EDWARDS J D & CO, 10-Q, 1999-03-12

EDWARDS J D & CO
10-Q, 1999-03-12
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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 JANUARY 31, 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 March 8, 1999, there were 105,440,879 shares of the Registrant's
Common Stock outstanding.

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J.D. EDWARDS & COMPANY

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Consolidated Balance Sheets as of October 31, 1998 and
January 31, 1999............................................ 3
Consolidated Statements of Income for the Three Months Ended
January 31, 1998 and 1999................................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended January 31, 1998 and 1999............................. 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
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............................ 24
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.
2
<PAGE> 3

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

J.D. EDWARDS & COMPANY

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $183,115 $178,750
Short-term investments.................................... 28,667 37,224
Accounts receivable, net of allowance for doubtful
accounts of $12,900 at October 31, 1998 and $11,400 at
January 31, 1999, respectively......................... 265,704 275,208
Prepaid and other current assets.......................... 32,823 35,491
-------- --------
Total current assets.............................. 510,309 526,673
Long-term investments....................................... 322,527 321,815
Property and equipment, net................................. 60,689 64,420
Software development costs, net............................. 5,821 4,558
Non-current portion of deferred income taxes................ 43,658 48,080
Deposits and other assets................................... 7,469 5,721
-------- --------
$950,473 $971,267
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.......................................... $ 60,366 $ 43,167
Unearned revenue and customer deposits.................... 121,092 161,178
Accrued liabilities....................................... 157,473 140,581
-------- --------
Total current liabilities......................... 338,931 344,926
Unearned revenue, net of current portion, and other......... 27,546 21,541
-------- --------
Total liabilities................................. 366,477 366,467
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 103,957,614 issued and
outstanding as of October 31, 1998 and January 31,
1999, respectively..................................... 103 104
Additional paid-in capital................................ 406,886 424,044
Deferred compensation..................................... (677) (647)
Retained earnings......................................... 177,324 181,592
Accumulated other comprehensive income: foreign currency
translation adjustments................................ 360 (293)
-------- --------
Total stockholders' equity........................ 583,996 604,800
-------- --------
$950,473 $971,267
======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

3
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J.D. EDWARDS & COMPANY

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Revenue:
License fees.............................................. $ 67,990 $ 69,599
Services.................................................. 110,266 153,338
-------- --------
Total revenue..................................... 178,256 222,937
Costs and expenses:
Cost of license fees...................................... 11,119 5,291
Cost of services.......................................... 70,588 99,462
Sales and marketing....................................... 50,421 69,413
General and administrative................................ 18,439 24,389
Research and development.................................. 19,938 22,715
-------- --------
Total costs and expenses.......................... 170,505 221,270

Operating income............................................ 7,751 1,667
Other income (expense):
Interest income........................................... 3,659 5,344
Interest expense.......................................... (545) (203)
Foreign currency losses and other, net.................... (665) (34)
-------- --------
Income before income taxes.................................. 10,200 6,774
Provision for income taxes................................ 3,774 2,506
-------- --------
Net income.................................................. $ 6,426 $ 4,268
======== ========
Net income per common share:
Basic..................................................... $ 0.07 $ 0.04
======== ========
Diluted................................................... $ 0.06 $ 0.04
======== ========
Shares used in computing per share amounts:
Basic..................................................... 93,413 103,111
Diluted................................................... 108,116 111,549
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

4
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J.D. EDWARDS & COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income.................................................. $ 6,426 $ 4,268
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 8,360 5,732
Amortization of software development costs................ 1,636 1,263
Provision for deferred income taxes....................... (3,798) (345)
Other..................................................... 1,121 736
Changes in operating assets and liabilities:
Accounts receivable, net.................................. (39,031) (12,910)
Prepaid and other assets.................................. (6,506) (2,216)
Accounts payable.......................................... (4,459) (16,159)
Unearned revenue and customer deposits.................... 54,048 34,625
Accrued liabilities....................................... (9,274) (14,727)
-------- --------
Net cash provided by operating activities......... 8,523 267
Investing activities:
Purchase of investments................................... (48,856) (45,610)
Proceeds from maturities of investments................... -- 37,765
Purchase of property and equipment........................ (8,630) (10,406)
Proceeds from sale of assets and other, net............... 4,808 76
-------- --------
Net cash used for investing activities............ (52,678) (18,175)
Financing activities:
Proceeds from issuance of common stock.................... 11,089 13,792
-------- --------
Net cash provided by financing activities......... 11,089 13,792
Effect of exchange rate changes on cash..................... (839) (249)
-------- --------
Net decrease in cash and cash equivalents................... (33,905) (4,365)
Cash and cash equivalents at beginning of period............ 224,437 183,115
-------- --------
Cash and cash equivalents at end of period.................. $190,532 $178,750
======== ========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Interest paid............................................. $ 545 $ 203
Income taxes paid......................................... 1,585 5,638
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

5
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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 three-month period ended January 31,
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, 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 per share ("EPS") is computed by dividing net income by the
weighted average number of shares outstanding during the period. Diluted EPS 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 each period have been
adjusted to include all common shares issuable under stock options using the
treasury stock method. All shares owned by the J.D. Edwards & Company Retirement
Savings Plan were included in the weighted average common shares outstanding.
Anti-dilutive stock options that were excluded from the denominator of diluted
EPS were immaterial.

The computation of basic and diluted EPS was as follows (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Numerator:
Net income................................................ $ 6,426 $ 4,268
======== ========
Denominator:
Basic income per share -- weighted average shares
outstanding............................................ 93,413 103,111
Dilutive effect of common stock equivalents............... 14,703 8,438
-------- --------
Diluted net income per share -- adjusted weighted average
shares outstanding, assuming conversion of common stock
equivalents............................................ 108,116 111,549
======== ========
Basic net income per share.................................. $ 0.07 $ 0.04
Diluted net income per share................................ $ 0.06 $ 0.04
</TABLE>

(3) COMMITMENTS AND CONTINGENCIES

6
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J.D. EDWARDS & COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 January 31, 1999,
investments totaling $83.9 million were designated as collateral for these
leases.

(4) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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 three months or less in term. All contracts are entered into with
major financial institutions. Gains and losses on these contracts are included
with foreign currency gains and losses on the transactions being hedged and are
recognized as non-operating income or expense in the period in which the gain or
loss on the underlying transaction is recognized. 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 January 31, 1999, the Company had approximately $53.0 million of gross
U.S. dollar equivalent forward foreign exchange contracts outstanding as hedges
of monetary assets and liabilities denominated in foreign currency. Included in
other income and expense are net foreign exchange transaction losses of $746,000
and $4,000 for the first quarters of fiscal 1998 and 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. SFAS No. 133 will be effective for the Company in the first quarter of
fiscal 2000. 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. Accordingly, the Company's comprehensive income, comprised of net
income and foreign currency translation adjustments, was $5.5 million and $3.9
million for the first quarters of fiscal 1998 and 1999, respectively.

(6) SUBSEQUENT EVENT

In February 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 will be 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 is being accounted for as a
purchase and, accordingly, the purchase price will be allocated to the acquired
assets and liabilities at their fair values as of the consummation date of the
merger. Such assets include amounts allocated to capitalized software and other
intangibles which will be amortized on a straight-line basis over three- to
four-year periods. Additionally, a portion of the purchase price will be
allocated to in-process research and development, and the Company will incur a
one-time charge to earnings of approximately $2.0 to $2.5 million for the
write-off of this unproven technology. Future consideration that may be paid in
fiscal 2001 based upon certain future events will be recorded as compensation
expense through the second quarter of fiscal 2001. The acquisition is not
material to the Company and, accordingly, pro forma financial statements have
not been included.

7
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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

The Company's fiscal 1999 first quarter operating income was $1.7 million
compared to $7.8 million for the first quarter last fiscal year. Net income for
the quarter was $4.3 million compared to $6.4 million last year, and first
quarter diluted EPS decreased to $0.04 compared to $0.06 for the same period
last year. The results for the first quarter of fiscal 1999 were impacted by
external market and competitive factors as well as the slower than expected
realization of benefits from internal operational changes. Compared to the same
period last year, operating expenses increased 30% in the first quarter of
fiscal 1999 which exceeded total revenue growth of 25%.

Factors that affected the Company's performance for the first quarter of
1999 included a slowing of software purchases resulting from market focus on
Year 2000 preparations, the continued downturn in global economic conditions and
intensified competitive pressures. 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, these were investments for the long-term
from which the Company believes it will benefit in the future.

The Company is actively addressing its future operating plans given the
uncertainty in the enterprise resource planning ("ERP") market. The sales force
hiring and training programs were completed by the end of the first quarter, and
the Company is currently focused on controlling expenses by closely reviewing
headcount additions and adding only personnel in critical positions. Controls
over discretionary expenses have also been tightened throughout the Company.

Due to the deterioration of global economic conditions in the Asian
markets, particularly in Japan, and in certain other geographic regions, the
Company is closely monitoring its investments in certain international areas to
ensure that such opportunities are deemed appropriate and are consistent with
the Company's overall growth strategies. 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 being impacted by the
global economic conditions and increased market focus on Year 2000 compliance,
risks associated with these international investments may not be mitigated by
the broad geographic diversity of its operations. As a result, the Company's
investment in certain international areas could have a material negative impact
on its financial condition and results of operations should such conditions
continue or worsen.

8
<PAGE> 9

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 challenging. There can be no assurance of the
level of revenue growth 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.

The Company has experienced, and expects to continue to experience, a high
degree of seasonality, with a disproportionately greater amount of its revenue
and an even greater proportion of net income for any fiscal year being
recognized in its fourth fiscal quarter. For example, in the fourth quarter of
1998, the Company recognized 32.9% of total revenue, 37.2% of license fee
revenue, 29.9% of services revenue and 50.6% of net income. Because the
Company's operating expenses are relatively fixed in the near term, the
Company's operating margins have historically been significantly higher in its
fourth fiscal quarter than in its other quarters. The Company believes that such
seasonality is primarily the result of both the efforts of the Company's direct
sales force to meet or exceed fiscal year-end sales quotas and the tendency of
certain customers to finalize sales contracts at or near software vendors'
fiscal year ends. The Company's first quarter revenue has historically slowed
during the holiday season in November and December, and its total revenue,
license fee revenue, services revenue and net income in its first fiscal quarter
have historically been lower than those in the immediately preceding fourth
quarter. For example, total revenue, license fee revenue, services revenue and
net income in the first quarter of fiscal 1998 decreased 17.7%, 30.4%, 7.3% and
71.9%, respectively, from the fourth quarter of fiscal 1997. Comparatively,
total revenue, license fee revenue, services revenue and net income in the first
quarter of fiscal 1999 decreased 27.4%, 51.5%, 6.3% and 88.7%, respectively,
from the fourth quarter of fiscal 1998. 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 due to the current adverse market
conditions and increased market focus on the Year 2000 issues.

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
ENDED
JANUARY 31,
-------------
1998 1999
----- -----
<S> <C> <C>
Revenue:
License fees.............................................. 38.1% 31.2%
Services.................................................. 61.9 68.8
----- -----
Total revenue..................................... 100.0 100.0
Costs and expenses:
Cost of license fees...................................... 6.2 2.4
Cost of services.......................................... 39.6 44.6
Sales and marketing....................................... 28.3 31.2
General and administrative................................ 10.4 10.9
Research and development.................................. 11.2 10.2
----- -----
Total costs and expenses.......................... 95.7 99.3
Operating income............................................ 4.3 0.7
Other income (expense), net................................. 1.4 2.3
----- -----
Income before income taxes.................................. 5.7 3.0
Provision for income taxes................................ 2.1 1.1
----- -----
Net income.................................................. 3.6% 1.9%
===== =====
Gross margin on license fee revenue......................... 83.6% 92.4%
Gross margin on services revenue............................ 36.0% 35.1%
</TABLE>

9
<PAGE> 10

TOTAL REVENUE. Total revenue grew by 25% to $222.9 million for the quarter
ended January 31, 1999 from $178.3 million for the quarter ended January 31,
1998. The increase in total revenue for fiscal 1999 was primarily from growth in
services revenue, largely due to the license transactions closed during prior
fiscal quarters. The revenue mix between license fees and services was 31.2% and
68.8%, respectively, for the first quarter of fiscal 1999 compared to 38.1% and
61.9%, respectively, for the same quarter last year. The significant change in
revenue mix was primarily due to the minimal license fee growth and an increase
in services revenue in the first quarter of fiscal 1999. There can be no
assurance that the Company's revenue will not continue to be adversely affected
by the downturn in global economic conditions and the increased market focus on
Year 2000 compliance.

Geographically, the overall revenue growth was led by sales performance in
Europe, the Middle East and Africa (EMEA), with a 51% increase in total revenue
for the first quarter of fiscal 1999 compared to the same period last year. The
geographic areas defined as United States, EMEA and the rest of the world
accounted for 61%, 24% and 15% of total revenue, respectively, for the
three-month period ended January 31, 1999. Comparatively, for the three-month
period of 1998, the United States, EMEA and the rest of the world accounted for
66%, 20% and 14% of total revenue, respectively.

LICENSE FEES. License fee revenue grew by 2% to $69.6 million for the
quarter ended January 31, 1999 from $68.0 million for the quarter ended January
31, 1998. The license fee growth was minimal primarily as the result of a
decline in the number of transactions over $1.0 million and a decline in the
average transaction size. While the total volume of license transactions
increased, the number of users licensed for non-AS/400(R) platforms decreased
primarily due to an increased portion of licenses for the Windows NT(R)platform,
which typically involve fewer users than licenses for the UNIX platform.
Additionally, the number of users licensed for the AS/400 platform declined and
the percentage of revenue from existing customers also declined. As previously
discussed, during the quarter ended January 31, 1999 the Company experienced
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 this period, the Company invested in its
capacity to achieve future license revenue growth by expanding its direct sales
force by 58% at the end of the first quarter of fiscal 1999 compared to a year
ago. New hires to the sales force are generally not expected to begin generating
incremental license revenue for six to nine months. Additionally, the Company
realigned the sales force along vertical industries and increased resources in
vertical marketing and support. There can be no assurance that the Company's
license fee growth, results of operations and financial condition will not
continue to be adversely affected in future periods as a result of the continued
downturn in global economic conditions, intensified competitive pressures and an
increasing focus in the market on Year 2000 readiness or that the Company's
operational investments for the long-term will be successful.

The Company expanded its number of customers by 15% compared to the end of
the first quarter last year to approximately 5,050 at January 31, 1999, and
customers have increasingly accepted the OneWorld(TM) applications available for
Windows NT and UNIX(R) platforms in addition to the AS/400 platform. In the
first quarter of fiscal 1999, 27% of license activity was from customers using
the Windows NT or UNIX platforms compared to 10% in the first quarter 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 by 39% to $153.3 million for the quarter
ended January 31, 1999 from $110.3 million for the quarter ended January 31,
1998. The Company continued to experience increased demand for services in the
first quarter of fiscal 1999 compared to the same period last year. The increase
was primarily due to higher revenue from consulting, which is the largest
component of services, although training and support revenue increased as well.
The increase in consulting revenue for the first quarter of fiscal 1999 compared
to the same period in fiscal 1998 was primarily the result of license fee growth
in prior quarters. Support revenue increased primarily as a result of the
Company's growing installed base of customers compared to the previous year.
Training revenue increased primarily due to the increase in license transactions
from previous quarters and an increase in prices for training courses effective
in the first quarter of fiscal 1999, as well as additional personnel resources
available to teach the training courses.

10
<PAGE> 11

As a percentage of total revenue, services revenue increased in the first
quarter of fiscal 1999 compared to the same period in the prior year and
services revenue as a percentage of total revenue remained higher than license
fee revenue. This was due to minimal license fee growth coupled with continued
demand for services and 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.

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 62% in the 1999 first quarter over the 1998 first quarter and
direct services increased 16% in the 1999 quarter over the 1998 quarter. The
services revenue generated through subcontracted work for the 1999 quarter
accounted for 49% compared to 43% for the first quarter of fiscal 1998. In
addition to subcontracting out a substantial portion of its service 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.
During fiscal 1998 new alliances were established to achieve this objective, and
several existing alliance partners began providing significantly more resources
to complete extensive training programs and to begin implementing OneWorld.
However, the 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 first 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 quarter of 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, 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,
implementation, support and training. 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 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

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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 52% to $5.3 million for the quarter ended
January 31, 1999 from $11.1 million for the quarter ended January 31, 1998. The
decrease in costs for the three months ended January 31, 1999 compared to the
same period last year was primarily due to lower royalty expenses. In future
quarters, royalties may increase depending upon the portion of the Company's
software products that are subject to such payments. 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. Amortization of capitalized software development costs decreased 22% in
the first quarter of fiscal 1999 compared to the first quarter 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 first
quarter of fiscal 2000. The Company anticipates that it will capitalize software
development costs of approximately $2.0 to $3.0 million during the second
quarter of fiscal 1999 in connection with its acquisition of The Premisys
Corporation which it will begin to amortize over a three-year period beginning
in the second quarter of fiscal 1999. Software delivery expenses are also
expected to increase beginning the second quarter of fiscal 1999 due to the
opening of a software reproduction and distribution facility located in Dublin,
Ireland. Therefore, the total cost of license fees is expected 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 first quarter of fiscal 1999 was positively
impacted primarily by the decrease in royalty expense. The gross margin on
license fee revenue increased to 92.4% for the first quarter of 1999 from 83.6%
for the first quarter of last year. However, due to the expected increase in the
amortization of capitalized software development costs and software delivery
expenses, as well as possible increases in certain 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 support, training, consulting and
implementation, as well as fees paid to third parties for subcontracted
services. Cost of services increased 41% to $99.5 million for the quarter ended
January 31, 1999 from $70.6 million for the quarter ended January 31, 1998. The
increase was primarily due to subcontracted business partner service costs and
additional personnel to support the growth in demand for implementation and
consulting services as well as an increase in customer support staff. During the
quarter ended January 31, 1999, a larger portion of services revenue was
generated through subcontracted work, which increased the related costs in the
first quarter of fiscal 1999 compared to the same period last year. As a result,
the gross margin on services revenue decreased to 35.1% for the quarter ended
January 31, 1999 from 36.0% for the quarter ended January 31, 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 implementing its strategy of relying on third
parties to contract
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<PAGE> 13

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.

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 $69.4 million for the quarter ended January 31, 1999 from
$50.4 million for the quarter ended January 31, 1998, representing 31.2% and
28.3% of total revenue, respectively. The increase in expense was primarily the
result of additional personnel and increased advertising and promotion costs for
the Company's expanded publicity activities. The total number of sales and
marketing personnel increased 57% as of January 31, 1999 compared to a year ago.
The Company continued to recruit additional personnel in direct sales and
supporting positions during the first quarter 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 $24.4
million for the quarter ended January 31, 1999 from $18.4 million for the
quarter ended January 31, 1998, representing 10.9% and 10.4% of total revenue,
respectively. The total dollar amount of expense was higher in the quarter ended
January 31, 1999 compared to the same period last year 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 growth, offset in part by
increased efficiencies within support functions to effectively manage the
overall growth in the Company's operations.

RESEARCH AND DEVELOPMENT. Research and development expense includes
personnel and related overhead costs for product development, enhancements,
upgrades, quality assurance and testing. Research and development expense
increased to $22.7 million for the quarter ended January 31, 1999 from $19.9
million for the quarter ended January 31, 1998, representing 10.2% and 11.2% of
total revenue, respectively. The total dollar amount of research and development
expenses was higher in the quarter ended January 31, 1999 compared to the same
period last year primarily due to a substantial increase in personnel together
with increases in related facilities and computer systems costs necessary to
meet product development objectives. However, these costs increased at a rate
less than the overall growth in revenue during the first quarter, resulting in
lower costs when represented as a percentage of total revenue.

Development resources were primarily devoted to enhancements of both the
Company's World and OneWorld application suites during the first quarters 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 either during fiscal 1998 or the first quarter of fiscal 1999.
The Company anticipates that future research and development expenses will
increase in subsequent periods as enhancements are made in e-commerce and new
modules such as sales force automation and advanced planning and scheduling are
developed. Technology acquired in the Company's purchase of The Premisys
Corporation will be integrated with OneWorld, furthering enhancements to the
Company's SCORE(X) (Supply Chain Optimization and Real-Time Extended Execution)
solution. In connection with the purchase of The Premisys Corporation, the
Company anticipates a one-time charge of $2.0 to $2.5 million during the second
quarter of fiscal 1999 for the portion of the purchase price allocated to
in-process research and development.

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 $5.3 million for the quarter ended January 31, 1999 from
$3.7 million, for the quarter ended January 31, 1998, primarily due to interest
earned on the Company's short-and long-term investments which had increased year
over year. Due to effective hedging activities during the current year, foreign
currency losses were minimal during the quarter ended January 31, 1999 compared
to a net loss of $746,000 for the quarter ended January 31, 1998. The losses
were primarily due to the strengthening of the U.S. dollar against many other
currencies during the first quarter 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.

LIQUIDITY AND CAPITAL RESOURCES

As of January 31, 1999, the Company's principal sources of liquidity
consisted of $178.8 million of cash and cash equivalents, $359.0 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 three-month
periods ended January 31, 1999 or 1998. The Company had working capital of
$181.7 million at January 31, 1999 and a current ratio of 1.5 to one. Included
in determining such amounts are short-term unearned revenue and customer
deposits of $161.2 million. The majority of short-term unearned revenue
represents annual support payments billed to customers, which is recognized
ratably as revenue over the support service period. Without the short-term
unearned revenue and customer deposits, working capital would have been $342.9
million.

The Company's accounts receivable days sales outstanding ("DSO") was 111 at
January 31, 1999 compared to 107 at January 31, 1998. The Company also
calculates DSO by dividing its accounts receivable balance at the end of the
quarter by the sum of revenue for the quarter plus the net change in unearned
revenue divided by 90 days. The net change in unearned revenue is included in
the calculation to better reflect sales activity timing rather than revenue
recognition timing. Calculated as such, DSO was 96 days as of the quarter ended
January 31, 1999 compared to 82 days as of the quarter ended January 31, 1998.
The Company's DSO can fluctuate depending upon a number of factors, including
the concentration of transactions that occur toward the end of each quarter and
the variability of quarterly operating results. See "Factors Affecting The
Company's Business, Operating Results and Financial Condition -- Quarterly
Financial Results are Subject to Significant Fluctuation."

The Company generated operating cash flow of $267,000 during the
three-month period ended January 31, 1999 compared to $8.5 million during the
three-month period ended January 31, 1998. The decrease in operating cash flow
was due to the decreased net income and a decrease in deferred revenue, which
was somewhat offset by a decline in accounts receivable. Tax deductions
associated with stock option exercises during the first three months of fiscal
1999 increased the deferred income tax asset and additional paid-in capital on
the balance sheet as of January 31, 1999.

Financing activities provided $13.8 million in cash from exercises of
common stock options and the Employee Stock Purchase Plan. The Company issued a
total of 1.3 million shares of common stock during the first three months of
fiscal 1999. The Company did not have other significant net financing activities
for the first three months of fiscal 1999 or during the same period last year.

The Company used $18.2 million in cash for investing activities for the
three-month period ended January 31, 1999 compared to $52.7 million for the
three-month period ended January 31, 1998. 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 three months of both fiscal
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years, the Company purchased furniture, fixtures and equipment necessary to
support its expanding operations. The Company's cash utilized for investing
activities was offset in part by $4.8 million of proceeds from the sale of
assets in the first three months of fiscal 1998.

The Company leases two corporate headquarters office buildings and has
entered into agreements to lease two additional buildings 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 $127.7 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 January 31, 1999, investments totaling
$83.9 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 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 presented
to the Company's senior management and to the audit committee of the board of
directors periodically.

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 the 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 in 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.

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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 business.

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.

6) Deployment -- Implement modified systems and processes back into
normal production; implement contingency plans where appropriate.

Overall, the Company estimates it has completed 58% 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"
and "assessment" phases, 98% of the "resolution" phase and 12% of the "testing"
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 100% of the first three phases
and 75% of the "resolution" 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 are not directly involved in the project. 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. Many companies are expending 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.

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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
over 80% 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 are being 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 generators 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.

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 our 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
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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.

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 quarter of fiscal 1999, 39% of the Company's total revenue was
generated from its international operations, and the net assets of the Company's
foreign subsidiaries totaled 22% of consolidated net assets as of January 31,
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 January 31, 1999, the Company had
approximately $53.0 million of gross U.S. dollar equivalent forward foreign
exchange contracts outstanding as hedges of monetary assets and liabilities
denominated in foreign currency.

The Company prepared sensitivity analyses of its exposures from forward
foreign exchange contracts as of January 31, 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
January 31, 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. Based upon the results of these analyses, a 10% adverse
change in foreign currency rates from the January 31, 1999 rates would not
materially impact the Company's results of operations, cash flows or financial
condition for the full fiscal year ending October 31, 1999. However, such an
adverse change in foreign currency rates could result in a material adverse
effect on the Company's results of operations, cash flows or financial condition
within a future quarter.

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.
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At January 31, 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 January 31, 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:
- demand for our software products and services
- the size and timing of our sales
- the level of product and price competition that we encounter
- the length of our sales cycle
- the timing of our new product introductions and enhancements and those of
our competitors
- market acceptance of our new products
- changes in our pricing policies and those of our competitors
- announcements of new hardware platforms that may delay customer's
purchases
- variations in the length of our product implementation process
- the mix of products and services sold
- the mix of distribution channels through which we sell our software
- the mix of international and domestic revenue
- changes in our sales incentives
- changes in the renewal rate of our support agreements
- the life cycles of our products
- software defects and other product quality problems
- the expansion of our international operations
- the general economic and political conditions
- 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 operating losses.
The timing of large individual sales is also difficult for us to predict. In
some cases, sales have occurred in quarters subsequent to those anticipated by
us. To the extent one or more such sales 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 portion 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
sales contracts at or near our fiscal year end.
19
<PAGE> 20

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 adverse market conditions and increased
market focus on the Year 2000.

As a result of the unpredictability of our sales cycle, increasing
uncertainty in the ERP market attributed to many factors including global
economic conditions, issues surrounding the Year 2000 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
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.
Our revenue growth depends on our ability to market OneWorld and to license it
to new non-installed base customers. We do not anticipate generating much
revenue of OneWorld sales from our current WorldSoftware users. We have also
found that it takes longer to implement OneWorld than WorldSoftware. As of
January 31, 1999, 189 of our customers had implemented OneWorld. We believe that
certain customers may not license OneWorld or may find it difficult to implement
OneWorld because:
- customers may lack the necessary hardware, software or networking
infrastructure
- implementation may be too lengthy and/or costly for some customers
- OneWorld may not be perceived as competitive with other products on the
market
- significant defects or "bugs" may exist in OneWorld
- OneWorld may fail to meet our customers' expectations

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 overcome
obstacles such as competitors with significantly more experience and name
recognition, the pursuit to continue establishing relationships with third-party
implementation providers, and limited reference accounts in the open systems
market.

If we are unable to successfully sell 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 substantially
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 fiscal 1998 and the first quarter of fiscal 1999 was
derived from the sale of software products and related services for the AS/400
market. We will continue to offer enhanced software products for this market.
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 in this market. There can be no
assurance that we can maintain or gain market share in 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 in
late calendar 1996 and it is our software version that runs on leading NT and
UNIX servers. If we lose AS/400 installed base customers or relative 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
20
<PAGE> 21

and marketed for the AS/400 and NT and UNIX platforms. We compete with a large
number of independent software vendors including:
- companies offering 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)
- companies offering products on the AS/400 platform, such as System
Software Associates, Inc., Marcam Corporation, Infinium Software, Inc.
and JBA Holdings plc
- companies offering either standard or fully customized products that run
on mainframe computer systems, such as SAP

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 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 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 this 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 systems consulting and systems
integration firms for implementation, customer support services, and
recommendations of 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 will be materially adversely affected.

We believe that the following are the principal competitive factors
affecting the market for our software products:
- responsiveness to customers' needs
- product functionality
- speed of implementation
- ease of use
- product performance and features
- product quality and reliability
- vendor and product reputation
- quality of customer support
- price

21
<PAGE> 22

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 29 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:
- imposition of governmental controls
- export license requirements
- restrictions on the export of certain technology
- cultural and language difficulties
- the impact of a recessionary environment in economies outside the United
States
- reduced protection for intellectual property rights in some countries
- the potential exchange and repatriation of foreign earnings
- political instability
- trade restrictions and tariff changes
- localization and translation of products
- difficulties in staffing and managing international operations
- difficulties in collecting accounts receivable and longer collection
periods
- 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 the Asian and other
specific geographic areas that are currently being impacted by adverse economic
conditions. With our worldwide performance being impacted by 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 have been 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 first quarters of
fiscal 1998 and 1999, we incurred foreign exchange losses of approximately
$742,000 and $4,000, 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.

22
<PAGE> 23

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 global economic conditions, issues surrounding the Year 2000 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

None.

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

27.1 Financial Data Schedule

(b) Reports on Form 8-K

None.

24
<PAGE> 25

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: March 9, 1999

By: /s/ PAMELA L. SAXTON
----------------------------------
Name: Pamela L. Saxton
Title: Vice President of Finance,
Controller
and Chief Accounting Officer
(principal accounting officer)

Dated: March 9, 1999

<ARTICLE> 5
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT JANUARY 31, 1999 AND STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
JANUARY 31, 1999 AS FILED ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 178,750
<SECURITIES> 37,224
<RECEIVABLES> 286,608
<ALLOWANCES> 11,400
<INVENTORY> 0
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<COMMON> 104
<OTHER-SE> 604,696
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<OTHER-EXPENSES> 116,517
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