulting
services. Technology acquired from The Premisys Corporation is being integrated
with OneWorld(TM), the Company's multi-platform applications. The purchase price
was paid with a combination of J.D. Edwards' common stock and cash. The
acquisition was accounted for as a purchase and, accordingly, the purchase price
was allocated to the acquired assets and liabilities at their fair values as of
the closing date of the merger, and the accompanying consolidated statements of
operations do not include any revenues or expenses related to the acquisition
prior to the closing date. Acquired assets include capitalized software and
other intangibles that are being amortized on a straight-line basis over three
to four years. Additionally, a portion of the purchase price was allocated to
in-process research and development, and the Company incurred a one-time charge
to earnings in the second quarter of $2.1 million for the write-off of unproven
technology currently under development. Future consideration that may be paid in
fiscal 2001 based upon certain future events is being recorded as compensation
expense through the second quarter of fiscal 2001. The acquisition was not
material to the Company and, accordingly, pro forma financial statements have
not been included.
NUMETRIX LIMITED. In May 1999, the Company entered into an agreement to
acquire privately-held Numetrix Limited ("Numetrix"), a Toronto-based provider
of Internet-enabled supply chain planning software. Numetrix's current product
suite will be integrated with the Company's existing enterprise application
solutions to link customers, suppliers and trading partners in collaborative
enterprise networks and will also continue to be sold separately. The combined
Numetrix/J.D. Edwards offering will be designed to result in an integrated,
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Web-based supply chain solution that accelerates the flow of goods and services
through the extended enterprise, reducing manufacturing cycle time and
investment in working capital, and increasing responsiveness to customer
demands. Numetrix is also currently in the later development stages of new
technology and has major enhancements to some existing products underway. The
Company will pay approximately $80 million in cash for all of the outstanding
common and preferred shares of Numetrix stock. The acquisition is expected to
close in June 1999 and will be accounted for as a purchase in the Company's
third fiscal quarter. Accordingly, the total purchase price will be allocated to
the acquired assets and liabilities at their fair values as of the closing date
of the merger, and the Company's consolidated statements of operations will not
include any revenues or expenses related to the acquisition prior to the closing
date. Such assets include capitalized software and other intangibles which are
expected to be amortized on a straight-line basis over periods of up to five
years. Additionally, a portion of the purchase price, expected to be
approximately $20 million to $25 million, will be allocated to in-process
research and development and charged to expense in the third quarter.
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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, 1998 UNDER "FACTORS AFFECTING THE COMPANY'S
BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION" ON PAGES 11 THROUGH 20.
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
OVERVIEW. During the second quarter of fiscal 1999, the Company's results of
operations reflected an operating loss of $22.8 million compared to operating
income of $16.0 million for the second quarter last year. The net loss for the
second quarter of fiscal 1999 was $10.4 million, or $0.10 per share, compared to
net income of $12.3 million, or $0.11 per diluted share, for the same period
last year. Quarterly operating expenses increased 32% and exceeded total revenue
growth of 11% compared to the same period last year. The Company's operating
loss for the first six months of fiscal 1999 was $21.1 million compared to
operating income of $23.7 million for the same period last year. The net loss
for the first six months of fiscal 1999 was $6.1 million, or $0.06 per share,
compared to net income of $18.8 million, or $0.17 per diluted share, for the
same period last year. For the six-month period ending April 30, 1999 operating
expenses increased 31%, exceeding total revenue growth of 17% compared to the
same period last year.
External market and competitive factors as well as the slower than expected
realization of benefits from internal operational changes impacted the Company's
results for the second quarter and six-month period of fiscal 1999. Specific
factors that affected the Company's performance were primarily a continued
slowing of software purchases resulting from companies focusing on Year 2000
preparations and the full quarter impact of headcount investments made in the
first quarter. The acquisition of The Premisys Corporation in February 1999 also
had an impact on the second quarter of fiscal 1999. The Company incurred a
one-time charge of $2.1 million for the write-off of in-process development, and
incremental expenses such as the amortization of intangibles and operating
expenses totaled $1.4 million. Additionally, the Company realigned its sales
force along vertical industries and invested in hiring and training sales
account executives, marketing consultants and vertical marketing support
personnel during the first quarter of fiscal 1999. While operational changes
affected the Company's productivity in the six-month period ended April 30,
1999, these were investments for the long-term from which the Company believes
it will benefit in the future. The sales force hiring and training programs were
completed by the end of the first quarter of fiscal 1999, but the full impact of
this growth was reflected in second quarter operating expenses. The Company is
actively addressing its future operating plans given the uncertainty in the
enterprise resource planning ("ERP") market, and the Company is currently
focused on controlling expenses by closely reviewing headcount additions and
adding personnel only in critical positions. Controls over discretionary
expenses have also been tightened throughout the Company.
Due to the deterioration of economic conditions in the Asian markets,
particularly in Japan, and in certain other geographic regions, the Company is
closely monitoring its investments in international areas to ensure that such
opportunities are deemed appropriate and are consistent with the Company's
overall growth strategies. During the second quarter ended April 30, 1999, the
Company made some personnel changes and reduced some layers of management
through a voluntary reduction in force program in Japan and incurred a one-time
charge of $1.2 million to operating expenses for the period. Consistent with its
historical results, the Company expects that during fiscal 1999 it will continue
to recognize a relatively small percentage of its revenue from Asia and other
specific geographic areas that are currently being impacted by adverse economic
conditions. With the worldwide performance of the Company continuing to be
negatively impacted by certain economic conditions and the global market focus
on Year 2000 compliance, risks associated with these international investments
may not be mitigated by the broad geographic diversity of the Company's
operations. As a result, the Company's investments in certain international
areas could have a material negative impact on its future financial condition
and results of operations.
The Company has also reassessed its financial expectations and operating
plans for the remainder of fiscal 1999. The uncertainty in the ERP market has
resulted in reduced visibility to software transactions and has made forward
looking projections even more
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challenging. There can be no assurance of the level of revenue growth, if any,
that will be achieved or that the Company's financial condition, results of
operations and market price of the Company's common stock will not continue to
be adversely impacted by unfavorable factors.
In May 1999, the Company entered into an agreement to acquire all of the
outstanding common and preferred shares privately-held Numetrix Limited
("Numetrix"), a Toronto-based provider of Internet-enabled supply chain planning
software for approximately $80 million in cash. The acquisition is expected to
close in June 1999 and will be accounted for as a purchase in the Company's
third fiscal quarter. Accordingly, operating expenses are expected to increase
in periods subsequent to the consummation date of the acquisition as a result of
amortization charges, additional personnel, office and equipment costs.
Amortization of intangible assets acquired is expected to be in the range of $4
to $5 million in the third fiscal quarter and $9 to $12 million for the full
fiscal year ending October 31, 1999. Additionally, a portion of the purchase
price, expected to be approximately $20 million to $25 million, will be
allocated to in-process research and development and charged to expense in the
third quarter.
During and just subsequent to the second quarter of fiscal 1999, the Company
made strategic investments in areas such as product development, sales and
marketing. Despite their short-term impact on earnings, management believes the
investments were necessary to remain competitively positioned in the market for
future growth and success. These investments were aimed at helping the Company
deliver solutions that allow customers to control their entire business cycle,
and included the Company's two recent acquisitions, The Premisys Corporation and
Numetrix. Additionally, the Company signed an agreement with Siebel Systems
which extends its customer relationship management offering to include the
mobile sales professional. The Company plans to extend its procurement
capabilities by providing an Intranet- and Internet-based business-to-business
electronic commerce solution for operating resources through a recent
partnership with Ariba, Inc. Worldwide alliances agreements with Andersen
Consulting and Deloitte Touche Tohmatsu were also recently signed to expand the
Company's reach beyond its traditional market space.
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 ENDED
APRIL 30, APRIL 30,
---------------- ----------------
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue:
License fees 36.6% 29.0% 37.3% 30.1%
Services 63.4 71.0 62.7 69.9
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of license fees 3.9 3.3 5.0 2.8
Cost of services 40.5 46.1 40.1 45.3
Sales and marketing 29.4 35.9 28.9 33.6
General and administrative 8.7 11.0 9.4 11.0
Research and development 9.9 13.5 10.5 11.9
----- ----- ----- -----
Total costs and expenses 92.4 109.8 93.9 104.6
Operating income (loss) 7.6 (9.8) 6.1 (4.6)
Other income (expense), net 1.7 2.7 1.6 2.4
----- ----- ----- -----
Income (loss) before income taxes 9.3 (7.1) 7.7 (2.2)
Provision for (benefit from) income taxes 3.4 (2.6) 2.9 (0.8)
----- ----- ----- -----
Net income (loss) 5.9% (4.5)% 4.8% (1.4)%
===== ===== ===== =====
Gross margin on license fee revenue 89.3% 88.8% 86.6% 90.6%
Gross margin on services revenue 36.2% 35.1% 36.1% 35.1%
</TABLE>
TOTAL REVENUE. Total revenue grew by 11% to $231.6 million for the quarter
ended April 30, 1999 from $209.0 million for the quarter ended April 30, 1998.
The revenue mix between license fees and services was 29% and 71%, respectively,
for the second quarter of fiscal 1999 compared to 37% and 63%, respectively, for
the same quarter last year. For the first six months of fiscal 1999, total
revenue grew by 17% to $454.5 million from $387.2 million for the same period in
fiscal 1998. The revenue mix between license fees and services was 30% and 70%,
respectively, for the first six months of fiscal 1999 compared to 37% and 63%,
respectively, for the corresponding period last year. The increase in total
revenue for the second quarter and six-month period ended April 30, 1999
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compared to the corresponding periods last year was primarily from growth in
services revenue, which typically follows the license transactions closed during
prior fiscal quarters. The minimal license fee growth and increase in services
revenue during the first six months of fiscal 1999 also resulted in the
significant change in revenue mix compared to last year. There can be no
assurance that the Company's revenue will not continue to be adversely affected
by increased market focus on Year 2000 compliance, economic conditions, or other
factors.
Geographically, the overall revenue growth was led by sales performance in
Europe, the Middle East and Africa (EMEA), with a 22% increase in total revenue
for the second quarter of fiscal 1999 compared to the same period last year. The
geographic areas defined as the United States, EMEA and the rest of the world
accounted for 63%, 24% and 13% of total revenue, respectively, for the second
quarter of 1999. Comparatively, for the second quarter of 1998, the United
States, EMEA and the rest of the world accounted for 64%, 22% and 14% of total
revenue, respectively. The geographic breakdown of total revenue for the
six-month periods was 62%, 24% and 14% for the United States, EMEA and the rest
of the world, respectively, in fiscal 1999 and 65%, 21% and 14% for the United
States, EMEA and the rest of the world, respectively, in fiscal 1998.
LICENSE FEES. License fee revenue decreased 12% to $67.2 million for the
quarter ended April 30, 1999 from $76.4 million for the quarter ended April 30,
1998. License fee revenue decreased 5% to $136.8 million for the six-month
period ended April 30, 1999 from $144.4 million for the six-month period ended
April 30, 1998. Although the total volume of license transactions increased
during both the quarter and six-month period ended April 30, 1999 compared to
the corresponding periods last year, license revenue decreased primarily as the
result of fewer large transactions and a smaller average transaction size
compared to last year. The average transaction size declined primarily due to a
larger portion of licenses for the Windows NT(R) platform, which typically
involve fewer users than licenses for the UNIX(R) platform. Additionally, the
average transaction size declined for the AS/400(R) platform for both the
quarter and six-month period due to a drop in the average number of users
licensed. The percentage of revenue from new customers was slightly lower during
the second quarter compared to the same quarter last year, but was higher during
the six-month period of fiscal 1999 compared to last year.
As previously discussed in the overview of the Company's results of
operations, the Company is experiencing increasing uncertainty in its business
due to external market and competitive factors, as well as a slower than
anticipated realization of benefits from internal operational changes. During
the first six months of the current fiscal year the Company completed new
initiatives and agreements aimed at future growth opportunities, such as the
Siebel Systems and Ariba, Inc. alliances and new relationships with strategic
partners such as Andersen Consulting and Deloitte Touche Tohmatsu. Management
also invested in its capacity to achieve future license revenue growth by
expanding its direct sales force by 43% as of the end of the second quarter of
fiscal 1999 compared to a year ago. New hires to the sales force are typically
not expected to begin generating incremental license fee revenue for six to nine
months. Additionally, in the first quarter of fiscal year 1999, the Company
realigned the sales force along vertical industries and increased resources in
vertical marketing support and this may have negatively impacted license fee
revenue during the six-month period ended April 30, 1999. There can be no
assurance that the Company's license fee revenue, results of operations and
financial condition will not continue to be adversely affected in future periods
as a result of an increasing focus in the market on Year 2000 readiness, global
economic conditions and intensified competitive pressures or that the Company's
operational investments for the long-term will be successful.
The Company expanded the number of its customers by 13% compared to the end
of the second quarter last year to approximately 5,200 at April 30, 1999, and
customers have increasingly accepted the OneWorld applications available for
Windows NT and UNIX platforms in addition to the AS/400 platform. In the second
quarter of fiscal 1999, 33% of license activity was from customers using the
Windows NT or UNIX platforms compared to 13% in the second quarter of the
previous year. For the six-month period of fiscal 1999, 30% of license activity
was from customers using the Windows NT or UNIX platforms compared to 12% in the
six-month period of the previous 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.
SERVICES. Services revenue grew 24% to $164.4 million for the quarter ended
April 30, 1999 from $132.6 million for the quarter ended April 30, 1998.
Services revenue grew 31% to $317.7 million for the six-month period ended April
30, 1999 from $242.8 million for the six-month period ended April 30, 1998. The
Company continued to experience increased demand for services in both the
quarter and the first six months of fiscal 1999 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 maintenance revenue also
increased during the quarter and six-month period. The increase in consulting
revenue was primarily due to prior periods license fee revenue growth, which
resulted in more demand for implementation services. Support revenue increased
during both the quarter and six-month period compared to last year primarily as
a result of the Company's growing installed base of customers and the consistent
renewal rates for existing customers. Training revenue decreased during the
second quarter of fiscal 1999 compared to the same period last year
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primarily due to the decrease in license fee revenue in the same periods.
However, for the six-month period of fiscal 1999, training revenue increased
compared to the same period last year primarily as a result of prior periods
license fee revenue growth, an increase in prices for training courses effective
in the first quarter of fiscal 1999, and additional personnel resources
available to meet demand for the training courses.
As a percentage of total revenue, services revenue increased during the
second quarter and first six months of fiscal 1999 compared to the same periods
in the prior year. This was due to the timing of services revenue in relation to
license fee growth in prior periods, minimal license fee growth in the first
quarter and a decline in license fee revenue in the second quarter of fiscal
1999. Continued demand for services also resulted from the Company's ongoing
emphasis on providing consulting and training services that complement its
software products. In any quarter, total services revenue is dependent upon
license transactions closed during the current and preceding 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 referred to alliance
partners for consulting and training services, 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. Due to the recent decline in license fee revenue, there can be
no assurance that the Company's services revenue growth, results of operations
and financial condition will not be adversely affected in future periods.
Historically, the Company has been the primary service provider for its
customers, either directly or through subcontracted services from its business
partners. Subcontracted consulting and training services revenue from business
partners increased 36% for the quarter and 46% for the six-month period ended
April 30, 1999 over the same periods in fiscal 1998. Direct services increased
12% for the quarter and 18% for the six-month period ended April 30, 1999 over
the corresponding periods in fiscal 1998. The services revenue generated through
subcontracted work accounted for 49% of the Company's consulting and training
services revenue for both the quarter and the six-month period ended April 30,
1999 compared to 45% for the quarter and 44% for the six-month period ended
April 30, 1998.
In addition to subcontracting out a substantial portion of its services work
to business partners, the Company is continuing to pursue a strategy of relying
on third-party alliance partners to contract directly with the Company's
customers under a referral arrangement for OneWorld implementations and related
services. The Company has established new alliances, such as with Andersen
Consulting and Deloitte Touche Tohmatsu, to achieve this objective and several
existing alliance partners began providing significantly more resources to
complete extensive training programs and to begin implementing OneWorld since
last year. However, migration to this model is taking longer than originally
anticipated. The transition to this referral strategy had a limited impact on
financial results through the second quarter of fiscal 1999 due to direct
service contracts currently in place, the limited number of experienced alliance
partner resources and established relationships with existing customers. While
the number of transactions involving the alliance partners who contracted
directly with the Company's customers increased during the first six months of
fiscal 1999 compared to the same period last year, the number of implementations
referred to alliance partners to date under this arrangement remains relatively
limited. To the extent the Company is successful in establishing this strategy
and generating license fee revenue, consulting revenue as a percentage of total
revenue is likely to gradually decrease as 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 consulting, training
and support. In October 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," which provides guidance on recognizing revenue on software
transactions and supersedes SOP 91-1. Further guidance was published during 1998
in SOP 98-4, "Software Revenue Recognition," and SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions."
Additionally, the AICPA issued technical questions and answers on financial
accounting and reporting issues related to SOP 97-2 in January 1999. The Company
applied the provisions of SOP 97-2 on a prospective basis for new software
transactions entered into from the beginning of the first quarter of fiscal
1999. The adoption of this guidance did not have a material impact on the
Company's financial condition or results of operations and did not have a
significant impact on its current licensing or revenue recognition practices.
However, comprehensive interpretations and commonly accepted business practices
for these statements have not yet been established. There can be no assurance
that additional guidance and commonly accepted business practices pertaining to
the new standards will not result in unexpected modifications to the Company's
current revenue recognition practices which could materially adversely impact
the Company's future license fee revenue, results of operations and net income.
Revenue is currently recognized in accordance with SOP 97-2, "Software
Revenue Recognition." Consulting, implementation and training services are not
essential to the functionality of the Company's software products, are
separately priced and are available from
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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, contingency-free license agreement has been signed, the product
has been delivered, fees from the arrangement are fixed or determinable, and
collection is probable. Revenue on all software license transactions in which
there are undelivered elements other than post-contract customer support is
deferred and recognized once such elements are delivered. 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 consulting, implementation and training 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. Such unearned
revenue includes a portion of the related arrangement 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.
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 incurred
for the cost of license fees decreased 8% to $7.6 million for the quarter ended
April 30, 1999 from $8.2 million for the quarter ended April 30, 1998. For the
six-month period, the total dollar amount for the cost of license fees decreased
33% to $12.8 million from $19.3 million for the same period last year due
primarily due to lower royalty expenses and business partner commissions.
However, royalties are expected to increase in future quarters as a result of
agreements signed in May 1999 with Siebel Systems and Ariba, Inc. for the
Company to resell their products. Amortization of capitalized software
development costs decreased 16% for the second quarter and 20% for the six-month
period of fiscal 1999 compared to the same periods of fiscal 1998 as certain
software development costs were fully amortized during fiscal 1998. The
capitalized OneWorld costs will continue to be amortized through the second
quarter of fiscal 2000. During the second quarter of fiscal 1999, the Company
capitalized $2.4 million of software development costs in connection with its
acquisition of The Premisys Corporation which it began to amortize over a
three-year period. Software development costs will also be capitalized in the
third quarter in connection with the Numetrix acquisition, which will further
increase amortization in future periods. Additionally, business partner costs
may represent a larger percentage of revenue compared to the previous year if
the Company is successful with certain expanded sales channel initiatives and
business alliances that would increase expenses and could reduce margins.
Software delivery expenses also may increase in future periods primarily due to
the opening of a software reproduction and distribution facility located in
Dublin, Ireland. Accordingly, the total cost of license fees is likely to
increase over the remainder of fiscal 1999.
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, and the portion of the Company's
software products that are subject to royalty payments and the amounts
negotiated for such royalties. The gross margin on license fee revenue decreased
to 88.8% for the second quarter of 1999 from 89.3% for the second quarter of
last year primarily as a result of lower license revenue volume in relation to
certain fixed costs. For the six-month period ended April 30, 1999, the gross
margin on license fee revenue increased to 90.6% from 86.6% for the same period
last year, due primarily to the decrease in royalty expense and business partner
commissions. Due to the expected increase in royalties, amortization of
capitalized software development costs and software delivery expenses, as well
as possible increases in other costs, it is likely that the gross margin on
license fee revenue will decline over the remainder of fiscal 1999.
COST OF SERVICES. Cost of services includes the personnel and related
overhead costs for services, including consulting, training and support, as well
as fees paid to third parties for subcontracted services. Cost of services
increased 26% to $106.7 million for the quarter ended April 30, 1999 from $84.6
million for the quarter ended April 30, 1998. For the six-month period ended
April 30, 1999, cost of services increased 33% to $206.1 million from $155.1
million for the same period last year. The increase was primarily due to
increased personnel expenses and subcontracted business partner service costs to
support the growth in demand for implementation and consulting services as well
as an increase in customer support staff. During the first six months of fiscal
year 1999, a larger percentage of consulting and training services revenue was
generated through subcontracted work, which increased the related costs compared
to the same period last year. As a result, the gross margin on services revenue
decreased to 35.1% for both the second quarter and first six-months of fiscal
1999 compared to 36.2% for the second quarter and 36.1% for the first six months
of 1998.
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 services revenue. In particular, the extent to which
the Company is successful in establishing its strategy of relying on alliance
partners to contract directly with the Company's customers for OneWorld
implementations and related services will affect gross margin on services
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.
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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 $83.5 million for the quarter ended April 30, 1999 from
$61.4 million for the quarter ended April 30, 1998, representing 35.9% and 29.4%
of total revenue, respectively. Sales and marketing expense increased to $152.9
million for the six-month period ended April 30, 1999 from $111.9 million for
the corresponding period last year, representing 33.6% and 28.9% of total
revenue, respectively. The increase in expense for both the quarter and
six-month period was primarily the result of additional personnel and increased
advertising and promotion costs for the Company's expanded marketing activities,
offset in part by reduced commission expense. The total number of sales and
marketing personnel increased 52% as of April 30, 1999 compared to a year ago,
but grew only minimally since the end of the first quarter of fiscal 1999. The
Company continued to add personnel in direct sales and supporting positions
during the first quarter of fiscal 1999 in order to meet the Company's future
sales goals, to support the new vertical industry sales force alignment and to
address the Windows NT and UNIX market growth opportunities from the OneWorld
version of its application suites.
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 $25.5
million for the quarter ended April 30, 1999 from $18.2 million for the quarter
ended April 30, 1998, representing 11.0% and 8.7% of total revenue,
respectively. General and administrative expense increased to $49.9 million for
the six-month period ended April 30, 1999 from $36.7 million for the six-month
period ended April 30, 1998, representing 11.0% and 9.4% of total revenue,
respectively. The total dollar amount of expense increased primarily due to an
increase in personnel to facilitate expansion of the Company's operations.
General and administrative expenses as a percentage of total revenue increased
primarily due to the lower than expected license fee revenue during the first
half of fiscal 1999.
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 $31.2 million for the quarter ended April 30, 1999 from $20.6
million for the quarter ended April 30, 1998, representing 13.5% and 9.9% of
total revenue, respectively. Research and development expense increased to $53.9
million for the six-month period ended April 30, 1999 from $40.6 million for the
six-month period ended April 30, 1998, representing 11.9% and 10.5% of total
revenue, respectively. The increase was primarily due to a 29% increase in the
number of personnel compared to the end of the second quarter last year.
Additionally, in connection with the purchase of The Premisys Corporation, the
Company incurred a one-time charge of $2.1 million during the second quarter of
fiscal 1999 for the portion of the purchase price allocated to in-process
research and development. Technology acquired in the Company's purchase of The
Premisys Corporation is being integrated with OneWorld, furthering enhancements
to the Company's SCOREx (Supply Chain Optimization and Real-Time Extended
Execution) solution. During the third quarter of fiscal 1999, an additional
one-time charge for the portion of the Numetrix purchase price allocated to
in-process research and development is anticipated in the range of $20 million
to $25 million. Technology acquired in the Company's purchase of Numetrix will
continue to be developed or enhanced as stand-alone products and will be
integrated with OneWorld.
Development resources were primarily devoted to enhancements of both the
Company's World and OneWorld application suites during the first six months of
both fiscal 1998 and 1999. The Company ceased capitalizing OneWorld development
costs during fiscal 1997 and as a result, there were no software development
costs capitalized during fiscal 1998. During the second quarter of fiscal 1999,
software costs totaling $2.4 million were capitalized in connection with the
purchase of The Premisys Corporation, along with internal development costs for
major software enhancements totaling $215,000. Software development costs will
also be capitalized in the third quarter in connection with the Numetrix
acquisition. The Company anticipates that future research and development
expenses will increase in subsequent periods due in part to the addition of the
Numetrix organization during the third quarter of fiscal 1999. Additionally, the
Company is continuing its ongoing product enhancements in e-business and other
areas and its integration of modules such as sales force automation and advanced
planning and scheduling, utilizing The Premisys Corporation and Numetrix
development teams and third-party development alliances such as Siebel Systems
and Ariba, Inc.
OTHER INCOME (EXPENSE). Other income (expense) includes interest income
earned on cash, cash equivalents and investments, interest expense, foreign
currency gains and losses, and other non-operating income and expenses. Interest
income increased to $5.6 million for the quarter and $11.0 million for the
six-month period ended April 30, 1999 from $3.7 million for the quarter and $7.4
million for the six-month period ended April 30, 1998. The increase was
primarily due to interest earned on the higher average balances in the Company's
short-and long-term investment accounts year over year. Other income also
increased due to proceeds from a legal judgement received during the second
quarter of fiscal 1999. Offset by effective hedging activities during the
current year, foreign currency losses were $373,000 and $375,000, respectively,
during the quarter and six-month period ended April 30, 1999 compared to a net
loss of $79,000 and $826,000, respectively, for the quarter and six-month period
ended April 30, 1998. The losses were primarily due to the strengthening of the
U.S. dollar against many other currencies during the first half of both fiscal
years.
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During late fiscal 1998, the Company broadened its foreign exchange hedging
activities to help offset the effects of exchange rate changes on cash exposures
from receivables and payables denominated in foreign currencies. Such hedging
activities cannot completely protect the Company from the risk of foreign
currency losses due to 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.
The Company uses hedging instruments to mitigate foreign currency exchange
risk of assets and liabilities denominated in foreign currency. The hedging
instruments used are forward foreign exchange contracts with maturities of
generally six months or less in term. All contracts are entered into with major
financial institutions. Gains and losses on these contracts are recognized as
non-operating income or expense in the period in which the gain or loss is
recognized from the settlement or translation of the underlying assets and
liabilities. All gains and losses related to foreign exchange contracts are
included in cash flows from operating activities in the consolidated statements
of cash flows.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1999, the Company's principal sources of liquidity consisted
of $114.4 million of cash and cash equivalents, $402.6 million of short-term and
long-term investments and an unsecured, revolving line of credit. No amounts
were outstanding under the line of credit during the six-month periods ended
April 30, 1999 or 1998. The Company had working capital of $139.4 million at
April 30, 1999 and a current ratio of 1.4 to one. Included in determining such
amounts are short-term unearned revenue and customer deposits of $142.3 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 $281.7 million.
The Company's accounts receivable days sales outstanding ("DSO") was 99 at
April 30, 1999 compared to 97 at April 30, 1998. The Company's DSO can fluctuate
depending upon a number of factors. In addition to aging and payment terms, the
concentration of transactions that occur toward the end of each quarter and the
variability of quarterly operating results will impact DSO. See "Factors
Affecting The Company's Business, Operating Results and Financial Condition --
Quarterly Financial Results are Subject to Significant Fluctuation."
The Company used $4.4 million in cash for operating activities during the
six-month period ended April 30, 1999 compared to generating $53.7 million in
cash during the six-month period ended April 30, 1998. The decrease in operating
cash flow was due to the net loss for the fiscal 1999 period and a decrease in
accrued liabilities, somewhat offset by a decline in accounts receivable. Tax
deductions associated with stock option exercises during the first six months of
fiscal 1999 increased the deferred income tax asset and additional paid-in
capital on the balance sheet as of April 30, 1999.
The Company used $83.5 million in cash for investing activities for the
six-month period ended April 30, 1999 compared to $105.4 million for the
six-month period ended April 30, 1998. In both fiscal year periods, the primary
investing activity was the purchase of short- and long-term debt and equity
securities. The decrease from the prior year 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 years, the Company purchased furniture, fixtures and equipment necessary
to support its expanding operations. During the second quarter of fiscal 1999,
the Company purchased The Premisys Corporation for a net cash payment of $4.3
million and shares of J.D. Edwards' common stock valued at $3.2 million.
Financing activities provided $20.1 million in cash during the first six
months of fiscal 1999 compared to $28.1 million for the same period last year
from exercises of common stock options and the Employee Stock Purchase Plan. The
Company issued a total of 2.9 million shares of common stock through employee
stock plans during the first six months of fiscal 1999. The Company did not have
other significant net financing activities for the first six months of fiscal
1999 or during the same period last year.
The Company expects to complete an acquisition of Numetrix in June 1999 and
will pay approximately $80 million in cash for all of the outstanding common and
preferred shares of Numetrix stock. In addition, the Company expects to pay
liabilities assumed and expenses incurred in connection with the transaction
that will increase the total purchase price to be allocated to the fair value of
assets and liabilities acquired at closing. The acquisition will be accounted
for as a purchase in the Company's third fiscal quarter.
The Company leases three corporate headquarters office buildings and has
entered into agreements to lease one additional building currently being
constructed on land owned by the Company once construction is completed. The
lessor, a wholly-owned subsidiary of
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a bank, and a syndication of banks are collectively financing up to $127.6
million in purchase and construction costs through a combination of equity and
debt. The Company guarantees the 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. Management has elected to reduce the
interest rate used to calculate lease expense by collateralizing up to 97% of
the financing arrangements with investments consistent with the Company's
investment policy. The Company may withdraw the funds used as collateral at its
sole discretion, provided it is not in default under the lease agreement. At
April 30, 1999, investments totaling $101.1 million were designated as
collateral for these leases.
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-term
and long-term investments to acquire businesses, products or technologies that
are complementary to those of the Company or to acquire treasury stock. 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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is a result of computer systems and other electronic
equipment using software processors or embedded chips which use only two digit
entries in the date code field and may not be able to distinguish whether "00"
means 1900 or 2000. The potential for system errors and failures involves
substantially all aspects of the Company's internal operations, including
computer systems, voice and data networks and the infrastructure of its
facilities.
To address the company-wide internal Year 2000 readiness activities, the
Company established a corporate readiness program during fiscal 1998 to
coordinate efforts already underway in the information technology ("IT") and
software development departments and to expand the program to include all
business functions and geographic areas. The program is addressing internal
operational and financial risks as well as those associated with business
partners and other third parties. Status reports on this program are
periodically presented to the Company's senior management and to the audit
committee of the board of directors.
STATE OF READINESS. The Company's business operations are significantly
dependent upon the proprietary software products it licenses to customers.
Management believes it has already successfully addressed the Year 2000 issues
in the current versions of its proprietary software products and does not
anticipate any business interruptions associated with these applications. The
Company has been encouraging its customers to migrate to current product
versions that are Year 2000 ready.
Certain custom software applications used internally are not yet Year 2000
ready, and the Company plans to finish the programming of needed revisions,
testing and implementation by its fourth quarter of fiscal 1999. An internal
upgrade to product versions of third-party software that are Year 2000 ready is
also expected to be completed by its fourth quarter of fiscal 1999.
Additionally, the Company is working with all service providers to protect its
operations from the potential effects of a third party failing to become Year
2000 ready.
The following six-step process is being followed to assess the Company's
internal state of readiness and to direct preparations for the Year 2000:
1) Awareness -- Make all levels of the organization aware of Year 2000
issues.
2) Inventory -- Obtain detailed lists of specific issues from
representatives in every area of the Company's operations.
3) Assessment -- Complete a detailed inventory review to determine and
prioritize areas of exposure; identify mission critical processes and
systems; initiate certification of Year 2000 compliance for
vendors/suppliers/landlords; establish contingency plans.
4) Resolution -- Decide which systems to replace, retrofit or retire;
initiate conversion to systems that are Year 2000 ready.
5) Testing -- Obtain assurance that conversions were completed properly
and that the systems and processes will function correctly; finalize
contingency plans.
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6) Deployment -- Implement new or modified systems and processes back
into normal production; implement contingency plans where appropriate.
Overall, the Company estimates it has completed 78% of its readiness process
to date, excluding any issues related to the current versions of its proprietary
software products which management believes to be generally Year 2000 compliant.
The Company has completed 100% of the awareness, inventory, assessment, and
resolution phases, 77% of the testing phase and 37% of the deployment phase in
its readiness of IT systems. In relation to its state of readiness for non-IT
areas and issues related to third parties with which the Company has a material
relationship, the Company has completed substantially all of the first four
phases, 59% of the testing phase and 30% of the deployment phase. Management
expects to be substantially Year 2000 ready company-wide no later than December
1999.
COSTS. The Company estimates the direct costs to remediate Year 2000 issues
will total $2.7 million and does not anticipate such costs will have a material
impact on its results of operations. Such costs include the budget for the
Company's corporate readiness programs, IT and non-IT costs, including legal
expenses, and expenses associated with a field readiness task force and
equipment purchases. Such costs do not include an estimate for labor, overhead
or other resources that are associated with the impact of Year 2000 compliance
but not directly involved in the project and also not expected to have a
material impact on results of operations. To date, the direct costs incurred to
remediate Year 2000 issues were less than $1.0 million.
RISKS. Failure to correct mission critical Year 2000 problems could cause a
serious interruption in business operations and could have a material impact on
the Company's results of operations, liquidity and financial condition. The
actions currently being taken are expected to significantly reduce the risks of
an adverse impact. However, due to the scope of the Company's operations and the
extent of Year 2000 risks, it is likely that the Company will not be able to
eliminate all potential problems before they arise.
Significant uncertainty exists in the ERP software industry concerning the
potential effects associated with Year 2000 readiness. Management believes that
customers and potential customers purchasing patterns may be affected in a
number of ways, and the current slowing in license fee growth may be primarily
due to such changes. Many companies have already expended significant resources
to upgrade their systems. These expenditures may result in reduced funds
available to purchase software products such as those the Company offers.
Additionally, it is possible that certain of our customers are purchasing
support contracts only to ensure that they are Year 2000 ready and then will
cancel such contracts. Many potential customers may defer purchasing Year 2000
ready products as long as possible, accelerate purchasing such products, switch
to other systems or suppliers, or purchase the Company's products only as an
interim solution. 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.
The Company mailed information regarding the Year 2000 issue along with a
questionnaire to its customers in March 1998 to assist them in preparations for
the century change as well as to help the Company assess its customer service
demands. Based upon the number of responses received and the number of customers
that originally licensed recent product versions, the Company estimated that a
significant majority of its customer base is currently operating with a version
of its software applications that is Year 2000 ready. However, the Company could
be faced with an inability to meet the demand for services to upgrade its
existing installed base of customers or to meet increased demand from potential
customers who still need to address their Year 2000 issues.
Factors outside the Company's control could cause significant disruptions of
business activities and affect the Company's ability to be ready for the Year
2000 such as the failure of its third-party business partners, suppliers,
government entities, customers, and others to adequately prepare. 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 and a material adverse impact to the Company's results of operations,
liquidity and financial condition could result if any third parties fail to
adequately address the problem or if software conversions result in system
incompatibilities with these third parties.
CONTINGENCY PLANS. As part of the six-step process previously outlined,
specific contingency plans were developed in connection with the assessment and
resolution to the mission critical risks identified. Such planning is
complicated by the risk of multiple Year 2000 problems and the fact that many of
the Company's risks reside with third parties who may not successfully address
their own risks. However, the Company has currently established certain
contingency plans for both IT and non-IT systems, and it is continuing to
develop such plans regarding all its specific mission critical functions. Such
plans include backup power for the Company's facilities, explicit manual
"workaround" procedures and the identification of key contacts worldwide who
will be responsible for addressing specific issues and implementing such plans.
17
<PAGE> 18
EURO
In January 1999, a new currency called the ECU or the "euro" was introduced
in certain Economic and Monetary Union ("EMU") countries. During 2002, all
participating EMU countries are expected to be operating with the euro as their
single currency. During the next three years, business in participating EMU
member states will be conducted in both the existing national currency and the
euro. As a result, companies operating in or conducting business in these EMU
member states will need to ensure that their financial and other software
systems are capable of processing transactions and properly handling these
currencies, including the euro. Although the Company currently offers software
products that are designed to be euro currency enabled and management believes
it will be able to accommodate any required euro currency changes, there can be
no assurance that the software will contain all the necessary changes or meet
all of the euro currency requirements. If the Company's software does not meet
all the euro currency requirements of its business, its operating results and
financial condition would be materially adversely affected. The Company has not
had and does not expect a material impact on its results of operations from
foreign currency gains or losses as a result of its transition to the euro as
the functional currency for its subsidiaries based in EMU countries.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company will be required to apply recently issued accounting standards
in its future consolidated financial statements. SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports. SFAS No. 132, "Employers' Disclosures about Pensions and
Other Post-Retirement Benefits," revises employers' disclosures about pension
and other postretirement benefit plans, but does not change the measurement or
recognition of those plans. SFAS No. 133, "Accounting for Derivative Instruments
and for Hedging Activities," will require companies to value derivative
financial instruments, including those used for hedging foreign currency
exposures, at current market value with the impact of any change in market value
being charged against earnings in each period. SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions,"
provides additional guidance regarding software revenue recognition. The Company
has determined that the adoption of these recently issued standards will not
have a material impact on its financial condition or results of operations. SFAS
Nos. 131 and 132 are effective for disclosures to be included in the Company's
financial statements for the fiscal year ending October 31, 1999. SOP 98-9 and
SFAS No. 133 will be effective for the Company's first quarter of fiscal 2000
although the effective date for SFAS No. 133 may be extended.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of its operations, the Company is exposed to certain
market risks, primarily changes in foreign currency exchange rates and interest
rates. Uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax, other regulatory or credit risks are not included in
the following assessment of the Company's market risks.
FOREIGN CURRENCY EXCHANGE RATES. Operations outside of the U.S. expose the
Company to foreign currency exchange rate changes and could impact translations
of foreign denominated assets and liabilities into U.S. dollars and future
earnings and cash flows from transactions denominated in different currencies.
During the first six months of fiscal 1999, 38% of the Company's total revenue
was generated from its international operations, and the net assets of the
Company's foreign subsidiaries totaled 20% of consolidated net assets as of
April 30, 1999. The Company's exposure to currency exchange rate changes is
diversified due to the number of different countries in which it conducts
business. The Company operates outside the U.S. primarily through wholly-owned
subsidiaries in Europe, Africa, Asia, Canada and Latin America. These foreign
subsidiaries use the local currency or, more recently in Europe, the euro as
their functional currency as sales are generated and expenses are incurred in
such currencies.
The Company enters into forward foreign exchange contracts to hedge the
effects of exchange rate changes on cash exposures from receivables and payables
denominated in foreign currencies. Such hedging activities cannot completely
protect the Company from the risk of foreign currency losses due to the number
of currencies in which it 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. At April 30, 1999, the Company had approximately
$65.3 million of gross U.S. dollar equivalent forward foreign exchange contracts
outstanding as hedges of monetary assets and liabilities denominated in foreign
currency.
18
<PAGE> 19
The Company prepared sensitivity analyses of its exposures from forward
foreign exchange contracts as of April 30, 1999 to assess the impact of
hypothetical changes in foreign currency rates. The Company's analysis assumed a
10% adverse change in foreign currency rates in relation to the U.S. dollar. At
April 30, 1999, there was not a material change in the sources or the estimated
effects of foreign currency rate exposures from the Company's quantitative and
qualitative disclosures presented in Form 10-K for the year ended October 31,
1998. A 10% adverse change in foreign currency rates from the April 30, 1999
rates could result in approximately a $4 million effect. Due to the Company's
slowing revenue growth and management's revised expectations for fiscal 1999
operating results, such an adverse change could result in a material impact to
the Company's results of operations, cash flows and financial condition for a
future quarter and the full fiscal year ending October 31, 1999.
INTEREST RATES. Investments, including cash equivalents, consist of U.S.,
state and municipal bonds, as well as domestic corporate bonds, with maturities
of up to thirty months. All investments are classified as held-to-maturity as
defined in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and accordingly are carried at amortized cost. Additionally, the
Company has lease obligations calculated as a return on the lessor's costs of
funding based on LIBOR and adjusted from time to time to reflect any changes in
the Company's leverage ratio. Changes in interest rates could impact the
Company's anticipated interest income and lease obligations or could impact the
fair market value of its investments.
The Company prepared sensitivity analyses of its interest rate exposures and
its exposure from anticipated investment and borrowing levels for fiscal 1999 to
assess the impact of hypothetical changes in interest rates. At April 30, 1999,
there was not a material change in the sources or the estimated effects of
interest rate exposures from the Company's quantitative and qualitative
disclosures presented in Form 10-K for the year ended October 31, 1998.
Additionally, based upon the results of these analyses, a 10% adverse change in
interest rates from the April 30, 1999 rates would not have a material adverse
effect on the fair value of investments and would not materially impact the
Company's results of operations, cash flows or financial condition for the
fiscal year ending October 31, 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.
QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. Our
revenues and operating results have varied widely in the past and we expect that
they will continue to vary significantly from quarter to quarter due to a number
of factors, including the following:
o demand for our software products and services
o the size and timing of our license transactions
o the level of product and price competition that we encounter
o the length of our sales cycle
o the timing of our new product introductions and enhancements and those of
our competitors
o market acceptance of our products
o changes in our pricing policies and those of our competitors
o announcements of new hardware platforms that may delay customer's
purchases
o variations in the length of our product implementation process
o the mix of product and services revenue
o the mix of distribution channels through which we license our software
19
<PAGE> 20
o the mix of international and domestic revenue
o changes in our sales incentives
o changes in the renewal rate of our support agreements
o the life cycles of our products
o software defects and other product quality problems
o the expansion of our international operations
o the general economic and political conditions
o the budgeting cycles of our customers
Our software products are typically shipped when we receive orders.
Consequently, license backlog in any quarter generally represents only a small
portion of that quarter's revenue. As a result, license fee revenue is difficult
to forecast due to its dependence on orders received and shipped in that
quarter. We also recognize a substantial amount of our revenue in the last month
of each quarter and increasingly in the last week of the quarter. Because many
of our operating expenses are relatively fixed, a shortfall in anticipated
revenue or delay in recognizing revenue could cause our operating results to
vary significantly from quarter to quarter and could result in future operating
losses. The timing of large individual transactions is also difficult for us to
predict. In some cases, transactions have occurred in quarters subsequent to
those anticipated by us. To the extent one or more such transactions are lost or
occur later than we expected, operating results could be materially adversely
affected. If our revenues fall below our expectations in any particular quarter,
our business, operating results and financial condition could be materially
adversely affected.
We continue to experience significant seasonality with respect to software
license revenues. We recognize a disproportionately greater amount of revenue
for any fiscal year in our fourth quarter and an even greater proportion of net
income in the fourth quarter. As a result of this and our relatively fixed
operating expenses, our operating margins tend to be significantly higher in the
fourth fiscal quarter than other quarters. We believe this seasonality is
primarily the result of the efforts of our direct sales force to meet or exceed
fiscal year-end quotas and the tendency of certain of our customers to finalize
license contracts at or near our fiscal year end. Because revenue, operating
margins and net income are greater in the fourth quarter, any shortfall in
revenue, particularly license fee revenue, in the fourth quarter, would have a
disproportionately large adverse effect on our operating results for the fiscal
year. Additionally, our revenue and net income in the first quarter is
historically lower than in the preceding fourth quarter. Our first fiscal
quarter revenue also slows during the holiday season in November and December.
However, there can be no assurance that the fourth quarter of fiscal 1999 will
have the same degree of seasonality in revenue and net income as in prior years
given the increased market focus on the Year 2000 and the adverse market
conditions.
As a result of the unpredictability of our revenue cycle, increasing
uncertainty in the ERP market attributed to many factors including issues
surrounding the Year 2000, global economic conditions, and strong competitive
forces we continue to have reduced visibility of future revenue and operating
results.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance. It
is likely that in some future quarter, our operating results may again be below
expectations of public market analysts or investors. In this event, the price of
our common stock may fall.
LIMITED DEPLOYMENT OF ONEWORLD AND ENTRANCE INTO NEW MARKETS. We first
shipped the OneWorld version of our application suites in late calendar 1996,
and as of April 30, 1999, over 300 of our customers had implemented OneWorld.
Our revenue growth depends on our ability to market OneWorld and to license it
to new customers. We do not anticipate generating much OneWorld license revenue
from our current WorldSoftware users. We have also found that it takes longer to
implement OneWorld than WorldSoftware. We believe that certain new customers may
not license OneWorld or may find it difficult to implement OneWorld because:
o customers may lack the necessary hardware, software or networking
infrastructure
o implementation may be too lengthy and/or costly for some customers
20
<PAGE> 21
o OneWorld may not be perceived as competitive with other products on the
market
o defects or "bugs" may exist in OneWorld
With the introduction of OneWorld, we also entered new markets -- the NT and
UNIX markets. In order to be competitive in these markets, we must continue to
overcome obstacles such as competitors with significantly more experience and
name recognition, continue to establish relationships with third-party
implementation providers, and continue to add referenceable accounts in the open
systems market.
If we are unable to successfully license or implement OneWorld, our
reputation would be damaged and we would suffer material adverse effects to our
business, operating results and financial condition. Additionally, failure to
achieve success in marketing OneWorld could result in a drop in our stock price.
COMPANY DEPENDENCE ON IBM AS/400 PLATFORM. We continue to be dependent upon
the market for software products on the IBM AS/400 platform. All of our revenue
in fiscal 1996, most of the revenue for fiscal 1997 and a substantial portion
for 1998 was derived from the licensing of our software product and related
services for the AS/400 market. However, during the first two quarters of fiscal
1999, our percentage of revenue from the AS/400 continued to decline as our
percentage of revenue from the non-AS/400 market continued to increase. We will
continue to offer enhanced software products for the AS/400 market, but there is
no guarantee that our customers will buy or support these enhanced software
products.
The AS/400 market is expected to grow at a minimal rate and there can be no
assurance that it will grow at all in the future. Our future growth depends, in
part, on our ability to gain market share. There can be no assurance that we can
maintain or increase our relative share of the AS/400 market. As we continue to
focus more on our OneWorld software version, it may become more difficult to
gain market share in the AS/400 market. We introduced OneWorld, our software
version that runs on leading NT and UNIX servers as well as on the AS/400, in
late calendar 1996. If we lose AS/400 installed base customers or market share
in the AS/400 market, we may suffer material adverse affects to our business,
operating results or financial condition.
COMPETITION. We compete in the ERP software solutions market. This market is
highly competitive, subject to rapid technological change and significantly
affected by new products. Our products are designed and marketed for the AS/400
and NT and UNIX platforms. We compete with a large number of independent
software vendors including:
o companies offering other products that run on Windows NT- or UNIX-based
systems, such as SAP Aktiengesellschaft (SAP), Baan Company N.V. (Baan),
PeopleSoft, Inc. (PeopleSoft) and Oracle Corporation (Oracle)
o companies offering other products on the AS/400 platform, such as System
Software Associates, Inc., Marcam Corporation, Infinium Software, Inc. and
JBA Holdings plc
o companies offering either standard or fully customized products that run
on mainframe computer systems, such as SAP, which we do not offer
In addition, we compete with suppliers of custom developed business
applications software, such as systems consulting groups of major accounting
firms and IT departments of potential customers. There can be no assurances that
we will be able to successfully compete with new or existing competitors or that
such competition will not materially adversely effect our business, operating
results or financial condition.
Some of our competitors, SAP and Oracle in particular, have significantly
greater financial, technical, marketing and other resources than we do. In
addition, they have wider name recognition and a larger installed customer base.
In contrast, we entered the NT and UNIX markets only two years ago. SAP, Baan,
PeopleSoft and Oracle have significantly more experience and name recognition
with NT and UNIX implementations and platforms and have more referenceable
accounts. Such competitors also have substantially more customers than we have
in the NT and UNIX markets. Additionally, several of our competitors have
well-established relationships with our current or potential customers. These
relationships may prevent us from competing effectively in divisions or
subsidiaries of such customers. Many of our competitors have also announced
their intention to offer vertical applications to mid-sized organizations, which
is the market that comprises a substantial portion of our revenue. There can be
no assurances that we can successfully compete against any of these competitors.
Further, several of our competitors regularly and significantly discount prices
on their products. If our competitors continue to discount or increase the
frequency of their discounts, we may be required to
21
<PAGE> 22
similarly discount our products. This could have a material adverse effect on
our operating margins. In addition, we believe that we encountered increased
competition during the first quarter because our main competitors were
completing their fiscal years. This resulted in increased competitive pricing
pressures.
We continue to rely on a number of firms that provide systems consulting,
systems integration, services implementation and customer support services and
that recommend our products during the evaluation stage by potential customers.
A number of our competitors have more well-established relationships with such
firms, and as a result, such firms may be more likely to recommend our
competitors' products over our products. It is also possible that these third
parties will market software products that compete with our products in the
future. If we are unable to maintain or increase our relationships with these
third parties that recommend, implement or support our software, our business,
operating results and financial condition may be materially adversely affected.
We believe that the following are the principal competitive factors
affecting the market for our software products:
o responsiveness to customers' needs
o product flexibility and ability to handle business changes
o product functionality
o speed of implementation
o ease of use
o product performance and features
o product quality and reliability
o vendor and product reputation
o quality of customer support
o overall cost
We believe that we compete favorably with respect to the above factors. In
order to be successful in the future, we must continue to respond promptly and
effectively to the challenges of technological change and our competitors'
innovations. We cannot guarantee that our products will continue to compete
favorably or that we will be successful in facing the increasing competition
from new products and enhancements introduced by our existing competitors or new
companies entering the market.
INTERNATIONAL OPERATIONS AND CURRENCY FLUCTUATIONS. We market and sell our
products in the United States and internationally. Our international revenue
continues to represent a significant portion of our total revenue. We currently
maintain 37 international sales offices located throughout Canada, Europe, Asia,
Latin America and Africa. We intend to continue to substantially expand our
international operations and enter new international markets. This expansion
will require significant management attention and financial resources.
Traditionally, our international operations are characterized by higher
operating expenses and lower operating margins. As a result, if our
international revenue increases as a percentage of total revenue, our operating
margins may be adversely affected. Additionally, costs associated with
international expansion include the establishment of additional offices, hiring
of additional personnel, localization and marketing of our products in foreign
markets, and the development of relationships with international service
providers. If international revenue is not adequate to offset the expense of
expanding foreign operations, our business, operating results and financial
condition could be materially adversely affected. Our international operations
are also subject to other inherent risks, including:
o imposition of governmental controls
o export license requirements
o restrictions on the export of certain technology
22
<PAGE> 23
o cultural and language difficulties
o the impact of a recessionary environment in economies outside the United
States
o reduced protection for intellectual property rights in some countries
o the potential exchange and repatriation of foreign earnings
o political instability
o trade restrictions and tariff changes
o localization and translation of products
o difficulties in staffing and managing international operations
o difficulties in collecting accounts receivable and longer collection
periods
o the impact of local economic conditions and practices
Our success in expanding our international operations depends, in part, on
our ability to anticipate and effectively manage these and other risks. We
cannot guarantee that these or other factors will not materially adversely
affect our business, operating results or financial condition.
We have assessed and continue to closely monitor our international business
risks due to the deterioration of global economic conditions in the Asian
markets, particularly in Japan, and in certain other geographic regions.
Consistent with our historical results, we expect to continue to recognize a
small percentage of our revenue and operating income from Asian and other
specific geographic areas that are currently being impacted by adverse economic
conditions. With our worldwide performance being impacted by certain adverse
economic conditions and the increased market focus on Year 2000 compliance, our
international investments may not be mitigated by the broad geographic diversity
of our operations. As a result, our investment in certain international areas
could have a material adverse effect on our financial condition and results of
operations if such conditions continue or worsen.
A significant portion of our revenue is received in currencies other than
United States dollars and as a result we are subject to risks associated with
foreign exchange rate fluctuations. We have recently broadened our foreign
exchange hedging activities to limit our exposure risk. In the second fiscal
quarter of 1998 and 1999, we incurred foreign exchange losses of approximately
$79,000 and $373,000, respectively. Due to the substantial volatility of foreign
exchange rates, there can be no assurance that our hedging activities will
effectively limit our exposure or that such fluctuations will not a have a
material adverse effect on our business, operating results or financial
condition.
ECONOMIC AND MARKET CONDITION RISKS. Various segments of the software
industry have experienced significant economic downturns characterized by
decreased product demand, price erosion, work slowdown and layoffs. In addition,
there is increasing uncertainty in the ERP market attributed to many factors
including issues surrounding the Year 2000, global economic conditions and
strong competitive forces. Our future license fee revenue and results of
operations may experience substantial fluctuations from period to period as a
consequence of these factors and such conditions may affect the timing of orders
from major customers and other factors affecting capital spending. Although we
have a diverse client base, we have targeted a number of vertical markets. As a
result, any economic downturns in general or in our targeted vertical markets
would have a material adverse effect on our business, operating results or
financial condition.
OTHER RISKS. 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, 1998.
23
<PAGE> 24
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
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on March 24, 1999 (the
"Annual Meeting"). At the Annual Meeting, stockholders voted on two matters: (1)
the election of Class II directors for a term of three years expiring in 2002;
and (2) the ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants. The stockholders elected management's
nominees as Class II directors in an uncontested election and ratified the
appointment of the independent accountants by the following votes, respectively:
(1) Election of Class II directors for a term expiring in 2002:
<TABLE>
<CAPTION>
Votes Broker
Votes For Withheld Non-Votes
---------- -------- ---------
<S> <C> <C> <C>
Richard E. Allen 90,185,307 211,520 0
Harry T. Lewis, Jr. 90,156,297 240,530 0
Robert C. Newman 90,195,156 201,671 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 III directors (Michael J. Maples, C. Edward McVaney and Trygve E.
Myhren) will expire at the meeting of stockholders to be held in 2000, and the
term for Class I directors (Gerald Harrison, Delwin D. Hock and Douglas S.
Massingill) will expire at the annual meeting of stockholders to be held in
2001.
(2) Ratification of the Appointment of PricewaterhouseCoopers LLP as independent
accountants:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
<S> <C> <C> <C>
90,095,518 160,552 140,757 0
</TABLE>
ITEM 5. OTHER INFORMATION
None.
24
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
25
<PAGE> 26
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 14, 1999
By: /s/ PAMELA L. SAXTON
------------------------------------------
Name: Pamela L. Saxton
Title: Vice President of Finance, Controller
and Chief Accounting Officer
(principal accounting officer)
Dated: June 14, 1999
26
<PAGE> 27
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT APRIL 30, 1999 AND STATEMENT OF INCOME FOR THE SIX MONTHS ENDED APRIL
30, 1999 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> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<CASH> 114,394
<SECURITIES> 55,490
<RECEIVABLES> 264,467
<ALLOWANCES> 10,700
<INVENTORY> 0
<CURRENT-ASSETS> 464,252
<PP&E> 150,466
<DEPRECIATION> 74,473
<TOTAL-ASSETS> 960,763
<CURRENT-LIABILITIES> 324,895
<BONDS> 0
0
0
<COMMON> 106
<OTHER-SE> 611,583
<TOTAL-LIABILITY-AND-EQUITY> 960,763
<SALES> 136,803
<TOTAL-REVENUES> 454,528
<CGS> 12,847
<TOTAL-COSTS> 218,972
<OTHER-EXPENSES> 256,645
<LOSS-PROVISION> 1,496
<INTEREST-EXPENSE> 620
<INCOME-PRETAX> (9,733)
<INCOME-TAX> (3,601)
<INCOME-CONTINUING> (6,132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,132)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
