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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-23091
J.D. EDWARDS & COMPANY
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 84-0728700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE TECHNOLOGY WAY, DENVER, COLORADO 80237
(Address of principal executive offices) (Zip code)
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Registrant's telephone number, including area code 303/334-4000
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, par value $0.001 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of January 15, 1999, there were 103,510,566 shares of the Registrant's
common stock outstanding, and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on January 15, 1999) was approximately $1.1
billion. Shares of the Registrant's common stock held by each executive officer
and director and by each entity that owns 5% or more of the Registrant's
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the
1999 Annual Meeting of Stockholders to be held on March 24, 1999 are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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PART I
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about J.D. Edwards' industry, management's beliefs and certain
assumptions made by J.D. Edwards' management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results may differ materially from those expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include those set forth herein under "Factors Affecting the Company's Business,
Operating Results, and Financial Condition" on pages 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 and documents that the Company files from time to
time with the Securities and Exchange Commission, particularly the Quarterly
Reports on Form 10-Q and any Current Reports on Form 8-K.
J.D. Edwards 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
names used herein are trademarks or registered trademarks of their respective
owners.
ITEM 1. BUSINESS.
OVERVIEW
J.D. Edwards develops, markets and supports highly functional Enterprise
Resource Planning ("ERP") software for managing the supply chain. The Company
provides the core software products to run an entire business. These software
solutions operate on multiple computing platforms and are designed to deliver
the solutions that organizations need to maintain control of their business as
circumstances, technologies and market environments change.
One of the problems with complex ERP software systems is that once
installed or implemented, the system becomes difficult to modify. In today's
changing business environment, a customers' inability to change its business
processes can be an impediment to growth. The Company's unique Idea to
Action(TM) concept enabled through ActivEra(TM), a collection of tools, extends
the capabilities of the Company's solutions and enables customers to change
their technology as their business practices change and evolve. The Company's
integrated software application suites give customers control over their
manufacturing, finance, distribution/ logistics, human resources and customer
service management operations for multi-site and multinational organizations.
The Company also provides implementation, training and support services designed
to enable customers to rapidly achieve the benefits of the Company's ERP
solutions. The Company has developed and marketed ERP solutions for over 20
years, principally for operation on AS/400 and other IBM mid-range systems and,
more recently, on leading Windows NT ("NT") and UNIX servers through Windows-and
Internet browser-enabled desktop clients.
The Company's family of application suites is designed to improve most
organizations' core business processes and supply chain. In addition, the
Company extends its application suites to address certain vertical markets with
specific configurations, templates and additional software features designed to
meet these industries' needs. The Company offers two versions of its application
suites -- OneWorld(TM) and WorldSoftware(TM). OneWorld incorporates the
Company's Configurable Network Computing(TM) ("CNC") architecture and operates
on leading NT and UNIX servers, as well as the AS/400 platform. Through its CNC
architecture, the Company's ERP software is specifically designed to enable
customers to make business changes quickly and easily. The Company believes its
network-centric CNC architecture provides a valuable extension beyond
traditional client/server architectures by masking complexity, lowering cost of
change and facilitating greater scalability. WorldSoftware operates in a
host-centric environment on the AS/400 platform.
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With the addition of the WorldVision(R) thin client interface, WorldSoftware
applications can be operated through a Windows-based graphical user interface.
In addition, OneWorld and WorldSoftware are capable of operating together in a
unified enterprise-wide environment. The Company also provides OneWorld and
WorldSoftware toolsets to enable rapid implementation, customization and
modification of its application suites.
The Company distributes, implements and supports its products worldwide
through 50 offices and more than 270 third-party business partners. To date, the
Company has more than 5,000 customers with sites in over 100 countries.
The Company was incorporated in Colorado in March 1977 and was
reincorporated in Delaware in August 1997. The Company's principal executive
office is located at One Technology Way, Denver, Colorado 80237 and its
telephone number is 303/334-4000. The Company's home page can be located on the
World Wide Web at http://www.jdedwards.com. Except as otherwise noted herein,
all references to "J.D. Edwards" or the "Company" shall mean J.D. Edwards &
Company and its subsidiaries.
THE J.D. EDWARDS SOLUTION
The Company's ERP solutions are designed to offer the following customer
benefits:
DELIVER AND SUPPORT COMPREHENSIVE SOLUTIONS FOR GLOBAL ENTERPRISES. The
Company's ERP software supports an organization's core business processes
through a family of application suites, including manufacturing, finance,
distribution/logistics, human resources and customer service management. These
application suites are designed to enable a customer to integrate business
information across its organization and throughout its supply chain; accommodate
diverse business practices across a geographically dispersed organization; and
support multiple languages, currencies and countries. The Company's experienced
service organization provides training, support and a tested methodology to
enable rapid implementation of its ERP solutions.
FACILITATE CHANGES IN TECHNOLOGY AND BUSINESS PRACTICES. The Company's CNC
architecture is designed to mask the complexities of underlying platform
technologies, thus enhancing flexibility and simplifying software modification.
Using the Company's highly flexible software toolset, customers can modify the
Company's application suites to accommodate their business practices without
regard to the underlying hardware, software and network technologies. By masking
the complexity of the underlying technology, the Company's CNC architecture
facilitates the incorporation of new technologies and enables customers to
modify business practices without extensive low-level software code modification
or support.
OFFER TECHNOLOGY CHOICES FOR DIFFERENT MARKET SEGMENTS. Customers can
select between two versions of the Company's application suites. The Company
provides its OneWorld version to customers who want the accessibility of
information and ease of use typically associated with client/server systems,
without the burdens often associated with these complex systems. OneWorld's
object-based technology is designed to enhance programmer productivity,
facilitate modification of business practices and leverage network scalability.
OneWorld, introduced in late 1996, operates on leading NT and UNIX servers, in
addition to the AS/400 platform. The Company offers its WorldSoftware version to
customers who seek the reliable performance and lower cost of ownership
associated with host-centric systems. By offering two versions of its software,
the Company addresses different segments and allows customers to maintain
consistent business functionality while combining different technologies to meet
their specific requirements.
PRESERVE AND EXTEND CUSTOMER INVESTMENT. The Company designed OneWorld to
provide customers with a migration path to a network-centric architecture, while
preserving the customers' existing investments in AS/400 platforms. The
Company's CNC architecture enables OneWorld and WorldSoftware application suites
to co-exist on the AS/400 platform, allowing customers to incorporate the new
technologies of OneWorld while maintaining consistent functionality with their
WorldSoftware systems. This architecture minimizes disruptions and reduces the
overall cost of change for customers.
LOWER COST OF OWNERSHIP. The Company's ERP solutions are designed to reduce
overall cost of ownership through a combination of advanced technology and
comprehensive service and support. The
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Company's CNC architecture is specifically designed to enable customers to
change business practices or technology environments without significant costs
or business interruptions. In addition, the Company's OneWorld software version
is platform independent, allowing customers to select the best price and
performance solutions from multiple hardware and software suppliers. The Company
also offers implementation services and support enabling more rapid deployment
of the Company's ERP solutions, thus reducing customers' overall cost of
ownership.
ESTABLISH LONG-TERM CUSTOMER RELATIONSHIPS. The Company has designed its
ERP software solutions with broad business functionality and flexibility to
reduce the need for significant custom modifications. By minimizing custom
modifications, the customer's ability to benefit from subsequent releases is
enhanced, as is the Company's ability to support the software as implemented.
The Company believes its investment in worldwide customer support services and
user groups facilitates customer communication and feedback, enhancing customer
satisfaction. The Company believes this focus on standard software functionality
and flexibility, and its investment in customer support and user groups,
contribute to long-term customer relationships.
PRODUCTS
Application Suites
The Company's family of application suites includes manufacturing, finance,
distribution/logistics, human resources and customer service management. The
Company's application suites accommodate different business practices across a
geographically dispersed organization, as well as multiple languages, currencies
and countries. Each suite can operate on a stand-alone basis, or can be
integrated with other Company suites and selected third-party applications and
systems. The majority of the Company's customers deploy multiple application
suites.
MANUFACTURING. The Company's manufacturing application suite is designed to
enable organizations to optimize their manufacturing operations resources within
a single plant or across multiple locations and to provide information links to
other departments within the organization. This suite offers customers
everything from product configuration to enterprise facilities planning to
position themselves for the challenges faced in their manufacturing operations.
FINANCE. The expanding markets and changing processes of today require
flexible financial practices. The Company's finance application suite is
designed to provide structure, security and the ability to audit a customer's
financial systems without limiting the customer's ability to respond to
operational and market changes. The application suite provides a central
repository of financial information with simplified transaction processing. This
suite enables customers to respond to the latest changes in management and
market trends.
DISTRIBUTION/LOGISTICS. The distribution/logistics process continues to
face increasing demand for the fast delivery of customers' products, emphasis on
value added services and pressure to control costs. The Company's
distribution/logistics application suite is designed to address these changing
needs. This suite offers an extensive breadth and depth of functionality that
allows customers to meet the demands of their customers. The
distribution/logistics suite includes features that enable customers to manage
their warehouses, inventory and transportation for a single site or multiple
sites around the world.
HUMAN RESOURCES. The human resources department requires efficient
solutions to meet its complex information needs. The Company's human resources
application suite is designed to maximize the contributions of a customers'
human resources staff. This suite enables customers to change operational
processes to support shifting business strategies, as well as eliminate
redundancies while providing immediate access to online information.
CUSTOMER SERVICE MANAGEMENT. The Company offers the customer service
management ("CSM") suite, which allows the Company's customers to communicate
customer service information across the supply chain from a single information
source, tailor a response to the needs of their customers, and streamline
processes for increased productivity and rapid identification of new service
opportunities. With CSM, the Company's customers receive the flexibility to
manage workflow for the unique and changing requirements of
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their customers. CSM offers customer information management, installed-base
management, service contract management, call center management, service order
management and flexible reporting and online inquiry.
Vertical Market Application Suites
Over the last 20 years, the Company has acquired significant vertical
market experience and expertise through developing, selling and deploying ERP
solutions for over 5,000 customers across a variety of industries. The Company
has recently enhanced its strategic focus on key vertical markets in order to
better address customers' needs. The Company's new focus offers customers
greater tailored solutions, faster implementation and broader industry-specific
expertise. The Company believes that by aligning the sales and support
organizations along vertical lines that it will be able to shorten the sales
cycle, broaden industry offerings and better enable customers to quickly react
to business changes. The Company currently targets the following industry
sectors:
- The industrial sector focuses on industrial fabrication and assembly,
electronics and automotive supply solutions.
- The consumer sector focuses on consumer-packaged goods, pharmaceuticals
and energy and chemical solutions.
- The service industries sector focuses on engineering, architecture,
construction, real estate, mining and public services solutions.
The Company intends to pursue solutions for retail, health care and service
providers and other areas as appropriate during 1999.
The Company plans to continue its strategy of customizing application
suites and templates for these vertical markets. The Company also plans to offer
industry specific training and services to these markets.
The Company's application suites are licensed under perpetual, fully paid
licenses. The prices for such licenses are based on the functionality of the
application suite and the number and type of licensed users. Customers pay a
base amount per application suite plus a per user amount.
Solutions For Emerging Businesses
The Company has created solutions for small emerging companies. These
solutions were created to fit the operational needs and budgets of smaller
businesses and offer fast startup and ease of use. The Company offers two
solutions for emerging businesses: the Small Business Solution and the Genesis
Channel.
SMALL BUSINESS SOLUTIONS. The Company offers the Small Business Solution
("SBS") for companies with annual revenues of $35 million or less. This solution
delivers the Company's WorldSoftware pre-loaded on the IBM AS/400 System 170.
This allows customers to simply connect the system to their network and begin
implementation. The SBS minimizes customers' costs and time to benefit through
innovative online implementation tools and streamlined training processes. The
online implementation methodology tools guide customers through a step by step
setup process.
GENESIS CHANNEL. The Company's Genesis channel focuses on mid-tier
companies with revenues of $100 million or less and that face the constraints of
smaller budgets and fewer dedicated information technology ("IT") staff and
resources. This channel allows mid-tier customers to purchase the Company's
solution and receive exclusive implementation tools from the Company's Genesis
partners. By working through the Company's Genesis partners, customers can
tailor and implement the software, receive dedicated service and support and
benefit from the Genesis partners' expertise.
J.D. EDWARDS SCORE(X) (SUPPLY CHAIN OPTIMIZATION AND REAL-TIME EXTENDED
EXECUTION)
The Company introduced the J.D. Edwards SCORE(X) solution in May 1998. This
solution is designed to integrate and extend a company's business lifecycle and
execute tailored supply chains for individual customers. It allows companies to
effectively manage the dynamics of customer-centric supply chains with
network-centric computing. The Company's functionally rich components and
advanced architecture provide
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customer focused supply chain solutions that allow companies to understand the
changing requirements of their customers and then make the changes to their
business to meet those customer requirements. J.D. Edwards SCORE(X) gives
companies the capability to take an order, price it, manufacture it, source it,
package it and ship it the way the customer wants. J.D. Edwards SCORE(X)
provides the comprehensive information backbone for managing processes and
enterprise data between suppliers' suppliers and customers' customers.
TECHNOLOGY
Architecture
The Company offers two versions of its application suites -- OneWorld and
WorldSoftware. OneWorld incorporates the Company's CNC architecture and operates
on leading NT and UNIX servers, as well as the AS/400. WorldSoftware operates in
a host-centric environment on the AS/400 platform. In addition, OneWorld and
WorldSoftware are capable of operating together in a unified enterprise-wide
environment.
OneWorld is an object-based, event-driven technology designed to provide
the information access and other user benefits of traditional client/server
systems while masking complexity and accommodating future change. OneWorld's CNC
architecture enables the deployment of a single version of an application across
a network, regardless of the underlying technologies.
The CNC architecture consists of three components: (1) the application
layer; (2) the toolset layer; and (3) the technology layer.
The OneWorld application layer contains the specific business functionality
of the OneWorld manufacturing, finance, distribution/logistics, human resources
and customer service management application suites. OneWorld application suites
are composed of over 3,000 reusable objects. The applications are distributed by
the OneWorld deployment server in object form to individual platforms where they
are compiled and executed. A customer changes the application logic by modifying
the objects or creating new objects using the OneWorld toolset. Applications
containing the modified or newly created objects are then redistributed to
individual platforms. The Company believes that this single-point-of-change
architecture significantly reduces the cost of change compared to traditional
client/server architectures.
The OneWorld toolset is used to create or modify OneWorld objects, allowing
customers or the Company's developers to quickly create new application
functionality. The toolset also insulates users from lower level technologies.
For example, OneWorld objects exist independent of any specific computer
language. Currently, the OneWorld toolset can generate objects in three computer
languages -- C, C++ and Java. The Company believes it can readily incorporate
new languages in the future as market requirements dictate. The Company also
believes that this unified toolset approach significantly reduces customers'
cost of ownership when compared to traditional client/server systems that
require a variety of tools.
The OneWorld technology layer is designed to mask the differences between
underlying platforms and provide a uniform interface for OneWorld applications.
This uniformity allows a single object to execute on a wide variety of
platforms, a "write once, run anywhere" capability. The technology layer is able
to support IBM's AS/400 platform, Digital Equipment Corporation's Alpha- and
Intel-based NT servers, IBM's RS/6000, Hewlett-Packard's 9000, Sun Microsystems'
platform, as well as other NT servers from NEC and Fujitsu. Supported clients
include personal computers running Windows 95 and Windows NT or any desktop
system running an Internet browser. Supported databases include Oracle
databases, the IBM DB2 family and Microsoft's SQL Server. The Company intends to
continue to integrate additional platforms, servers and software as necessary to
meet market demands.
The technology layer also integrates a variety of components not typically
integrated in traditional client/server architectures, including an object
request broker, a transaction processing monitor, a workflow engine, a C/C++
generator and a Java generator. In traditional client/server implementations,
customers often have to integrate these components obtained from multiple
suppliers. The Company believes that its architecture and high degree of
integration reduce the cost of ownership and facilitate change when compared to
traditional client/server implementations.
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WorldSoftware is a well established, procedural-based technology designed
to take advantage of the security, integrity and easily maintained architecture
of the AS/400 platform. Unlike many host-centric ERP systems, WorldSoftware
provides flexibility to make run-time changes in application suites without the
need to recompile software. WorldSoftware also incorporates features such as an
active data dictionary, user defined codes and a variety of run-time options.
With the addition of the WorldVision thin client interface, WorldSoftware
applications can be operated through a Windows-based graphical user interface.
ActivEra Activators
The ActivEra activators are discrete applications or utilities that
facilitate changes to the system. The Company currently provides over 150
activators that allow customers to quickly react to changes in their business.
The Company plans to continue to develop additional activators both internally
and through third parties over the next several years. Third-party developed
activators will be designed to "snap in" and operate within the Company's
application suites. The Company has developed activators for both the business
professional and technology professional. These separate activators allow each
group to make changes to the system independently of the other group.
BUSINESS ACTIVATORS. The business activators allow business professionals
to shape the way applications work and the way the customer conducts its
business. Business solutions can be visually composed in real-time with
point-and-click, drag-and-drop ease. A selection of intuitive graphical
navigators such as automated question and answer directors, flowcharts, menus
and user defined shortcuts automatically direct the business professional to
where they need to go in the system to make changes. The Company has designed
three types of business activators: the work activators, application activators
and process activators.
The work activators are a series of activators designed to modify the way
users interact with their individual working environment. By using these
activators, the business professional can define how individual users are able
to interact with the ERP applications and receive output. Work activators give
users the ability to make immediate changes in the areas of user interface,
navigation and output operations and choices.
The application activators are a series of activators designed to modify
the functional attributes of the ERP application. These activators reference
application attributes running either locally on the client workstation or
remotely on the ERP server and provide users with the ability to make
modifications to the Company's applications. This enables users to respond to
the changing business conditions within their environment.
The process activators are a series of activators designed to modify the
way ERP applications can be used to control business processes. These activators
provide users with the ability to engage in business scripting. Business
scripting is a guided path that provides users with a mechanism that enables or
establishes company characteristics and processing rules to support the business
process. Users are then lead through a set of questions and activities designed
to gather specific information about the business process. Once completed, these
activators implement the process changes that meet the business process
requirements.
TECHNOLOGY ACTIVATORS. The technology activators enable technology
professionals to streamline management of the information system infrastructure.
This allows the systems administrators, integrators and developers to work with
a common set of activators that insulate applications programming and network
configuration from the underlying applications database, operating system,
hardware, messaging systems and telecommunications protocols. The Company has
designed three types of technology activators: the system activators,
integration activators and object activators.
The system activators are a series of activators designed to modify the way
ERP applications work with the computer system environment. These activators
enable technology professionals to deploy changes and enhancements
instantaneously across the entire network. This allows users to implement global
modifications to the Company's system on a unified network environment.
The integration activators are a series of activators designed to modify
the way ERP applications communicate with other applications. These activators
allow application integration by enabling applications to share logic and data.
This interoperability allows users to leverage technology and to enhance the
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productivity of their employees. This means technology professionals can easily
integrate third-party applications.
The object activators are a series of activators designed to modify the way
ERP applications increase their functionality by utilizing software objects and
components. These activators provide users with a simple object scripting
methodology. Object scripting allows business critical changes to be easily
incorporated and deployed enterprise-wide automatically.
ActivEra Console And Extension Architecture
The ActivEra console, which will be released in 1999 as a part of the
OneWorld application, acts as a window for systems users to view the actions
required for implementing a change to the system. When a customer wants to make
a change, they will use the ActivEra console to launch the appropriate wizard,
which then walks them through the change process.
The ActivEra extension architecture, which will be released in 1999, will
allow customers to "snap in" third-party activators. This means that third
parties can create and develop activators that meet customers' best business
practices.
Toolsets
The Company's software application suites were developed with the Company's
OneWorld and WorldSoftware toolsets. These toolsets are also used for the
ongoing enhancement and modification of the Company's products. The Company
believes the advantages of these toolsets include increased productivity,
increased code consistency, self-documenting code and improved quality.
The OneWorld and WorldSoftware toolsets are bundled with the OneWorld and
WorldSoftware applications, respectively, providing customers the same
productivity, consistency and quality benefits enjoyed by the Company's own
developers, thus reducing the complexities typically associated with upgrades to
new releases. Since modifications made by both the customers and the Company
made with the same toolset, it is easier and faster to upgrade to new releases
while preserving the customers' modifications. The Company believes that this
capability enables customers to incorporate new functionality more rapidly,
while also reducing the Company's support costs.
The Company's OneWorld toolset incorporates more advanced technologies,
including object-based methods and event-driven models. The OneWorld toolset
generates code in C, C++ and Java for a multi-platform, network-centric
environment. Because the OneWorld toolset rigorously separates business logic
from underlying technologies, it also facilitates the incorporation of new
technologies. The Company believes that the ability to incorporate new
technologies by regenerating, rather than rewriting, applications provides a
competitive advantage.
The Company's WorldSoftware toolset provides a high-level architecture,
allowing the Company's development staff to express business practices as an
abstract model. The toolset then uses the model to generate RPG code that runs
on an AS/400 platform in a host-centric, procedural architecture. The Company
continues to use this toolset to add new functionality to the WorldSoftware
application suites.
NETWORK APPLICATION SERVICES
The Company announced during 1998 its Network Application Services ("NAS")
program. This program allows customers to rent or outsource the Company's ERP
software solutions. When customers subscribe to NAS, they gain access to the
Company's application suites over a secure network line at an off-site computer
center. Customers receive 24 hour access to their data and their systems are
monitored by trained specialists who are available to answer questions at any
time. The NAS solution allows for continuous system and application support for
a fixed monthly per-user fee. By outsourcing through NAS, customers can take
advantage of the latest technologies while reducing up-front capital investment
and IT staffing costs. In addition, the user-based subscription fees are
scaleable so customers only pay for what they currently require.
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PRODUCT ALLIANCES
One of the Company's on-going goals is to form relationships with
organizations whose products enhance the Company's OneWorld and WorldSoftware
solutions. This allows the Company to keep development costs down, while at the
same time offering our customers the broadest spectrum of products and services
needed. The Company's product alliance partners allow customers to benefit from
well-rounded solutions and the assurance of compatible technology and qualified
support. The Company currently has over 60 product alliance partners.
DIRECT IMPLEMENTATION SERVICES AND TRAINING
The Company believes that delivery of its ERP software together with high
quality consulting, implementation, support and training services enables the
Company to achieve a high level of customer satisfaction, strong customer
references and long-term relationships, as well as facilitate software
improvement based on customer feedback. The Company offers extensive
implementation and training services directly and through third parties to
assist customers in rapidly achieving benefits from its ERP solutions. As of
October 31, 1998, the Company had 1,571 employees in its customer services and
training departments, located worldwide.
The Company has designed an implementation process called J.D. Edwards
OnTrack ("OnTrack"). OnTrack enables customers to implement quickly and gives
customers the flexibility to meet their changing business needs. OnTrack
includes a six-step process: define, train, model, configure, go live and
refine. With the OnTrack shared implementation approach, accelerated
implementation tools, custom built documentation and classroom training, the
Company and its partners enable on-time, on-budget implementation.
In addition to its standard implementation services, the Company also
offers a full range of custom implementation services, including conversion
programs, upgrade assistance, custom modifications and interfaces, and technical
documentation. Implementation services are generally provided on a time and
materials basis.
THIRD-PARTY IMPLEMENTATION PROVIDERS
The Company seeks to provide its customers with high quality implementation
services in the most efficient and effective manner. In some cases where the
Company does not provide implementation services itself, it subcontracts such
services through third parties. The Company also has relationships with a number
third-party implementation providers that contract directly with customers for
the implementation of the Company's software. The Company selects these
third-party providers carefully to ensure that they have the ability and
knowledge to represent the Company and implement its ERP solutions properly.
Providers receive extensive training regarding the Company's application suites
and its implementation process. In addition, the Company evaluates these
providers on a regular basis to ensure quality service and support to its
customers. The Company continues to move toward relying on more third-party
implementation providers to contract directly with customers for the
implementation of the OneWorld version of its applications suites. These
relationships will enable the Company to provide implementation services through
third-party personnel with extensive client/server expertise, while expanding
its service capacity, focusing on license fee revenue generation and
concentrating its own service resources on those activities it can perform most
efficiently. The Company believes that this direct- and third-party customer
service strategy will enable it to deliver comprehensive and timely services
worldwide.
EDUCATION AND TRAINING
The Company offers a comprehensive education and training program to its
customers and to the Company's third party implementation providers. Classes are
offered at the Company's in-house facilities located throughout the world, as
well as at customer locations. The Company's instructors are certified for each
course they teach, and their backgrounds generally include cross-functional
experience in product testing, customer support and implementation services.
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SUPPORT
The Company believes that providing business solutions along with a high
level of on-going support to its customers is a critical element in establishing
long-term relationships and maintaining a high level of customer satisfaction.
The Company provides support services for an annual fee, which entitles the
customer to receive telephone customer support, as well as enhancements and
updates to its licensed version of the Company's software. The Company provides
customer support through three customer support centers located in Denver,
London and Singapore, which are connected through a wide area network. Customer
support from these centers is provided in nine languages on a 12-hour-per-day,
five-day-per-week basis, and in English-only on a 24-hour-per-day,
seven-day-per-week basis. Customer support personnel have the ability to access
customer systems remotely to diagnose and resolve problems. As of October 31,
1998, the Company had 522 employees in its customer support department.
CUSTOMERS
The Company, to date, has licensed its application suites to over 5,000
customers. During each of the last three fiscal years, no customer accounted for
more than 10% of total revenue.
SALES AND MARKETING
Selling the Company's software to multinational organizations typically
requires the Company to engage in a lengthy sales cycle, generally between 6 and
15 months, and to expend substantial time, effort and money educating
prospective customers regarding the use and benefits of the Company's products.
However, the Company has recently begun to experience a shortening of the sales
cycle. See "Factors Affecting the Company's Business, Operating Results and
Financial Condition -- Lengthy Sales Cycles." The Company sells its software and
services through direct sales and business partner channels throughout the
world. In addition, the Company utilizes more than 270 sales and consulting
business partners worldwide as an indirect distribution channel to penetrate
certain vertical markets and geographic areas, in particular those areas in
which the Company has not invested resources to establish a direct presence. The
Company expects to continue to rely on indirect channels in order to enhance its
market penetration and implementation capabilities. See "Factors Affecting the
Company's Business, Operating Results and Financial Condition -- Management of
Growth and Hiring of Qualified Personnel." International revenue as a percentage
of total revenue ranged between 35% and 37% for each of the past three fiscal
years, and the Company expects that revenue from international customers will
continue to account for a significant portion of the Company's total revenue.
The Company's marketing strategy is to position itself as a premier
provider of ERP solutions and to increase recognition of the J.D. Edwards name.
In support of this strategy, the Company's marketing programs include developing
and maintaining industry analyst and public relations, developing databases of
targeted customers, conducting advertising and direct mail campaigns, and
maintaining a World Wide Web home page.
PRODUCT DEVELOPMENT
The Company has invested and expects to continue to invest substantial
resources in research and product development. The research and product
development department is organized into three groups that work closely
together: the development technologies group; the application development group;
and the documentation, localization and translations group. The efforts of these
groups are enhanced by cross-functional product management teams, frequent
solicitation of customer feedback and close contact with customers through the
Company's implementation services. As of October 31, 1998, the Company's
research and product development operations included 889 employees, primarily
located in Denver, Colorado. Research and development expenditures, which
include capitalized software development costs, were $89.4 million, $62.8
million and $47.6 million for the fiscal years ended October 31, 1998, 1997 and
1996, respectively.
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The Company's development technologies group is responsible for both the
toolsets and underlying technologies of OneWorld and WorldSoftware. The OneWorld
development technologies team focuses on enhancing the flexibility, simplicity
and performance of the OneWorld toolset, as well as OneWorld's ActivEra
Activators and CNC technology layer. The WorldSoftware development technologies
team is primarily focused on maintaining and enhancing the toolset and
underlying technologies for WorldSoftware. Both development technologies teams
share responsibility for cross-functional coordination with sales and support,
as well as with hardware and software suppliers with whom the Company has
relationships, to identify, analyze, prioritize and schedule new features and
functionalities.
The application development group is responsible for developing, enhancing
and maintaining the OneWorld and WorldSoftware application suites, including the
vertical market application suites. Separate application development teams use
the toolsets developed by the development technologies group to create and
enhance each application suite. The Company has designed its toolsets to enable
application programming to be performed by nonprogrammers responsible for
business practices. These application development teams also work with customers
and third-party implementation providers to identify, analyze, prioritize and
schedule new functionality in the Company's existing application suites, as well
as to establish specifications and priorities for new vertical markets.
The Company's documentation, localization and translations group is
responsible for the documentation, localization and translation of the Company's
application suites for particular foreign markets, as well as the vertical
market application suites and templates, for both OneWorld and WorldSoftware.
The documentation, localization and translations group works closely with
domestic and international customers and third-party implementation providers,
as well as cross-functional Company teams of development, implementation,
support and training professionals, to ensure that appropriate enhancements are
incorporated into products, documentation and implementation processes. The
Company's OneWorld application suites are currently translated into and operate
in 18 languages and the Company's WorldSoftware application suites are currently
translated into and operate in 21 languages. In addition, this group develops
and maintains a single database for documentation, which is currently translated
into eight languages. The Company intends to offer additional language
translations in the future.
COMPETITION
The Company competes in the ERP software solutions market. This market is
highly competitive, subject to rapid technological change and significantly
affected by new product introductions. The Company competes with a large number
of independent software vendors in this market, as well as with suppliers of
custom developed business application software. Some of the Company's
competitors have significantly greater financial, technical, marketing and other
resources and there can be no assurance that the Company will be able to
successfully compete. See "Factors Affecting the Company's Business, Operating
Results and Financial Condition -- Competition."
PROPRIETARY RIGHTS AND LICENSING
The Company's success depends, in part, on its ability to protect its
proprietary rights. To protect these rights the Company relies primarily on a
combination of copyright, trade secret and trademark laws; confidentiality
agreements with employees and third parties; and protective contractual
provisions. While the Company seeks to protect its proprietary rights there can
be no assurances that such protection is adequate. See "Factors Affecting the
Company's Business, Operating Results and Financial Condition -- Limited
Protection of Proprietary Technology and Infringement Rights."
EMPLOYEES
As of October 31, 1998, the Company had 4,950 full-time employees: 889 in
research and development; 1,242 in sales and marketing; 1,571 in customer
services and training; 522 in customer support; and 726 in management and
administration. The Company believes that its continuing success will depend, in
part, on its ability to retain a limited number of key employees and other
members of senior management, as well as its
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ability to attract and retain highly skilled technical, marketing and management
personnel, who are in great demand. See "Factors Affecting the Company's
Business, Operating Results and Financial Condition -- Management of Growth and
Hiring of Qualified Personnel." The Company has not had a work stoppage, and no
employees are represented under collective bargaining agreements. The Company
considers its employee relations to be good.
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
In addition to other information in this Annual Report on Form 10-K and in
the documents incorporated by reference therein, 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.
For your convenience we have written our risk factors in Plain English.
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,
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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 proportion of net
income in such 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. 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.
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
October 31, 1998, 120 of our customers have 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 customer's 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, continuing to establish 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 and most of the revenue for fiscal 1997 and a
substantial portion for 1998 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.
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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 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:
- 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.
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.
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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
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.
LENGTHY SALES CYCLE. Customers make a substantial capital investment in
purchasing our software for division or enterprise-wide business critical
purposes. Potential customers spend significant time and resources on
determining which software to purchase. This requires us to spend substantial
time, effort and money educating and convincing prospective customers to
purchase our software over our competitors. Selling our products requires an
extensive sales effort because the decision to license software generally
involves evaluation by a significant number of customer personnel in various
functional and geographic areas. We also have no control over which company a
customer favors or if the customer chooses to delay or forego a purchase. Due to
all of these factors, our sales cycle generally can range from six (6) to
fifteen (15) months. Since the sales cycle is unpredictable, we cannot forecast
the timing or amount of specific sales, and sales vary from quarter to quarter.
Recently, we have experienced a shortening in our sales cycle and during fiscal
1998 our sales force closed more transactions within a time period toward the
shorter end of this range. The delay to complete one or more large sales could
have a material adverse effect on our business, operating results or financial
condition.
LENGTHY IMPLEMENTATION PROCESS. Our software is complex and affects many
different business-critical functions across various functional or geographic
areas of an enterprise. This results in a complex and lengthy implementation
processes. The implementation process requires the involvement of significant
resources of the customer and can result in significant risks. Our OneWorld
implementation process is more complex than our WorldSoftware implementation
process. Delays in implementation by us or our business partners, may result in
customer dissatisfaction or damage to our reputation. This could result in
material adverse effects to the our business, operating results and financial
condition.
RELIANCE ON THIRD PARTIES AND DEVELOPMENT OF THIRD-PARTY RELATIONSHIPS. We
heavily rely on third-party implementation providers to implement the OneWorld
version of our application suites. Additionally, we have adopted a strategy in
which an increasing number of OneWorld implementations will be performed by
third parties that contract directly with our customers. Executing this strategy
requires our current third-party implementation providers to allocate additional
resources to OneWorld implementations. In addition, we must continue to enter
into additional third-party implementation relationships. Due to the limited
resources and capacities of many third-party implementation providers, there can
be no assurance that we will establish or maintain relationships with third
parties having sufficient resources to provide the necessary implementation
services to support the demand of our OneWorld customers. If we cannot obtain
such resources, we will be required to perform the implementation services
ourselves. There is no guarantee that we will have sufficient
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resources available for such purposes. If we are unable to establish and
maintain effective long-term relationships with such third party implementation
providers or if such providers do not meet our customers needs, our business,
operating results and financial condition could be materially adversely
affected.
We have established relationships with a number of third parties, including
consulting and system integration firms, hardware suppliers, and database,
operating system and other independent software vendors to enhance our sales,
marketing and customer service efforts. Many of these third parties also have
relationships with one or more of our competitors and may, in some instances,
select or recommend the software offerings of our competitors rather than our
software. In addition, certain of these third parties compete with us directly
in developing and marketing ERP software applications. Competition between us
and these third parties could result in the deterioration in or the termination
of our relationship. This could have a material adverse effect on our business,
operating results or financial condition.
DEPENDENCE ON SERVICE REVENUE. We license our software under non-cancelable
license agreements and provide related services such as consulting,
implementation, support and training. Until fiscal 1998, our service revenue as
a percent of total revenue had increased as a result of our continued emphasis
on providing consulting and training services that complement our software
products and that benefit our growing installed base of customers. Historically,
we have subcontracted a portion of our consulting and training services to third
parties. We are currently pursuing a strategy of relying on third-party
implementation providers to contract directly with our OneWorld customers for
implementation and related services. To the extent we are successful with this
strategy, revenue from subcontracted services and service revenue as a
percentage of total revenue will most likely decrease. If such revenue decreases
more than anticipated, our operating results will be materially adversely
affected. There can be no assurances that we will be successful in implementing
this strategy or that such services will achieve market acceptance. The failure
of this could have a material adverse effect on our business, operating results
and financial condition.
MANAGEMENT OF GROWTH AND HIRING OF QUALIFIED PERSONNEL. Our ability to
successfully offer products and services and implement our business plan in a
rapidly evolving market requires an effective planning and management process.
Continued growth of our business may place a significant strain on our existing
management systems and resources. To compete effectively and manage future
growth, we must continue to evaluate and improve the adequacy of our management
structure and existing procedures, including our financial and internal
controls. If we are not successful, our business, operating results and
financial condition would be materially adversely affected. Additionally, we
have focused a significant amount of our resources on the NT and UNIX markets as
a result of the development and release of the OneWorld version of our
application suites. We must also continue to maintain a focus on the AS/400
market. If our efforts to maintain a focus on these markets are unsuccessful,
our business, operating results and financial condition could be materially
adversely affected.
Our future performance depends, in part, on our ability to attract and
retain highly skilled technical, managerial, sales, marketing, service and
support personnel. We have experienced and expect to continue to experience
difficulty in recruiting and hiring qualified personnel. If we are not able to
hire qualified personnel on a timely basis, our business, operating results and
financial condition would be materially adversely affected.
YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. As a result, software that records only the last two digits of the
calendar year may not be able to distinguish whether "00" means 1900 or 2000.
This may result in software failures or the creation of erroneous results.
Significant uncertainty exists in the software industry concerning the potential
effects associated with the century change. Based on our assessments, we believe
the current versions of our software products are generally Year 2000 compliant.
We believe that our customers and potential customers purchasing patterns
may be affected by Year 2000 issues in a number of ways. Many companies are
expending significant resources to correct or "patch" their current software
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase software products such as those that we offer.
Additionally, it is possible that certain of our customers are purchasing
support contracts only to ensure that they are Year 2000 compliant, and once
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compliant, will cancel such contracts. We also believe that many potential
customers may defer purchasing Year 2000 compliant products until it is
absolutely necessary, accelerate purchasing Year 2000 compliant products, switch
to other systems or suppliers, or purchase our products only as an interim
solution. If any of the above were to happen, our business, operating results or
financial condition could be materially adversely affected.
We also need to ensure Year 2000 compliance of our own internal third-party
computer systems. We do not expect the total cost of Year 2000 compliance issues
to be material to our business, operating results or financial condition. We
cannot provide assurances that we or our customers and suppliers will identify
and remediate all significant Year 2000 problems on a timely basis. Remediation
efforts may involve significant time and expense and unremediated problems could
materially adversely effect our business, operating results and financial
condition. See "Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Impact of the Year 2000 Issue."
EURO CURRENCY. 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 EMU countries are expected to be operating with the euro as their
single currency. During the next three years, business in 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 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 we currently offer software products that are designed to be euro
currency enabled and we believe will be able to accommodate any required euro
currency changes, there can be no assurance that our software will contain all
the necessary changes or meet all of the euro currency requirements. If our
software does not meet all the euro currency requirements our business,
operating results and financial condition would be materially adversely
affected. See "Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Euro."
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
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- 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.
Although we expect that the current worldwide economic conditions may negatively
impact our business to some degree, we do not believe such impact will be
material primarily due to the broad geographic diversity of our operations.
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.
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 fiscal 1998, 1997 and
1996, we incurred foreign exchange losses of approximately $2.8 million, $2.0
million and $1.7 million, 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.
RISKS ASSOCIATED WITH NEW VERSIONS AND PRODUCTS, RAPID TECHNOLOGY CHANGE
AND DEFECTS. The software market in which we compete is characterized by rapid
technological change, evolving industry standards, changes in customer
requirements, and frequent new product introductions and enhancements. For
instance, existing products can become obsolete and unmarketable when products
utilizing new technologies are introduced or new industry standards emerge. As a
result, the life cycles of our software products are difficult to estimate. To
be successful, we must be able to enhance existing products, develop and
introduce new products that keep pace with technological development, satisfy
our customer's requirements and achieve market acceptance. There can be no
assurances that we will successfully identify new product opportunities, develop
and bring new products to the market in a timely and cost-effective manner, or
that products, capabilities or technologies developed by our competitors will
not render our products obsolete. We have addressed the need to develop new
products and enhancements primarily through internal development efforts, though
on occasion we have licensed third-party technology and will consider acquiring
technology. Licensing third-party technology is risky. See "Limited Protection
of Proprietary Technology and Infringement Risks." If we are unable to develop
new software products or enhancements, or if such products do not achieve market
acceptance, our business, operating results or financial condition may be
materially adversely affected.
Historically, we have issued significant new releases of our software
products periodically with minor interim releases issued more frequently. As a
result of the complexities inherent in our software, major new product
enhancements and new products often require long development and testing periods
before they are released. On occasion, we have experienced delays in the
scheduled release date of new and/or enhanced products and we cannot provide any
assurances that we will not miss future scheduled release dates. The delay of
product releases or enhancements or the failure of such products or enhancements
to achieve market acceptance could materially adversely affect our business,
operating results or financial condition.
Software products as complex as our products frequently contain undetected
errors or "bugs" when first introduced or as new versions are released. Despite
extensive testing, some bugs are not discovered until the product has been
installed and used by our customers. To date, our business, operating results
and financial condition have not been materially adversely affected by the
release of products containing errors. There can
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be no assurance that any future errors will not result in the delay or loss of
revenue, diversion of development resources, damage to our reputation, increased
service or warranty costs or impaired market acceptance of these products. Any
of these results could materially adversely effect our business, operating
results or financial condition.
FIXED-PRICE SERVICE CONTRACTS. We offer a combination of software,
implementation and support services to our customers. We typically enter into
service agreements with our customers that provide consulting and implementation
services on a time and materials basis. We have, from time to time, entered into
fixed-price service contracts with certain of our customers. These types of
contracts specify that we must obtain certain milestones prior to payment,
regardless of the actual costs incurred by us. We believe that such fixed price
service contracts may be offered more frequently by our competitors to
differentiate their products and services. As a result, we may be forced to
enter into more of such contracts. We can offer no assurance that we can
successfully complete these contracts on budget or that our inability to do so
would not have a material adverse effect on our business, operating results and
financial condition.
DEPENDENCE ON KEY PERSONNEL. Our success depends, to a significant extent,
upon a limited number of members of our senior management and other key
employees. The loss of one or more of our key employees could result in a
material adverse effect to our business. Although we maintain key man life
insurance on C. Edward McVaney, chairman and co-founder, such insurance is
minimal and is not maintained on our chief executive officer or other key
personnel. In addition, we believe that our future success will depend, in part,
on our ability to attract and retain highly skilled technical, managerial, sales
and marketing personnel. Competition for such personnel in the computer software
industry is intense. There can be no assurance that we will be successful in
attracting or retaining such personnel. The failure to do so, could have a
material adverse effect on our business, operating results or financial
condition.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY AND INFRINGEMENT RISKS. Our
success depends, in part, on our ability to protect our proprietary rights. To
protect our proprietary rights, we rely primarily on a combination of copyright,
trade secret and trademark laws; confidentiality agreements with employees and
third parties; and protective contractual provisions such as those contained in
our license agreements with consultants, vendors and customers. We currently
have 2 patents and 6 patent applications pending on various aspects of our
software application suites. We pursue the registration of certain of our
trademarks and service marks in the United States and in certain other
countries. However, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States and
effective copyright, trademark and trade secret protection may not be available
in other jurisdictions. Nevertheless, we believe that the following factors are
more essential to protecting our technology leadership position:
- the technological and creative skills of our personnel
- new product developments
- frequent product enhancements
- name recognition
- customer training and support
- reliable product support
We generally enter into confidentiality or license agreements with our
employees, consultants, and vendors. These agreements control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
copy aspects of our products, obtain and use information that we regard as
proprietary, or develop similar technology through reverse engineering or other
means. Preventing or detecting unauthorized use of our products is difficult.
There can be no assurances that the steps we take will prevent misappropriation
of our technology or that our license agreements will be enforceable. In
addition, we may resort to litigation to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of
others' proprietary rights, or to defend against claims of infringement or
invalidity in the future. Such litigation
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<PAGE> 20
could result in significant costs or the diversion of resources. This could
materially adversely affect our business, operating results or financial
condition.
We generally license our products to end users through our standard license
agreement. Each agreement is negotiated individually and may contain variations.
We also license our products to independent third-party distributors with a
right to sub-license. Although we establish conditions under which our products
are licensed by our distributors to end users, there can be no assurances that
our distributors do not deviate from such conditions.
We may receive notice of claims of infringement of other parties'
proprietary rights in the normal course of business. Although we do not believe
that our products infringe the proprietary rights of third parties, we cannot
guarantee that such infringement or invalidity claims will not be asserted or
prosecuted against us. Defending such claims, regardless of their validity,
could result in significant costs and diversion of resources. Such assertions or
defense of such claims may materially adversely affect our business, operating
results or financial condition. In addition, such assertion could result in
injunctions against us. Injunctions that prevent us from distributing our
products would have a material adverse effect on our business, operating results
and financial condition. If such claims are asserted against us, we may seek to
obtain a license to use such intellectual property rights. There can be no
assurance that such a license would be available on commercially reasonable
terms.
We also rely on certain technology that we license from third parties,
including software that is integrated with our internally developed software. In
particular, we license the graphical user interface to our WorldSoftware, which
we market as WorldVision. There can be no assurances that these third-party
licenses will continue to be available to us on commercially reasonable terms.
The loss of, or inability to maintain, any of these licenses, would result in
delays or reductions in product shipments until we could identify, license or
develop and integrate equivalent technology. Any such delays or reductions in
product shipments would materially adversely affect our business, operating
results or financial condition. Although we are generally indemnified by third
parties against claims that such third parties' technology infringes the
proprietary rights of others, such indemnification is not always available for
all types of intellectual property. Often such third-party indemnifiers are not
well capitalized and may not be able to indemnify us in the event that their
technology infringes the proprietary rights of others. As a result, we may face
substantial exposure in the event that technology licensed from a third party
infringes another party's proprietary rights. We currently do not maintain
liability insurance to protect against this risk. There can be no assurance that
such infringement claims will not be asserted against the company or that such
claims would not materially adversely affect our business, operating results or
financial condition. Defending such infringement claims, regardless of their
validity, could result in significant costs and diversion of resources. Such
assertions or defense of such claims may materially adversely effect our
business, operating results or financial condition.
RISKS OF SECURITY OF PRODUCTS. We have included security features in
certain of our Internet browser-enabled products that are intended to protect
the privacy and integrity of customer data. Despite these security features, our
products may be vulnerable to break-ins and similar problems caused by Internet
users. Such break-ins and other disruptions could jeopardize the security of
information stored in and transmitted through the computer systems of our
customers. Break-ins include such things as hackers bypassing firewalls and
misappropriating confidential information. Addressing problems caused by such
break-ins may have a material adverse effect on our business, operating results
and financial condition.
Although our license agreements with our customers contain provisions
designed to limit our exposure as a result of the defects listed above, such
provisions may not be effective. Existing or future federal, state or local laws
or ordinances or unfavorable judicial decisions could effect their
enforceability. To date, we have not experienced any such product liability
claims, but there can be no assurance that this will not occur in the future.
Because our products are used in business-critical applications, a successful
product liability claim could have a material adverse effect on our business,
operating results and financial condition. Additionally, defending such a suit,
regardless of its merits, could entail substantial expense and require the time
and attention of key management personnel, either of which could have a material
adverse effect on our business, operating results or financial condition.
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<PAGE> 21
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.
VOLATILITY OF COMMON STOCK PRICE. The market price of our common stock has
fluctuated in the past and is likely to fluctuate in the future. In addition,
securities markets have experienced significant price and volume fluctuations
and the market prices of high-tech companies have been especially volatile.
Investors may be unable to resell their shares of our common stock at or above
the price they paid for it. In the past, companies that have experienced
volatility in the market price of their stock have been the object of securities
class action litigation. If we were the object of securities class action
litigation, it could result in substantial costs and diversion of management's
attention and resources.
CONTROL BY EXISTING SHAREHOLDERS. As of January 25, 1999, J.D. Edwards
executive officers, directors and entities affiliated with them, in the
aggregate, beneficially owned approximately 52.1% of our outstanding common
stock. These stockholders, if acting together, would be able to significantly
influence all matters requiring approval by stockholders, including the election
of directors and the approval of mergers or other business combinations.
Additionally, C. Edward McVaney, Robert C. Newman and Jack L. Thompson, the
founders of J.D. Edwards, have entered into an Amended and Restated Stockholders
Agreement. This agreement provides that Messrs. Newman and Thompson must cast
their votes in the same proportion as the votes cast by Mr. McVaney with respect
to certain significant corporate issues, including:
- any revision to our Certificate of Incorporation
- any merger, consolidation, share exchange or similar event
- any sale or disposition of all or substantially all of our assets
- any dissolution or liquidation
- any bankruptcy filing
As a result of this agreement, Mr. McVaney has substantial control over the
approval of such matters. In addition, each founder must vote for the election
of the other founders to the board of directors or a designee appointed by such
other founder.
ANTITAKEOVER EFFECTS AND DELAWARE LAW. Certain provisions of our Amended
and Restated Certificate of Incorporation, Bylaws, and Delaware law could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. This could adversely affect the market price of
our common stock.
ITEM 2. PROPERTIES.
The Company's corporate headquarters and executive offices are in Denver,
Colorado, where the Company leases approximately 750,000 square feet of space in
multiple facilities. The leases on these facilities expire at various dates
ranging from 1999 through 2012. The Company also leases approximately 250,000
square feet of space, primarily for regional sales and support offices,
elsewhere in the United States. Additionally, the Company leases approximately
337,000 square feet of office space in countries outside the United States, used
primarily for sales and support offices. Expiration dates on sales and support
office leases range from fiscal 1999 to 2010. In addition, a third and fourth
corporate facility of approximately 200,000 square feet each are being built.
The Company will lease these buildings upon their scheduled completion in March
and November 1999, respectively. The Company believes that its current domestic
and international
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<PAGE> 22
facilities will be sufficient to meet its needs for at least the next twelve
months. See Note 7 of Notes to Consolidated Financial Statements for information
regarding the Company's obligations under its facilities leases and Note 9 of
Notes to Consolidated Financial Statements for information regarding the
Company's recent financing activities.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. While the outcome of
these matters cannot be predicted with certainty, in the opinion of management,
the adverse outcome of any such current legal proceedings would not have a
material adverse effect on the Company's results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of January 15, 1999
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Douglas S. Massingill.... 41 President and Chief Executive Officer
David E. Girard.......... 43 Executive Vice President and Chief Operating Officer
Richard E. Allen......... 41 Senior Vice President, Finance and Administration and Chief
Financial Officer
Paul E. Covelo........... 43 Senior Vice President
Michael A. Schmitt....... 41 Senior Vice President
Daniel B. Snyder......... 41 Senior Vice President
Pamela L. Saxton......... 46 Vice President of Finance, Controller and Chief Accounting
Officer
Richard G. Snow, Jr. .... 53 Vice President, General Counsel and Secretary
</TABLE>
Douglas S. Massingill has been President and Chief Executive Officer of the
Company since November 1998. From March 1997 to October 1998, he was Executive
Vice President and Chief Operating Officer. From February 1994 to March 1997, he
was Executive Vice President of Worldwide Operations, and from January 1993 to
March 1994, Mr. Massingill was Vice President and General Manager of the South
Area. He joined the Company in June 1990 as Account Executive for the Large
Accounts Program. Mr. Massingill holds a B.A. in accounting from Shorter College
and an M.B.A. from Georgia Southern University.
David E. Girard has been Executive Vice President and Chief Operating
Officer of the Company since November 1998. From November 1997 to October 1998,
he was Senior Vice President. He was Vice President and General Manager of the
East Area from May 1994 through October 1997. Mr. Girard holds a B.S. in
marketing from University of Connecticut and attended the Columbia Executive
Marketing Management Program at Columbia University.
Richard E. Allen has been Senior Vice President, Finance and Administration
since November 1997 and Chief Financial Officer, Treasurer and Assistant
Secretary since January 1990. From January 1990 through October 1997, he was
Vice President, Finance and Administration. From August 1985 to September 1994,
Mr. Allen served as Controller of the Company and as Secretary from March 1986
to January 1990. Mr. Allen holds a B.S. in business administration from Colorado
State University.
Paul E. Covelo has been Senior Vice President since November 1997. From
August 1994 to October 1997, he was Vice President of International Operations.
He served as Vice President and General Manager of the West Area from January
1992 to September 1994 and Manager of the Newport Beach Region from July 1988 to
January 1992. Mr. Covelo holds a B.A. in marketing from Loyola Marymount
University.
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<PAGE> 23
Michael A. Schmitt has been Senior Vice President since November 1997. From
September 1996 to October 1997, he held the position of Vice President and
General Manager of Central European operations, and from October 1994 to August
1996 he was Vice President and General Manager of the West area. Mr. Schmitt
holds a B.S. in Business Administration from California Polytechnic State
University.
Daniel B. Snyder has been Senior Vice President since November 1997. He was
Vice President and General Manager of the Midwest Area from March 1992 to
October 1997, and from January 1992 to March 1992, he served as Director of
Large Accounts for the Midwest Area. Mr. Snyder holds a B.S. in business
administration from Arizona State University, and an M.B.A. in finance from
University of Southern California.
Pamela L. Saxton has been Vice President of Finance, Controller and Chief
Accounting Officer since joining the Company in September 1994. Ms. Saxton holds
a B.S. in accounting from University of Colorado.
Richard G. Snow, Jr. has been Vice President, General Counsel and Secretary
since joining the Company in January 1990. He holds a B.S. in business
administration from the University of California, Berkeley and a J.D. from
California Western University Law School.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
(a) The Company made its initial public offering on September 23, 1997 at a
price of $23.00 per share The Company's common stock is listed on the Nasdaq
National Market under the symbol "JDEC." The following table sets forth the high
and low closing sale prices per share of the Company's common stock for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1997
Fourth Quarter (beginning September 23, 1997)............. 40.375 31.00
1998
First Quarter............................................. 35.19 26.31
Second Quarter............................................ 41.50 28.75
Third Quarter............................................. 46.25 32.75
Fourth Quarter............................................ 49.38 26.25
</TABLE>
As of January 15, 1999, there were 469 holders of record of the Company's
common stock. Because many of the Company's shares of common stock are held by
brokers and other institutions on behalf of stockholders, the Company is unable
to estimate the total number of stockholders represented by these record
holders. The Company has never declared or paid any cash dividend on its common
stock. Since the Company currently intends to retain all future earnings to
finance future growth, it does not anticipate paying any cash dividends in the
foreseeable future.
(b) In connection with J.D. Edwards' acquisition of substantially all of
the assets of a privately-held company (the "Acquired Company"), which included
2.7 million shares of J.D. Edwards' Common Stock, the Company issued 2,707,316
shares of J.D. Edwards' Common Stock (the "New Shares") to the Acquired Company.
The New Shares were issued pursuant to an exemption from the registration
requirements of the Securities Act afforded by Regulation D under Section 4(2)
of the Securities Act. The stockholders of the Acquired Company were either
accredited or sophisticated investors with access to all relevant information
regarding J.D. Edwards necessary to evaluate the investment, and each
stockholder represented that the New Shares were being acquired for investment
intent. There was no general solicitation or advertising, and J.D. Edwards used
reasonable care to assure that the stockholders of the Acquired Company were not
underwriters.
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<PAGE> 24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company should be
read in conjunction with "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations," the consolidated financial
statements and notes thereto and other financial information included elsewhere
in this Annual Report on Form 10-K. The consolidated statements of income data
set forth below for the years ended October 31, 1996, 1997 and 1998 and the
consolidated balance sheet data as of October 31, 1997 and 1998 are derived
from, and are qualified by reference to, the Company's consolidated financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, which
are included elsewhere in this Annual Report on Form 10-K. The consolidated
statements of income data for the years ended October 31, 1994 and 1995 and the
consolidated balance sheet data as of October 31, 1994, 1995 and 1996 are
derived from consolidated financial statements audited by PricewaterhouseCoopers
LLP, independent accountants, which are not included in this Annual Report on
Form 10-K. Historical results are not necessarily indicative of results for any
future period. The Company has never declared or paid any cash dividend on its
Common Stock. See "Consolidated Financial Statements" under Item 14(a).
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenue:
License fees.................................... $107,561 $134,138 $180,366 $248,707 $386,081
Services........................................ 133,026 206,628 297,682 399,105 547,901
-------- -------- -------- -------- --------
Total revenue............................ 240,587 340,766 478,048 647,812 933,982
Costs and expenses:
Cost of license fees............................ 12,832 18,461 27,443 36,444 43,404
Cost of services................................ 87,826 128,144 184,846 244,640 349,689
Sales and marketing............................. 76,169 102,310 128,759 176,031 261,400
General and administrative...................... 27,377 38,677 53,052 69,850 83,450
Research and development........................ 18,936 24,296 40,321 60,591 89,401
-------- -------- -------- -------- --------
Total costs and expenses................. 223,140 311,888 434,421 587,566 827,344
-------- -------- -------- -------- --------
Operating income.................................. 17,447 28,878 43,627 60,256 106,638
Other income (expense):
Interest income................................. 483 1,697 629 1,686 15,294
Interest expense................................ (101) (576) (899) (829) (843)
Foreign currency losses and other, net.......... (486) (411) (1,403) (1,787) (2,886)
-------- -------- -------- -------- --------
Income before income taxes........................ 17,343 29,588 41,954 59,326 118,203
Provision for income taxes(1)................... 5,280 11,379 15,628 22,098 43,735
-------- -------- -------- -------- --------
Net income........................................ $ 12,063 $ 18,209 $ 26,326 $ 37,228 $ 74,468
======== ======== ======== ======== ========
Net income per common share:(2)
Basic........................................... $ 0.15 $ 0.23 $ 0.33 $ 0.46 $ 0.76
======== ======== ======== ======== ========
Diluted......................................... $ 0.15 $ 0.22 $ 0.30 $ 0.39 $ 0.68
======== ======== ======== ======== ========
Shares used in computing per share amounts:
Basic........................................... 80,872 79,139 79,044 80,546 98,264
Diluted......................................... 82,253 82,504 87,667 96,500 109,993
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------------------------------
1994 1995 1996 1997(3) 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 28,615 $ 34,897 $ 25,554 $224,437 $183,115
Short- and long-term investments.................. -- -- -- 138,560 351,194
Total assets...................................... 127,131 175,191 243,786 643,037 950,473
Mandatorily redeemable shares, at redemption
value........................................... 14,290 19,973 47,024 -- --
Stockholders' equity.............................. 13,612 22,972 22,902 396,861 583,996
</TABLE>
- ---------------
(1) A valuation allowance provided against foreign tax loss carryforwards
totaling $2.4 million was eliminated in the year ended October 31, 1994 as a
result of the Company's determination that it would likely realize these
benefits.
(2) See Note 1 of Notes to Consolidated Financial Statements in Item 14 for a
discussion of the computation of earnings per common share and weighted
average common shares outstanding.
(3) The Company completed an initial public offering ("IPO") in September 1997.
Upon closing the IPO, the mandatory redemption feature of the mandatorily
redeemable shares was eliminated.
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<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and notes
thereto included elsewhere in this Annual Report on Form 10-K. This item
contains forward-looking statements that involve risks and uncertainties. Actual
results may differ materially from those indicated in such forward-looking
statements. Factors that may cause such a difference include, but are not
limited to, those discussed in "Item 1: Business -- Factors Affecting the
Company's Business, Operating Results and Financial Condition."
OVERVIEW
J.D. Edwards develops, markets and supports highly functional Enterprise
Resource Planning ("ERP") software for managing the supply chain. The Company
provides the core software products to run an entire business. These software
solutions operate on multiple computing platforms and are designed to deliver
the solutions that organizations need to maintain control of their businesses as
circumstances, technologies and market environments change.
The Company released the OneWorld version of its application suites in late
calendar 1996 to take advantage of potential opportunities in the Windows NT and
UNIX markets, as well as to enhance its position as a leader in the AS/400
market. The Company's software application suites had historically been designed
to operate exclusively on certain mid-range computing platforms, most recently
the IBM AS/400 platform. The WorldSoftware version of application suites for use
on the AS/400 platform first shipped in 1988, and sales of such applications and
related services accounted for substantially all of the Company's revenue until
the most recent two fiscal years.
The Company licenses software under non-cancelable license agreements and
provides related services, including consulting, implementation, support and
training. Revenue is recognized in accordance with Statement of Position ("SOP")
91-1, "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 license agreement
has been signed, the product has been delivered, collection is probable and all
significant contractual obligations relating to this license have been
satisfied. Revenue on all software license transactions in which there are
significant outstanding obligations is deferred and recognized once such
obligations are fulfilled. Typically, the Company's software licenses do not
include significant post-delivery obligations to be fulfilled by the Company and
payments are due within a twelve-month period from date of delivery. Where
software license contracts call for payment terms in excess of twelve months
from date of delivery, revenue is recognized as payments become due and all
other conditions for revenue recognition have been satisfied. Revenue from
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, and includes a portion of
the related license fee equal to the fair value of any bundled support services.
The Company does not require collateral for its receivables and reserves are
maintained for potential losses.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued SOP 97-2, "Software Revenue Recognition," which provides
guidance on recognizing revenue on software transactions and supersedes SOP
91-1. 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 will apply the
provisions of SOP 97-2 on a prospective basis for new software transactions
entered into beginning in the first quarter of fiscal 1999. Management believes
that the adoption of this guidance will not have a material impact on its
financial condition or results of operations and will not have a significant
impact on its current licensing or revenue recognition practices. However,
comprehensive interpretations and commonly accepted business practices for these
statements have not yet been established. There can be no assurance that
additional
24
<PAGE> 26
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 license fee revenue, results of operations and net income.
The Company distributes its products and services through both direct and
indirect sales channels. Currently, the Company has 50 direct sales and
consulting offices located throughout the world. The Company also utilizes more
than 270 outside sales and consulting partners with offices throughout the world
as an indirect distribution channel to penetrate certain vertical markets or
geographic areas. Generally, operating margins are higher on domestic revenue
than on international revenue. Additionally, operating margins are generally
higher in the geographic areas where the Company's operations are more
established than in the geographic areas where the Company is investing new
resources. International revenue as a percentage of total revenue ranged between
35% and 37% for each of the past three fiscal years.
Total revenue from both license fees and services has increased from year
to year. As a percentage of total revenue, service revenue is higher than
license revenue primarily as a result of the Company's historical emphasis on
providing consulting and training services that complement its software products
and due to increased support revenue from the Company's growing installed base
of customers. A change in the mix between license fee and service revenue could
impact operating income as the gross margins on license fee revenue are
generally higher than gross margins on service revenue. The revenue mix may
change in future periods depending upon a number of factors, particularly the
Company's success in penetrating the Windows NT and UNIX markets with the
OneWorld version of its application suites and in its implementation strategy
for OneWorld. The Company has historically subcontracted a substantial portion
of its consulting and training services to third parties. Such subcontracted
services accounted for 40%, 43% and 46% of this service revenue in fiscal 1996,
1997 and 1998, respectively. Currently, the Company is also pursuing a strategy
of relying on third-party implementation providers to contract directly with its
customers for OneWorld implementations and related services. See "Item 1:
Business -- Third Party Implementation Providers." To the extent the Company is
successful in implementing this strategy and the OneWorld version of the
Company's application suites achieves increased market acceptance in future
periods, revenue from subcontracted services and total service revenue as a
percentage of total revenue will likely decrease. However, there can be no
assurance that the Company will be successful in implementing its strategy or
that such products will achieve substantial market acceptance.
The Company has reassessed, and continues to closely monitor, its
international business risks due to the deterioration of global economic
conditions in the Asian markets, particularly in Japan, and in certain other
geographic regions. Although the Company expects that the current worldwide
economic conditions may negatively impact its business to some degree,
management does not believe such an impact will be material primarily due to the
broad geographic diversity of its operations. The Company plans to continue to
make investments in certain international areas as 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 small percentage of its revenue and
operating income from Asia and other specific geographic areas that are
currently being impacted by adverse economic conditions. The Company does not
anticipate material changes in its projections of future revenue or operating
income as a result of its international operations. However, there can be no
assurance that the current economic conditions in Asia or other geographic areas
will not worsen or that the situation will not have a material negative impact
on the Company's financial condition or results of operations.
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 service 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 the Company's fiscal
year end. Because total revenue, operating
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<PAGE> 27
margins and net income are greater in the fourth quarter, any shortfall from
anticipated revenue, particularly license fee revenue, in the fourth quarter
would have a disproportionately large adverse effect on the Company's operating
results for the fiscal year. The Company's first quarter revenue has
historically slowed during the holiday season in November and December, and its
total revenue, license fee revenue, service revenue and net income in its first
fiscal quarter have historically been lower than those in the immediately
preceding fourth quarter. For example, total revenue, license fee revenue,
service revenue and net income in the first quarter of fiscal 1998 decreased
17.7%, 30.4%, 7.3% and 71.9%, respectively, from the fourth quarter of fiscal
1997.
Historically, the sales cycle typically ranged between 6 and 15 months.
During fiscal 1998, the Company experienced a shortening of the software sales
cycle and the Company's sales force closed more transactions within a time
period toward the shorter end of this range. Additionally there is increasing
uncertainty in the ERP market attributed to a number of factors including global
economic conditions, issues surrounding the Year 2000 and strong competitive
forces which could reduce the growth in the Company's license fee revenue. Due
to these factors the Company is experiencing reduced visibility of future
revenue and operating results. As a result, there can be no assurance that the
Company's future license fee revenue and operating results will not be adversely
affected by these factors or that its financial condition, results of operations
and market price of the Company's common stock will not be adversely impacted.
(See "Item 1: Business -- Factors Affecting the Company's Business, Operating
Results and Financial Condition -- Lengthy Sales Cycle and -- Competition.")
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's consolidated statements of income as a percentage of total
revenue (except for gross margin data):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenue:
License fees.............................................. 37.7% 38.4% 41.3%
Services.................................................. 62.3 61.6 58.7
----- ----- -----
Total revenue..................................... 100.0 100.0 100.0
Costs and expenses:
Cost of license fees...................................... 5.7 5.6 4.7
Cost of services.......................................... 38.7 37.8 37.4
Sales and marketing....................................... 27.0 27.2 28.0
General and administrative................................ 11.1 10.8 8.9
Research and development.................................. 8.4 9.3 9.6
----- ----- -----
Total costs and expenses.......................... 90.9 90.7 88.6
Operating income............................................ 9.1 9.3 11.4
Other income (expense), net................................. (.3) (.2) 1.3
----- ----- -----
Income before income taxes.................................. 8.8 9.1 12.7
Provision for income taxes................................ 3.3 3.4 4.7
----- ----- -----
Net income.................................................. 5.5% 5.7% 8.0%
===== ===== =====
Gross margin on license fee revenue......................... 84.8% 85.3% 88.8%
Gross margin on service revenue............................. 37.9% 38.7% 36.2%
</TABLE>
Fiscal Years Ended October 31, 1997 and 1998
Total Revenue. Total revenue increased to $934.0 million for fiscal 1998
from $647.8 million for fiscal 1997, representing an increase of 44%. The
Company has achieved a greater acceptance of its software products by mid-sized
organizations in key domestic and international markets. Additionally, new
releases of
26
<PAGE> 28
the Company's application suites, and enhanced services, support and custom
programming capabilities have further increased such acceptance. The total
revenue increase in fiscal 1998 was due to growth in both software license
transactions and services, with higher growth in license fees than services. The
revenue mix between license fees and services was 41.3% and 58.7%, respectively,
compared to 38.4% and 61.6%, respectively, for fiscal 1997. The Company is
pursuing a strategy to change its revenue mix by achieving greater license fee
growth compared to services. The Company increased the number of large license
transactions and the number of new customers as compared to fiscal 1997,
expanding its installed base of customers by 16% compared to the end of last
fiscal year to approximately 5,000 at October 31, 1998. Additionally, the
Company is continuing with a strategy of relying on third parties to contract
directly with the Company's customers for OneWorld implementations and related
services which may affect the revenue mix in future periods. However, there can
be no assurance that the Company will be successful in implementing this
strategy or that OneWorld will achieve substantial market acceptance.
Geographically, the overall growth was led by strong performance in Europe,
the Middle East and Africa (EMEA), with a 61% increase in total revenue during
fiscal 1998 compared to last year. The geographic areas defined as United
States, EMEA and the rest of the world accounted for 63%, 22% and 15% of total
revenue, respectively, for fiscal 1998. Comparatively, during fiscal 1997, the
United States, EMEA and the rest of the world accounted for 63%, 20% and 17% of
total revenue, respectively.
License fees. License fee revenue increased to $386.1 million for fiscal
1998 from $248.7 million for fiscal 1997, representing an increase of 55%. The
growth was primarily due to increases in the volume of license transactions, the
number of new customers added during the year, and the number of large license
transactions. The OneWorld version of application suites expanded the Company's
target market to include customers using Windows NT and UNIX platforms in
addition to those using the AS/400 platform. The portion of license fee revenue
generated from customers using either Windows NT or UNIX platforms increased to
16% in fiscal 1998 from 11% in fiscal 1997. 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
fiscal years.
During fiscal 1998, the Company expanded several sales channel
opportunities in an effort to increase license revenue generated through
indirect sales channels in future periods. In addition to other international
relationships, the Company's Genesis distribution channel, which is focused on
companies with annual revenue of less than $100 million, expanded to also
include international partners. A new distribution channel, the Small Business
Solution, was established to focus on companies with annual revenue of less than
$35 million. Also, the Company began partnering with other established software
development vendors in key niche markets to focus on expansion outside the
traditional ERP market.
Services. Service revenue increased to $547.9 million for fiscal 1998 from
$399.1 million for fiscal 1997, representing an increase of 37%. The Company
continued to experience increased demand for services in fiscal 1998 compared to
last year. The increase in total service revenue was led by higher revenue from
consulting, the largest component of services, although training and support
revenue also increased. Consulting revenue increased primarily due to the
increase in license transactions and the demand for implementations as well as
the expanded capacity from both internal personnel and business partner
resources. Support revenue increased primarily as a result of the Company's
growing installed base of customers. Training revenue increased primarily due to
the increase in license transactions, expanded capacity, additional personnel
resources and an increase in prices for certain courses. As a percentage of
total revenue, services revenue remained higher than license fee revenue due to
the continued increases in demand and the Company's ongoing commitment to
provide consulting and training services that complement its software products.
In any fiscal year, total service 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 who have contracted for support and the
amount of the related fees, billing rates for consulting services and training
courses, and number of customers attending training courses.
27
<PAGE> 29
The Company subcontracts a portion of its consulting and training services
to third parties. The portion of such service revenue generated through
subcontracted work accounted for 46% in fiscal 1998 compared to 43% in fiscal
1997. In addition to subcontracting out some of its service work to business
partners, the Company put a strategy in place during the previous fiscal year to
utilize third parties to contract directly with its customers to implement the
OneWorld version of its applications suites. During fiscal 1998, new business
alliances were established to achieve this objective, and several existing
alliance partners provided significantly more resources to implement OneWorld;
however, to date the Company has referred only a limited number of its
implementations to such third parties. The transition to this referral strategy
had a limited impact on the fiscal 1998 results due to direct service contracts
currently in place and established relationships with existing customers. 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.
Cost of license fees. Cost of license fees includes royalties, business
partner commissions, amortization of capitalized software development costs,
documentation costs and software delivery expenses. Cost of license fees
increased to $43.4 million for fiscal 1998 from $36.4 million for fiscal 1997.
The increase in the dollar amount of costs in fiscal 1998 compared to last
fiscal year was primarily due to the volume of license transactions closed
through business partners, resulting in higher commissions to the business
partners. In future periods, business partner costs may represent a larger
percentage of revenue compared to the previous year if the Company is successful
with its expanded sales channel initiatives and business alliances that would
drive an increase in expense. The overall increase in costs compared to fiscal
1997 were partially offset by the Company's renegotiation of certain royalty
agreements effective in fiscal 1998 which lowered royalty expense in the current
year compared to last year. Amortization of capitalized software development
costs was relatively consistent at $6.1 million for fiscal 1998 compared to $6.0
million for fiscal 1997. Capitalized software costs primarily relate to the
OneWorld applications and will continue to be amortized through the first
quarter of fiscal 2000.
The gross margin on license fee revenue increased to 88.8% in fiscal 1998
from 85.3% in fiscal 1997. 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, the volume
of license transactions closed through business partners, internal terms, and
the proportion of the Company's software products that are subject to royalty
payments. The fiscal 1998 results were positively impacted by the overall
increase in license fee revenue volume and lower royalty expense on
complementary third-party software products licensed through the Company in
fiscal 1998 compared to fiscal 1997.
Cost of services. Cost of services includes the personnel and related
overhead costs for consulting, implementation, support and training services,
together with fees paid to third parties for subcontracted services. Cost of
services increased to $349.7 million for fiscal 1998 from $244.6 million for
fiscal 1997. The dollar amount increase was primarily due to additional
personnel and subcontracted service costs to support the growth in demand for
implementation and consulting services as well as an increase in customer
support staff. During fiscal 1998, the Company invested additional resources for
training its personnel and business partners on the OneWorld applications and
related computer platforms. As a result, the gross margin on service revenue
decreased to 36.2% in fiscal 1998 from 38.7% in fiscal 1997.
Generally, the gross margin on support revenue is higher than on consulting
and training revenue, and any change in the mix in types of services will affect
the gross margin on total service revenue. In particular, the extent to which
the Company is successful in implementing its strategy of relying on third
parties to contract directly with the Company's customers for OneWorld
implementations and related services will affect gross margin on service
revenue.
Sales and marketing. Sales and marketing expense consists of personnel and
related overhead costs, including commissions, for the sales and marketing
activities of the Company, together with advertising and promotion costs. Sales
and marketing expense increased to $261.4 million for fiscal 1998 from $176.0
million for fiscal 1997, representing 28.0% and 27.2% of total revenue,
respectively. Increased license fee revenue
28
<PAGE> 30
impacted sales and marketing expenses during fiscal 1998 by driving higher sales
commission expense as compared to fiscal 1997. The increase in the total dollar
amount of expense was also 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 52% at October 31,
1998 compared to a year ago. Sales and marketing expenses as a percentage of
total revenue increased primarily as a result of outside costs associated with
the Company's marketing, promotion, and advertising placement activity in fiscal
1998 as compared to last year. The Company expects to continue recruiting
additional direct sales personnel in relation to the Company's future sales
goals and the Windows NT and UNIX market opportunities with the OneWorld version
of its application suites. Additional personnel may also be required to support
the Company's marketing and promotion efforts. As a result, future compensation
and other related costs are expected to increase. Additionally, sales and
marketing expenses may continue to increase as a percentage of total revenue in
future periods as a result of the Company's anticipated growth and potential
timing differences between the anticipated revenue growth in relation to the
additional expense from the new sales personnel.
General and administrative. General and administrative expense includes
personnel and related overhead costs for the support and administration
functions of the Company. General and administrative expense increased to $83.5
million for fiscal 1998 from $69.9 million for fiscal 1997, representing 8.9%
and 10.8% of total revenue, respectively. The total dollar amount of expense was
higher in fiscal 1998 primarily due to an increase in personnel and
subcontracted services to facilitate the growth in the Company's operations.
General and administrative expenses as a percentage of total revenue declined
primarily as a result of the growth in revenue volume and increased efficiencies
within support functions to effectively manage the overall growth in the
Company's operations. The growth in support personnel was less than planned as
of October 31, 1998, and general and administrative expenses are likely to
increase at a rate more comparable to the overall growth of the Company in
subsequent periods. As a result, future general and administrative expenses are
not expected to continue to decline substantially as a percentage of total
revenue in future fiscal years as compared to fiscal 1998.
Research and development. Research and development expense includes
personnel and related overhead costs for product development, enhancements,
upgrades, quality assurance and testing. Research and development expense
increased to $89.4 million for fiscal 1998 from $60.6 million for fiscal 1997.
In addition, no software development costs were capitalized in fiscal 1998 while
$2.2 million was capitalized in fiscal 1997. Total research and development
expenditures were higher in fiscal 1998 primarily due to a 37% increase in
personnel, together with increases in related facilities and equipment costs.
Development resources were primarily devoted to enhancements of both the
Company's World and OneWorld application suites during both fiscal 1997 and
1998. Capitalized software development costs in fiscal 1997 primarily consisted
of OneWorld development costs which the Company ceased capitalizing during the
first half of fiscal 1997 following the release of the version in late calendar
1996. As a percentage of total revenue, research and development expenditures,
including capitalized software development costs in fiscal 1997, were relatively
consistent at 9.6% in fiscal 1998 and 9.7% in fiscal 1997. The Company
anticipates that research and development expense will increase in subsequent
periods.
Other income (expense). Other income (expense) includes interest income on
cash, cash equivalents and investments, interest expense on the Company's
financing arrangements and its bank line of credit, foreign currency gains and
losses, and other non-operating income and expenses. Interest income increased
to $15.3 million for fiscal 1998 from $1.7 million for fiscal 1997 primarily due
to interest earned on the investment of proceeds from the Company's initial
public offering completed in September 1997. Foreign currency losses increased
to $2.8 million for fiscal 1998 from $2.0 million for fiscal 1997 primarily due
to the strengthening of the U.S. dollar against certain foreign currencies.
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
29
<PAGE> 31
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 certain currency risk of
foreign denominated assets and liabilities. The primary hedging instruments are
forward foreign exchange contracts with maturities of generally three months or
less in term, and all contracts are entered into with major financial
institutions. Gains and losses on these contracts are recognized as other income
or expense in the current period, consistent with the period in which the gain
or loss of 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.
Fiscal Years Ended October 31, 1996 and 1997
Total Revenue. Total revenue increased to $647.8 million for fiscal 1997
from $478.0 million for fiscal 1996, representing an increase of 36%. This
increase was primarily a result of greater acceptance of the Company's software
products by mid-sized organizations in key domestic and international markets,
together with new releases of the Company's application suites, and enhanced
services, support and custom programming capabilities. International revenue as
a percentage of total revenue was 37.2% of total revenue in fiscal 1997 and
34.9% in fiscal 1996.
License fees. License fee revenue increased to $248.7 million for fiscal
1997 from $180.4 million for fiscal 1996, representing an increase of 38%. The
increase was primarily due to a greater volume of license transactions and an
increase in average transaction size. During fiscal 1996, all license fee
revenue was generated from customers operating on the AS/400 platform. The
Company began generating some of its license fee revenue from customers
operating on UNIX and NT platforms during fiscal 1997; however, the substantial
majority of all license fee revenue was still generated from customers operating
on the AS/400 platform.
Services. Service revenue increased to $399.1 million for fiscal 1997 from
$297.7 million for fiscal 1996, representing an increase of 34%. This increase
was primarily due to higher revenue from consulting, which is the largest
component of services, although support and training revenue also increased.
Total service revenue is dependent upon the amount and size of consulting
engagements, the number of Company and business partner consultants available to
staff engagements, the number of customers who have contracted for support and
the amount of the related fees, billing rates for consulting services and
training courses, and average training course sizes. Service revenue as a
percentage of total revenue was 61.6% for fiscal 1997 compared to 62.3% for
fiscal 1996. The consistent demand for services resulted from the Company's
emphasis on providing consulting and training services that complement its
software products and the growth in its installed base of customers.
Cost of license fees. Cost of license fees increased to $36.4 million for
fiscal 1997 from $27.4 million for fiscal 1996. Gross margin on license fee
revenue increased to 85.3% for fiscal 1997 from 84.8% for fiscal 1996, primarily
as a result of lower royalty expense on complementary third-party software
products licensed through the Company in fiscal 1997 compared to fiscal 1996.
Amortization of capitalized software development costs increased to $6.0
million for fiscal 1997 compared to $2.6 million for fiscal 1996. This increase
was the result of the amortization of capitalized OneWorld development costs,
which began upon the release of the OneWorld version of the Company's
application suites in late calendar 1996. Gross margin on license fee revenue
varies, in part, depending upon the proportion of the Company's software
products that are subject to royalty payments. The Company offers certain
complementary software products that are subject to royalties payable by the
Company to third parties. License fees subject to royalties were lower during
fiscal 1997 compared to fiscal 1996 primarily due to declining license fee
revenue from application suites incorporating WorldVision, a graphical user
interface for WorldSoftware that utilizes technology licensed from third
parties, as more of the Company's customers seeking such functionality during
the later part of fiscal 1997 chose to purchase OneWorld. Also affecting license
fee margins in fiscal 1997 was an increase in business partner commissions from
fiscal 1996 due
30
<PAGE> 32
primarily to an increase in license fee revenue from the Company's Genesis
version of its application suites, which is offered exclusively through business
partners.
Cost of services. Cost of services increased to $244.6 million for fiscal
1997 from $184.8 million for fiscal 1996. This increase was due to increased
personnel and subcontracted services to support the growing demand for
implementation and consulting services. Gross margin on service revenue
increased to 38.7% in fiscal 1997 from 37.9% in fiscal 1996 primarily due to
lower compensation costs as a percentage of the related revenue.
Sales and marketing. Sales and marketing expense increased to $176.0
million for fiscal 1997 from $128.8 million for fiscal 1996, representing 27.2%
and 27.0% of total revenue, respectively. The increase was primarily the result
of the addition of direct sales personnel necessary to support the Company's
selling efforts, especially the OneWorld version of its application suites.
General and administrative. General and administrative expense increased to
$69.9 million for fiscal 1997 from $53.1 million for fiscal 1996, representing
10.8% and 11.1% of total revenue, respectively. Total dollar amount of expense
was higher in fiscal 1997 primarily due to an increase in personnel to support
the growth in the Company's operations.
Research and development. Research and development expense increased to
$60.6 million for fiscal 1997 from $40.3 million for fiscal 1996. In addition,
capitalized software development costs were $2.2 million for fiscal 1997, down
from $7.3 million for fiscal 1996. Total research and development expenditures,
including the capitalized software development costs, were higher in fiscal 1997
primarily due to a 29% increase in personnel, together with increases in related
facilities and equipment costs. During each period, development resources were
devoted to continued enhancements of the Company's application suites.
Capitalized software development costs for both periods primarily consisted of
OneWorld development costs. Due to the release of the OneWorld version in late
calendar 1996, the Company ceased capitalizing OneWorld development costs during
the first half of fiscal 1997. As a percentage of total revenue, research and
development expenditures, including capitalized software development costs, were
relatively consistent at 9.7% in fiscal 1997 and 10.0% in fiscal 1996.
Other income (expense). Interest income increased to $1.7 million for
fiscal 1997 from $629,000 for fiscal 1996 primarily due to interest earned on
the investment of proceeds from the Company's initial public offering completed
in September 1997. Interest expense decreased to $829,000 for fiscal 1997 from
$899,000 for fiscal 1996 due to lower average borrowings outstanding on the
Company's line of credit during fiscal 1997. Foreign currency losses increased
to $2.0 million for fiscal 1997 from $1.7 million for fiscal 1996 primarily due
to the strengthening of the U.S. dollar against most European currencies.
31
<PAGE> 33
QUARTERLY RESULTS OF OPERATIONS/SUPPLEMENTARY FINANCIAL INFORMATION
The following table sets forth certain unaudited consolidated statements of
income data, both in absolute dollars and as a percentage of total revenue
(except for gross margin data), for each of the Company's last eight quarters.
This data has been derived from unaudited consolidated financial statements that
have been prepared on the same basis as the annual audited consolidated
financial statements and, in the opinion of the Company, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information. These unaudited quarterly results should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Annual Report on Form 10-K. The consolidated results
of operations for any quarter are not necessarily indicative of the results for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Revenue:
License fees................. $ 40,934 $ 51,129 $ 58,983 $ 97,661 $ 67,990 $ 76,424 $ 98,122 $143,545
Services..................... 81,887 94,725 103,551 118,942 110,266 132,567 141,480 163,588
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue.......... 122,821 145,854 162,534 216,603 178,256 208,991 239,602 307,133
Costs and expenses:
Cost of license fees......... 7,698 9,386 7,900 11,460 11,119 8,185 11,199 12,901
Cost of services............. 51,493 57,813 64,306 71,028 70,588 84,559 91,283 103,259
Sales and marketing.......... 34,706 39,029 44,881 57,415 50,421 61,440 68,334 81,205
General and administrative... 14,772 16,315 17,352 21,411 18,439 18,211 20,639 26,161
Research and development..... 10,142 14,391 16,567 19,491 19,938 20,640 22,399 26,424
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses............. 118,811 136,934 151,006 180,805 170,505 193,035 213,854 249,950
Operating income............... 4,010 8,920 11,528 35,798 7,751 15,956 25,748 57,183
Other income (expense), net.... (313) (1,178) (22) 583 2,449 3,620 2,907 2,589
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes..... 3,697 7,742 11,506 36,381 10,200 19,576 28,655 59,772
Provision for income taxes... 1,368 2,893 4,286 13,551 3,774 7,243 10,602 22,116
-------- -------- -------- -------- -------- -------- -------- --------
Net income..................... $ 2,329 $ 4,849 $ 7,220 $ 22,830 $ 6,426 $ 12,333 $ 18,053 $ 37,656
======== ======== ======== ======== ======== ======== ======== ========
Net Income per common share
Basic........................ $ 0.03 $ 0.06 $ 0.09 $ 0.27 $ 0.07 $ 0.13 $ 0.18 $ 0.37
======== ======== ======== ======== ======== ======== ======== ========
Diluted...................... $ 0.02 $ 0.05 $ 0.07 $ 0.23 $ 0.06 $ 0.11 $ 0.16 $ 0.34
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing per
share amounts:
Basic........................ 79,094 79,112 79,146 84,789 93,413 96,975 100,522 102,145
Diluted...................... 93,520 95,544 96,799 100,107 108,116 109,525 110,867 111,466
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
License fees................. 33.3% 35.1% 36.3% 45.1% 38.1% 36.6% 41.0% 46.7%
Services..................... 66.7 64.9 63.7 54.9 61.9 63.4 59.0 53.3
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of license fees......... 6.3 6.4 4.9 5.3 6.2 3.9 4.7 4.2
Cost of services............. 41.9 39.6 39.6 32.8 39.6 40.5 38.1 33.6
Sales and marketing.......... 28.2 26.8 27.6 26.5 28.3 29.4 28.5 26.5
General and administrative... 12.0 11.2 10.7 9.9 10.4 8.7 8.6 8.5
Research and development..... 8.3 9.9 10.2 9.0 11.2 9.9 9.4 8.6
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses............. 96.7 93.9 93.0 83.5 95.7 92.4 89.3 81.4
Operating income............... 3.3 6.1 7.0 16.5 4.3 7.6 10.7 18.6
Other income (expense), net.... (.3) (.8) (.0) .3 1.4 1.7 1.2 0.9
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes..... 3.0 5.3 7.0 16.8 5.7 9.3 11.9 19.5
Provision for income taxes... 1.1 2.0 2.6 6.3 2.1 3.4 4.4 7.2
-------- -------- -------- -------- -------- -------- -------- --------
Net income..................... 1.9% 3.3% 4.4% 10.5% 3.6% 5.9% 7.5% 12.3%
======== ======== ======== ======== ======== ======== ======== ========
Gross margin on license fee
revenue...................... 81.2% 81.6% 86.6% 88.3% 83.6% 89.3% 88.6% 91.0%
Gross margin on service
revenue...................... 37.1% 39.0% 37.9% 40.3% 36.0% 36.2% 35.5% 36.9%
</TABLE>
In the last eight quarters, expenses and operating income as a percentage
of total revenue have varied primarily due to seasonality, which has resulted in
disproportionately higher license fee revenue in the fourth fiscal quarter.
Expenses as a percentage of revenue have decreased in the fourth quarter due to
seasonally
32
<PAGE> 34
higher license fee revenue. Gross margin on license fee revenue has varied
quarterly from 81.2% to 91.0% within the last eight quarters due to fluctuations
in license volume and the mix of fixed and variable costs of licenses. Gross
margin on service revenue has declined moderately primarily due to the
investment in resources for training personnel and business partners on OneWorld
applications and has decreased in the first quarters of fiscal 1997 and fiscal
1998 due to lower service revenue during the holiday season in November and
December.
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from quarter to
quarter. As a result, quarterly comparisons of operating results are not
necessarily meaningful or indicative of future performance. Furthermore, the
Company believes it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail, or
are perceived to prevail, with respect to the Company's business or generally,
the market price of the Company's Common Stock would likely be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1998, the Company's principal sources of liquidity
consisted of $183.1 million of cash and cash equivalents, $351.2 million of
short-term and long-term investments and a $50.0 million, unsecured, revolving
line of credit which can be utilized for working capital requirements and other
general corporate purposes. As of October 31, 1998, the Company had working
capital of $171.4 million and no amounts were outstanding under the Company's
bank line of credit. Short-term deferred revenue and customer deposits totaling
$121.1 million are included in determining this amount. The short-term deferred
revenue primarily represents annual support payments billed to customers that is
recognized ratably as revenue over the support service period. Without the
short-term deferred revenue and customer deposits, working capital would have
been $292.5 million, and including short-term and long-term investments working
capital would have been $643.7 million.
The Company calculates accounts receivable days sales outstanding (DSO) by
dividing its accounts receivable balance at the end of the quarter by the sum of
revenue for the quarter plus the net change in unearned revenue divided by 90
days. The net change in unearned revenue is included in the calculation to
better reflect sales activity timing rather than revenue recognition timing.
Calculated as such, DSO was 81 days as of October 31, 1998 compared to 77 days
as of the previous fiscal year end. 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
Fluctuations."
The Company generated operating cash flow of $150.8 million for fiscal 1998
and $74.2 million and $42.4 million for fiscal 1997 and 1996, respectively. The
increases in operating cash flow from year to year were due primarily to
increased net income. During these periods, growth in operating assets such as
accounts receivable has been funded by similar growth in operating liabilities,
primarily deferred revenue and accrued liabilities. Tax deductions associated
with stock option exercises during fiscal 1998 increased the deferred income tax
asset and additional paid-in capital in the balance sheet as of October 31,
1998.
The Company utilized cash for investing activities of $241.2 million,
$154.6 million and $51.2 million for fiscal 1998, 1997 and 1996, respectively.
The increased net levels in fiscal 1998 and 1997 were due to the investment of
cash from the initial public offering. During each of these fiscal years, the
Company purchased furniture, fixtures and equipment that were necessary to
support its expanding operations. In fiscal 1998 and 1997, the Company's cash
utilized for investing activities was offset in part by $7.7 million and $8.7
million, respectively, of proceeds from the sale of assets. In fiscal 1996, the
Company invested $19.4 million to purchase land in Denver, Colorado, a portion
of which is being used by the Company for a headquarters facility.
Financing activities provided $47.8 million in cash from exercises of
common stock options and the Employee Stock Purchase Plan activity. The Company
issued a total of 9.9 million shares of common stock
33
<PAGE> 35
during fiscal 1998. In September 1997, the Company completed its initial public
offering of 18.2 million shares of common stock, of which 12.8 million were
issued by the Company, generating net proceeds of $276.5 million. Additionally,
during fiscal 1997, the Company issued 941,000 shares of common stock upon the
exercise of options and received $3.2 million in proceeds. The Company did not
have other significant net financing activities for fiscal 1998, 1997, or 1996.
The Company utilized its bank line of credit for working capital and other
general corporate purposes during fiscal 1997 and 1996 but repaid all amounts
borrowed within each of these periods.
Management believes its cash and cash equivalents balance, short-term and
long-term investments, amounts available under existing credit facilities and
funds generated from operations will be sufficient to meet its cash needs for at
least the next twelve months. Additionally, the Company may also use a portion
of its short and long-term investments to acquire businesses, products or
technologies that are complementary to those of the Company 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 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 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.
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 in 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. 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, and the
Company has been encouraging its customers to migrate to current product
versions that are 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 complete 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.
34
<PAGE> 36
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;
implement contingency plans.
6) Deployment -- Implement modified systems and processes back into
normal production; monitor contingency plans.
Overall, the Company had accomplished a 48% completion 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 had finished the first three steps of the process
and had completed 30% of the "resolution" 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
had completed the "awareness" and "inventory" phases and was 98% complete with
the "assessment" 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 $2.4 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, 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 $500,000.
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.
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 also 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
35
<PAGE> 37
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 outlined above, 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 EMU
countries are expected to be operating with the euro as their single currency.
During the next three years, business in 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 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, 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. Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income,"
establishes standards for reporting comprehensive income in 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 97-2, "Software Revenue Recognition," SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition," and
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect
to Certain Transactions" provide 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. SOPs 97-2 and 98-4 and SFAS Nos. 130, 131 and 132 are
effective for fiscal 1999. SOP 98-9 and SFAS No. 133 will be effective for the
Company's first quarter of fiscal 2000.
36
<PAGE> 38
ITEM 7A. 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 fiscal 1998, 37% of the Company's total revenue was generated from its
international operations, and the net assets of the Company's foreign
subsidiaries totaled 2% of consolidated net assets as of October 31, 1998. 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, 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 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 prepared sensitivity analyses of its exposures from foreign net
asset and forward foreign exchange contracts as of October 31, 1998 and its
exposure from anticipated foreign revenue in fiscal 1999 to assess the impact of
hypothetical changes in foreign currency rates. Based upon the results of these
analyses, a 10% adverse change in foreign currency rates from the 1998 fiscal
year end rates would not have a material adverse effect on the Company's results
of operations, cash flows or financial condition for the next fiscal year.
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. Based upon
the results of these analyses, a 10% adverse change in interest rates from the
1998 fiscal year end 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 next fiscal year.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required pursuant to this item are included in
Item 14 of this Annual Report on Form 10-K and are presented beginning on page
F-1. The supplementary financial information required by this item is included
in "Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the subsection entitled "Quarterly Results of
Operations/Supplementary Financial Information."
37
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the sections entitled
"Information About Nominees and Other Directors and Directors' Compensation" and
"Section 16(a) Beneficial Ownership Compliance" in the Company's Proxy Statement
for the 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement") to be
filed with the Commission within 120 days after the end of the Company's fiscal
year ended October 31, 1998, except that the information required by this item
concerning the executive officers of the Company is incorporated by reference to
the information set forth in the section entitled "Executive Officers of the
Company" at the end of Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the section entitled
"Compensation of Executive Officers" in the Company's 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Beneficial Owners and
Management's Ownership of J.D. Edwards' Stock" in the Company's 1999 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Relationships and Related Transactions" in the
Company's 1999 Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. Consolidated Financial Statements.
The following consolidated financial statements of J.D. Edwards &
Company are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Income........................... F-3
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
38
<PAGE> 40
2. Consolidated Financial Statements Schedules.
The following financial statement schedule of the Company for each of
the years ended October 31, 1998, 1997 and 1996 is filed as part of this
Form 10-K and should be read in conjunction with the Consolidated Financial
Statements, and the related notes thereto, of the Company.
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ S-1
</TABLE>
Schedules other than those listed above have been omitted since they
are either not required, not applicable or the information is otherwise
included.
3. Exhibits. The exhibits listed on the accompanying index to exhibits
immediately following the financial statement schedule are filed as part
of, or incorporated by reference into, this Form 10-K.
(b) Reports on Form 8-K: No Current Reports on Form 8-K were filed by the
Company in the fourth quarter ended October 31, 1998.
39
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized on this
26 day of January 1999.
J.D. EDWARDS & COMPANY
By: /s/ RICHARD G. SNOW, JR.
----------------------------------
Name: Richard G. Snow, Jr.
Title: Vice President, General
Counsel
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on January 26, 1999 on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ DOUGLAS S. MASSINGILL President, Chief Executive Officer and
- ----------------------------------------------------- Director (principal executive officer)
Douglas S. Massingill
/s/ RICHARD E. ALLEN Chief Financial Officer, Senior Vice
- ----------------------------------------------------- President, Finance and Administration and
Richard E. Allen Director (principal financial officer)
/s/ PAMELA L. SAXTON Vice President of Finance, Controller and
- ----------------------------------------------------- Chief Accounting Officer (principal accounting
Pamela L. Saxton officer)
/s/ C. EDWARD MCVANEY Chairman of the Board
- -----------------------------------------------------
C. Edward McVaney
/s/ ROBERT C. NEWMAN Director
- -----------------------------------------------------
Robert C. Newman
/s/ JACK L. THOMPSON Director
- -----------------------------------------------------
Jack L. Thompson
/s/ GERALD HARRISON Director
- -----------------------------------------------------
Gerald Harrison
/s/ DELWIN D. HOCK Director
- -----------------------------------------------------
Delwin D. Hock
/s/ HARRY T. LEWIS, JR. Director
- -----------------------------------------------------
Harry T. Lewis, Jr.
/s/ MICHAEL J. MAPLES Director
- -----------------------------------------------------
Michael J. Maples
/s/ TRYGVE E. MYHREN Director
- -----------------------------------------------------
Trygve E. Myhren
</TABLE>
40
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
J.D. Edwards & Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)1. and 2. on page 38 present fairly, in all material
respects, the financial position of J.D. Edwards & Company and its subsidiaries
at October 31, 1997 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Broomfield, Colorado
November 30, 1998
F-1
<PAGE> 43
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $224,437 $183,115
Short-term investments.................................... 30,464 28,667
Accounts receivable, net of allowance for doubtful
accounts of $9,800 and $12,900 at October 31, 1997 and
1998, respectively..................................... 174,532 265,704
Prepaid and other current assets.......................... 21,436 32,823
-------- --------
Total current assets.............................. 450,869 510,309
Long-term investments....................................... 108,096 322,527
Property and equipment, net................................. 55,705 60,689
Software development costs, net............................. 11,879 5,821
Non-current portion of deferred income taxes................ 10,646 43,658
Deposits and other assets................................... 5,842 7,469
-------- --------
$643,037 $950,473
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 34,915 $ 60,366
Unearned revenue and customer deposits.................... 67,104 121,092
Accrued liabilities....................................... 110,565 157,473
-------- --------
Total current liabilities......................... 212,584 338,931
Unearned revenue, net of current portion, and other......... 33,592 27,546
-------- --------
Total liabilities................................. 246,176 366,477
Commitments and contingencies (Note 7)...................... -- --
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none outstanding........................... -- --
Common stock, $.001 par value; 300,000,000 shares
authorized; 92,822,186 and 102,681,608 issued and
outstanding as of October 31, 1997 and 1998,
respectively........................................... 93 103
Additional paid-in capital................................ 294,278 406,886
Retained earnings......................................... 102,856 177,324
Cumulative translation adjustments and other, net......... (366) (317)
-------- --------
Total stockholders' equity........................ 396,861 583,996
-------- --------
$643,037 $950,473
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 44
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue:
License fees.............................................. $180,366 $248,707 $386,081
Services.................................................. 297,682 399,105 547,901
-------- -------- --------
Total revenue..................................... 478,048 647,812 933,982
Costs and expenses:
Cost of license fees...................................... 27,443 36,444 43,404
Cost of services.......................................... 184,846 244,640 349,689
Sales and marketing....................................... 128,759 176,031 261,400
General and administrative................................ 53,052 69,850 83,450
Research and development.................................. 40,321 60,591 89,401
-------- -------- --------
Total costs and expenses.......................... 434,421 587,556 827,344
Operating income............................................ 43,627 60,256 106,638
Other income (expense):
Interest income........................................... 629 1,686 15,294
Interest expense.......................................... (899) (829) (843)
Foreign currency losses and other, net.................... (1,403) (1,787) (2,886)
-------- -------- --------
Income before income taxes.................................. 41,954 59,326 118,203
Provision for income taxes................................ 15,628 22,098 43,735
-------- -------- --------
Net income.................................................. $ 26,326 $ 37,228 $ 74,468
======== ======== ========
Net income per common share:
Basic..................................................... $ 0.33 $ 0.46 $ 0.76
======== ======== ========
Diluted................................................... $ 0.30 $ 0.39 $ 0.68
======== ======== ========
Shares used in computing per share amounts:
Basic..................................................... 79,044 80,546 98,264
Diluted................................................... 87,667 96,500 109,993
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 45
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
(INCLUDING MANDATORILY ADJUSTMENT FOR
REDEEMABLE SHARES) ADDITIONAL MANDATORILY
---------------------- PAID-IN RETAINED REDEEMABLE
SHARES AMOUNT CAPITAL EARNINGS OTHER SHARES
------------ ------- ---------- -------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1995.... 79,038,820 $ 79 $ 3,593 $ 39,302 $ (29) $(19,973)
Purchase of common stock..... (25,200) -- (152) -- -- 152
Increase in share redemption
value of mandatorily
redeemable ESOP shares..... -- -- -- -- -- (23,903)
Increase in founders' stock
purchase obligation........ -- -- -- -- -- (3,300)
Stock option exercises....... 79,450 -- 228 -- -- --
Net income................... -- -- -- 26,326 -- --
Change in cumulative
translation adjustment and
other, net................. -- -- -- -- 579 --
----------- ---- -------- -------- ----- --------
Balance, October 31, 1996.... 79,093,070 79 3,669 65,628 550 (47,024)
Purchase of common stock..... (1,403) -- (15) -- -- --
Issuance of shares in public
offering, net.............. 12,790,004 13 276,452 -- -- --
Lapse of mandatorily
redeemable provision on
ESOP shares................ -- -- -- -- -- 47,024
Tax benefit from stock
compensation............... -- -- 10,137 -- -- --
Stock option exercises....... 940,515 1 3,230 -- -- --
Net income................... -- -- -- 37,228 -- --
Change in cumulative
translation adjustment and
other, net................. -- -- 805 -- (916) --
----------- ---- -------- -------- ----- --------
Balance, October 31, 1997.... 92,822,186 93 294,278 102,856 (366) 0
Stock options exercises and
issuances under employee
stock purchase plan........ 9,853,606 10 53,096 -- -- --
Tax benefit from stock
compensation............... -- -- 58,262 -- -- --
Other stock issuances, net of
shares acquired............ 5,816 -- 1,250 -- -- --
Net income................... -- -- -- 74,468 -- --
Change in cumulative
translation adjustment and
other, net................. -- -- -- -- 49 --
----------- ---- -------- -------- ----- --------
Balance, October 31, 1998.... 102,681,608 $103 $406,886 $177,324 $(317) $ 0
=========== ==== ======== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 46
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income................................................. $ 26,326 $ 37,228 $ 74,468
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................. 13,166 15,649 22,701
Amortization of software development costs............... 2,568 6,022 6,058
Benefit from deferred income taxes....................... (1,854) (6,554) (1,933)
Other.................................................... 2,216 1,692 3,433
Changes in operating assets and liabilities:
Accounts receivable, net................................. (35,164) (59,398) (93,096)
Prepaid and other current assets......................... (2,876) (2,790) (11,744)
Accounts payable......................................... 12,138 2,830 25,361
Unearned revenue and customer deposits................... 13,655 29,669 48,471
Accrued liabilities...................................... 12,185 49,882 77,119
-------- --------- ---------
Net cash provided by operating activities........ 42,360 74,230 150,838
Investing activities:
Purchase of investments.................................. -- (138,560) (286,116)
Proceeds from maturities of investments.................. -- -- 73,481
Purchase of property and equipment....................... (41,135) (22,436) (36,270)
Proceeds from sale of assets............................. -- 8,661 7,728
Capitalized software development costs................... (7,320) (2,244) --
Other.................................................... (2,695) -- --
-------- --------- ---------
Net cash used for investing activities........... (51,150) (154,579) (241,177)
Financing activities:
Proceeds from issuance of common stock, net.............. -- 279,696 47,824
Proceeds from bank line of credit........................ 85,100 81,950 --
Repayment of bank line of credit......................... (85,100) (81,950) --
Purchase of common stock and other, net.................. (69) (15) --
-------- --------- ---------
Net cash provided by (used for) financing
activities..................................... (69) 279,681 47,824
Effect of exchange rate changes on cash.................... (484) (449) 1,193
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... (9,343) 198,883 (41,322)
Cash and cash equivalents at beginning of period........... 34,897 25,554 224,437
-------- --------- ---------
Cash and cash equivalents at end of period................. $ 25,554 $ 224,437 $ 183,115
======== ========= =========
Supplemental disclosure of other cash and non-cash
investing and financing transactions
Interest paid............................................ $ 899 $ 829 $ 843
Income taxes paid........................................ 8,061 17,168 12,447
ESOP contribution funded with common stock............... -- -- 6,050
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 47
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
J.D. Edwards develops, markets and supports highly functional Enterprise
Resource Planning ("ERP") software for managing the supply chain. The Company
provides the core software products to run an entire business. These software
solutions operate on multiple computing platforms and are designed to deliver
the solutions that organizations need to maintain control of their businesses as
circumstances, technologies and market environments change. The Company provides
implementation, training and support services designed to enable customers to
rapidly achieve the benefits of the Company's ERP solutions. The Company has
developed and marketed ERP solutions for over 20 years, principally for
operation on AS/400 and other IBM mid-range systems and, more recently, on
leading Windows NT and UNIX servers using Windows- and Internet browser-enabled
desktop clients. The Company operates primarily in the United States, Canada,
Europe, Asia, Latin America and Africa.
Principles of Consolidation and Basis of Presentation
The accounts of the Company have been consolidated. All intercompany
accounts and transactions have been eliminated. The consolidated financial
statements are stated in U.S. dollars and are prepared under U.S. generally
accepted accounting principles.
Initial Public Offering
In September 1997, the Company completed an initial public offering
("IPO"). Of the 18.2 million shares of common stock sold to the public at $23.00
per share, the Company issued 12.8 million shares and selling shareholders sold
5.4 million shares. The Company realized $276.5 million from the offering after
deducting expenses of the offering of approximately $17.7 million.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company licenses software under non-cancelable license agreements and
provides related services, including consulting, implementation, support and
training. Revenue is recognized in accordance with Statement of Position ("SOP")
91-1, "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 license agreement
has been signed, the product has been delivered, collection is probable and all
significant contractual obligations relating to this license have been
satisfied. Revenue on all software license transactions in which there are
significant outstanding obligations is deferred and recognized once such
obligations are fulfilled. Typically, the Company's software licenses do not
include significant post-delivery obligations to be fulfilled by the Company and
payments are due within a twelve-month period from date of delivery. Where
software license contracts call for payment terms in excess of twelve months
from date of delivery, revenue is recognized as payments become due and all
other conditions for revenue recognition have been satisfied. Revenue from
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
F-6
<PAGE> 48
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as unearned revenue and is recognized ratably over the support service period,
and includes a portion of the related license fee equal to the fair value of any
bundled support services. The Company does not require collateral for its
receivables and reserves are maintained for potential losses.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued SOP 97-2, "Software Revenue Recognition," which provides
guidance on recognizing revenue on software transactions and supersedes SOP
91-1. 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 reporting issues related to
SOP 97-2 in January 1999. The Company will apply the provisions of SOP 97-2 on a
prospective basis for new software transactions entered into beginning in the
first quarter of fiscal 1999. Management believes that the adoption of this
guidance will not have a material impact on its financial condition or results
of operations and will not have a significant impact on its current licensing or
revenue recognition practices. However, comprehensive interpretations and
commonly accepted business practices for these statements have not yet been
established. Unexpected modifications to the Company's current revenue
recognition practices resulting from such clarifications of the new standards
could cause its future license fee revenue, results of operations and net income
to be materially adversely impacted.
Software Research and Development Costs
The Company capitalizes internally developed software costs in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalization of development costs of software products begins once the
technological feasibility of the product is established. Based on the Company's
product development process, technological feasibility is established upon
completion of a detailed program design. Capitalization ceases when such
software is ready for general release, at which time amortization of the
capitalized costs begins.
Amortization of capitalized internally developed software costs is computed
as the greater of: (a) the amount determined by ratio of the product's current
revenue to its total expected future revenue or (b) the straight-line method
over the product's estimated useful life, generally three years. During all
periods presented herein, the Company has used the straight-line method to
amortize such capitalized costs.
Research and development costs relating principally to the design and
development of products (exclusive of costs capitalized under SFAS No. 86) are
expensed as incurred. The cost of developing routine enhancements are expensed
as research and development costs as incurred because of the short time between
the determination of technological feasibility and the date of general release
of related products.
Foreign Currency Translation
The functional currency of each subsidiary is the local currency.
Translation of balance sheet amounts to U.S. dollars is based on exchange rates
as of each balance sheet date. Income statement and cash flow statement amounts
are translated at the average exchange rates for the period. Cumulative currency
translation adjustments, net of related deferred taxes, are presented as a
separate component of stockholders' equity. Transaction gains and losses and
unrealized gains and losses on short-term intercompany receivables and payables
are included in income as incurred. Accumulated foreign currency translation
losses were $23,000 and $360,000, at October 31, 1997 and 1998, respectively.
Accounting for Derivative Instruments and Hedging Activities
During late fiscal 1998, the Company broadened its foreign exchange hedging
activities. The Company uses hedging instruments to mitigate certain foreign
currency risk of foreign denominated assets and liabilities. The primary hedging
instruments are forward foreign exchange contracts with maturities of generally
three months or less in term, and all contracts are entered into with major
financial institutions. Gains and losses on
F-7
<PAGE> 49
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these contracts are netted with foreign currency gains and losses and recognized
as other income or expense in the current period, consistent with the period in
which the gain or loss of 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 October 31, 1998, the Company had approximately $71.9 million of gross
U.S. dollar equivalent forward foreign exchange contracts outstanding as hedges
of monetary assets and liabilities held in foreign currency. The fair value of
foreign currency contracts is estimated based on the spot rate of the various
hedged currencies as of the end of the period. Included in other income and
expense are net foreign exchange transaction losses and expenses of $1.7
million, $2.0 million and $2.8 million in fiscal 1996, 1997, and 1998,
respectively.
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
anticipates that the adoption of SFAS No. 133 will not have a material impact on
its consolidated financial statements.
Cash and Cash Equivalents, Short-term Investments and Long-term Investments
All highly liquid investments with an original maturity of three months or
less when purchased are considered to be cash equivalents. All cash equivalents
are carried at cost, which approximates fair value. Investments consist of U.S.,
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.
At October 31, 1997 and 1998, the amortized cost basis, aggregate fair
value and gross unrealized holding gains and losses by major security type were
as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED AGGREGATE UNREALIZED UNREALIZED
COST BASIS FAIR VALUE GAINS LOSSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FISCAL 1997:
Debt securities issued by states of the U.S. and
political subdivisions of the states............. $260,272 $260,255 $ 49 $66
Corporate debt securities.......................... 65,588 65,577 1 12
Other debt securities.............................. 9,500 9,500 0 0
-------- -------- ------ ---
Total cash investments................... $335,360 $335,332 $ 50 $78
======== ======== ====== ===
FISCAL 1998:
Debt securities issued by the U.S. Treasury and
other U.S. government corporations and
agencies......................................... $ 14,178 $ 14,178 $ 0 $ 0
Debt securities issued by states of the U.S. and
political subdivisions of the states............. 382,751 384,800 2,078 29
Corporate debt securities.......................... 61,825 61,819 34 40
Other debt securities.............................. 17,000 17,000 0 0
-------- -------- ------ ---
Total cash investments................... $475,754 $477,797 $2,112 $69
======== ======== ====== ===
</TABLE>
F-8
<PAGE> 50
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with certain lease transactions discussed in Note 7,
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 October 31, 1998, long-term marketable
securities totaling $66.6 million were designated as collateral for these
leases.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables. The Company has cash investment policies that limit investments to
investment grade securities. Management believes the risk with respect to trade
receivables is mitigated to some extent by the fact that the Company's customer
base is widespread geographically and is highly diversified. No single customer
accounted for ten percent or more of revenue for fiscal 1996, 1997 or 1998 or of
accounts receivable at October 31, 1997 or 1998.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method. The estimated useful
lives are as follows:
<TABLE>
<S> <C>
Furniture and fixtures...................................... 5-7 years
Computer equipment.......................................... 2 years
</TABLE>
Stock-based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in
October 1995. This accounting standard permits the use of either a fair value
based method or the method defined in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") to account for
stock-based compensation arrangements. Companies that elect to use the method
provided in APB No. 25 are required to disclose the pro forma net income and
earnings per share that would have resulted from the use of the fair value based
method. The Company has elected to continue to determine the value of
stock-based compensation arrangements under the provisions of APB No. 25 and,
accordingly, has included the pro forma disclosures required under SFAS No. 123
in Note 5.
Income Taxes
Deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying consolidated balance
sheets, as well as operating loss and tax credit carryforwards. Deferred tax
assets may be reduced by a valuation allowance if current evidence indicates
that it is likely that these benefits will not be realized.
Reclassifications
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the fiscal 1998 presentation.
Earnings Per Common Share
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share," beginning in the first quarter of fiscal 1998.
Prior period earnings per common share ("EPS") were restated to conform with the
new statement. This pronouncement established new standards for computing
F-9
<PAGE> 51
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and presenting EPS on a basis that is more comparable to international standards
and provides for the presentation of basic and diluted EPS, replacing the
previously required primary and fully-diluted EPS. The basic EPS 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 Employee Stock Ownership Plan ("ESOP") 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 net income per share was as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income............................................ $26,326 $37,228 $74,468
======= ======= =======
Denominator:
Basic income per share -- weighted average shares
outstanding........................................ 79,044 80,546 98,264
Dilutive effect of common stock equivalents........... 8,623 15,954 11,729
------- ------- -------
Diluted net income per share -- adjusted weighted
average shares outstanding, assuming conversion of
common stock equivalents........................... 87,667 96,500 109,993
======= ======= =======
Basic net income per common share....................... $ 0.33 $ 0.46 $ 0.76
Diluted net income per common share..................... $ 0.30 $ 0.39 $ 0.68
</TABLE>
Other Recently Issued Accounting Pronouncements
The Company will be required to apply recently issued standards in its
future consolidated financial statements. SFAS No. 130, "Reporting Comprehensive
Income," establishes standards for reporting comprehensive income in 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.
F-10
<PAGE> 52
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
PROPERTY AND EQUIPMENT:
Furniture and fixtures.................................... $ 44,220 $ 66,094
Computer equipment........................................ 38,778 49,359
Land...................................................... 16,559 8,990
-------- --------
99,557 124,443
Less: accumulated depreciation............................ (43,852) (63,754)
-------- --------
$ 55,705 $ 60,689
======== ========
SOFTWARE DEVELOPMENT COSTS:
Software development costs................................ $ 26,636 $ 26,636
Less: accumulated amortization............................ (14,757) (20,815)
-------- --------
$ 11,879 $ 5,821
======== ========
ACCRUED LIABILITIES:
Accrued compensation and related expenses................. $ 68,803 $ 97,377
Income taxes payable...................................... 15,261 19,780
Other accrued expenses.................................... 26,501 40,316
-------- --------
$110,565 $157,473
======== ========
</TABLE>
(3) BANK LINE OF CREDIT
The Company has a $50 million, unsecured, revolving line of credit (the
"Revolver") with a syndication of banks. The Revolver expires on July 31, 1999.
Borrowings under the Revolver are for working capital requirements and other
general corporate purposes and bear tiered interest rates as determined by the
Company's defined leverage ratio. The maximum rate of interest is the bank's
prime rate plus .50% or LIBOR plus 1.75% at the option of the Company. The
credit agreement associated with the Revolver requires that the Company remain
in compliance with certain affirmative and negative covenants and
representations and warranties. The financial covenants include liquidity,
leverage, and coverage ratios, capital expenditure limitations and profitability
requirements. Non-financial covenants include, but are not limited to, certain
restrictions on additional indebtedness, contingent liabilities, mergers and
acquisitions and investments. At October 31, 1997 and 1998, the Company was in
full compliance with all covenants under the credit agreement, and there were no
borrowings outstanding.
(4) STOCKHOLDERS' EQUITY
Founders' Stock
The founders of the Company currently own or control a majority of the
Company's issued and outstanding common stock. Under the terms of a shareholder
agreement (the "Original Shareholder Agreement"), the Company had certain
redemption obligations prior to the completion of the Company's IPO. The
Original Shareholder Agreement provided for the Company's repurchase of a
limited amount of the founders' stock in the event of their deaths. In
accordance with the requirements of the SEC, the share redemption obligations
under the Original Shareholder Agreement were reflected in the balance sheets
prior to the IPO as mandatorily redeemable shares with the offsetting adjustment
included as a reduction of stockholders' equity. In August 1997, the founders of
the Company entered into an agreement which replaced
F-11
<PAGE> 53
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Original Shareholder Agreement effective upon the completion of the IPO (the
"New Shareholder Agreement"). The New Shareholder Agreement has no provisions
which obligate the Company to purchase any shares of the founders' stock, and,
accordingly, the mandatorily redeemable amounts were reclassified to
stockholders' equity.
During the year ended October 31, 1996, the Company was notified of a
contractual arrangement whereby two founders would sell 3.5 million shares of
stock to certain identified third parties. Under the terms of the Original
Shareholder Agreement, such stock was required to be offered to the Company at
the pending sales price prior to the sale to the third parties. The Company
assigned its right-to-purchase these shares to the ESOP, which purchased the 3.5
million shares of common stock from the founders for $10.4 million.
Other Stock Transactions
In September 1998, the Company purchased substantially all of the assets of
a privately-held company, which included 2.7 million shares of the Company's
common stock and cash, through the issuance of a slightly greater number of
shares of the Company's common stock. The treasury shares acquired through this
purchase were immediately retired, and the Company received a total of $1.25
million in cash for a net issuance of 5,816 shares of common stock.
(5) EMPLOYEE RETIREMENT SAVINGS PLAN AND STOCK-BASED BENEFIT PLANS
Employee Retirement Savings Plan
The Company established the J.D. Edwards & Company Retirement Savings Plan
(the "401(k) Plan") subject to the provisions of ERISA in 1988 and made certain
amendments during fiscal 1998. The 401(k) Plan is an Internal Revenue Code
Section 401(k) plan, commonly known as a salary reduction retirement plan.
Employees are eligible to participate in the 401(k) Plan on the first day of the
calendar quarter following one complete calendar month of service effective in
calendar 1999. The 401(k) Plan allows for both matching and discretionary
contributions. Generally, the Company matches 50% of an employee's eligible
contributions to the 401(k) Plan, up to a maximum match of 3% of eligible
compensation for each calendar year. The Company's matching contributions are
fully vested when made for all participants. Employees must complete 1,000 hours
of service and be employed by the Company on the last day of the calendar year
to receive the matching contribution. Discretionary contributions to the 401(k)
Plan are subject to a five-year vesting schedule based on number of years of
service with the Company. No discretionary contributions have been made to the
401(k) Plan. The Company recognized expense for matching contributions of
$200,000, $2.1 million and $5.4 million for fiscal 1996, 1997 and 1998,
respectively. In August 1998, the Company merged the U.S. employee portion of
its ESOP into the 401(k) Plan.
ESOP and Mandatorily Redeemable ESOP Shares
The Company established the ESOP effective January 1, 1989, subject to the
provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The
Company made discretionary contributions of cash and/or shares of common stock
of the Company to the ESOP trust fund maintained in the form of individual
participant accounts that vest over a seven-year period. Allocations to these
accounts were made on the basis of each participant's proportionate share of
total compensation paid by the Company to all ESOP participants during each
calendar year. At the discretion of the Company, unvested shares forfeited by a
terminated participant could be used to offset future Company contributions to
the ESOP or be reallocated to the remaining participants of the ESOP. With
certain limitations, Company employees in the United States who were at least 21
years old and had completed one year of service were eligible ESOP participants.
Upon termination of employment, the ESOP provided that a terminating
employee would receive his or her vested shares. Prior to the Company's IPO, a
terminating employee could elect to receive a distribution of
F-12
<PAGE> 54
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company common stock for shares vested or require the Company to purchase such
vested shares. In the event the Company was required to purchase such shares
from a terminating employee, the Company would purchase the vested shares at the
fair value determined by independent appraiser annually. In accordance with the
requirements of the SEC, the redemption value of shares held by the ESOP was
reflected in the balance sheets prior to completion of the IPO as mandatorily
redeemable shares with the offsetting adjustments included as a reduction of
stockholders' equity. Upon completion of the IPO, the Company's obligation to
purchase the ESOP shares terminated, and the amount related to the mandatorily
redeemable shares was reclassified to stockholders' equity.
Compensation cost was measured as the estimated fair value of shares
contributed to or committed to be contributed to the ESOP plus the cash
contributed to or committed to be contributed to the ESOP. For the years ended
October 31, 1996, 1997 and 1998, the Company recognized as compensation cost
$5.9 million, $5.3 million, and $7.3 million, respectively. The ESOP owned
8,558,270 and 7,888,494 shares of common stock at October 31, 1997 and 1998,
respectively. All shares owned by the ESOP had been allocated to participants.
In August 1998, a total of 8,108,373 shares owned by the ESOP were transferred
to individual frozen accounts in the 401(k) Plan for all U.S. participants.
Remaining shares in the Plan for non-U.S. participants may be maintained in the
account up to the end of calendar year 2000.
Equity Incentive Plans
In August 1997, the Company established an Equity Incentive Plan (the "1997
Plan"). A total of 10,000,000 shares of common stock are reserved for issuance
under the 1997 Plan, of which 5,430,410 were available for grant as of October
31, 1998. The number of shares of common stock reserved for issuance is
increased on each anniversary date of the adoption of the 1997 Plan by a number
of shares equal to the number of shares needed to restore the maximum aggregate
number of shares to 10,000,000 or a lesser amount determined by the Company's
Board of Directors. The 1997 Plan provides for the granting of incentive stock
options to employees and the granting of nonstatutory stock options and stock
purchase rights to employees, directors and consultants.
In November 1992, the Company established an Incentive Stock Option Plan
and a Nonqualified Stock Option Plan (the "1992 Option Plans"). A total of
35,000,000 shares of common stock are authorized for issuance under the 1992
Option Plans, of which 12,783,350 and 12,982,200 shares were available for grant
as of October 31, 1997 and 1998, respectively. The Company does not anticipate
granting additional options under the 1992 Option Plans. Options granted vest
over a period of time ranging from four to five years with a term of not more
than ten years.
Employee Stock Purchase Plans
In August 1997, the Company established employee stock purchase plans (the
"Employee Stock Purchase Plans") which took effect upon completion of the IPO. A
total of 2,000,000 shares of common stock were reserved for issuance under the
Employee Stock Purchase Plans. An annual increase will be made to the Employee
Stock Purchase Plans on each anniversary date of the plans in an amount equal to
the number of shares of common stock required to restore the maximum number of
shares reserved for issuance to 2,000,000, or a lesser amount determined by the
Company's Board of Directors. The Employee Stock Purchase Plans permit eligible
employees to purchase common stock totaling up to 10% of an employee's
compensation through payroll deductions. The Employee Stock Purchase Plan for
U.S. employees is intended to qualify under Section 423 of the Internal Revenue
Code. The price of common stock to be purchased will be 85% of the lower of the
fair market value of the common stock on the first or last day of each purchase
period. During the year ended October 31, 1998, a total of 864,000 shares were
issued under the Employee Stock Purchase Plans, generating total proceeds to the
Company of $16,995,000. At October 31, 1998, a total of $6.8 million
F-13
<PAGE> 55
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
had been withheld from employees' payroll for the purchase offering periods
ending on December 31, 1998. Subsequent six-month purchase offering periods will
commence on January 1, 1999 and June 1, 1999.
Stock-based Compensation
The Company records compensation expense related to its stock plans using
the intrinsic value based method and includes a pro forma disclosure in the
footnotes for compensation value measured using the fair value accounting
treatment. Generally, stock options are granted with an exercise price equal to
the fair value at the date of grant. For the fair value disclosure below,
compensation value is estimated for each option grant under the 1992 and 1997
Option Plans on the date of grant using a Black-Scholes option pricing model.
The following assumptions were used for grants in fiscal 1996, 1997 and 1998:
risk-free rates corresponding to government securities with original maturities
similar to the expected option lives of 5.1% to 5.8% in fiscal 1996, 5.8% to
6.1% in fiscal 1997, and 4.7% to 5.7% in fiscal 1998; expected dividend yield of
0% for all periods; volatility factor of zero in fiscal 1996 and the period in
fiscal 1997 prior to the Company's IPO, 46% for the period in fiscal 1997
following the IPO, and 50% in fiscal 1998; and expected lives of approximately
one year beyond vest dates for all periods. Each share issued through the
Employee Stock Purchase Plans during fiscal 1998 was valued with a minimum value
pricing model using the following assumptions: risk-free rates ranging from 5.1%
to 5.4%, expected dividend yield of 0% and lives ranging from 3.2 to 9.2 months,
corresponding with the appropriate purchase period.
Based on calculations using a Black-Scholes option pricing model, the
weighted-average grant date fair value of options was $1.12, $2.67 and $16.24 in
fiscal 1996, 1997 and 1998, respectively. The weighted-average grant date fair
value of shares issued through the Employee Stock Purchase Plans in fiscal 1998
was $3.52. The pro forma impact on the Company's net income and net income per
share had compensation cost been recorded as determined under the fair value
method is shown below (in thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net income:
As reported........................................... $26,326 $37,228 $74,468
Pro forma............................................. 25,328 35,058 58,183
Basic net income per share:
As reported........................................... 0.33 0.46 0.76
Pro forma............................................. 0.32 0.44 0.59
Diluted net income per share:
As reported........................................... 0.30 0.39 0.68
Pro forma............................................. 0.29 0.36 0.53
</TABLE>
F-14
<PAGE> 56
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The status of total stock options outstanding and exercisable under the
1992 and 1997 Option Plans as of October 31, 1998 follows:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
- ---------------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
-------- ---------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 2.66 - 3.44 6,122,431 5.6 $ 2.97 3,211,191 $ 2.89
6.24 3,987,660 7.3 6.24 1,003,560 6.24
10.71 2,106,235 8.1 10.71 247,035 10.71
23.00 - 34.13 209,607 7.4 31.99 16,400 30.32
34.75 - 46.25 4,366,983 7.4 38.81 -- --
---------- ---------
$ 2.66 - 46.25 16,792,916 6.8 $14.40 4,478,186 $ 4.17
========== =========
</TABLE>
Activity of the 1992 and 1997 Option Plans is summarized in the following
table:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE OPTIONS AVERAGE
SHARES EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Options outstanding, October 31, 1995....... 15,140,370 $ 2.89 3,046,750 $2.70
Options granted........................... 5,572,560 6.18
Less: options exercised................... (79,450) 2.87
Less: options forfeited................... (698,600) 4.01
----------
Options outstanding, October 31, 1996....... 19,934,880 3.77 5,895,960 2.79
Options granted........................... 2,506,500 11.40
Less: options exercised................... (940,515) 3.44
Less: options forfeited................... (249,340) 6.15
----------
Options outstanding, October 31, 1997....... 21,251,525 4.66 8,964,695 3.15
Options granted........................... 4,648,590 38.57
Less: options exercised................... (8,769,329) 3.37
Less: options forfeited................... (337,870) 19.11
----------
Options outstanding, October 31, 1998....... 16,792,916 14.40 4,478,186 4.17
==========
</TABLE>
(6) INCOME TAXES
Income before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Domestic............................................... $24,770 $34,667 $ 89,624
Foreign................................................ 17,184 24,659 28,579
------- ------- --------
$41,954 $59,326 $118,203
======= ======= ========
</TABLE>
F-15
<PAGE> 57
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current provision:
U.S. Federal.......................................... $ 8,737 $ 9,342 $24,146
State................................................. 1,259 1,798 4,417
Foreign............................................... 7,486 17,512 17,105
------- ------- -------
17,482 28,652 45,668
------- ------- -------
Deferred provision (benefit):
U.S. Federal.......................................... (4,951) (6,292) (324)
State................................................. -- (715) (36)
Foreign............................................... 3,097 453 (1,573)
------- ------- -------
(1,854) (6,554) (1,933)
------- ------- -------
Total provision for income taxes.............. $15,628 $22,098 $43,735
======= ======= =======
</TABLE>
The provisions for income taxes are different from the amounts computed by
applying the federal statutory rate to income before income taxes. The amounts
are reconciled as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Statutory rate.......................................... $14,684 $20,764 $41,371
Foreign income taxed at higher rates.................... 3,018 3,915 7,119
Non-deductible expenses/non-taxable income.............. 1,676 563 (1,067)
State income taxes, net of federal benefit.............. 818 1,431 2,847
Income tax credits...................................... (3,844) (5,796) (5,590)
Other................................................... (724) 1,221 (945)
------- ------- -------
Provision for income taxes.............................. $15,628 $22,098 $43,735
======= ======= =======
</TABLE>
F-16
<PAGE> 58
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Revenue deferred for book purposes........................ $ 9,403 $ 10,219
Foreign tax credit carryforwards.......................... 14,290 15,818
Allowance for doubtful accounts........................... 3,638 3,388
Vacation and other accruals............................... 2,587 4,499
Fixed assets.............................................. 1,440 4,560
Unrealized currency losses................................ 536 278
Foreign income currently subject to U.S. tax.............. 2,815 515
Research and development credit carryforward.............. 2,636 6,591
Net operating loss carryforward........................... 3,400 28,241
Other..................................................... 809 1,254
-------- --------
Total deferred tax assets......................... 41,554 75,363
-------- --------
Deferred tax liabilities:
Capitalized software development costs.................... (4,425) (2,168)
Revenue deferred for tax.................................. (7,258) (8,610)
Other..................................................... (877) --
-------- --------
Total deferred tax liabilities.................... (12,560) (10,778)
-------- --------
Less -- valuation allowance for foreign tax credits......... (9,651) (9,651)
-------- --------
Net deferred tax asset...................................... $ 19,343 $ 54,934
======== ========
Current portion of deferred taxes........................... $ 8,697 $ 11,276
Non-current portion of deferred taxes....................... 10,646 43,658
-------- --------
Net deferred tax asset...................................... $ 19,343 $ 54,934
======== ========
</TABLE>
The Company has available approximately $15.8 million of foreign tax credit
carryforwards of which $4.6 million will expire in 2001, $6.3 million will
expire in 2002 and $4.9 million will expire in 2003. The Company has a net
operating loss carryforward of approximately $75.5 million of which $6.2 million
will expire in 2012 and $69.3 will expire in 2013. Additionally, a research and
development credit carryforward of approximately $6.6 million is available, of
which $2.4 million will expire in 2012 and $4.2 million will expire in 2013.
At October 31, 1997 and 1998, unremitted earnings of foreign subsidiaries
totaled $10.3 million and $17.7 million, respectively, and were deemed to be
permanently invested. The unrecognized deferred tax liability for such earnings
is immaterial.
The Company has provided a valuation allowance of $9.7 million relating to
foreign tax credits due to the fact that the Company could not utilize such
credits in the current year and there is uncertainty that the credits will be
utilized prior to expiration in 2002 and 2003. The valuation allowance may be
adjusted in future periods to the extent evidence becomes available that these
foreign tax credits will be utilized before they expire.
F-17
<PAGE> 59
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases equipment and office space under various operating
leases. Rent expense on these leases for fiscal 1996, 1997 and 1998 was $21.6
million, $27.9 million, and $42.8 million respectively.
Minimum future non-cancelable commitments under these leases as of October
31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- --------
<S> <C>
1999........................................................ $ 42,787
2000........................................................ 28,758
2001........................................................ 18,862
2002........................................................ 14,963
2003........................................................ 12,786
Thereafter.................................................. 40,035
--------
$158,191
========
</TABLE>
The Company leases its corporate headquarters office buildings, of which
two are currently being constructed on land owned by the Company. The Company is
acting as construction agent for the lessor. The lessor, a wholly-owned
subsidiary of a bank, and a syndication of banks are collectively financing up
to $94.5 million in purchase and construction costs through a combination of
equity and debt. In the event any of the buildings are sold, the Company will
guarantee a residual value of each building up to approximately 85% of its
original cost. The Company's lease obligations are based on a return on the
lessor's costs. In connection with the lease transactions, the Company is
collateralizing up to 97% of the financing with investments as discussed in Note
1.
Legal Matters
The Company is involved in certain disputes and legal actions as a result
of its normal operations. In management's opinion, none of these disputes and
legal actions are expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
(8) GEOGRAPHICAL INFORMATION
The following is an analysis of the Company's operations by geographical
region (in thousands):
<TABLE>
<CAPTION>
ASIA, LATIN
EUROPE, AMERICA
MIDDLE EAST AND
DOMESTIC AND AFRICA CANADA TOTAL
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1996
Total revenue................................... $311,238 $ 99,021 $ 67,789 $478,048
Operating income................................ 22,307 14,123 7,197 43,627
Total assets.................................... 199,489 23,354 20,943 243,786
YEAR ENDED OCTOBER 31, 1997
Total revenue................................... 406,521 128,878 112,413 647,812
Operating income................................ 41,171 11,196 7,889 60,256
Total assets.................................... 584,713 26,376 31,948 643,037
YEAR ENDED OCTOBER 31, 1998
Total revenue................................... 591,887 206,922 135,173 933,982
Operating income................................ 86,380 14,584 5,674 106,638
Total assets.................................... 870,249 42,643 37,581 950,473
</TABLE>
F-18
<PAGE> 60
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total revenue for each geographic region represents revenue from
unaffiliated customers only. Operating income includes intercompany royalty and
cost allocation arrangements that were in effect for each year. Total revenue
shown above for the Company's foreign regions includes software that was shipped
from the United States. The total amount of these export sales was $36.9
million, $50.9 million and $84.1 million for Europe, Middle East, and Africa
and, $27.2 million, $59.4 million and $61.9 million for Asia, Latin America, and
Canada for fiscal 1996, 1997 and 1998, respectively.
(9) SUBSEQUENT EVENTS
Commitments
In November 1998, the Company entered into a six-year agreement to lease an
office building to be constructed on a portion of land owned by the Company. The
lessor, a wholly-owned subsidiary of a bank, and the bank collectively committed
to finance up to $34.0 million in construction costs through a combination of
equity and debt financing. The Company is acting as agent for the lessor to
design and undertake construction of the building and land improvements. The
Company's lease obligation will be calculated as a return on the lessor's costs
of funding and will be based on a spread over LIBOR, adjusted from time to time
to reflect any changes in the Company's leverage ratio. At any time during the
lease term, in the event the building is sold, the Company will guarantee a
residual value of the building up to approximately 85% of the building's
original cost.
In connection with the above lease transaction, management intends to
collateralize up to 97% of the financing with investments. The Company may
withdraw the funds used as collateral at its sole discretion, provided it is not
in default under the lease agreement.
(10) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's quarterly financial information for fiscal 1997 and 1998 is
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1997:
Total revenue...................................... $122,821 $145,854 $162,534 $216,603
Less: costs and expenses......................... 118,811 136,934 151,006 180,805
-------- -------- -------- --------
Operating income................................... 4,010 8,920 11,528 35,798
-------- -------- -------- --------
Income before income taxes......................... 3,697 7,742 11,506 36,381
Net income......................................... 2,329 4,849 7,220 22,830
Net income per common share:
Basic............................................ $ 0.03 $ 0.06 $ 0.09 $ 0.27
Diluted.......................................... $ 0.02 $ 0.05 $ 0.07 $ 0.23
YEAR ENDED OCTOBER 31, 1998:
Total revenue...................................... $178,256 $208,991 $239,602 $307,133
Less: costs and expenses......................... 170,505 193,035 213,854 249,950
-------- -------- -------- --------
Operating income................................... 7,751 15,956 25,748 57,183
-------- -------- -------- --------
Income before income taxes......................... 10,200 19,576 28,655 59,772
Net income......................................... 6,426 12,333 18,053 37,656
Net income per common share:
Basic............................................ $ 0.07 $ 0.13 $ 0.18 $ 0.37
Diluted.......................................... $ 0.06 $ 0.11 $ 0.16 $ 0.34
</TABLE>
F-19
<PAGE> 61
SCHEDULE II
J.D. EDWARDS & COMPANY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO TRANSLATION END
CLASSIFICATION PERIOD OPERATIONS WRITE-OFFS ADJUSTMENTS OF PERIOD
-------------- ------------ ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Allowance For Doubtful Accounts
Fiscal Year Ended:
October 31, 1996................. $5,700 $1,387 $(1,496) $ 9 $5,600
October 31, 1997................. 5,600 8,434 (4,078) (156) 9,800
October 31, 1998................. 9,800 7,211 (4,527) 416 12,900
</TABLE>
S-1
<PAGE> 62
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
3.1(i) -- Amended and Restated Certificate of Incorporation of
Registrant, which is incorporated herein by reference to
Exhibit 3.1(i) to the Registrant's Statement on Form S-1,
Registration No. 333-30701, as amended ("Registrant's
Form S-1").
3.1(ii) -- Bylaws of Registrant which, is incorporated herein by
reference to Exhibit 3.1(ii) to the Registrant's Form
S-1.
4.1 -- Specimen stock certificate of Registrant's Common Stock,
which is incorporated herein by reference to Exhibit 4.1
to the Registrant's Form S-1.
10.1 -- Original Software Vendor Marketing and License Agreement
between Seagull Business Software and J.D. Edwards &
Company dated August 19, 1994, which is incorporated
herein by reference to Exhibit 10.1 to the Registrant's
Form S-1.
10.2 -- Amended and Restated Credit Agreement by and Between
Wells Fargo Bank (Colorado), N.A., as Lender and as Agent
Bank, Harris Trust and Savings Bank, as Lender, Key Bank
of Colorado, as Lender, and J.D. Edwards & Company, as a
Borrower, J.D. Edwards World Solutions Company, as a
Borrower, J.D. Edwards World Source Company, as a
Borrower dated as of July 25, 1997, which is incorporated
herein by reference to Exhibit 10.2 to the Registrant's
Form S-1.
10.3 -- Form of Indemnification Agreement entered into between
the Registrant and each of its officers and directors,
which is incorporated herein by reference to Exhibit
10.13 to the Registrant's Form S-1.
10.4 -- J.D. Edwards & Company Retirement Savings Plan, Amended
and Restated as of January 1, 1997
10.5 -- J.D. Edwards & Company 1992 Incentive Stock Option Plan,
which is incorporated herein by reference to Exhibit
10.16 to the Registrant's Form S-1.
10.6 -- J.D. Edwards & Company 1992 Nonqualified Stock Option
Plan, which is incorporated herein by reference to
Exhibit 10.17 to the Registrant's Form S-1.
10.7 -- Restricted Stock Grant Plan for employees of J.D. Edwards
& Company, which is incorporated herein by reference to
Exhibit 10.18 to the Registrant's Form S-1.
10.8 -- Stock Plan for Employees of J.D. Edwards & Company, which
is incorporated herein by reference to Exhibit 10.19 to
the Registrant's Form S-1.
10.9 -- J.D. Edwards & Company 1997 Employee Stock Purchase Plan,
which is incorporated herein by reference to Exhibit
10.20 to the Registrant's Form S-1.
10.10 -- J.D. Edwards & Company 1997 Equity Incentive Plan, which
is incorporated herein by reference to Exhibit 10.21 to
the Registrant's Form S-1.
10.11 -- Amended and Restated Stockholders Agreement between C.
Edward McVaney, Jack L. Thompson, Robert C. Newman and
the Registrant dated as of August 20, 1997, which is
incorporated herein by reference to Exhibit 10.22 to the
Registrant's Form S-1.
10.12 -- J.D. Edwards & Company 1997 Employee Stock Purchase Plan
for Non-U.S. Employees, which is incorporated herein by
reference to Exhibit 10.23 to the Registrant's Form S-1.
21.1 -- Subsidiaries of Registrant
23.1 -- Consent of PricewaterhouseCoopers LLP
27.1 -- Financial Data Schedule for fiscal year ended October 31,
1998
27.2 -- Financial Data Schedule for fiscal year ended October 31,
1997
27.3 -- Financial Data Schedule for fiscal year ended October 31,
1996
</TABLE>
<PAGE> 1
EXHIBIT 10.4
J.D. EDWARDS & COMPANY RETIREMENT SAVINGS PLAN
AMENDED AND RESTATED AS OF JANUARY 1, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 1 INTRODUCTION................................................................................1
ARTICLE 2 DEFINITIONS.................................................................................2
2.1 "Account".......................................................................................2
2.2 "Actual Contribution Percentage"................................................................2
2.3 "Actual Deferral Percentage"....................................................................2
2.4 "Affiliate".....................................................................................2
2.5 "Annual Additions"..............................................................................2
2.6 "Beneficiary"...................................................................................3
2.7 "Board".........................................................................................3
2.8 "Break in Service"..............................................................................3
2.9 "Code"..........................................................................................3
2.10 "Committee" or "Advisory Committee".............................................................3
2.11 "Company".......................................................................................3
2.12 "Company Stock".................................................................................4
2.13 "Compensation"..................................................................................4
2.14 "Contribution Rate".............................................................................5
2.15 "Current Year Method"...........................................................................5
2.16 "Deferral Rate".................................................................................5
2.17 "Defined Benefit Plan Fraction".................................................................6
2.18 "Defined Contribution Plan Fraction"............................................................7
2.19 "Disability"....................................................................................7
2.20 "Discretionary Contributions"...................................................................7
2.21 "Discretionary Account".........................................................................7
2.22 "Effective Date"................................................................................7
2.23 "Eligible Employee".............................................................................7
2.24 "Employee"......................................................................................8
2.25 "Employer"......................................................................................8
2.26 "Employer Contributions"........................................................................8
2.27 "Employer Contributions Account"................................................................8
2.28 "Employer Matching Contributions"...............................................................8
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
PAGE
<S> <C> <C>
2.29 "Employer Matching Contributions Account".......................................................8
2.30 "Employment Commencement Date"..................................................................9
2.31 "Entry Date"....................................................................................9
2.32 "ERISA".........................................................................................9
2.33 "ESOP"..........................................................................................9
2.34 "Excess Aggregate Contributions"................................................................9
2.35 "Excess Contributions"..........................................................................9
2.36 "Excess Elective Deferrals"....................................................................10
2.37 "Five Year Break in Service"...................................................................10
2.38 "Forfeiture"...................................................................................10
2.39 "401(k) Account"...............................................................................10
2.40 "401(k) Agreement".............................................................................10
2.41 "401(k) Contributions".........................................................................10
2.42 "Hardship".....................................................................................10
2.43 "Highly Compensated Employee"..................................................................10
2.44 "Hour of Service"..............................................................................11
2.45 "Investment Fund"..............................................................................11
2.46 "Investment Manager"...........................................................................12
2.47 "Limitation Year"..............................................................................12
2.48 "Non-Highly Compensated Employee"..............................................................12
2.49 "Normal Retirement Age"........................................................................12
2.50 "Participant"..................................................................................12
2.51 "Period of Service"............................................................................12
2.52 "Period of Severance"..........................................................................13
2.53 "Plan".........................................................................................13
2.54 "Plan Year"....................................................................................13
2.55 "Prior ESOP Account"...........................................................................13
2.56 "Prior Year Method"............................................................................13
2.57 "Qualified Matching Contributions".............................................................13
2.58 "Qualified Matching Contributions Account".....................................................14
</TABLE>
ii.
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
PAGE
<S> <C> <C>
2.59 "Qualified Nonelective Contributions"..........................................................14
2.60 "Qualified Nonelective Contributions Account"..................................................14
2.61 "Reemployment Commencement Date"...............................................................14
2.62 "Required Beginning Date"......................................................................14
2.63 "Review Panel".................................................................................14
2.64 "Rollover Account".............................................................................14
2.65 "Rollover Contribution"........................................................................14
2.66 "Salary".......................................................................................15
2.67 "Severance from Severance Date"................................................................15
2.68 "Testing Year".................................................................................15
2.69 "Trust"........................................................................................15
2.70 "Trust Agreement"..............................................................................15
2.71 "Trustee"......................................................................................15
2.72 "Valuation Date"...............................................................................15
2.73 "Year of Service"..............................................................................15
ARTICLE 3 ELIGIBILITY AND PARTICIPATION..............................................................17
3.1 Eligibility to Become a Participant............................................................17
3.2 Suspension of Participation....................................................................17
3.3 Reestablishing Eligible Employee Status and Plan Reentry.......................................18
3.4 Termination of Participation...................................................................18
3.5 No Maximum Age.................................................................................18
ARTICLE 4 CONTRIBUTIONS..............................................................................19
4.1 401(k) Contributions...........................................................................19
4.2 401(k) Agreement...............................................................................21
4.3 Employer Contributions.........................................................................22
4.4 Qualified Nonelective Contributions............................................................22
4.5 Qualified Matching Contributions...............................................................23
4.6 Time of Payment................................................................................23
4.7 Rollover Contributions.........................................................................24
4.8 Nondiscrimination Requirements.................................................................24
</TABLE>
iii.
<PAGE> 5
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
PAGE
<S> <C> <C>
4.9 Reversion of Contributions.....................................................................29
4.10 Other Limitations on Contributions.............................................................30
4.11 USERRA Compliance..............................................................................31
ARTICLE 5 PARTICIPANTS' ACCOUNTS.....................................................................32
5.1 Individual Accounts............................................................................32
5.2 Revaluation of the Trust.......................................................................32
5.3 Statements.....................................................................................32
5.4 Allocation of Investment Income................................................................32
ARTICLE 6 INVESTMENT OF PARTICIPANT'S ACCOUNTS.......................................................34
6.1 Investment Control.............................................................................34
6.2 Selection of Investment Funds..................................................................34
6.3 Investment of Accounts.........................................................................34
6.4 Change of Investment Election as to Future Contributions.......................................34
6.5 Transfers Between Investment Funds.............................................................34
6.6 Investment in Company Stock....................................................................35
ARTICLE 7 VESTING....................................................................................36
7.1 Fully Vested Accounts..........................................................................36
7.2 Vesting of the Discretionary Account...........................................................36
7.3 Change in Vesting Schedule.....................................................................36
7.4 Forfeitures....................................................................................37
7.5 Vesting on Reemployment........................................................................38
ARTICLE 8 PLAN DISTRIBUTIONS.........................................................................40
8.1 Events Permitting Distribution.................................................................40
8.2 Applicable Distribution and Withdrawal Provisions..............................................40
8.3 Time of Distribution to Participant............................................................40
8.4 Time of Distribution of Death Benefits.........................................................41
8.5 Latest Time of Distribution....................................................................41
8.6 Small Benefits: Immediate Payment.............................................................42
8.7 Form of Distribution to Participant............................................................42
8.8 Distribution of Death Benefit..................................................................42
</TABLE>
iv.
<PAGE> 6
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
PAGE
<S> <C> <C>
8.9 Beneficiary Designation; Spousal Consent Rights................................................43
8.10 Minimum Required Distributions; Incorporation of Regulations...................................43
8.11 Direct Rollover................................................................................44
8.12 Withholding on Distributions...................................................................45
8.13 Deferred Distribution..........................................................................45
8.14 Determination of Account Balance...............................................................45
8.15 Reemployment of Participants Receiving Payments................................................45
8.16 No Liability...................................................................................46
ARTICLE 9 WITHDRAWALS WHILE EMPLOYED.................................................................47
9.1 Withdrawals From Rollover Account..............................................................47
9.2 Withdrawals From 401(k) Account................................................................47
9.3 No Withdrawals from Employer Contributions Account, and Discretionary Account and
Prior ESOP Account.............................................................................47
9.4 Company Consent................................................................................47
9.5 Hardship Withdrawal Rules......................................................................47
9.6 Frequency and Source of Withdrawals............................................................49
9.7 Payment of Withdrawals.........................................................................49
9.8 Valuation Date.................................................................................49
9.9 Special Withdrawal Rights......................................................................49
ARTICLE 10 LOANS FROM THE PLAN........................................................................51
10.1 Eligibility for Loans..........................................................................51
10.2 Amount of Loans................................................................................51
10.3 Aggregate Loan Limitation......................................................................51
10.4 Loan Requirements..............................................................................51
10.5 Loan Provisions and Loan Procedures............................................................52
10.6 Segregated Investment..........................................................................53
10.7 USERRA Compliance..............................................................................53
ARTICLE 11 FUNDING POLICY AND METHOD..................................................................54
11.1 Contributions..................................................................................54
11.2 Expenses of the Plan...........................................................................54
</TABLE>
v.
<PAGE> 7
TABLE OF CONTENTS
(CONTINUED)
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11.3 Independent Accountant.........................................................................54
ARTICLE 12 FIDUCIARY RESPONSIBILITIES AND PLAN ADMINISTRATION.........................................55
12.1 Plan Sponsor and Plan Administrator............................................................55
12.2 Administrative Responsibilities................................................................55
12.3 Management of Plan Assets......................................................................55
12.4 Trustee and Investment Managers................................................................55
12.5 Selection of Service Providers and Delegation of Fiduciary Responsibilities....................56
12.6 Service in Several Fiduciary Capacities........................................................56
12.7 Appointment of the Committee...................................................................56
12.8 Indemnification................................................................................57
12.9 Participant Voting Rights - Company Stock......................................................57
ARTICLE 13 CLAIMS PROCEDURES..........................................................................58
13.1 Application for Benefits.......................................................................58
13.2 Denial of Application..........................................................................58
13.3 Review Panel...................................................................................58
13.4 Request for Review.............................................................................58
13.5 Decision on Review.............................................................................58
13.6 Rules and Interpretations......................................................................59
13.7 Exhaustion of Remedies.........................................................................59
ARTICLE 14 AMENDMENT OR DISCONTINUANCE OF THE PLAN....................................................60
14.1 Amendments.....................................................................................60
14.2 Merger, Consolidation or Transfer..............................................................60
14.3 Right to Terminate Plan........................................................................60
14.4 Employer's Rights and Obligations Upon Plan Termination........................................60
14.5 Participants' Rights Upon Plan Termination.....................................................61
ARTICLE 15 TOP-HEAVY PROVISIONS.......................................................................62
15.1 Top-Heavy Plan Defined.........................................................................62
15.2 Other Definitions..............................................................................62
15.3 Top-Heavy Accrual Rules........................................................................63
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15.4 Impact on Contribution Limitations.............................................................64
ARTICLE 16 GENERAL PROVISIONS.........................................................................65
16.1 No Implied Employment Contract.................................................................65
16.2 Benefits Not Assignable........................................................................65
16.3 Qualified Domestic Relations Orders............................................................65
16.4 Payments of Benefits to Infants or Incompetents................................................65
16.5 Unclaimed Benefits.............................................................................66
16.6 Source of Benefits.............................................................................66
16.7 Forms of Plan Communications...................................................................66
16.8 IRS Qualification..............................................................................66
16.9 Construction of Plan...........................................................................66
16.10 Governing Law..................................................................................66
16.11 Severability...................................................................................66
ARTICLE 17 EXECUTION..................................................................................67
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vii.
<PAGE> 9
J.D. EDWARDS & COMPANY RETIREMENT SAVINGS PLAN
AMENDED AND RESTATED AS OF
JANUARY 1, 1997
ARTICLE 1
INTRODUCTION
The J.D. Edwards & Company Retirement Savings Plan, originally
effective on January 1, 1988, is amended and restated in its entirety effective
as of January 1, 1997, except as provided elsewhere in the Plan.
The Plan as amended and restated is intended to qualify as a
profit-sharing plan under Sections 401(a) and 501 of the Code, with a cash or
deferred arrangement intended to qualify under Section 401(k) of the Code.
Notwithstanding the foregoing, contributions to the Plan shall be determined
without regard to profits of the Employer or any Affiliate of the Employer. The
Plan shall be maintained for the exclusive benefit of the Participants and their
Beneficiaries.
The Plan is intended to be an "eligible individual account plan" as
defined in Section 407(d)(3)(A) of ERISA. Accordingly, the Trustee is authorized
to invest and hold up to one hundred percent (100%) of the assets of the Trust
established pursuant to the Plan in Company Stock.
The Plan is amended and restated effective January 1, 1997, to
incorporate the changes required by the Small Business Job Protection Act of
1996 and the Taxpayer Relief Act of 1997. In addition, the Plan is amended and
restated to become an eligible individual account plan in order to hold Company
Stock based on Employer Contributions that may be made to the Plan in the form
of Company Stock and to hold Company Stock transferred into the Plan from the
J.D. Edwards & Company Employee Stock Ownership Plan. The majority of the assets
of the J.D. Edwards & Company Employee Stock Ownership Plan were transferred
into the Plan effective August 3, 1998.
1.
<PAGE> 10
ARTICLE 2
DEFINITIONS
The following terms when used in the Plan shall have the meanings
specified below. Words in the masculine, feminine and neuter gender shall be
deemed to include the other, and words in the singular shall include the plural
and vice versa, unless a different meaning is plainly required by the context:
2.1 "ACCOUNT" means, to the extent applicable to a Participant, the
aggregate of the separate accounts and subaccounts maintained under the Plan and
held by the Trustee for the benefit of a Participant, as described in Articles 5
and 6.
2.2 "ACTUAL CONTRIBUTION PERCENTAGE" means the average of the
Contribution Rates (calculated separately for each Eligible Employee) of the
Eligible Employees in a group.
2.3 "ACTUAL DEFERRAL PERCENTAGE" means the average of the Deferral
Rates (calculated separately for each Eligible Employee) of the Eligible
Employees in a group.
2.4 "AFFILIATE" means any corporation or other trade or business
(whether or not incorporated) that, together with the Employer is a member of a
"controlled group of corporations" or is under "common control" as defined in
Section 414(b) or 414(c) of the Code, respectively, is a member of an
"affiliated service group" as defined in Section 414(m) of the Code, or is
required to be treated as a single employer pursuant to regulations under
Section 414(o) of the Code, but only to the extent provided in any such
regulations. An entity shall be considered an Affiliate only with respect to
periods during which the relationship described above exists. See Appendix A for
the listing of affiliates.
2.5 "ANNUAL ADDITIONS" means, to the extent applicable under the Plan,
the sum of the following amounts credited to a Participant's Account for any
Limitation Year:
(a) 401(k) Contributions;
(b) Employer Contributions;
(c) Qualified Matching Contributions;
(d) Qualified Nonelective Contributions;
(e) Allocated Forfeitures; and
(f) Amounts described in Sections 415(l)(1) and 419A(d)(2) of the
Code.
Notwithstanding the foregoing, Excess Elective Deferrals that are distributed in
accordance with Subsection 4.1(d) of the Plan are not Annual Additions. However,
Excess Contributions and Excess Aggregate Contributions that are distributed (or
in the case of Excess Aggregate Contributions, that are forfeited) in accordance
with Paragraphs 4.8(b)(1) and (e)(1) of the Plan, respectively, are Annual
Additions.
2.
<PAGE> 11
2.6 "BENEFICIARY" means the person or persons entitled under Section
8.9 to receive any Plan benefit payable pursuant to Section 8.8 following the
death of a Participant.
2.7 "BOARD" means the Board of Directors of the Company, as constituted
from time to time.
2.8 "BREAK IN SERVICE" means, effective January 1, 1998, for purposes
of eligibility and vesting, any Plan Year during which the Participant completes
less than 501 Hours of Service. For purposes of eligibility and vesting prior to
January 1, 1998, Break in Service means any one-year Period of Severance.
Notwithstanding any provision of this Plan to the contrary, an Employee's leave
under the Family and Medical Leave Act of 1993 ("FMLA") shall not constitute a
Break in Service.
For purposes of determining whether a Break in Service has occurred for
eligibility and vesting purposes, an individual Employee shall be credited with
service for certain periods of absence from work. This rule applies to an
individual who is absent from work by reason of:
(a) Pregnancy of the individual;
(b) Birth of a child of the individual;
(c) Placement of a child in connection with the adoption of the
child by the individual; or
(d) Caring for the child during the period immediately following
the birth of the child or placement of the child for adoption.
The Hours of Service required to be credited for purposes of this paragraph are:
(i) Hours of Service that normally would have been credited to such Employee but
for the absence, or (ii) if the Company is unable to determine the hours
described in the foregoing clause (i), eight (8) Hours of Service per day of
absence, provided, however, that the total number of Hours of Service credited
under this paragraph by reason of any pregnancy, birth or placement shall not
exceed 501. The Hours of Service required to be credited under this paragraph
shall be credited only in the Plan Year in which the absence begins for one of
the reasons specified above if the crediting is necessary to prevent a Break in
Service in that year, or, if the Employee already has completed 501 Hours of
Service in such year, in the following Plan Year. If the absence from work is
not an approved leave of absence, credit will not be granted during such absence
unless the Employee demonstrates to the satisfaction of the Employer on a timely
basis that the leave was taken for one of the permitted reasons listed above.
2.9 "CODE" means the Internal Revenue Code of 1986, as amended from
time to time.
2.10 "COMMITTEE" OR "ADVISORY COMMITTEE" means the Retirement Plan
Advisory Committee referred to in Section 12.7(a), if appointed as provided in
Section 12.7.
2.11 "COMPANY" means J.D. Edwards & Company and any successor thereto.
3.
<PAGE> 12
2.12 "COMPANY STOCK" means shares of any class or series of stock
issued by the Company that constitutes a qualifying employer security within the
meaning of Section 407(d)(5) of ERISA.
2.13 "COMPENSATION" means for a Plan Year an Eligible Employee's wages
as defined in Section 3401(a) of the Code for purposes of income tax withholding
and all other amounts paid to an Eligible Employee (in the course of the
Employer's trade or business) for which the Employer is required to furnish the
Eligible Employee a written statement under Sections 6041(d) and 6051(a)(3) of
the Code. Compensation shall be determined without regard to any rules that
limit the remuneration included in wages based on the nature or location of the
employment or the services performed (such as the exception for agricultural
labor in Section 3401(a)(2) of the Code).
Notwithstanding the foregoing, for purposes of determining whether an individual
is a Highly Compensated Employee or a Key Employee, Compensation shall be
determined without regard to Sections 125, 402(e)(3), and 402(h)(1) of the Code,
and in the case of employer contributions made pursuant to a salary reduction
agreement, without regard to Section 403(b) of the Code. For purposes of
calculating an Eligible Employee's Contribution Rate or Deferral Rate and
allocating contributions under Article 4 (but not for purposes of the
limitations contained in Section 4.10), Compensation shall include: (i) 401(k)
Contributions, (ii) other elective contributions that are made by the Employer
or an Affiliate on behalf of its Employees that are not includable in gross
income under Sections 125, 402(e)(3), 402(h), and 403(b) of the Code, (iii)
Compensation deferred under an eligible deferred compensation plan within the
meaning of Section 457(b) of the Code (deferred compensation plans of state and
local governments and tax-exempt organizations), and (iv) employee contributions
(under governmental plans) described in Section 414(h)(2) of the Code that are
picked up by the employing unit and thus are treated as employer contributions.
In addition, for purposes of calculating an Eligible Employee's Contribution
Rate or Deferral Rate, Compensation shall exclude all of the following items
(even if includable in gross income): (i) reimbursements or other expense
allowances, (ii) fringe benefits (cash and noncash), (iii) moving expenses, (iv)
deferred compensation, and (v) welfare benefits. Effective for Limitation Years
beginning January 1, 1998 and thereafter, for purposes of the limitations on
contributions specified in Section 4.10, Compensation shall include (i) elective
deferrals as defined in Section 402(g)(3) of the Code and (ii) any amount which
is contributed or deferred by the Employer at the election of the Employee and
which is not includable in the gross income of the Employee by reason of Section
125 or 457 of the Code.
Compensation of an Eligible Employee taken into account for determining all
benefits provided under the Plan for any Plan Year shall not exceed $150,000, as
adjusted for increases in the cost of living in accordance with Section
401(a)(17)(B) of the Code. If the period for determining Compensation used in
calculating an Eligible Employee's allocation for a Plan Year is a short Plan
Year (i.e., shorter than twelve (12) months), the annual Compensation limit is
an amount equal to the otherwise applicable annual Compensation limit multiplied
by a fraction, the numerator of which is the number of months in the short Plan
Year, and the denominator of which is twelve (12).
Only compensation attributable to periods in such Plan Year during which an
Eligible Employee was a Participant shall be taken into account.
4.
<PAGE> 13
2.14 "CONTRIBUTION RATE" means the rate (expressed as a percentage to
the nearest one hundredth of one percent) determined by dividing:
(a) The aggregate amount of any Employer Matching Contributions and
Qualified Matching Contributions (to the extent not taken into account in
determining the Eligible Employee's Deferral Rate for purposes of the Actual
Deferral Percentage test under Subsection 4.8(a)) made under the Plan on behalf
of an Eligible Employee for the relevant Plan Year; by
(b) The Eligible Employee's Compensation for the relevant Plan
Year.
The amount in Subsection (a) above shall include any Forfeiture allocated to the
Participant's Account on the basis of Employer Matching Contributions or 401(k)
Contributions, which shall be taken into account in the Plan Year in which such
Forfeiture is allocated. The amount in Subsection (a) above shall not include
any Employer Matching Contributions and Qualified Matching Contributions that
are forfeited as Excess Aggregate Contributions, or because the 401(k)
Contributions to which they relate are treated as an Excess Contribution, Excess
Elective Deferral or Excess Aggregate Contribution. The Compensation of an
Eligible Employee taken into account in Subsection (b) above shall be limited,
where applicable, to the Compensation of the Eligible Employee during the
portion of the relevant Plan Year during which he or she is eligible to
participate in the Plan.
In computing the Contribution Rate, the Company may elect to include in the
amount in Subsection (a) above:
(1) All or a portion of the 401(k) Contributions for such
Employees;
(2) All or a portion of the Qualified Nonelective
Contributions for such Employees; or
(3) All or a portion of any contributions (including, if
applicable, any Employer Contributions) that constitute "qualified nonelective
contributions" (as defined in Section 401(m)(4)(C) of the Code) or "elective
deferrals" (as defined in Section 401(m)(4)(B) of the Code) made to the Plan or
any other plan of the Employer or any Affiliate of the Employer;
provided, however, that the 401(k) Contributions, including those taken into
account hereunder, satisfy the nondiscrimination test under Subsection 4.8 (a).
Any such election shall be subject to the requirements of and shall be made in
accordance with any regulations applicable under Section 401(m) of the Code.
2.15 "CURRENT YEAR METHOD" means using data for non-Highly Compensated
Employees and Highly Compensated Employees from the Testing Year in conducting
the testing required under Section 4.8.
2.16 "DEFERRAL RATE" means the rate (expressed as a percentage to the
nearest one hundredth of one percent) determined by dividing:
5.
<PAGE> 14
(a) The aggregate amount of the Eligible Employee's 401(k)
Contributions, if any, for the relevant Plan Year; by
(b) The Eligible Employee's Compensation for the relevant Plan
Year.
The Compensation of an Eligible Employee taken into account in Subsection (b)
above shall be limited, where applicable, to the Compensation of the Eligible
Employee during the portion of the relevant Plan Year during which he or she is
eligible to participate in the Plan.
In computing the Deferral Rate, the Employer may elect to include in the amount
in Subsection (a) above:
(1) All or a portion of the Qualified Matching Contributions
made on behalf of such Eligible Employees;
(2) All or a portion of the Qualified Nonelective
Contributions made on behalf of such Eligible Employees; or
(3) All or a portion of any contributions (including, if
applicable, any Employer Contributions) that constitute "qualified nonelective
contributions" (as defined in Section 401(m)(4)(C) of the Code) or "matching
contributions" described in Section 401(k)(3)(D)(ii)(I) of the Code (generally
known as "qualified matching contributions") made to the Plan or any other plan
of the Employer or any Affiliate of the Employer.
Any such election shall be subject to the requirements of and shall be in
accordance with regulations applicable under Section 401(k) of the Code.
2.17 "DEFINED BENEFIT PLAN FRACTION" means, for any Limitation Year, a
fraction, the numerator of which is the Participant's projected annual
retirement income benefit under all the defined benefit plans (whether or not
terminated) maintained by the Employer or any Affiliate of the Employer
determined as of the end of the Limitation Year, and the denominator of which is
the lesser of:
(a) The product of 1.25 multiplied by $90,000 (which dollar amount
shall be automatically adjusted for increases in the cost of living, if any, in
accordance with regulations or other pronouncements issued by the Secretary of
the Treasury or Commissioner of Internal Revenue, for such calendar year, under
the authority granted by Section 415(d) of the Code); or
(b) The product of 1.4 multiplied by one hundred percent (100%) of
the Participant's average annual Compensation for the three (3) consecutive
calendar years during which he or she received his or her greatest aggregate
compensation from the Company and during which he or she was a Participant in
the Plan.
The limitations under Subsection (a) shall be adjusted in the case of annual
retirement income benefits which do not exceed $10,000 for the Limitation Year
and for Participants with Years of Service of less than ten (10) years, to the
extent provided in Sections 415(b)(4) and (5) of the Code. This Section 2.17
shall cease to be effective as of January 1, 2000.
6.
<PAGE> 15
2.18 "DEFINED CONTRIBUTION PLAN FRACTION" means, for any Limitation
Year, a fraction, the numerator of which is the sum of the Annual Additions to
the Participant's accounts under all the defined contribution plans maintained
by the Employer or any Affiliate of the Employer (whether or not terminated) for
the current and all prior Limitation Years, and the denominator of which is the
sum of the maximum aggregate amounts for the current and all prior Limitation
Years of service with the Employer or any Affiliate of the Employer (regardless
of whether a defined contribution plan was maintained by the Employer). The
maximum aggregate amount in any Limitation Year is the lesser of one hundred
twenty-five percent (125%) of the dollar limitation in effect under Section
415(c)(1)(A) of the Code or thirty-five percent (35%) of the Participant's
Compensation for such year. This Section 2.18 shall cease to be effective as of
January 1, 2000.
2.19 "DISABILITY" means any physical or mental condition which renders
a Participant incapable of performing the work for which he or she was employed
by the Employer or similar work offered by the Employer. The Disability of a
Participant shall be determined by the Company in its sole discretion, in
accordance with uniform principles consistently applied, upon the basis of such
evidence as the Company deems necessary and advisable, including approval of the
Disability by a physician approved by the Company
2.20 "DISCRETIONARY CONTRIBUTIONS" means the amount, if any,
contributed to the Plan by the Employer under Subsection 4.3(b).
2.21 "DISCRETIONARY ACCOUNT" means the account into which Discretionary
Contributions, if any, and investment gains and losses thereon shall be
credited. The Employer may establish subaccounts under the Discretionary Account
to which contributions of Company Stock shall be credited.
2.22 "EFFECTIVE DATE" of the Plan as amended and restated means January
1, 1997.
2.23 "ELIGIBLE EMPLOYEE" means any Employee, except any Employee who:
(a) Has not attained age twenty-one (21);
(b) Is a nonresident alien who received no earned income (within
the meaning of Section 911(b) of the Code) from the Employer that constitutes
income from sources within the United States (within the meaning of Section
861(a)(3) of the Code);
(c) Is a member of a collective bargaining unit covered under a
collective bargaining agreement, unless such agreement expressly provides for
coverage of such bargaining unit members in the Plan;
(d) Is a leased employee (within the meaning of Section 414(n) of
the Code).
(e) Is an attorney primarily engaged by the Employer to handle
Employer related litigation;
7.
<PAGE> 16
(f) Is a resident of a foreign country and is employed in the
United States on temporary assignment for a specific period of time, after which
time such Employee will return to the country of his or her permanent residence;
(g) Effective August 3, 1998, is not enrolled on the United States
payroll of the Employer and has no United States source income; or
(h) Effective August 3, 1998, Employees who are classified as
"interns" by the Company on the Company's personnel records.
provided, however, that if such an Employee later becomes an Eligible Employee,
all of his or her prior service with the Employer or an Affiliate of the
Employer shall be credited immediately.
An individual's status as an Eligible Employee shall be determined by the
Employer pursuant to the foregoing provisions, and such determination shall be
conclusive and binding on all persons. A Leased Employee, independent
contractor, or self-employed individual who is reclassified as an Employee by
any governmental agency shall not be eligible to participate in this Plan
following such reclassification.
2.24 "EMPLOYEE" means an individual who is employed by the Employer in
the status of "employee" as that term is used in Section 3121(d)(1) or (2) of
the Code or is a leased employee (as defined in Section 414(n) of the Code),
unless such leased employee is covered by a plan of the leasing organization
that meets the requirements of Section 414(n)(5)(B) of the Code and leased
employees constitute no more than twenty percent (20%) of the Employer's
Employees who are Non-Highly Compensated Employees. Notwithstanding the
foregoing, "Employee" shall not include any individual performing services
solely through an employment or leasing agency except to the extent required
under Section 414(n) of the Code.
2.25 "EMPLOYER" means the Company and each Affiliate of the Company
that, with the approval of the Company and subject to such conditions as the
Company may impose, adopts this Plan, and any successor or successors of any of
them.
2.26 "EMPLOYER CONTRIBUTIONS" means any Employer Matching Contributions
or Discretionary Contributions made by the Employer pursuant to Section 4.3.
2.27 "EMPLOYER CONTRIBUTIONS ACCOUNT" means the aggregate of the
separate accounts into which Employer Matching Contributions and Discretionary
Contributions, if any, and investment gains and losses thereon shall be
credited.
2.28 "EMPLOYER MATCHING CONTRIBUTIONS" means contributions to the Plan
by the Employer made under Subsection 4.3(a) on behalf of a Participant on
account of such Participant's 401(k) Contributions.
2.29 "EMPLOYER MATCHING CONTRIBUTIONS ACCOUNT" means the account into
which Employer Matching Contributions, if any, and investment gains and losses
thereon shall be credited.
8.
<PAGE> 17
2.30 "EMPLOYMENT COMMENCEMENT DATE" means the date on which an Employee
first performs an Hour of Service for the Employer, including service performed
prior to the Effective Date.
2.31 "ENTRY DATE" means, effective August 3, 1998, for purposes of
401(k) Contributions, Matching Contributions and Discretionary Contributions,
the first day of each calendar quarter (January 1, April 1, July 1 and October
1). For periods prior to August 3, 1998, Entry Date means each January 1 and
July 1.
2.32 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time.
2.33 "ESOP" means the J.D. Edwards & Company Employee Stock Ownership
Plan.
2.34 "EXCESS AGGREGATE CONTRIBUTIONS" means, for each Plan Year, the
excess of:
(a) The aggregate amount of Employer Matching Contributions,
Qualified Matching Contributions, 401(k) Contributions, and Qualified
Nonelective Contributions actually taken into account in computing the Actual
Contribution Percentage for Eligible Employees who are Highly Compensated
Employees for such Plan Year, over
(b) The maximum amount of such contributions permitted under the
Actual Contribution Percentage test under Subsection 4.8(d).
The amount of Excess Aggregate Contributions for Eligible Employees who are
Highly Compensated Employees shall be determined by first reducing the
contributions of the Highly Compensated Employee(s) having the highest amount of
contributions by such amounts so as to cause the Plan to satisfy such Actual
Contribution Percentage test or to lower such Eligible Employee's amount of
contributions to that of the Highly Compensated Employee(s) with the next
highest amount of contributions, whichever occurs first. Such process shall
continue, as necessary, with respect to the Highly Compensated Employee(s) with
the next highest amount of contributions until such Actual Contribution
Percentage test is met.
2.35 "EXCESS CONTRIBUTIONS" means, for each Plan Year, the excess of:
(a) The aggregate amount of 401(k) Contributions, Qualified
Nonelective Contributions, and Qualified Matching Contributions actually taken
into account in computing the Actual Deferral Percentage for Highly Compensated
Employees for such Plan Year, over
(b) The maximum amount of such contributions permitted by the
Actual Deferral Percentage test under Subsection 4.8(a).
The amount of Excess Contributions for Eligible Employees who are Highly
Compensated Employees shall be determined by first reducing the contributions of
the Highly Compensated Employee(s) having the highest amount of contributions by
such amounts so as to cause the Plan to satisfy such Actual Deferral Percentage
test or to lower such Eligible Employee's amount of contributions to that of the
Highly Compensated Employee(s) with the next highest amount of contributions,
whichever occurs first. Such process shall continue, as necessary, with respect
to
9.
<PAGE> 18
the Highly Compensated Employee(s) with the next highest amount of contributions
until such Actual Deferral Percentage test is met.
2.36 "EXCESS ELECTIVE DEFERRALS" means, for a taxable year of a
Participant, the amount by which the total of such Participant's 401(k)
Contributions under this Plan and any other elective deferrals (as defined in
Section 402(g)(3) of the Code) under all other plans, contracts or arrangements
in which the Participant is eligible to participate (whether or not maintained
by the Employer or any Affiliate of the Employer) exceeds $7,000, and therefore
are includable in his or her gross income under Section 402(g) of the Code. Such
$7,000 amount shall be adjusted for cost-of-living increases at the same time
and in the same manner as under Section 415(d) of the Code, except that any
increase which is not a multiple of $500 shall be rounded to the next lowest
multiple of $500.
2.37 "FIVE YEAR BREAK IN SERVICE" means, effective January 1, 1998,
five consecutive one year Breaks in Service. For periods beginning prior to
January 1, 1998, Five Year Break in Service means five consecutive one-year
Periods of Severance.
2.38 "FORFEITURE" means the portion of a Participant's Employer
Contributions Account which is not payable to the Participant or his or her
Beneficiary because of such Participant's termination of employment before full
vesting or excess Annual Additions reallocated in accordance with Section 4.10.
2.39 "401(k) ACCOUNT" means the account into which 401(k)
Contributions, Qualified Matching Contributions, or Qualified Nonelective
Contributions made on behalf of a Participant pursuant to Article 4, and
earnings on those contributions, shall be credited, except to the extent that
the Company determines, in accordance with Sections 4.4 or 4.5 to cause
Qualified Nonelective Contributions or Qualified Matching Contributions to be
allocated to a separate subaccount for each Participant instead of allocating
such contributions to the 401(k) Accounts of Participants.
2.40 "401(k) AGREEMENT" means the agreement between the Employer and an
Employee to reduce the Employee's Salary as provided for in Article 4.
2.41 "401(k) CONTRIBUTIONS" means contributions to the Plan by the
Employer that are made pursuant to the election of a Participant pursuant to a
401(k) Agreement under Section 4.1, in lieu of Salary payable to the
Participant.
2.42 "HARDSHIP" means the immediate and heavy financial need of a
Participant, as determined in a uniform and nondiscriminatory basis by the
Company in accordance with Section 9.5 and as may be further clarified by rules
or regulations issued by the Secretary of the Treasury or the Internal Revenue
Service.
2.43 "HIGHLY COMPENSATED EMPLOYEE" means, with respect to a given Plan
Year, any Employee who (i) was a five percent (5%) owner of the Employer, within
the meaning of Section 416(q)(2) of the Code, during the Plan Year or the
preceding Plan Year, or (ii) for the preceding Plan Year had Compensation from
the Employer in excess of $80,000 (as adjusted for cost-of-living increases at
the same time and in the same manner as under Section 415(d) of the
10.
<PAGE> 19
Code, as modified by Section 414(q)(1) of the Code), and was in the top twenty
percent (20%) of Employees, ranked on the basis of Compensation, for the
preceding Plan Year.
In determining whether an Employee is a Highly Compensated Employee, all
employers that are aggregated under Section 414(b), (c), (m) or (o) of the Code
shall be treated as a single employer.
The determination of who is a Highly Compensated Employee, including the
determinations of the Employees in the top twenty percent (20%) of Employees
when ranked on the basis of Compensation and the Compensation that is
considered, shall be made in accordance with Section 414(q) of the Code and the
regulations thereunder.
2.44 "HOUR OF SERVICE" means:
(a) Each hour for which an Employee is directly or indirectly paid
or entitled to payment for the performance of duties for the Employer or an
Affiliate of the Employer during the applicable computation period;
(b) Each hour for which an Employee is directly or indirectly
entitled to payment on account of a period of time during which no duties are
performed (irrespective of whether the employment relationship has terminated)
due to vacation, holiday, illness, incapacity, disability, layoff, jury duty,
military duty or leave of absence. Notwithstanding the foregoing however, no
more than 501 Hours of Service shall be credited to an Employee on account of
any single continuous period in which the Employee performs no duties. Hours of
Service shall not be counted where such payment is made or is due:
(1) Under a plan maintained solely for the purpose of
complying with applicable workers' compensation, unemployment or disability
insurance law; or
(2) Solely to reimburse an Employee for medical or
medically-related expenses; and
(c) Each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the Employer or an Affiliate of the
Employer. These hours shall be credited to the computation period(s) to which
the award or agreement for back pay pertains rather than to the computation
period in which the award, agreement or payment is made; provided, however, that
the limits under Subsection (b) above are applicable and that an Employee shall
not be entitled to additional Hours of Service under this Subsection (c) for the
same Hours of Service credited under Subsection (a) or (b) above.
Hours of Service shall be credited to the Employee for the periods specified
above in accordance with Department of Labor Regulations Sections 2530.200b-2
and -3, the provisions of which are incorporated herein by this reference.
2.45 "INVESTMENT FUND" means, to the extent applicable, one or more of
the investment funds referred to in Article 6 in which the assets of the Trust
are invested.
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2.46 "INVESTMENT MANAGER" means any fiduciary (other than a Trustee or
named fiduciary as specified in Article 12) who:
(a) Has the power to manage, acquire or dispose of any asset of the
Trust;
(b) Is
(1) Registered as an investment adviser under the Investment
Advisers Act of 1940 (the "1940 Act");
(2) Not registered as an investment adviser under the 1940 Act
by reason of paragraph (1) of Section 203A(a) of the 1940 Act, but is registered
as an investment adviser under the laws of the State (referred to in paragraph
(1) of Section 203(A) of the 1940 Act) in which it maintains its principal
office and place of business, and, at the time the fiduciary last filed the
registration form most recently filed by the fiduciary with such State in order
to maintain the fiduciar's registration under the laws of such State, also filed
a copy of such form with the Secretary of Labor;
(3) A "bank," as defined in such Act; or
(4) An insurance company qualified to perform services
described in Subsection (a) above under the laws of more than one state; and
(c) Has acknowledged in writing that such person is a fiduciary
with respect to the Plan.
2.47 "LIMITATION YEAR" means the Plan Year.
2.48 "NON-HIGHLY COMPENSATED EMPLOYEE" means, with respect to a given
Plan Year, any Employee who is not a Highly Compensated Employee for such Plan
Year.
2.49 "NORMAL RETIREMENT AGE" means, for periods beginning before
January 1, 1999, the date on which a Participant attains age sixty-five (65).
For periods beginning on or after January 1, 1999, Normal Retirement Age means
the later of age 65 or the fifth anniversary of the Participant's date of
participation in the Plan.
2.50 "PARTICIPANT" means an Eligible Employee, whether or not he or she
has elected to make 401(k) Contributions, who has become a Participant in the
Plan in accordance with Section 3.1 or a former Eligible Employee who has an
Account under the Plan.
2.51 "PERIOD OF SERVICE" means a period of time beginning on the
Employment Commencement Date or Reemployment Commencement Date, as the case may
be, and ending on the Severance from Service Date. A Period of Service shall not
include the period between the first and second anniversaries of the first day
of absence from work if the absence from work is due to maternity or paternity
purposes. If an Employee leaves service and subsequently returns to service
within 12 months, the Period of Severance, if any, shall be included in
computing the Employee's service for purposes of vesting.
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All Periods of Service with the Employer or an Affiliate shall be
aggregated for vesting purposes except as follows:
(a) For the purposes of vesting in benefits accrued before a Five
Year Break in Service, service after such Five Year Break in Service shall be
disregarded and any unvested amounts shall be permanently forfeited. For the
purposes of vesting in benefits accrued after a Period of Severance of one or
more consecutive years, service prior to such Period of Severance shall be
disregarded if the Employee was not vested in any part of his or her Account at
the time of such Period of Severance and if the Period of Severance equals or
exceeds the greater of (i) five consecutive years or (ii) the Period of Service
accrued prior to such Period of Severance. In applying the rule in the preceding
sentence, any Period of Service excluded upon a prior application of this rule
shall be excluded for all purposes thereafter, including future application of
this rule.
(b) For vesting purposes, in aggregating any nonsuccessive Periods
of Service for a reemployed Employee, 12 months of service (30 days shall equal
one month, for purposes of aggregating fractional months) or 365 days shall
equal a one year Period of Service. Any Period of Service that, after such
aggregation, is less than 12 months or 365 days shall be disregarded in
calculating an Employee's vested benefit.
2.52 "PERIOD OF SEVERANCE" means a period of time commencing on the
Severance from Service Date and ending on the date on which the Employee again
performs an Hour of Service for the Employer. If an Employee is absent from
employment as a result of the Employee's pregnancy, birth of the Employee's
child, placement of a child for adoption by the Employee, or caring for the
child for a period beginning on such birth or placement, and if such absence
extends beyond the first anniversary of the date such absence began, the Period
of Severance shall begin on the second anniversary of the date such absence
began.
2.53 "PLAN" means the J.D. Edwards & Company Retirement Savings Plan,
as set forth herein and as amended from time to time.
2.54 "PLAN YEAR" means the twelve-consecutive month period commencing
each January 1 and ending the following December 31.
2.55 "PRIOR ESOP ACCOUNT" means the subaccount established for each
affected Participant to which Company Stock transferred to the Plan from the
ESOP, and any earnings thereon, shall be credited.
2.56 "PRIOR YEAR METHOD" means using data for non-Highly Compensated
Employees from the Plan Year immediately prior to the Testing Year and data for
Highly Compensated Employees from the Testing year in conducting the testing
required under Section 4.8.
2.57 "QUALIFIED MATCHING CONTRIBUTIONS" means contributions to the Plan
by the Employer made under Section 4.5, provided that any such contributions
shall be subject to the distribution limitations and nonforfeitability
requirements of Section 401(k)(2)(B) and (C) of the Code.
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2.58 "QUALIFIED MATCHING CONTRIBUTIONS ACCOUNT" means the account into
which Qualified Matching Contributions (other than contributions of Company
Stock), if any, and investment gains and losses thereon shall be credited.
2.59 "QUALIFIED NONELECTIVE CONTRIBUTIONS" means contributions to the
Plan by the Employer made under Section 4.4, provided that a Participant may not
elect to receive any such contributions in cash until distributed from the Plan
and that such contributions shall be subject to the distribution limitations and
nonforfeitability requirements of Section 401(k)(2)(B) and (C) of the Code.
2.60 "QUALIFIED NONELECTIVE CONTRIBUTIONS ACCOUNT" means the account
into which Qualified Nonelective Contributions (other than contributions of
Company Stock), if any, and investment gains and losses thereon shall be
credited.
2.61 "REEMPLOYMENT COMMENCEMENT DATE" means the first day on which an
Employee again performs an Hour of Service for the Employer following his or her
termination of employment.
2.62 "REQUIRED BEGINNING DATE" means:
(a) In the case of a Participant who has attained age 70 1/2 and is
not a "five percent owner" (within the meaning of Section 416(i)(1)(B)(i) of the
Code), April 1 of the calendar year following the later of (i) the calendar year
in which the Participant attains age 70 1/2or (ii) the calendar year in which
the Participant retires; and
(b) In the case of a "five percent owner" (within the meaning of
Section 416(i)(1)(B)(i) of the Code), April 1 of the calendar year following the
calendar year in which the Participant attains age 70 1/2, whether or not he or
she is still an Employee. If the Participant became a "five percent owner" after
the calendar year in which he or she attains age 70 1/2, then his or her
Required Beginning Date shall be no later than April 1 of the calendar year
following the year in which he she becomes a "five percent owner."
2.63 "REVIEW PANEL" means the committee, if any, appointed by the
Company to review appeals of denied claims under the Plan pursuant to Section
13.3.
2.64 "ROLLOVER ACCOUNT" means the account credited with Rollover
Contributions under Section 4.7.
2.65 "ROLLOVER CONTRIBUTION" means a contribution to the Plan of an
amount described in (i) Sections 402(c) or 403(a)(4) of the Code, relating to
certain distributions from an employees' trust or employee annuity described in
Sections 401(a) or 403(a) of the Code, respectively, (ii) Section
408(d)(3)(A)(ii) of the Code, relating to certain distributions from an
individual retirement account or an individual retirement annuity, and (iii) in
Section 4.7. Further, for the purposes of this Plan, a Rollover Contribution
shall include direct trustee-to-trustee transfers (within the meaning of Section
401(a)(31) of the Code) from other qualified plans and direct or indirect
plan-to-plan transfers from other qualified plans or from the custodian of a
conduit individual retirement arrangement, provided that the trust or custodial
account from which the funds are being transferred permits such a transfer to be
made.
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2.66 "SALARY" means an Eligible Employee's Compensation (as defined in
Section 2.14), except as set forth below:
Salary shall exclude all of the following items (even if includable in
gross income): (i) reimbursements or other expense allowances; (ii) fringe
benefits (cash and noncash); (iii) moving expenses; (iv) deferred compensation;
and (v) welfare benefits.
Only Salary attributable to periods during which an Eligible Employee was a
Participant shall be taken into account.
2.67 "SEVERANCE FROM SEVERANCE DATE" means, the date on which the
earlier of the following events occur:
(a) the Employee quits, is discharged, retires or dies;
(b) the first anniversary of the first date of a period in which
the Employee remains absent from service (with or without pay) for any reason
other than a quit, retirement, discharge or death, such as vacation, holiday,
sickness, disability, leave of absence or layoff; or
(c) in the case of an Employee who is absent from service for
maternity or paternity purposes, as described in Section 2.8, the second
anniversary of the first day of such absence.
2.68 "TESTING YEAR" means the Plan Year for which the testing required
under Section 4.8 is being conducted.
2.69 "TRUST" means all such money or other property that is held by the
Trustee pursuant to the terms of the Trust Agreement.
2.70 "TRUST AGREEMENT" means the trust agreement entered into between
the Company and a trustee for the purpose of funding benefits under the Plan, or
any successor trust agreement.
2.71 "TRUSTEE" means the trustee or any successor thereto acting as
such pursuant to Section 12.4 and the terms of the Trust Agreement.
2.72 "VALUATION DATE" means the date on which assets of the Trust are
valued, which, unless and until the Company directs otherwise, shall be each
business day of the New York Stock Exchange.
2.73 "YEAR OF SERVICE" means, effective January 1, 1998, for purposes
of eligibility, a computation period and, for purposes of vesting, a Plan Year
during which an Employee completes at least 1,000 Hours of Service.
For the purpose of determining eligibility, the initial computation period is
each twelve (12) consecutive month period measured from the Employment
Commencement Date (or the Reemployment Commencement Date) and each anniversary
thereof. Years of Service with each Affiliate shall be counted for all purposes
under the Plan.
15.
<PAGE> 24
For periods beginning prior to January 1, 1998, Year of Service means a
twelve-month Period of Service.
See Appendix A for grants of past service credit with regard to acquired or
merged companies. Appendix A is incorporated herein and may be revised from time
to time by the Employer.
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ARTICLE 3
ELIGIBILITY AND PARTICIPATION
3.1 ELIGIBILITY TO BECOME A PARTICIPANT. Each Eligible Employee who is
a Participant prior to the Effective Date shall continue to be a Participant in
the Plan. Effective August 3, 1998, each other Eligible Employee shall become a
Participant in the Plan as of the Entry Date, as defined in Section 2.31, next
following his or her completion of the service requirement specified in (a), (b)
or (c), below, as applicable, provided that he or she is an Eligible Employee on
such Entry Date.
(a) Effective for periods beginning on and after August 3, 1998,
for purposes of eligibility to make 401(k) Contributions, and to receive
Matching Contributions, an Eligible Employee must complete one full calendar
month of service.
(b) Effective for periods beginning prior to August 3, 1998 for
purposes of eligibility to receive Matching Contributions and Discretionary
Contributions, an Eligible Employee must complete six full calendar months of
service. For periods beginning prior to August 3, 1998, an Eligible Employee
shall become a Participant in the Plan as of the Entry Date coinciding with or
next following his or her completion of six (6) months of service.
(c) Effective for periods beginning on and after August 3, 1998,
for purposes of eligibility to receive Discretionary Contributions, an Eligible
Employee must complete one Year of Service and must have reached an Entry Date
for purposes of receiving Discretionary Contributions. The Entry Date for
purposes of receiving Discretionary Contributions is the first day of the
calendar quarter next following the one year anniversary of the Eligible
Employee's Entry Date for purposes of 401(k) and Matching Contributions.
Notwithstanding the foregoing, Employees hired by the Company on or after
December 1, 1997, and prior to August 3, 1998, will become eligible to receive
allocations of Discretionary Contributions under the eligibility criteria
described in this Section 3.1(c) that allows earlier participation for purposes
of receiving allocations of Discretionary Contributions.
For purposes of this Section 3.1, a full calendar month of service
means that the Eligible Employee must be continuously employed by the Employer
from the first day of a calendar month through the last day of that calendar
month.
3.2 SUSPENSION OF PARTICIPATION.
(a) A Participant shall be suspended from active participation in
the Plan for any period during which the Participant:
(1) Is on a leave of absence without pay or
(2) Does not qualify as an Eligible Employee but remains a
Participant.
(b) A Participant shall make no 401(k) Contributions with respect
to any period of suspended participation under Subsection (a) above, nor shall a
suspended Participant
17.
<PAGE> 26
receive any allocation of Employer Contributions, Qualified Nonelective
Contributions, Qualified Matching Contributions, or Forfeitures for any such
period. In addition, a Participant's 401(k) Contributions shall be suspended or
limited in the manner and for the period prescribed under Section 9.5 in the
case of a Hardship withdrawal from the Plan. A suspended Participant, however,
shall continue to share in the income, gains, losses and expenses of the
investments held in his or her Account.
3.3 REESTABLISHING ELIGIBLE EMPLOYEE STATUS AND PLAN REENTRY. If a
former Eligible Employee who was a Participant again becomes an Eligible
Employee, such Eligible Employee shall again be a Participant in the Plan
immediately on becoming an Eligible Employee.
3.4 TERMINATION OF PARTICIPATION. An Employee who becomes a Participant
shall cease to be a Participant as of the date on which no further benefits
under the Plan are payable to him or her.
3.5 NO MAXIMUM AGE. Participation in the Plan shall not be discontinued
or limited in any way, and the allocation of contributions shall not be
decreased, because of a Participant's attainment of any age.
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ARTICLE 4
CONTRIBUTIONS
4.1 401(k) CONTRIBUTIONS.
(a) Subject to the limitations established by this Article 4, the
Employer shall make 401(k) Contributions on an Eligible Employee's behalf in an
amount equal to the amount of Salary that the Eligible Employee has elected to
defer pursuant to the Eligible Employee's 401(k) Agreement. Each Eligible
Employee may elect to have the Employer contribute to the Plan from one percent
(1%) to a maximum of fifteen percent (15%) in whole percentages of such Eligible
Employee's Salary for the Plan Year in accordance with such uniform and
nondiscriminatory rules and procedures as the Company may establish.
(b) To participate for purposes of making 401(k) Contributions, an
Eligible Employee must have entered into a 401(k) Agreement, in the form as may
be prescribed by the Company, authorizing the reduction of his or her Salary in
amounts that will be contributed to the Plan as 401(k) Contributions on his or
her behalf by the Employer.
(c) Notwithstanding the provisions of Subsection 4.1(a) above, in
order for the Plan to comply with the requirements of Sections 401(k), 402(g)
and 415 of the Code (see Subsections 4.1(d) and 4.8(a) and Section 4.10 of the
Plan, respectively), at any time in a Plan Year, the Company (in its sole
discretion) may, by notifying the affected Eligible Employees in writing, reduce
the rate of 401(k) Contributions to be made on behalf of an Eligible Employee
for the remainder of that Plan Year, or the Company may require that all 401(k)
Contributions to be made on behalf of an Eligible Employee be discontinued for
the remainder of that Plan Year. Such a reduction or discontinuance may be
applied selectively to individual Eligible Employees or to a particular class of
Eligible Employees, as the Company may determine in its sole discretion. Upon
the close of the Plan Year or such earlier date as the Company may determine,
any reduction or discontinuance in 401(k) Contributions shall automatically
cease until the Company again determines that such a reduction or discontinuance
of 401(k) Contributions is required. Any such reduction or discontinuance shall
be prospective only as to pay periods commencing after notice to the affected
Eligible Employees, and shall not result in discrimination in favor of Highly
Compensated Employees in any manner prohibited by Section 401(a)(4) of the Code
or regulations applicable thereunder. Any amounts that would have been
contributed to the Plan in the absence of a reduction or discontinuance pursuant
to this Subsection 4.1(c) shall be paid in cash to the affected Eligible
Employees in the same manner in which such amounts otherwise are payable as
Salary in the absence of any election of 401(k) Contributions.
(d) The total of the 401(k) Contributions under this Plan and any
other elective deferrals (as defined in Section 402(g)(3) of the Code) under all
other plans, contracts or arrangements of the Employer or any Affiliate of the
Employer for any Participant during any taxable year of the Participant shall
not exceed $7,000 or such other amount in effect under Section 402(g)(1) of the
Code, as adjusted for increases in the cost of living for the calendar year in
which the Participant's taxable year begins. To the extent 401(k) Contributions
are distributed or returned to a Participant as excess Annual Additions pursuant
to Section 4.10 of the Plan, such
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<PAGE> 28
distributed or returned amounts shall be disregarded for purposes of the
limitation described in this Subsection 4.1(d).
(e) In the event a Participant has any Excess Elective Deferrals
for any taxable year of such Participant, whether or not the limitation in
Subsection 4.1(d) has been exceeded for such taxable year, such Excess Elective
Deferrals may be distributed to the Participant from the Plan in accordance with
either of Paragraphs (1) or (2) below (or a combination thereof, as applicable):
(1) The Company may cause the Excess Elective Deferrals to be
distributed to the Participant during the taxable year of the Participant in
which the Excess Elective Deferrals occur if the following conditions are
satisfied:
(A) The Participant designates the distribution as Excess
Elective Deferrals; provided, however, to the extent the Participant's Excess
Elective Deferrals are attributable only to 401(k) Contributions under this Plan
and any other elective deferrals (as defined in Section 402(g)(3) of the Code)
under all other plans, contracts or arrangements maintained by the Employer or
any Affiliate of the Employer, the Employer may designate the distribution as
Excess Elective Deferrals on behalf of the Participant;
(B) Such distribution is made after the date on which the
Excess Elective Deferrals were received by the Plan; and
(C) The Plan designates the distribution as a distribution
of Excess Elective Deferrals.
(2) If any amount of Excess Elective Deferrals is included in
the gross income of a Participant for federal income tax purposes for any
taxable year of such Participant, the Participant, not later than the first
March 1 following the close of such taxable year, may notify the Company of the
amount of such Excess Elective Deferrals that the Participant designates as
having been received by the Plan; provided, however, to the extent the
Participant's Excess Elective Deferrals are attributable only to 401(k)
Contributions under this Plan and any other elective deferrals (as defined in
Section 402(g)(3) of the Code) under all other plans, contracts or arrangements
maintained by the Employer or any Affiliate of the Employer, the Employer on
behalf of the Participant may notify the Company and designate the amount of the
Excess Elective Deferrals received by the Plan. In the event notice of Excess
Elective Deferrals is given in accordance with the foregoing provision, the
Company shall cause there to be distributed to the Participant, not later than
the first April 15 following the close of such taxable year of the Participant,
the amount designated, plus any income and minus any loss allocable thereto for
such taxable year of the Participant and for the period between the end of the
taxable year and the date of distribution (the "gap period"). The amount of any
income or loss to be allocated to Excess Elective Deferrals under this Paragraph
(2) shall be determined under the same method used for allocating income to
Participants' Accounts generally, as then in effect in accordance with the
provisions of Section 5.2 of the Plan.
Any designation of Excess Elective Deferrals made by a Participant under
Paragraph (1) or (2) above shall be in writing, and, if the Excess Elective
Deferrals are attributable in part to elective
20.
<PAGE> 29
deferrals made for the taxable year to any plan, contract or arrangement not
maintained by the Employer or any Affiliate of the Employer, the Participant
shall certify to the Company or otherwise provide such information as the
Company may reasonably require in order to establish that the amount designated
constitutes Excess Elective Deferrals. The amount of Excess Elective Deferrals
that may be distributed under this Subsection 4.1(e) with respect to a
Participant for a taxable year shall be reduced by any Excess Contributions
previously distributed in accordance with Subsection 4.8(b) for the Plan Year
beginning with or within the Participant's taxable year. In no event may a
Participant receive as a corrective distribution under this Subsection 4.1(e) an
amount in excess of the Participant's total 401(k) Contributions for the taxable
year. Notwithstanding any other provision in the Plan, the consent of a
Participant or his or her spouse shall not be required for a distribution of
Excess Elective Deferrals and allocable income.
(f) Any decrease in the 401(k) Contributions for an Eligible
Employee resulting from the distribution of Excess Elective Deferrals also shall
be effective for purposes of determining the amount of Employer Matching
Contributions and Qualified Matching Contributions to be made for the Eligible
Employee's benefit under Subsection 4.3(b) and Section 4.5.
(g) A Participant's 401(k) Contributions shall be credited to his
or her 401(k) Account. However, for Federal tax purposes (and wherever
permitted, for state tax purposes), 401(k) Contributions shall be deemed to be
contributions to the Plan by the Employer, and a Participant's 401(k) Agreement
shall constitute an election to have his or her taxable compensation reduced by
the amount of all such 401(k) Contributions. 401(k) Contributions shall be made
in accordance with Plan rules and are subject to the limitations set forth in
this Article 4.
4.2 401(k) AGREEMENT.
(a) 401(k) Contributions shall be authorized by a Participant in
writing pursuant to a 401(k) Agreement. The 401(k) Agreement shall provide that
a Participant's Salary shall be reduced by any whole number percentage;
provided, however, that the amount of the reduction does not exceed the
limitations set forth in this Article 4.
(b) A Participant may elect to suspend his or her 401(k)
Contributions at any time by filing a notice on the prescribed form with the
Company. Any such election shall be effective as soon as is reasonably practical
following receipt of such notice by the Company. By giving the Company
reasonable notice in the manner and at the time prescribed by the Company, a
Participant who has suspended 401(k) Contributions may recommence making 401(k)
Contributions as of any Entry Date after the date on which 401(k) Contributions
were suspended.
(c) A Participant may elect to change the amount of his or her
401(k) Contributions effective as of the Entry Date following receipt by the
Company of the Participant's revised election form. Any such change must be made
in the manner and at the time prescribed by the Company.
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(d) The Employer shall forward all 401(k) Contributions to the
Trustee for investment in the Trust, as provided for in Article 6, as soon as
reasonably feasible after such amounts would have been paid to the Participants
if not withheld from the Participants' Salary, but in any event no later than
the fifteenth (15th) business day of the month following the month in which such
amounts would otherwise have been paid to the Participant.
4.3 EMPLOYER CONTRIBUTIONS.
(a) EMPLOYER MATCHING CONTRIBUTIONS. For any Plan Year, the
Employer may make Employer Matching Contributions in any amount as may be
determined by the Employer, in its sole discretion. Such contributions, if any,
may be made in the form of cash or Company Stock (or a combination thereof) and
shall be allocated as of the last day of the Plan Year to the Employer Matching
Contributions Accounts of all Eligible Employees who made 401(k) Contributions
for the Plan Year and who are employed as of the last day of the Plan Year and
who completed 1,000 Hours of Service during the Plan Year or who terminated
employment during the Plan Year as a result of death, Disability, or attainment
of Normal Retirement Age in a specified dollar amount or number of shares per
Eligible Employee or in the proportion that each such Eligible Employee's 401(k)
Contributions for the Plan Year bears to the total 401(k) Contributions for all
Eligible Employees for such Plan Year, provided that the Employer may limit
allocations of Employer Matching Contributions to Eligible Employees who are
Non-Highly Compensated Employees or establish a uniform formula pursuant to
which Employer Matching Contributions are allocated at different rates with
respect to specified increments of each Eligible Employee's total 401(k)
Contributions for the Plan Year. The Employer also may uniformly limit for all
Eligible Employees, or just for those Eligible Employees who are Highly
Compensated Employees, the amount of 401(k) Contributions that are taken into
account for purposes of allocating Employer Matching Contributions.
(b) DISCRETIONARY CONTRIBUTIONS. For any Plan Year, the Employer
may make Discretionary Contributions in any amount as may be determined by the
Employer in its sole discretion. Such contributions, if any, may be made in the
form of cash or Company Stock (or a combination thereof) and shall be allocated
as of the last day of the Plan Year to the Discretionary Accounts of all
Participants who are employed as of the last day of the Plan Year and who
completed 1,000 Hours of Service during the Plan Year or who terminated
employment during the Plan Year as a result of death, Disability, or attainment
of Normal Retirement Age in a specified dollar amount or number of shares per
Participant or in the proportion that the Compensation of each such Participant
for the Plan Year bears to the total Compensation for all such Participants for
such Plan Year, provided that the Employer may limit the amount of Compensation
that is taken into account for purposes of allocating Discretionary
Contributions. For purposes of allocating such Discretionary Contributions for
any Plan Year based on a Participant's Compensation, only Compensation
attributable to periods in such Plan Year during which such Participant was a
Participant, and eligible to receive such Discretionary Contributions under
Section 3.1(c), shall be taken into account.
4.4 QUALIFIED NONELECTIVE CONTRIBUTIONS. For any Plan Year, the
Employer may make Qualified Nonelective Contributions in any amount as may be
determined by the Employer in its sole discretion. Such contributions, if any,
may be made in the form of cash or Company Stock (or a combination thereof) and
shall be allocated as of the last day of the Plan Year to the
22.
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401(k) Accounts, or, if made in the form of Company Stock, to the Discretionary
Accounts, of all Eligible Employees who are employed during such Plan Year in a
specified dollar amount or number of shares per Eligible Employee or in the
proportion that the Compensation of each such Eligible Employee for the Plan
Year bears to the total Compensation for all such Eligible Employees for such
Plan Year, provided that the Employer may uniformly limit for all Eligible
Employees, or just for those Eligible Employees who are Highly Compensated
Employees, the amount of Compensation that is taken into account for purposes of
allocating Qualified Nonelective Contributions or it may determine that
allocations of Qualified Nonelective Contributions shall be limited to
individual Eligible Employees who are Non-Highly Compensated Employees or to all
Eligible Employees who are Non-Highly Compensated Employees, as the Employer may
determine in its sole discretion. For purposes of allocating Qualified
Nonelective Contributions for any Plan Year based on an Eligible Employee's
Compensation, only Compensation attributable to periods in such Plan Year during
which such Eligible Employee was a Participant shall be taken into account.
If the Company so determines, it may cause Qualified Nonelective Contributions
to be allocated to a separate Qualified Nonelective Contributions Account for
each Participant established for the purpose of receiving and holding such
contributions instead of allocating such contributions to the 401(k) Accounts of
Participants. Such contributions shall meet the requirements of Section
401(m)(4)(C) of the Code and regulations applicable thereunder.
4.5 QUALIFIED MATCHING CONTRIBUTIONS. For any Plan Year, the Employer
may make Qualified Matching Contributions in any amount as may be determined by
the Employer, in its sole discretion. Such contributions, if any, may be made in
the form of cash or Company Stock (or a combination thereof) and shall be
allocated as of the last day of the Plan Year to the 401(k) Accounts, or, if
made in the form of Company Stock, to the Discretionary Accounts, of all
Eligible Employees who have made 401(k) Contributions for the Plan Year in a
specified dollar amount or number of shares per Eligible Employee or in the
proportion that each such Eligible Employee's 401(k) Contributions for the Plan
Year bears to the total 401(k) Contributions for all Eligible Employees for such
Plan Year, provided that the Employer may limit allocations of Qualified
Matching Contributions to individual Eligible Employees who are Non-Highly
Compensated Employees or to all Eligible Employees who are Non-Highly
Compensated Employees or establish a uniform formula pursuant to which Qualified
Matching Contributions are allocated at different rates with respect to
specified increments of each Eligible Employee's total 401(k) Contributions for
the Plan Year. The Employer also may uniformly limit for all Eligible Employees,
or just for those Eligible Employees who are Highly Compensated Employees, the
amount of 401(k) Contributions that are taken into account for purposes of
allocating Qualified Matching Contributions.
If the Company so determines, it may cause Qualified Matching Contributions to
be allocated to a separate Qualified Matching Contributions Account for each
Participant established for the purpose of receiving and holding such
contributions instead of allocating such contributions to the 401(k) Accounts of
Participants.
4.6 TIME OF PAYMENT. All Employer Contributions, Qualified Nonelective
Contributions, and Qualified Matching Contributions shall be paid to the
Trustee, in one or more installments, not later than the final date for filing
the Employer's Federal income tax return for
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the fiscal year of the Employer within which or with which occurs the end of the
Plan Year for which such contributions are made, including extensions of time
granted for such filing.
4.7 ROLLOVER CONTRIBUTIONS.
(a) An Eligible Employee, whether or not he or she has reached an
Entry Date or elected to make 401(k) Contributions, or an Employee who would be
eligible to participate in the Plan upon satisfaction of the age requirement in
Subsection 2.23(a) or the service requirement in Section 3.1, whether or not he
or she has yet satisfied such requirements, may make a Rollover Contribution
subject to the approval of the Company and in accordance with procedures
approved by the Company. Upon such a Rollover Contribution by an Eligible
Employee who has not yet otherwise become a Participant, his or her Rollover
Account shall represent his or her sole interest in the Plan.
(b) A Rollover Contribution (other than in the case of a direct
trustee-to-trustee transfer (within the meaning of Section 401(a)(31) of the
Code) or a plan-to-plan transfer) shall be made within sixty (60) days of
distribution (or such longer time as may be permitted by regulations), and shall
exclude any after-tax contribution amounts contributed by the Eligible Employee
to the plan, annuity or other arrangement from which the Rollover Contribution
is derived. In no event may an Eligible Employee make a Rollover Contribution
(including as a result of a plan-to-plan transfer) that would cause the Plan to
be a direct or indirect transferee, within the meaning of Section
401(a)(11)(B)(iii)(III) of the Code and any regulations or rulings thereunder,
of a plan described in Section 401(a)(11)(B)(i) or (ii) of the Code.
(c) Effective on and after August 3, 1998, a Rollover Contribution
shall be made only in the form of cash, provided however, that the Employer may
in its sole discretion allow the Plan to accept in-kind assets as Rollover
Contributions in the event of corporate events such as mergers or acquisitions.
(d) An Eligible Employee may be required to furnish evidence
satisfactory to the Company that the amount of a proposed Rollover Contribution
meets all of the foregoing requirements. When made, the Eligible Employee's
Rollover Contribution shall be credited to such Eligible Employee's Rollover
Account as of the date such contribution is received. A Rollover Contribution
shall not be considered a contribution by the Employer, and an Eligible
Employee's Rollover Account shall be fully vested at all times.
(e) No plan-to-plan transfer may be accepted by the Trustee of this
Plan from any other qualified retirement plan, whether or not such other plan is
maintained by the Employer, if the amounts to be transferred consist of
contributions based on foreign source (non-United States source) compensation.
Nor may the Trustee accept a transfer of earnings on such contributions, even
though the earnings may be United States source income.
4.8 NONDISCRIMINATION REQUIREMENTS.
(a) ACTUAL DEFERRAL PERCENTAGE TEST. In no event shall the Actual
Deferral Percentage for Eligible Employees who are Highly Compensated Employees
exceed with respect to any Plan Year the greater of (1) or (2) as follows:
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(1) One hundred twenty-five percent (125%) of the Actual
Deferral Percentage for Eligible Employees who are Non-Highly Compensated
Employees or
(2) The lesser of (i) two hundred percent (200%) of the Actual
Deferral Percentage for Eligible Employees who are Non-Highly Compensated
Employees, (ii) the Actual Deferral Percentage for Eligible Employees who are
Non-Highly Compensated Employees plus two (2) percentage points, or (iii) the
highest amount which, when taking into account the Actual Deferral Percentage
for Eligible Employees who are Non-Highly Compensated Employees and the Actual
Contribution Percentages for Highly Compensated Employees and Non-Highly
Compensated Employees, respectively, would not cause the "aggregate limit"
(within the meaning of Treasury Regulations Section 1.401(m)-2(b)(3)) to be
exceeded, in accordance with the provisions of Subsection 4.8(g) below.
This subparagraph (a) shall be applied by using the Current Year Method. If the
Employer so elects the method used in this subparagraph (a) may be changed in
accordance with guidance issued by the Internal Revenue Service, by amending the
Plan to reflect such election.
(b) CORRECTION METHODS TO MEET ACTUAL DEFERRAL PERCENTAGE TEST. In
the event that for any Plan Year the Actual Deferral Percentage for Eligible
Employees who are Highly Compensated Employees otherwise would not meet either
of the tests set forth above, as required by Section 401(k)(3)(A) of the Code,
then the Employer shall elect one of the following methods (or any combination
thereof) of meeting one of those tests:
(1) Excess Contributions, plus any income and minus any loss
allocable thereto for such Plan Year and for the period between the end of the
Plan Year and the date of distribution (the "gap period"), may be distributed
after the end of the Plan Year and within twelve (12) months after the close of
such Plan Year to the Highly Compensated Employees to whose Accounts such Excess
Contributions were allocated for the Plan Year in accordance with the
requirement of Section 401(k)(8)(c) of the Code. If Excess Contributions are
distributed more than 2 1/2 months after the last day of the Plan Year in which
such amounts arose, a ten percent (10%) excise tax will be imposed on the
Employer with respect to such amounts as provided in Section 4979 of the Code.
The amount of any income or loss to be allocated to Excess Contributions shall
be determined under the same method used for allocating income to Participants'
Accounts generally, as then in effect in accordance with the provisions of
Section 5.2 of the Plan. Notwithstanding any other provision in the Plan, the
consent of a Participant or his or her spouse shall not be required for a
distribution of Excess Contributions and allocable income.
(2) In its discretion, the Employer may make Qualified
Nonelective Contributions or Qualified Matching Contributions on behalf of
Non-Highly Compensated Employees pursuant to Sections 4.4 or 4.5 in amounts
sufficient to meet the Actual Deferral Percentage test when taking such
contributions into account to the extent permitted under the Plan and
regulations under Section 401(k) of the Code.
(c) Special Rules for Actual Deferral Percentage Limit Testing.
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(1) For purposes of the Actual Deferral Percentage test, the
Deferral Rate of any Eligible Employee who is a Highly Compensated Employee for
the Plan Year and who is eligible to have 401(k) Contributions or any other
employer contributions described in Section 401(k)(3)(D) of the Code allocated
to his or her accounts under two or more cash or deferred arrangements described
in Section 401(k) of the Code that are maintained by the Employer or an
Affiliate shall be determined as if all 401(k) Contributions and any such other
employer contributions were made under a single cash or deferred arrangement. If
a Highly Compensated Employee participates in two or more cash or deferred
arrangements described in Section 401(k) of the Code that have different plan
years, all such arrangements that have plan years ending with or within the same
calendar year shall be treated as a single arrangement.
(2) In the event that this Plan satisfies the requirements of
Sections 401(k), 401(a)(4) or 410(b) of the Code only if aggregated with one or
more other plans, or if one or more other plans satisfy the requirements of such
Sections of the Code only if aggregated with this Plan, then this Section 4.8
shall be applied by determining the Actual Deferral Percentage of Eligible
Employees as if all such plans were a single plan. Plans may be aggregated in
order to satisfy Section 401(k) of the Code only if they have the same Plan
Year.
(3) In order to be taken into account for purposes of the
Actual Participant's Percentage test for a Plan Year, 401(k) Contributions must
be allocated to the Employee's Account as of a date within such Plan Year. For
this purpose, 401(k) Contributions will not be considered to be allocated as of
a date within a Plan Year unless (i) the allocation is not contingent on the
Employee's participation in the Plan or performance of services on any date
subsequent to that date and (ii) such 401(k) Contributions are made before the
end of the twelve-month period immediately following such Plan Year.
(4) 401(k) Contributions will be taken into account under the
Actual Deferral Percentage test for a Plan Year only if they relate to
Compensation that would have been received by the Eligible Employee in the Plan
Year (but for his or her 401(k) Agreement).
(5) Any decrease in the 401(k) Contributions for an Eligible
Employee resulting from the distribution of Excess Contributions also shall be
effective for purposes of determining the amount of Employer Matching
Contributions or Qualified Matching Contributions to be made for the Eligible
Employee's benefit under Subsection 4.3(b) and Section 4.5, as the case may be.
(6) To the extent 401(k) Contributions are distributed or
returned to a Participant as excess Annual Additions pursuant to Section 4.10 of
the Plan, such amounts shall be disregarded for purposes of determining the
Deferral Rate of a Participant.
(7) To the extent 401(k) Contributions are taken into account
in determining an Eligible Employee's Contribution Rate for purposes of the
Actual Contribution Percentage test under Subsection 4.8(d), such amounts shall
be disregarded for purposes of determining the Deferral Rate.
(8) Excess Elective Deferrals of a Non-Highly Compensated
Employee that are calculated by taking into account only 401(k) Contributions
under this Plan
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and any other plan maintained by the Employer and that are distributed to such
Non-Highly Compensated Employee pursuant to Subsection 4.1(d) of the Plan shall
be disregarded for purposes of determining the Deferral Rate of such Non-Highly
Compensated Employee.
(9) For purposes of Subsection 4.8(a), Eligible Employee shall
include any Employee who would be eligible to make 401(k) Contributions to the
Plan but for a suspension due to a withdrawal, a loan, an election not to
participate in the Plan, or the inability of the Employee to receive additional
Annual Additions because of the limits imposed by Section 415(c)(1) or 415(e) of
the Code.
(10) The Company shall maintain such records as are necessary
to demonstrate compliance with the requirements of Subsection 4.8(a), including
the extent to which Qualified Nonelective Contributions and Qualified Matching
Contributions are taken into account for purposes of determining an Eligible
Employee's Deferral Rate.
(d) ACTUAL CONTRIBUTION PERCENTAGE TEST. In no event shall the
Actual Contribution Percentage for Eligible Employees who are Highly Compensated
Employees exceed with respect to any Plan Year the greater of (1) or (2) as
follows:
(1) One hundred twenty-five percent (125%) of the Actual
Contribution Percentage for Eligible Employees who are Non-Highly Compensated
Employees or
(2) The lesser of (i) two hundred percent (200%) of the Actual
Contribution Percentage for Eligible Employees who are Non-Highly Compensated
Employees or (ii) the Actual Contribution Percentage for Eligible Employees who
are Non-Highly Compensated Employees plus two (2) percentage points.
This subparagraph (d) shall be applied by using the Current Year
Method. If the Employer so elects, the method used in this subparagraph (d) may
be changed in accordance with guidance issued by the Internal Revenue Service,
by amending the Plan to reflect such election.
(e) CORRECTION METHODS TO MEET ACTUAL CONTRIBUTION PERCENTAGE TEST.
In the event that for any Plan Year the Actual Contribution Percentage for
Eligible Employees who are Highly Compensated Employees otherwise would not meet
either of the tests set forth above, as required by Section 401(m)(2) of the
Code, then the Employer shall elect one of the following methods (or any
combination thereof) of meeting one of those tests:
(1) Excess Aggregate Contributions, plus any income and minus
any loss allocable thereto for such Plan Year and for the period between the end
of the Plan Year and the date of distribution (the "gap period"), may be
distributed after the end of the Plan Year and within twelve (12) months after
the close of such Plan Year to the Highly Compensated Employees to whose
Accounts such Excess Aggregate Contributions were allocated for the Plan Year in
accordance with the requirements of Section 401(m)(b)(C) of the Code. If Excess
Aggregate Contributions are distributed more than 2 1/2 months after the last
day of the Plan Year in which such amounts arose, a ten percent (10%) excise tax
will be imposed on the Employer with respect to such amounts as provided in
Section 4979 of the Code. The amount of any income or loss to be allocated to
Excess Aggregate Contributions shall be determined under the
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<PAGE> 36
same method used for allocating income to Participants' Accounts generally, as
then in effect in accordance with the provisions of Section 5.2 of the Plan.
Notwithstanding any other provision in the Plan, the consent of a Participant or
his or her spouse shall not be required for a distribution of Excess Aggregate
Contributions and allocable income.
(2) In its discretion, the Employer may make Qualified
Nonelective Contributions or Qualified Matching Contributions on behalf of
Non-Highly Compensated Employees pursuant to Sections 4.4 or 4.5 in amounts
sufficient to meet the Actual Contribution Percentage test when taking such
contributions into account to the extent permitted under the Plan and
regulations under Section 401(m) of the Code.
(f) SPECIAL RULES FOR ACTUAL CONTRIBUTION PERCENTAGE LIMIT TESTING.
(1) For purposes of the Actual Contribution Percentage test,
the Contribution Rate for any Eligible Employee who is a Highly Compensated
Employee for the Plan Year and who is eligible to have Employer Matching
Contributions, Qualified Matching Contributions, or any other matching
contributions described in Section 401(m)(4)(A) of the Code allocated to his or
her accounts under two or more plans described in Section 401(a) of the Code
that are maintained by the Employer or an Affiliate shall be determined as if
all Employer Matching Contributions, Qualified Matching Contributions, and any
such other matching contributions were made under a single plan. If a Highly
Compensated Employee participates in two or more plans to which are made
contributions described in Section 401(m)(4)(A) of the Code that have different
plan years, all such plans that have plan years ending with or within the same
calendar year shall be treated as a single plan.
(2) In the event that this Plan satisfies the requirements of
Sections 401(m), 401(a)(4) or 410(b) of the Code only if aggregated with one or
more plans, or if one or more other plans satisfy the requirements of such
Sections of the Code only if aggregated with this Plan, then this Section 4.8
shall be applied by determining the Contribution Rate of Eligible Employees as
if all such plans were a single plan. Plans may be aggregated in order to
satisfy Section 401(m) of the Code only if they have the same plan year.
(3) In order to be taken into account for purposes of the
Actual Contribution Percentage test for a Plan Year, Employer Matching
Contributions and Qualified Matching Contributions must (i) be allocated to the
Eligible Employee's Account as of a date within the Plan Year under other
provisions of the Plan, (ii) be made on account of the Eligible Employee's
401(k) Contributions for the Plan Year and (iii) be made before the end of the
twelve-month period immediately following the Plan Year.
(4) Employer Matching Contributions and Qualified Matching
Contributions that are forfeited because the 401(k) Contributions to which they
relate are treated as Excess Contributions, Excess Elective Deferrals or Excess
Aggregate Contributions shall not be taken into account for purposes of the
Actual Contribution Percentage test.
(5) To the extent Employer Matching Contributions and
Qualified Matching Contributions are taken into account in determining an
Eligible Employee's Deferral
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Rate for purposes of the Actual Deferral Percentage test under Subsection
4.8(a), such amounts shall be disregarded for purposes of determining the
Contribution Rate.
(6) For purposes of Subsection 4.8(d), Eligible Employee shall
include any Employee who would be eligible to make 401(k) Contributions to the
Plan and thus receive Employer Matching Contributions and Qualified Matching
Contributions but for a suspension due to a withdrawal, a loan, an election not
to participate in the Plan, or the inability of the Employee to receive
additional Annual Additions because of the limits imposed by Section 415(c)(1)
or 415(e) of the Code.
(7) The Company shall maintain such records as are necessary
to demonstrate compliance with the requirements of Subsection 4.8(d), including
the extent to which 401(k) Contributions and Qualified Nonelective Contributions
are taken into account for purposes of determining an Eligible Employee's
Contribution Rate.
(g) PREVENTION OF MULTIPLE USE. Notwithstanding any other
provisions of the Plan to the contrary, in no event shall the sum of the Actual
Deferral Percentage and the Actual Contribution Percentage for Eligible
Employees who are Highly Compensated Employees exceed with respect to any Plan
Year the "aggregate limit," as that term is defined in Treasury Regulations
Section 1.401(m)-2(b)(3) (relating to the multiple use of the alternative
limitations contained in Sections 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii) of
the Code, respectively). However, the aggregate limit will not be considered to
have been exceeded in any Plan Year if either the Actual Deferral Percentage or
the Actual Contribution Percentage of the Eligible Employees who are Highly
Compensated Employees does not exceed 1.25 multiplied by the Actual Deferral
Percentage or Actual Contribution Percentage, as the case may be, of the
Eligible Employees who are Non-Highly Compensated Employees. If, after
application of the provisions in Subsections 4.8(b) and (e) above, such
aggregate limit would be exceeded for any Plan Year, then either the Actual
Deferral Percentage of Highly Compensated Employees for such Plan Year shall be
reduced or the Employer shall make Qualified Nonelective Contributions pursuant
to Section 4.4 so that the aggregate limit is not exceeded. The amount of any
reduction of the Actual Deferral Percentage for Highly Compensated Employees
under this Subsection 4.8(g) shall be determined in the same manner as the
amount of any Excess Contributions is determined, as specified in Section 2.35,
and such reduction shall be treated as Excess Contributions for purposes of the
Plan. For purposes of this Subsection 4.8(g), the provisions of Treasury
Regulations Section 1.401(m)-2 are incorporated by reference herein.
4.9 REVERSION OF CONTRIBUTIONS. Except as provided in this Section 4.9
or as provided in Section 4.10 in the case of the termination of the Plan, the
assets of the Plan shall never inure to the benefit of the Employer, and shall
be held for the exclusive purposes of providing benefits to Participants and/or
their Beneficiaries, and for defraying the expenses of administering the Plan.
(a) In the case of a contribution which is made by virtue of a
mistake of fact, this Section 4.0 shall not prohibit the return of such
contribution to the Employer within one (1) year after the payment of the
contribution.
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(b) The Employer's obligation to make contributions hereunder is
conditioned upon initial qualification of the Plan under Section 401(a) of the
Code, or any successor provision thereto, and if the Plan does not so qualify,
then this Section 4.9 shall not prohibit the return of such contribution to the
Employer within one (1) year after the date of denial of initial qualification
of the Plan, but only if the application for the qualification is made by the
time prescribed by law for filing the Employer's return for the taxable year in
which the Plan is adopted, or such later date as the Secretary of the Treasury
may prescribe.
(c) To the extent the deduction of a contribution by the Employer
under Section 404 of the Code, or any successor provision thereto, is
disallowed, this Section 4.9 shall not prohibit the return of such contribution
(to the extent disallowed) to the Employer within one (1) year after such
disallowance of the deduction.
4.10 OTHER LIMITATIONS ON CONTRIBUTIONS.
(a) In no event shall the Annual Additions allocated to any
Participant's Account in any Limitation Year exceed the lesser of (1) or (2) as
follows:
(1) Twenty-five percent (25%) of the Participant's
Compensation for the Limitation Year; or
(2) $30,000 (as adjusted annually under Section 415(d) of the
Code for increases in the cost of living).
(b) If, as a result of (i) the allocation of Forfeitures, (ii) a
reasonable error in estimating a Participant's Compensation, (iii) a reasonable
error in determining the amount of 401(k) Contributions that may be made with
respect to any Participant under the limits of Section 415 of the Code or (iv)
other limited facts and circumstances that the Commissioner of Internal Revenue
finds justify the availability of the relief provisions specified in this
Section 4.10, allocations of Annual Additions would exceed the limitation of
Subsection 4.10(a) with respect to any Participant, the Participant's 401(k)
Contributions for the Limitation Year, plus any income allocable thereto, shall
be distributed to the Participant to the extent that the distribution would
reduce the excess Annual Additions allocated to the Participant's Account. If
excess Annual Additions remain for any Participant after available 401(k)
Contributions have been distributed, and the Participant is in the service of
the Employer at the end of the Limitation Year, then such excess Annual
Additions shall be reapplied to reduce future Employer Contributions under this
Plan for the next Limitation Year (and for each succeeding year, as necessary)
for such Participant, so that in each such Limitation Year the sum of actual
Employer Contributions plus the reapplied amount shall equal the amount of
Employer Contributions which would otherwise be made to such Participant's
Account. If after the application of the corrective steps described previously
in this Section 4.10(b), an excess Annual Addition continues to exist and the
Participant is not in the service of the Employer at the end of a Limitation
Year, then such excess Annual Addition will be held unallocated in a suspense
account. The suspense account will be applied to reduce future Employer
Contributions for all remaining Participants in the next Limitation Year and
each succeeding Limitation Year, if necessary.
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(c) Any suspense account established under Subsection (b) shall be
maintained in accordance with the following special rules:
(1) The balance in the suspense account shall be allocated and
reallocated in the manner prescribed in Subsection 4.10(b) (except to the extent
limited by Subsection 4.10(a)) on the next succeeding allocation date for
allocation of contributions. The entire amount so allocated from the suspense
account shall be considered as Annual Additions as of the date allocated. No
investment gains, income or losses will be allocated to the suspense account.
(2) No further Employer Contributions may be made under the
Plan until the suspense account is exhausted.
(3) In the event of termination of the Plan, the suspense
account shall be allocated and reallocated to the Accounts of all Eligible
Employees in the manner prescribed in Subsections 4.10(b) and (c) up to the
limits of Subsection 4.10(a) determined without regard to Compensation paid
after the date of Plan termination. Any remaining amount of said suspense
account that cannot be so reallocated shall be repaid to the Employer.
(d) If a Participant has been a participant in a qualified defined
benefit plan (as defined in Section 414(j) of the Code) maintained by the
Employer or any Affiliate, in no event shall an Eligible Employee be entitled to
receive a benefit in an amount which would cause the sum of the Defined Benefit
Plan Fraction and the Defined Contribution Plan Fraction to exceed 1.0 for any
Limitation Year. In the event such sum of the Defined Benefit Plan Fraction and
the Defined Contribution Plan Fraction would otherwise exceed 1.0 for any Plan
Year, the projected annual retirement income benefit under the Defined Benefit
Plan Fraction shall be limited, to the extent necessary, to reduce such Defined
Benefit Plan Fraction so that the sum of the two fractions hereunder does not
exceed the foregoing 1.0 limitation. This subsection (d) shall cease to be
effective as of January 1, 2000.
(e) Notwithstanding other provisions of this Section 4.10 to the
contrary, the otherwise permissible Annual Additions for any Eligible Employee
under this Plan may be further reduced to the extent necessary, as determined by
the Company, to prevent disqualification of the Plan under Section 415 of the
Code, which imposes additional limitations on the benefits payable to Eligible
Employees who also may be participating in other tax-qualified pension, profit
sharing, savings or stock bonus plans maintained by an Affiliate of the
Employer. The Company shall advise affected Eligible Employees of any additional
limitation on their Annual Additions required by the preceding sentence.
4.11 USERRA COMPLIANCE. Notwithstanding any provision of this Plan to
the contrary, contributions, benefits and service credit with respect to
qualified military service will be provided in compliance with Section 414(u) of
the Code.
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ARTICLE 5
PARTICIPANTS' ACCOUNTS
5.1 INDIVIDUAL ACCOUNTS. The Company, or the Trustee if the Company so
determines and the Trustee agrees, shall maintain, or cause to be maintained, an
Account for each Participant, which shall consist of the following subaccounts,
as applicable: a 401(k) Account, an Employer Contributions Account, a Prior ESOP
Account, a Rollover Account, and such other separate subaccounts, if any, as the
Company may determine to establish pursuant to Sections 4.4 or 4.5. The Company
shall also maintain, or cause to be maintained, on behalf of each Participant, a
separate accounting of each Participant's Account, including contributions,
transfers, withdrawals, earnings, losses and expenses attributable thereto.
Employer Contributions made in the form of Company Stock shall be held in the
subaccount established for this purpose by the Employer. Company Stock
transferred to the Plan from the ESOP shall be held in the Prior ESOP Account.
5.2 REVALUATION OF THE TRUST. As of each Valuation Date, the Company shall
cause to be determined the fair market value of all assets of the Trust, giving
effect to (i) earnings, (ii) gains and losses and (iii) appreciation or
depreciation whether or not realized. The method of valuation shall be
determined by the Trustee and shall be followed with reasonable consistency from
year to year. The aggregate amount credited to the Accounts of all Participants
having Accounts in the Trust shall be adjusted as of each Valuation Date so as
to be equal to the value of all assets in the Trust on such date. Such
adjustment shall be made by allocating to the Account of each Participant, as of
the Valuation Date and prior to the allocation of contributions and Forfeitures
for the Plan Year or such other valuation period, that proportion of the net
change in fair market value of all assets as is equal to the proportion that the
value of each such Account bears to the value of all such Accounts as of the
immediately preceding Valuation Date, after making such adjustments as may be
appropriate to reflect contributions, loans or distributions which were made
subsequent to the preceding Valuation Date.
The Company may at any other time it deems appropriate under the circumstances
secure a determination of the fair market value of the Trust as a whole, of one
or more of the separate Investment Funds established under Article 6, or one or
more of the separate subaccounts maintained for a Participant. In such event,
the Company may make a determination as of such date of the income, gain or loss
on any such respective funds since the preceding Valuation Date. If the
allocation of such income, gain or loss will produce a significant change in the
value of Participants' Accounts, and if such valuation shall affect a
distribution, then in the discretion of the Company such date may thereupon be
deemed a Valuation Date, and the Company shall allocate such income, gain or
loss to the Accounts of Participants in the manner provided in the preceding
paragraph.
5.3 STATEMENTS. At least once in each Plan Year, the Company shall
cause to be furnished to each Participant a statement showing the values of his
or her Account pursuant to this Article 5 as of a Valuation Date occurring in
such Plan Year or the preceding Plan Year.
5.4 ALLOCATION OF INVESTMENT INCOME. Each Participant's Account shall
be revalued on each Valuation Date to reflect any investment income, gains,
losses and expenses allocable to
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such Account as well as any adjustments for contributions to or distributions,
loans or withdrawals from such Account.
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ARTICLE 6
INVESTMENT OF PARTICIPANT'S ACCOUNTS
6.1 INVESTMENT CONTROL. Except to the extent otherwise provided herein,
a Participant shall have the right to direct the investment of his or her
Account in accordance with Section 6.3 among such Investment Funds as are
selected by the Company.
6.2 SELECTION OF INVESTMENT FUNDS. The Company shall have the authority
to select and withdraw, in its sole discretion, one or more Investment Funds for
the investment of Participants' Accounts upon prior written notice to
Participants.
6.3 INVESTMENT OF ACCOUNTS.
(a) If the Company selects more than one Investment Fund pursuant
to Section 6.2, each Participant may make an investment election, in accordance
with such rules as may be established by the Company, which shall be applied in
a uniform and nondiscriminatory manner.
(b) Each Participant who directs the investment of his or her
Account is solely responsible for the selection of his or her investment
options. The Trustee, the Employer, and the officers, supervisors and other
employees of any such entity are not authorized to advise a Participant as to
the manner in which his or her Account shall be invested. The fact that an
Investment Fund is available to a Participant for investment under the Plan
shall not be construed as a recommendation for investment in that Investment
Fund. In the event no election is made by a Participant, such amounts available
for his or her election will be invested by the Trustee in a money market fund
or similar investment.
6.4 CHANGE OF INVESTMENT ELECTION AS TO FUTURE CONTRIBUTIONS. The
Company shall prescribe, on a uniform and nondiscriminatory basis, the timing
and frequency with which changes in investment elections as to future
contributions are permitted. The Company may establish and communicate to all
Participants procedures under which a Participant may elect to change his or her
investment election under Section 6.3 as to future contributions by the use of a
telephone exchange system maintained by the Investment Funds for such purposes,
subject to such restrictions as may be established by the Investment Fund.
6.5 TRANSFERS BETWEEN INVESTMENT FUNDS. The Company shall prescribe, on
a uniform and nondiscriminatory basis, the timing and frequency with which
Participants may elect to transfer amounts already allocated to their Accounts
between available Investment Funds. The Company may establish and communicate to
all Participants procedures under which Participants may indicate their
elections regarding transfers between Investment Funds by giving instructions
directly to the manager or managers of any such funds, subject to such
reasonable conditions and limitations as to the timing and frequency of such
instructions by a Participant as the Company from time to time may prescribe on
a uniform and nondiscriminatory basis. Such procedures shall specify (i) a
reasonable method for providing such instructions to the fund managers (which
may include telephonic instructions) designed to ensure the proper
implementation of a Participant's instructions and otherwise to protect the
interests of
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<PAGE> 43
Participants, and (ii) the frequency with which such transfers may be made
(which may be as frequently as daily) in accordance with new instructions of the
Participant.
6.6 INVESTMENT IN COMPANY STOCK. Subject to any restrictions
established by the Company and communicated to the Participants, Participants
who have Prior ESOP Accounts or Company Stock held in the Discretionary Account
may direct that the Company Stock held in such Accounts be sold and the proceeds
from such sale invested in one or more of the other investment alternatives
available under the Plan. Instructions from a Participant to sell all or any
part of the Company Stock held in the Participant's Account shall be carried out
by the Trustee in a nondiscriminatory manner, provided, however, that any
Participant directions to sell the Company Stock held in a Participant's Account
shall not be carried out by the Trustee if it is determined that such sale of
Company Stock would violate any applicable securities laws or require
registration under any applicable securities laws. In no event may a Participant
direct that any amounts held under the Plan for the Participant's benefit be
invested in Company Stock.
Effective August 3, 1998, the Employer has imposed the following
restrictions on diversification of Company Stock held for the benefit of a
Participant:
a. For the period beginning August 3, 1998, through December 31, 1998,
a Participant may elect to diversify no more than ten percent (10%) of the value
of the Company Stock held in the Participant's Account and valued as of August
3, 1998.
b. For Plan Years beginning on and after January 1, 1999, a Participant
may elect to diversify no more than twenty-five percent (25%) of the value of
the Company Stock held in the Participant's Account and valued as of the
immediately preceding December 31.
35.
<PAGE> 44
ARTICLE 7
VESTING
7.1 FULLY VESTED ACCOUNTS. A Participant shall at all times have a one
hundred percent (100%) nonforfeitable interest in his or her Employer Matching
Contributions Account, 401(k) Account, Qualified Nonelective Contributions
Account, Qualified Matching Contributions Account, and Rollover Account, as
applicable.
7.2 VESTING OF THE DISCRETIONARY ACCOUNT
(a) If a Participant's employment with the Employer is terminated
before his or her Normal Retirement Age for any reason other than Disability or
death, in addition to the amounts credited to the subaccounts identified in
Section 7.1, the Participant shall be entitled to an amount equal to the "vested
percentage" of his or her Discretionary Account. Such vested percentage shall be
determined based on the Participant's Years of Service for vesting purposes in
accordance with the following schedule:
<TABLE>
<CAPTION>
VESTED
YEARS OF SERVICE PERCENTAGE
<S> <C>
Less than 2 0%
2 but less than 3 25%
3 but less than 4 50%
4 but less than 5 75%
5 or more 100%
</TABLE>
(b) In all events, a Participant's Discretionary Account shall be
fully vested upon attainment of his or her Normal Retirement Age or the
termination of his or her employment with the Employer by reason of Disability
or death.
(c) For periods prior to August 3, 1998, vesting service for those
Participants who have Prior ESOP Accounts was calculated for such Prior ESOP
Accounts under the vesting schedule set forth in the ESOP. Effective on and
after August 3, 1998, the Prior ESOP Accounts of Participants who continue to be
employed by the Employer or and after such date shall be determined in
accordance with the vesting schedule set forth in Subsection (a) of this Section
7.2.
7.3 CHANGE IN VESTING SCHEDULE.
(a) If the vesting schedule set forth in Subsection 7.2(a) is
amended by the Company, for any Employee who is a Participant on the date the
amendment is adopted or the date the amendment is effective, whichever is later,
the vested percentage (determined as of such
36.
<PAGE> 45
date) of such Participant's Account shall not be less than the Participant's
vested percentage under the Plan without regard to such amendment.
(b) Notwithstanding any other provision of the Plan to the
contrary, in the event that the vesting schedule set forth in Subsection 7.2(a)
is amended by the Company, any Participant with at least three (3) Years of
Service for vesting purposes at the time such amendment first becomes effective
shall be permitted to elect, within a reasonable period after the adoption of
such amendment, to have the vested and nonforfeitable portion of his or her
Accounts calculated without regard to such amendment. In the event that the use
of the vesting schedule prior to amendment would under all circumstances provide
a Participant with vested and nonforfeitable benefits in his or her Accounts
that are equal to or greater than the amount of such benefits after applying the
amended vesting schedule, the Participant shall be deemed to have elected the
use of the vesting schedule prior to amendment for purposes of calculating the
vested and nonforfeitable portion of his or her Accounts. The period during
which the election may be made shall commence with the date the amendment is
adopted and shall end on the latest of (i) sixty (60) days after the amendment
is adopted, (ii) sixty (60) days after the amendment becomes effective, or (iii)
sixty (60) days after the Participant is issued written notice of the amendment
by the Company.
(c) Effective August 3, 1998, with respect to Participants who were
hired prior to August 3, 1998, the method of crediting service for vesting
purposes under the Plan was changed from the elapsed time method, as set forth
in Section 1.410(a)(7) of the Treasury Regulations, to the general (or the
"actual hours") method, as set forth in Section 2530.200b-2 of the Department of
Labor Regulations. For purposes of calculating vesting service, each Participant
shall be treated in the manner set forth in Section 1.410(a)(7)(f)(a) of the
Treasury Regulations, which are incorporated herein by reference. With respect
to Employees who are hired on or after August 3, 1998, and who become
Participants in the Plan, vesting service shall be credited by use of the
general method.
7.4 FORFEITURES.
(a) Any remainder of a terminated Participant's Discretionary
Account or Prior ESOP Account, if any, that is not vested in accordance with the
foregoing vesting schedule shall be retained in such Account and forfeited at
the earlier of the following dates: (i) if the Participant receives a complete
distribution out of the Participant's Account, the date of such distribution, or
(ii) if the Participant does not receive a distribution out of the Participant's
Account, the date on which the Participant incurs a Five Year Break in Service.
A Participant who has no vested interest in his or her Account at the time of
his or her termination of employment shall be deemed to have received a complete
cash-out distribution of his or her benefits under the Plan as of the date of
his or her termination of employment and unvested amounts held in such
Participant's Account shall be treated as a Forfeiture as of the date of such
Participant's termination of employment.
(b) Amounts forfeited under Subsection 7.4(a) shall be applied
first to restore the Account balances of any Participants entitled to such
restoration under Subsection (c) below. Remaining Forfeiture amounts, if any,
shall then be used to reduce any subsequent Employer
37.
<PAGE> 46
Contributions and shall be allocated to the Employer Contributions Accounts of
Participants in accordance with the provisions of Section 4.3.
(c) If a previously terminated Participant has received a
distribution from his or her Discretionary Account or Prior ESOP Account and the
nonvested portion of his or her Account has been forfeited pursuant to
Subsection 7.4(a), and if such Participant is reemployed by the Employer prior
to incurring a Five Year Break in Service, an amount equal to the value of the
forfeited portion of the Participant's Discretionary Account or Prior ESOP
Account shall be restored to his or her Account if the Participant repays the
full amount distributed to him or her before the earlier of (i) five (5) years
after the first day the Participant is subsequently reemployed by the Employer,
or (ii) the close of the first Five Year Break in Service commencing after the
distribution. In the event the former Participant does repay the full amount
distributed to him or her, an amount equal to the value of the forfeited portion
of the Participant's Discretionary Account or Prior ESOP Account shall be
restored to his or her Account in full, without adjustment for any gains or
losses occurring subsequent to the time of the prior forfeiture. Such
restoration shall be made out of then available Forfeitures of the nonvested
portions of the Account of other Participants in accordance with Subsection
7.4(b), if any, or by a special contribution from the Employer to the extent
that Forfeitures then available are insufficient.
(d) Notwithstanding Subsection (b), forfeitures of Company Stock
shall be applied only toward Employer Contributions, Qualified Nonelective
Contributions, or Qualified Matching Contributions otherwise payable in the form
of Company Stock as provided in Section 4.3; provided that, from time to time,
the Company may direct the Trustee to sell all or a portion of the Company Stock
held by the Plan as Forfeitures, in which case the cash proceeds of sale shall
be applied in accordance with Subsection (b) as soon as administratively
feasible.
7.5 VESTING ON REEMPLOYMENT.
(a) Except as provided in Subsection (d) of this Section 7.5, if a
Participant or former Participant is reemployed after a Break in Service
(including a Five Year Break in Service), he or she shall receive credit for any
Years of Service completed prior to his or her date of reemployment for the
purpose of computing his or her vested percentage after his or her date of
reemployment in his or her Discretionary Account and Prior ESOP Account balance
related to his or her employment after his or her Break in Service.
(b) If a Participant or former Participant is reemployed after a
Break in Service but before incurring a Five Year Break in Service, that
Participant's employment before his or her Break in Service shall be taken into
account, together with his or her employment after his or her Break in Service,
for purposes of computing his or her vested percentage in his or her
Discretionary Account or Prior ESOP Account balance with respect to his or her
participation before such Break in Service.
(c) If a Participant or former Participant is reemployed after
incurring a Five Year Break in Service, no amounts shall be reinstated to his or
her Discretionary Account or Prior ESOP Account under Section 7.4(c) and no
Years of Service after such Five Year Break in Service shall be taken into
account in determining the vested percentage in his or her
38.
<PAGE> 47
Discretionary or Prior ESOP Account balance accrued before such Five Year Break
in Service. The undistributed vested amount of a Participant's Discretionary
Account or Prior ESOP Account, if any, which accrued prior to the Participant's
Five Year Break in Service shall be held as a separate Discretionary Account or
Prior ESOP Account. Such separate subaccount shall be fully vested and shall
share in allocation of gain or loss pursuant to Section 5.2 but shall not share
in allocations pursuant to Article 4.
(d) If a Participant or former Participant who had no vested
interest in his or her Discretionary Account or Prior ESOP Accounts at the time
of his or her termination of employment is reemployed by the Employer after a
series of consecutive one year Breaks in Service, the Participant's Years of
Service before such Break in Service shall be disregarded for vesting purposes
if the number of consecutive one-year Breaks in Service equals or exceeds the
greater of five (5) or the aggregate number of Years of Service completed before
such Break in Service.
39.
<PAGE> 48
ARTICLE 8
PLAN DISTRIBUTIONS
8.1 EVENTS PERMITTING DISTRIBUTION. Except as otherwise provided in
Section 16.3, distribution of the balance credited to a Participant's Account
may be made only under the following circumstances:
(a) Upon termination of the Participant's employment for any
reason;
(b) In cases of in-service withdrawals to the extent permitted in
Article 9;
(c) Upon termination of the Plan, if the Employer does not maintain
a successor defined contribution plan (other than an employee stock ownership
plan as defined in Section 4975(e) or 409 of the Code or a simplified employee
pension plan as defined in Section 408(k) of the Code) and the Participant's
distribution is made in the form of a lump sum;
(d) Upon the sale, to an entity that is not an Affiliate, of
substantially all of the assets used by the Employer in a trade or business in
which the Participant is employed, if the Participant's distribution is made in
the form of a lump sum, the Employer continues to maintain the Plan following
such sale, and the Participant continues employment with the purchaser of such
assets; or
(e) Upon the sale, to an entity that is not an Affiliate, of the
interest of the Employer or an Affiliate in a subsidiary in which the
Participant is employed, if the Participant's distribution is made in the form
of a lump sum, the Employer continues to maintain the Plan following such sale,
and the Participant continues employment with such subsidiary.
8.2 APPLICABLE DISTRIBUTION AND WITHDRAWAL PROVISIONS. A Participant
who is an Employee may not receive any distributions from the Plan prior to his
or her termination of employment or the termination of the Plan except (i) to
the extent permitted under Article 9 as a withdrawal or (ii) as required under
Section 8.5 (relating to the latest time for distributions). Following a
Participant's termination of employment, distribution of his or her benefit
shall be made as provided below in this Article 8.
8.3 TIME OF DISTRIBUTION TO PARTICIPANT.
(a) Except as provided in Sections 8.4, 8.5, and 8.6, and unless a
Participant elects otherwise, the distribution of a Participant's benefit under
Section 8.7 shall occur or commence not later than sixty (60) days after the
close of the Plan Year in which occurs the later of (i) the Participant's
attainment of his or her Normal Retirement Age, (ii) the tenth (10th)
anniversary of the year in which the Participant commenced participation in the
Plan, or (iii) the Participant's termination of employment.
(b) If the value of a Participant's entire vested benefit exceeds
$5,000, no distribution to such Participant shall occur or commence before the
Participant has attained the later of Normal Retirement Age or age sixty-two
(62), unless an earlier distribution is elected by the Participant in accordance
with Subsection (c) below. For this purpose, solely for periods
40.
<PAGE> 49
beginning before January 1, 1999, if the Participant's vested benefit at the
time of any distribution exceeded $5,000, the value of his or her vested benefit
at all times thereafter will be deemed to exceed $5,000. For periods beginning
on and after January 1, 1999, the $5,000 value shall be determined as of the
time of distribution. For Plan Years beginning prior to January 1, 1998, $3,500
shall be substituted for $5,000 in this Section 8.3(b).
(c) The Company shall provide a Participant with the notices
required by Section 402(f) of the Code and Treasury Regulation Section
1.411(a)-11(c) no less than thirty (30) days and no more than ninety (90) days
before receipt or commencement of the distribution. A Participant may elect to
receive or commence receipt of his or her benefit at any reasonable time after
termination of employment. Such an election must be made in writing not more
than ninety (90) days and not less than thirty (30) days before the date
requested by the Participant for the distribution to occur or commence. Such
distribution may be made or commence less than thirty (30) days after the notice
required under Treasury Regulation Section 1.411(a)-11(c) is given, provided
that:
(1) The Company clearly informs the Participant that the
Participant has a right to a period of at least thirty (30) days after receiving
the notice to consider the decision of whether or not to elect a distribution
(and, if applicable, a particular distribution option), and
(2) The Participant, after receiving the notice, affirmatively
elects a distribution.
(d) A Participant who has attained age 70 1/2 may request a
distribution at any time, regardless of whether the Participant continues to be
employed by the Employer after the date the Participant attains age 701/2.
8.4 TIME OF DISTRIBUTION OF DEATH BENEFITS. The distribution of a
Participant's death benefit under Section 8.8 that is payable to a Participant's
Beneficiary other than his or her surviving spouse shall occur or commence
within a reasonable time after the Participant's death. If the Beneficiary to
whom the benefit is payable under Section 8.8 is the Participant's surviving
spouse, the surviving spouse may elect to receive or commence receipt of the
Participant's death benefit at any reasonable time after the Participant's
death. Such an election must be made in writing not more than ninety (90) days
before the date requested by the spouse for the distribution to occur or
commence.
8.5 LATEST TIME OF DISTRIBUTION. Notwithstanding any other provision of
this Plan, the distribution of a Participant's benefit shall occur or commence
under this Article 8 no later than the Participant's Required Beginning Date,
whether or not the Participant's employment has terminated. Notwithstanding the
foregoing sentence, the distribution of a Participant's benefit may be made
pursuant to Section 242(b) of the Tax Equity and Fiscal Responsibility Act of
1982, even if such distribution would otherwise fail to satisfy the requirements
of this Section 8.5 or any other provision of the Plan. If the Participant
continues to participate in the Plan after his or her Required Beginning Date,
distribution of any additional Plan benefit with respect to which distribution
had not occurred or commenced as of the Required Beginning Date shall
41.
<PAGE> 50
occur or commence under Section 8.7 during each calendar year following a
calendar year in which such an additional benefit is accrued.
8.6 SMALL BENEFITS: IMMEDIATE PAYMENT. Notwithstanding any other
provision of this Article 8, if the value of a Participant's entire vested
benefit is $5,000 or less, then the benefit shall be paid to such Participant
(or, in the case of his or her death, to the Beneficiary) in a single lump sum
in the form permitted under Section 8.7 as soon as practical following the
Participant's termination of employment (unless an earlier distribution is
required by Section 8.5). For this purpose, solely for periods beginning before
January 1, 1999, if the Participant's vested benefit at the time of any
distribution exceeded $5,000, the value of his or her vested benefit at all
times thereafter will be deemed to exceed $5,000. For periods beginning on and
after January 1, 1999, the $5,000 value shall be determined as of the time of
distribution. For Plan Years beginning prior to January 1, 1998, $3,500 shall be
substituted for $5,000 in this Section 8.6.
8.7 FORM OF DISTRIBUTION TO PARTICIPANT. A Participant's benefit shall
be distributed in a lump sum in cash, provided that a Participant shall receive
any shares of Company Stock held by the Plan and valued as of the date of
distribution in kind. The Company may require, as a condition to a Participant's
receipt of shares of Company Stock from the Plan, that the Participant make such
investment representations and warranties as reasonably may be necessary or
appropriate to ensure compliance with applicable securities laws and the Company
be permitted to repurchase any fractional share of Company Stock in a
Participant's Account, with cash being distributed to the Participant in lieu of
such fractional share.
8.8 DISTRIBUTION OF DEATH BENEFIT. If a Participant dies before
receiving his or her entire benefit, such Participant's Beneficiary shall be
entitled to receive such benefit (or the undistributed portion thereof) after
filing the prescribed claim form with the Company. Subject to the provisions of
Sections 8.6 and 8.10, the Beneficiary's distribution shall be made as follows:
(a) This Subsection 8.8(a) shall apply only in the event that a
Participant elected to receive his or her benefit in installments under Section
8.7 and then dies after the installment payments have commenced but before such
payments are completed. Subject to the requirements of Subsection 8.10(c), the
remaining installments of such Participant's benefit ordinarily shall be paid to
his or her Beneficiary in accordance with the predetermined distribution
schedule originally established for him or her by the Company. However, a
Beneficiary may make a written request, subject to the Company's consent, to
accelerate the distribution of any or all unpaid installments to which such
Beneficiary is entitled.
(b) This Subsection 8.8(b) shall apply in the event that a
Participant dies before his or her benefit is distributed and Subsection (a)
above does not apply. A Beneficiary may receive the Participant's benefit in any
of the forms of distribution set forth in Section 8.7 as he or she elects. If a
Beneficiary does not elect a form of distribution, the Participant's benefit
shall be paid to his or her Beneficiary in the form of a single lump sum in the
form permitted under Section 8.7 and the distribution shall be made as soon as
reasonably practical after the Participant's death. However, in no event shall
the lump sum distribution be made later than five (5) years after the
Participant's death.
42.
<PAGE> 51
8.9 BENEFICIARY DESIGNATION; SPOUSAL CONSENT RIGHTS.
(a) A Participant's Beneficiary shall be the person(s) so
designated by such Participant. If the Participant has not made an effective
designation of a Beneficiary or if the designated Beneficiary is not living when
a distribution is to be made, then (i) the surviving spouse of the deceased
Participant shall be the Beneficiary, if then living, or (ii) if none, the then
living children of the deceased Participant shall be the Beneficiaries in equal
shares, or (iii) if none, the then living parents of the deceased Participant
shall be the Beneficiaries in equal shares, or (iv) if none, the then living
brothers and/or sisters of the deceased Participant shall be the Beneficiaries
in equal shares, or (v) if none, the estate of the Participant shall be the
Beneficiary. The Participant may change his or her designation of a Beneficiary
from time to time. Any designation of a Beneficiary (or an amendment or
revocation thereof) shall be effective only if it is made in writing on the
prescribed form and is received by the Company prior to the Participant's death.
(b) The designation by a married Participant of a primary
Beneficiary other than his or her surviving spouse shall not be valid unless
such designation (i) includes the written consent of the surviving spouse that
acknowledges the effect of such designation and is witnessed by either a Plan
representative or a notary public, and (ii) names a specific Beneficiary that
may not be changed without further spousal consent (unless the consent or a
prior consent expressly permits designations by the Participant without any
requirement of further consent by the spouse). Such consent shall be effective
only as to the spouse who signs the consent and, once given, may not be revoked
by such spouse. Notwithstanding the foregoing, such spousal consent shall not be
required if it is established to the satisfaction of a Plan representative that
the required consent cannot be obtained because there is no spouse, because the
Participant is legally separated from or has been abandoned by the spouse (and
the Participant has a court order to that effect), because the spouse cannot be
located, or because of other circumstances that are deemed acceptable under
applicable Treasury Regulations. If a Participant's spouse is legally
incompetent to give consent, the spouse's legal guardian may do so, even if such
guardian is the Participant. A designation of Beneficiary made by a Participant
and consented to by his or her spouse may be revoked by the Participant in
writing without the consent of the spouse at any time prior to the time his or
her benefit is distributed or commences. Any new election must comply with the
requirements of this Subsection 8.9(b).
(c) The Company may require such proof of death and such evidence
of the right of any person to receive payment under Section 8.8 as the Company
may deem advisable. The Company's determination of the right under this Section
8.9 of any person to receive payment shall be final and conclusive upon all
persons.
8.10 MINIMUM REQUIRED DISTRIBUTIONS; INCORPORATION OF REGULATIONS.
(a) All distributions under the Plan shall comply with Section
401(a)(9) of the Code and the regulations promulgated thereunder, including
Treasury Regulations Section 1.401(a)(9)-2, and the provisions of the Plan
reflecting Section 401(a)(9) of the Code (including Section 8.5 and this Section
8.10) shall override any other provisions of the Plan that are inconsistent
therewith.
43.
<PAGE> 52
(b) All distributions shall be payable in accordance with Treasury
regulations over the life of the Participant (or the lives of the Participant
and his or her designated Beneficiary) or over a period not extending beyond the
life expectancy of the Participant (or the joint life and last survivor
expectancy of the Participant and his or her designated Beneficiary). The
present value of the payments to be made to the Participant during the
Participant's life expectancy shall be no less than is required under the
"incidental death benefit" rule of Section 401(a)(9)(G) of the Code and the
regulations thereunder. Life expectancies shall be recalculated annually, unless
the Participant (or, in the case of his or her death, the Participant's spouse)
irrevocably elects otherwise.
(c) Notwithstanding anything in the Plan to the contrary, if a
Participant dies before the distribution of his or her benefits has been made or
commenced, the Participant's entire benefit shall be distributed by December 31
of the calendar year containing the fifth (5th) anniversary of the date of his
or her death; provided that any portion of the benefit which is payable to a
designated Beneficiary may be distributed (i) over the life of (or over a period
not extending beyond the life expectancy of) such Beneficiary and (ii) beginning
not later than one year after the date of the Participant's death or, if such
Beneficiary is the Participant's surviving spouse, beginning not later than the
date on which the Participant would have attained age 70 1/2. If the spouse dies
before distributions begin, the spouse shall be treated as the Participant for
purposes of these provisions.
(d) Notwithstanding anything in the Plan to the contrary, if a
Participant dies after distribution of his or her benefits has commenced, the
remaining portion of the benefit will be distributed at least as rapidly as
under the method of distribution in effect at the date of such Participant's
death.
(e) For purposes of Subsections (c) and (d) above, distribution of
a Participant's benefits are treated as having commenced on the Participant's
Required Beginning Date, even though payments may actually have been made before
that date.
(f) For purposes of this Section 8.10 and to the extent permitted
by law, any amount paid to a Participant's child shall be treated as if it had
been paid to the Participant's surviving spouse if such amount will become
payable to the surviving spouse upon such child reaching the age of majority (or
other designated event permitted by law).
8.11 DIRECT ROLLOVER.
(a) Notwithstanding any provision of the Plan to the contrary that
would otherwise limit a distributee's election under this Section 8.11, a
distributee may elect, at the time and in the manner prescribed by the Company
and in accordance with the regulations promulgated under Section 402(c) of the
Code, to have any portion of an eligible rollover distribution paid directly to
an eligible retirement plan specified by the distributee in a direct rollover.
(b) For purposes of this Section 8.11 and Section 8.12:
(1) "Eligible retirement plan" means an individual retirement
account described in Section 408(a) of the Code, an individual retirement
annuity (other than an
44.
<PAGE> 53
endowment contract) described in Section 408(b) of the Code, a qualified trust
described in Section 401(a) of the Code, or an annuity plan described in Section
403(a) of the Code, that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover distribution to the
surviving spouse, an eligible retirement plan is an individual retirement
account or an individual retirement annuity.
(2) "Eligible rollover distribution" means any distribution,
in a form permitted under Section 8.7 of the Plan, of all or any portion of the
balance to the credit of the distributee, except that the following
distributions shall not be eligible rollover distributions: (i) any distribution
that is one of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
distributee or the joint lives (or joint life expectancies) of the distributee
and the distributee's designated beneficiary, or for a specified period of ten
(10) years or more, (ii) any distribution required under Section 8.5, (iii) the
portion of any distribution that is not includable in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect to
employer securities), and for distributions made after December 31, 1998, a
Hardship withdrawal.
(3) "Distributee" means an Employee or former Employee. In
addition, the Employee's or former Employee's surviving spouse and the
Employee's or former Employee's spouse or former spouse who is the alternate
payee under a qualified domestic relations order, as defined in Section 414(p)
of the Code, are distributees with regard to the interest of the spouse or
former spouse.
(4) "Direct rollover" means a payment by the Plan to the
eligible retirement plan specified by the distributee.
8.12 WITHHOLDING ON DISTRIBUTIONS. Distributions under this Plan shall
be subject to Federal income tax withholding to the extent prescribed by Section
3405 of the Code. In accordance with Section 3405(c) of the Code and the
regulations thereunder, if a Participant elects to receive a distribution of any
portion of an eligible rollover distribution rather than have such distribution
transferred directly to an eligible retirement plan in accordance with Section
8.11 the Company shall withhold or cause to be withheld from such distribution
an amount equal to twenty percent (20%) of such distribution.
8.13 DEFERRED DISTRIBUTION. The Accounts of Participants who have
terminated employment and have not yet received the entire value of their vested
Plan benefit may be charged with their proportionate shares of the
administrative expenses of the relevant Investment Funds and with their shares
of any per Participant fees charged by a third party administrator.
8.14 DETERMINATION OF ACCOUNT BALANCE. Whenever a Participant or his or
her Beneficiary is entitled to receive a distribution of the entire amount or a
percentage of his or her Account balance, the amount of such Account balance
shall be determined as of the Valuation Date immediately preceding the date of
distribution, as adjusted for contributions and withdrawals made after such
Valuation Date.
8.15 REEMPLOYMENT OF PARTICIPANTS RECEIVING PAYMENTS. In the event that
a Participant who is receiving installment payments under this Article 8, which
are payable as a
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result of the Participant attaining Normal Retirement Age or the Participant's
Disability, is reemployed by the Employer, such Participant shall continue to
receive payments from his or her Account in accordance with the method of
payment in effect prior to his or her reemployment unless such method is
changed. Payments shall be drawn from his or her entire Account, including any
contributions allocated to his or her Account after his or her reemployment.
8.16 NO LIABILITY. Any payment to any Participant, or to his or her legal
representative or Beneficiary, in accordance with the provisions of the Plan,
shall to the extent thereof be in full satisfaction of all claims for benefits
hereunder against the fiduciaries of the Plan, including the Employer and the
Trustee, any of whom may require such Participant, legal representative or
Beneficiary, as a condition precedent to such payment, to execute a receipt
therefor in such form as shall be determined by the fiduciary requesting such
receipt. The Employer does not guarantee the Plan, the Participants, former
Participants or their legal representatives or Beneficiaries against loss of or
depreciation in value of any right or benefit that any of them may acquire under
the terms of the Plan. All of the benefits payable hereunder shall be paid or
provided for solely from the Trust, and the Employer does not assume any
liability or responsibility therefor.
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ARTICLE 9
WITHDRAWALS WHILE EMPLOYED
9.1 WITHDRAWALS FROM ROLLOVER ACCOUNT. A Participant who has made a
Rollover Contribution and who is an Employee may make a withdrawal from his or
her Rollover Account at any time. The amount that may be withdrawn under this
Section 9.1 shall not exceed the balance credited to the Participant's Rollover
Account. Notwithstanding the foregoing provisions of this Section 9.1, to the
extent required by applicable rules or regulations in order to maintain the
qualification of the Plan or a plan from which assets are transferred to the
Plan, the withdrawal of any portion of a Participant's Rollover Account that is
attributable to a plan-to-plan transfer to the Plan from another qualified plan
shall be subject to any additional limitation imposed on the amounts so
transferred by the transferor plan immediately prior to such transfer.
9.2 WITHDRAWALS FROM 401(K) ACCOUNT. A Participant who has withdrawn
all amounts permitted to be withdrawn from his or her Rollover Account, if any,
pursuant to Section 9.1, and who is an Employee may make a withdrawal from his
or her 401(k) Account if:
(a) He or she has attained age fifty-nine and one-half (59 1/2) or
(b) Subject to the restrictions of Section 9.5, he or she is
eligible for a Hardship withdrawal.
9.3 NO WITHDRAWALS FROM EMPLOYER CONTRIBUTIONS ACCOUNT, AND
DISCRETIONARY ACCOUNT AND PRIOR ESOP ACCOUNT. A Participant may not make a
withdrawal from his or her Employer Contributions Account, Discretionary Account
or Prior ESOP Account
9.4 COMPANY CONSENT. The Company, in its sole discretion, may withhold
its consent to any withdrawal under this Article 9, and the Company may consent
only to the withdrawal of a part of the amount requested by the Participant. The
Company shall act upon requests for withdrawals in a uniform and
nondiscriminatory manner, based on written, objective criteria and consistent
with the requirements of Section 401(a), Section 401(k), Section 401(m) and
related provisions of the Code.
9.5 HARDSHIP WITHDRAWAL RULES.
(a) A Hardship withdrawal must be made on account of an immediate
and heavy financial need of the Participant arising solely from one or more of
the following:
(1) Costs directly related to the construction or purchase
(excluding mortgage payments) of the Participant's principal residence;
(2) Expenses for medical care described in Section 213(d) of
the Code which (i) were previously incurred by the Participant or the
Participant's spouse or dependent (as defined in Section 152 of the Code) or
(ii) are necessary for such persons to obtain such medical care;
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(3) Payment of tuition and related educational fees for the
next twelve (12) months of post-secondary education for the Participant or his
or her spouse, child or dependent (as defined in Section 152 of the Code);
(4) Payment of amounts necessary to prevent the eviction of
the Participant from his or her principal residence or the foreclosure of the
mortgage on the Participant's principal residence; or
(5) Any other financial need that has been identified as a
deemed immediate and heavy financial need in a ruling of general applicability
issued under the authority of the Commissioner of the Internal Revenue Service.
(b) A Hardship withdrawal must be necessary to satisfy an
immediate and heavy financial need of the Participant. In order to qualify for a
Hardship withdrawal:
(1) The amount of the Hardship withdrawal must not exceed the
amount of the immediate and heavy financial need of the Participant. The amount
of the immediate and heavy financial need may include any amounts necessary to
pay any federal, state or local income taxes or penalties reasonably anticipated
to result from the distribution of the Hardship withdrawal.
(2) The Participant must have obtained all distributions,
other than Hardship withdrawals, and all nontaxable loans currently available
under all plans maintained by the Employer, unless obtaining such loan would
increase the Participant's Hardship.
(3) Upon receipt of a Hardship withdrawal, the Participant
shall be suspended from making 401(k) Contributions to the Plan or elective
contributions to any other plan maintained by the Employer or an Affiliate
(including qualified and nonqualified plans, but excluding health or welfare
benefit plans) for twelve (12) months following the receipt of the Hardship
withdrawal.
(4) Upon receipt of a Hardship withdrawal, the Participant may
not make 401(k) Contributions to the Plan or elective contributions to any other
plan maintained by the Employer or an Affiliate for the Participant's taxable
year immediately following the year of the Hardship withdrawal in excess of the
applicable limit under Section 402(g) of the Code for such following year, less
the amount of such Participant's 401(k) Contributions to the Plan and elective
contributions to any other plan maintained by the Employer or an Affiliate for
the year of the Hardship withdrawal.
(c) The Company's determination of an immediate and heavy financial
need of the Participant, the amount required to satisfy such need and the
Participant's lack of other resources reasonably available to meet such need
shall be made in a uniform and nondiscriminatory manner with respect to all
Participants.
(d) Notwithstanding any other provision of this Article 9, a
Participant shall not be permitted to make a Hardship withdrawal of any
Qualified Nonelective Contributions or Qualified Matching Contributions or of
any earnings on such contributions credited to his or her Account.
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(e) Hardship withdrawals from a Participant's 401(k) Account under
this Article 9 shall be limited to an amount equal to the Participant's total
401(k) Contributions under the Plan, determined as of the date of the
withdrawal, reduced by the amount of any previous Hardship withdrawals.
(f) In order to qualify for a Hardship withdrawal, the Participant
must submit a properly completed withdrawal request form in accordance with
procedures established by the Company.
9.6 FREQUENCY AND SOURCE OF WITHDRAWALS. There shall be no limit on how
often a Participant shall be permitted to make a withdrawal under this Article
9. Withdrawals shall be paid from the affected Account and subaccounts. If more
than one Investment Fund is available to pay the withdrawal, the withdrawal
shall be made pro rata from each Investment Fund; provided, however, that a
Hardship withdrawal shall be made only after the maximum amount available
without demonstrating a Hardship has been withdrawn.
9.7 PAYMENT OF WITHDRAWALS. A Participant may request a withdrawal by
filing the prescribed withdrawal request form with the Company. A withdrawal
shall be paid as soon as reasonably practical after the date on which the
Company receives the prescribed withdrawal form (subject to the Company's
consent). Withdrawals shall be paid only in a single lump sum payment in cash.
9.8 VALUATION DATE. For purposes of this Article 9, the value of a
Participant's Account and, where applicable, the vested percentage of any
subaccounts shall be determined as of the Valuation Date preceding the date of
distribution of the withdrawal amount, as adjusted for contributions and
distributions made after such Valuation Date and for outstanding loans.
9.9 SPECIAL WITHDRAWAL RIGHTS. Notwithstanding the forgoing, effective
as of the date ESOP accounts are transferred into this Plan, each Qualified
Participant may elect a distribution of the portion of his or her Eligible
Accrued Benefit covered by the election. The Trustee will make the distribution
within ninety (90) days after the last day of the period during which the
Qualified Participant may make the election. The Qualified Participant must make
his direction to the Trustee in writing and the direction may be effective no
later than one hundred and eighty (180) days after the close of the Plan Year to
which the direction applies.
For purposes of this Section 9.9, the following definitions apply:
(a) "ELIGIBLE ACCRUED BENEFIT" shall mean, during the Qualified
Participant's Qualified Election Period, twenty-five percent (25%) of the value
of the Qualified Participant's Prior ESOP Account that was transferred to this
Plan from the ESOP. For the last Plan Year in the Qualified Participant's
Qualified Election Period, the Trustee will substitute fifty percent (50%) for
twenty-five percent (25%) in the immediately preceding sentence.
(b) "QUALIFIED PARTICIPANT" means a Participant who has attained
age 55 and who has completed at least 10 years of participation in the ESOP. A
"year of participation" means a Plan Year in which the Participant was eligible
for an allocation of Employer contributions, irrespective of whether the
Employer actually contributed to the Plan for the Plan Year.
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(c) "QUALIFIED ELECTION PERIOD" means the six (6) Plan Year period
beginning with the Plan Year in which the Participant first becomes a Qualified
Participant.
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ARTICLE 10
LOANS FROM THE PLAN
10.1 ELIGIBILITY FOR LOANS. Upon written approval of the Company, a
Participant who is an Employee may obtain a cash loan from the Plan as provided
in this Article 10. Notwithstanding the foregoing, to the extent required under
applicable Department of Labor regulations, a Participant who is not an Employee
but otherwise is a "party in interest" (within the meaning of Section 3(14) of
ERISA) also shall be eligible to receive a loan under the terms of this Article
10.
10.2 AMOUNT OF LOANS.
(a) The minimum amount of a Participant's loan shall be $1,000.
(b) The maximum amount of a loan shall be the lesser of (i) 50% of
the Participant's Account balance, (ii) the amount determined under Section 10.3
or (iii) the sum of the Participant's 401(k) Deferrals, Matching Contributions
and Rollover Contributions.
(c) For purposes of this Section 10.2, a Participant's vested
Account balance shall be determined as of the Valuation Date preceding the date
of the loan, as adjusted for any distributions or contributions made after such
Valuation Date.
(d) Company Stock held for the benefit of a Participant, if any,
shall not be the source of a loan under the Plan, however, in determining a
Participant's Vested Account balance for purposes of this Article 10, the value
of the Participant's Company Stock shall be taken into account.
10.3 AGGREGATE LOAN LIMITATION. No loan shall be granted under the Plan
if it would cause the aggregate balance of all loans that a Participant
thereafter has outstanding under this Plan or under any other qualified plan
maintained by the Employer or any Affiliate to exceed the lesser of:
(a) $50,000, less the amount by which such aggregate balance has
been reduced through repayments during the period of twelve (12) months ending
on the day before such loan is made; or
(b) The greater of (i) $10,000 or (ii) 50% of the vested portion of
all accounts of the Participant under this Plan or under any other qualified
plan maintained by the Employer or any Affiliate.
10.4 LOAN REQUIREMENTS. Loans to Participants shall be made on such
terms and conditions as the Company may determine in its sole discretion,
provided that loans shall:
(a) Be available to all Participants on a reasonably equivalent
basis;
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(b) Other than by operation of the limitations contained in Section
10.2, not be made available to Highly Compensated Employees in an amount greater
than the amount made available to other Employees;
(c) Bear a reasonable rate of interest;
(d) Provide for level amortization over its term with payments at
quarterly or more frequent intervals, as determined by the Company;
(e) Provide for repayment in full on or before the earlier of (i)
the date when the Participant ceases to be an Employee, or a reasonable time
thereafter, or (ii) the date five (5) years after the loan is made (or the date
ten (10) years after the loan is made if the loan is used to acquire a dwelling
unit that, within a reasonable period of time, is to be used as the principal
residence of the Participant); and
(f) Be adequately secured.
(g) Effective for periods prior to August 3, 1998, loans are
available for hardship purposes only.
(h) The Employer may limit the type and number of loans from the
Plan to a Participant. Such limitations shall be specified on the Loan
Provisions and the Loan Procedures.
10.5 LOAN PROVISIONS AND LOAN PROCEDURES. The terms and conditions of
any loans made from the Plan shall be set forth in the "Loan Procedures" that
shall be adopted by the Company as a part of the Plan, and which hereby are
incorporated in this Plan by reference. Such Loan Procedures may be amended from
time to time by the Company, and shall provide, among other things:
(a) The identity of the person or positions authorized to
administer the loan program established pursuant to this Article 10;
(b) The procedure for applying for loans;
(c) The basis on which loans will be approved or denied;
(d) Limitations (if any) on the types and amount of loans that are
available under the Plan;
(e) The procedure for determining a reasonable rate of interest
that will be charged on loans;
(f) The types of collateral that may secure a Participant's loan;
and
(g) The events constituting default and the steps that will be
taken to preserve Plan assets in the event of such default.
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10.6 SEGREGATED INVESTMENT. A loan to a Participant under this Article
10 shall be a segregated investment of the Account and applicable subaccount of
such Participant made at the Participant's direction. Principal and interest
payments on a Participant's loan shall be allocated to such Participant's
Account. Any loss caused by nonpayment or other default on a Participant's loan
obligations shall be borne solely by such Participant's Account, and neither the
Employer, the Trustee, nor any employee of any of the foregoing, shall be liable
for any such loss.
10.7 USERRA COMPLIANCE. Loan repayments will be suspended under this
Plan as permitted under Section 414(u)(4) of the Code.
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ARTICLE 11
FUNDING POLICY AND METHOD
11.1 CONTRIBUTIONS. The Company shall cause the participating Employers
to make Discretionary Contributions, Employer Matching Contributions, Qualified
Nonelective Contributions, and Qualified Matching Contributions to the Plan, as
provided in Article 4. The Company shall also make arrangements for the
collection of 401(k) Contributions and Rollover Contributions, as provided in
Article 4.
11.2 EXPENSES OF THE PLAN. All costs and expenses of the Plan shall be
paid out of the Trust, to the extent such costs and expenses are not paid by the
participating Employers.
11.3 INDEPENDENT ACCOUNTANT. The Company shall engage an independent
qualified public accountant to conduct such examination and to express such
opinion as may be required by Section 103(a)(3) of ERISA, if any. The Company
may remove and discharge the person so engaged, but in such event the Company
shall engage a successor independent qualified public accountant to perform such
examination and to express such opinion, if required.
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ARTICLE 12
FIDUCIARY RESPONSIBILITIES AND PLAN ADMINISTRATION
12.1 PLAN SPONSOR AND PLAN ADMINISTRATOR. The Company is the "plan
sponsor" and the "plan administrator" of the Plan, as such terms are used in
ERISA and the Code.
12.2 ADMINISTRATIVE RESPONSIBILITIES. The Company shall be the named
fiduciary that has the authority to control and manage the operation and
administration of the Plan in the Company's sole discretion subject to the terms
of the Plan. The Company shall make such rules, interpretations and computations
and take such other actions to administer the Plan as the Company may deem
appropriate in its sole discretion. The rules, interpretations, computations and
other actions of the Company shall be binding and conclusive on all persons. In
administering the Plan, the Company shall act in a nondiscriminatory manner to
the extent required by Section 401(a) and related provisions of the Code and
shall at all times discharge its duties with respect to the Plan in accordance
with the standards set forth in Section 404(a)(1) of ERISA.
12.3 MANAGEMENT OF PLAN ASSETS. The Company shall be a named fiduciary
with respect to control and management of the assets of the Plan, but only to
the extent that it shall have the authority (i) to appoint one or more Trustees
to hold the assets of the Plan and to enter into an agreement with each Trustee
it appoints, (ii) to select Investment Funds in which Plan assets may be
invested, (iii) to appoint one or more Investment Managers for any assets of the
Plan and to enter into an investment management agreement with each Investment
Manager it appoints, (iv) to direct the investment of any Plan assets not
assigned to an Investment Manager or not invested in one or more Investment
Funds at the direction of Participants in accordance with Article 6, (v) to
remove any Trustee or Investment Manager it appointed and (vi) to direct the
Trustee to enter into a custodial agreement with a bank or trust company
pursuant to which such bank or trust company is to have custody of Plan assets
as an agent of the Trust. Each Investment Manager so appointed shall acknowledge
in writing that it is a fiduciary with respect to the Plan.
12.4 TRUSTEE AND INVESTMENT MANAGERS. The Trustee shall have the
exclusive authority and discretion to control and manage the Plan assets held by
it, except to the extent that (i) the Company directs how such assets shall be
invested, (ii) the Company allocates the authority to manage such assets to one
or more Investment Managers, (iii) the Plan prescribes how such assets shall be
invested or (iv) Participants are permitted to direct the investment of their
Accounts pursuant to Article 6. Each Investment Manager appointed under Section
12.3 shall have the exclusive authority to manage, including the power to
acquire and dispose of, the Plan assets assigned to it by the Company except to
the extent that the Plan prescribes how such assets shall be invested (including
at the direction of Participants in accordance with Article 6). The Trustee and
any Investment Manager shall be solely responsible for diversifying the
investments, in accordance with Section 404(a)(1)(C) of ERISA, of the Plan
assets assigned to them by the Company, except to the extent that the Company
directs or the Plan prescribes how such assets shall be invested (including at
the direction of Participants in accordance with Article 6).
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12.5 SELECTION OF SERVICE PROVIDERS AND DELEGATION OF FIDUCIARY
RESPONSIBILITIES. The Company may engage such attorneys, actuaries, accountants,
consultants or other persons to render advice or to perform services with regard
to any of its responsibilities under the Plan as it shall determine to be
necessary or appropriate. The Company may designate by written instrument
(signed by both parties) one or more actuaries, accountants or consultants as
fiduciaries to carry out, where appropriate, fiduciary responsibilities of the
Company. The Company shall not allocate or delegate to any other person any of
its duties and responsibilities under the Plan. The duties and responsibilities
of the Company under the Plan shall be carried out by the directors, officers
and employees of the Company (or a Committee thereof appointed in accordance
with Section 12.7), acting on behalf and in the name of the Company in their
capacities as directors, officers and employees and not as individual
fiduciaries. Except as provided in Section 13.3 (regarding the appointment of a
Review Panel), the Company is specifically prohibited from designating any
director, officer or employee of the Company as a fiduciary and from allocating
or delegating to any such person any of its fiduciary responsibilities.
12.6 SERVICE IN SEVERAL FIDUCIARY CAPACITIES. Nothing herein shall
prohibit any person or group of persons from serving in more than one fiduciary
capacity with respect to the Plan (including service both as the Plan
Administrator and as a Trustee).
12.7 APPOINTMENT OF THE COMMITTEE. The Company may appoint a Committee
to act on its behalf in carrying out the Company's fiduciary duties under the
Plan. If the Company appoints a Committee, as provided in this Section 12.7, the
following rules shall apply:
(a) The Committee shall be known as the Retirement Plan Advisory
Committee.
(b) The Committee shall consist of three (3) or more persons
appointed from time to time by the Company who may be Employees and who shall
serve at the pleasure of the Company without compensation, unless otherwise
determined by the Company. The Company shall certify to the Trustee the members
of the Committee.
(c) The Committee shall act by agreement of a majority of its
members, either by vote at a meeting or in writing without a meeting. By such
action, it may authorize one or more members to execute documents on its behalf,
perform other fiduciary and ministerial duties and direct the Trustee in the
performance of its duties hereunder on behalf of the Committee. The Trustee,
upon written notification of such authorization, shall accept and rely upon such
documents until notified in writing that the authorization has been revoked by
the Committee. The Trustee shall not be deemed to be on notice of any change in
the membership of the Committee unless notified in writing. A member of the
Committee, who is also a Participant hereunder, shall not vote or act upon any
matter relating solely to himself or herself. In the event of a deadlock or
other situation which prevents agreement of a majority of the Committee members,
the matter shall be decided by the Company.
(d) The Committee shall keep such written records as it shall deem
necessary or proper, which records shall be open to inspection by the Company.
The Committee shall obtain from the Trustee regular reports with respect to the
current value of the assets held in the
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Trust, in such form as is acceptable to the Committee. The Committee shall keep
on file a copy of this Plan and the Trust Agreement, including any subsequent
amendments, all annual and interim reports of the Trustee and the latest annual
report, summary of the annual report, and summary plan description required
under Title I of ERISA for examination by Participants during business hours.
12.8 INDEMNIFICATION. Unless otherwise addressed in a written contract
entered into between the Company and a fiduciary of the Plan, the Company agrees
to indemnify and reimburse, to the fullest extent permitted by law, members of
the Committee, directors, officers and employees acting for the Company, all
such former members, directors, officers and employees, and any other person to
which any fiduciary responsibility with respect to the Plan is allocated or
delegated, for any and all expenses, liabilities or losses, including attorneys'
fees, arising out of any act or omission relating to the rendition of services
for or the management and administration of the Plan, other than such expenses,
liabilities and costs as may result from the bad faith, criminal acts or willful
misconduct of such persons or to the extent such indemnification is specifically
prohibited by ERISA.
12.9 PARTICIPANT VOTING RIGHTS - COMPANY STOCK. The Participant (or
Beneficiary) has the right to direct the Trustee regarding the voting of Company
Stock allocated to the Participant's Account with respect to all corporate
matters requiring a vote of stockholders. The Trustee does not have the right to
vote any Company Stock which a Participant (or Beneficiary) fails to vote.
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ARTICLE 13
CLAIMS PROCEDURES
13.1 APPLICATION FOR BENEFITS. Applications for benefits and inquiries
concerning the Plan (or concerning present or future rights to benefits under
the Plan) shall be submitted to the Company in writing. An application for
benefits shall be submitted on the prescribed form and shall be signed by the
Participant or, in the case of a benefit payable after his or her death, by his
or her Beneficiary.
13.2 DENIAL OF APPLICATION. In the event that an application for
benefits is denied in whole or in part, the Company shall notify the applicant
in writing of the denial and of the right to a review of the denial. The written
notice shall set forth, in a manner calculated to be understood by the
applicant, specific reasons for the denial, specific references to the
provisions of the Plan on which the denial is based, a description of any
information or material necessary for the applicant to perfect the application,
an explanation of why the material is necessary, and an explanation of the
review procedure under the Plan. The written notice shall be given to the
applicant within a reasonable period of time (not more than ninety (90) days)
after the Company received the application, unless special circumstances require
further time for processing and the applicant is advised of the extension. In no
event shall the notice be given more than one hundred eighty (180) days after
the Company received the application.
13.3 REVIEW PANEL. The Company may from time to time appoint a Review
Panel that may consist of two (2) or more individuals who may, but need not, be
Employees. If no such Review Panel is named, the Company shall be deemed to be
the Review Panel for purposes of this Article 13. The Review Panel shall be the
named fiduciary that has the authority to act with respect to any appeal from a
denial of benefits or a determination of benefit rights.
13.4 REQUEST FOR REVIEW. An applicant whose application for benefits
was denied in whole or in part, or the applicant's duly authorized
representative, may appeal from the denial by submitting to the Review Panel a
request for a review of the application within sixty (60) days after receiving
written notice of the denial from the Company. The Company shall provide the
applicant or his or her representative an opportunity to review pertinent
materials, other than legally privileged documents, in preparing the request for
a review. The request for a review shall be in writing and addressed to the
Review Panel. The request for a review shall set forth all of the grounds on
which it is based, all facts in support of the request, and any other matters
that the applicant deems pertinent. The Review Panel may require the applicant
to submit such additional facts, documents or other material as it may deem
necessary or appropriate in making its review.
13.5 DECISION ON REVIEW. The Review Panel shall act on each request for
a review within sixty (60) days after receipt, unless special circumstances
require further time for processing and the applicant is advised of the
extension. In no event shall the decision on review be rendered more than one
hundred twenty (120) days after the Review Panel received the request for a
review. The Review Panel shall give prompt written notice of its decision to the
applicant and to the Company. In the event that the Review Panel confirms the
denial of the application for benefits in whole or in part, the notice shall set
forth, in a manner calculated to be
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understood by the applicant, the specific reasons for the decision and specific
references to the provisions of the Plan on which the decision is based.
13.6 RULES AND INTERPRETATIONS. The Review Panel shall adopt such
rules, procedures and interpretations of the Plan as it deems necessary or
appropriate in carrying out its responsibilities under this Article 13.
13.7 EXHAUSTION OF REMEDIES. No legal action for benefits under the
Plan shall be brought unless and until the claimant (i) has submitted a written
application for benefits in accordance with Section 13.1, (ii) has been notified
by the Company that the application is denied, (iii) has filed a written request
for a review of the application in accordance with Section 13.4 and (iv) has
been notified in writing that the Review Panel has affirmed the denial of the
application; provided, however, that legal action may be brought after the
Company or the Review Panel has failed to take any action on the claim within
the time prescribed by Sections 13.2 and 13.5, respectively.
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ARTICLE 14
AMENDMENT OR DISCONTINUANCE OF THE PLAN
14.1 AMENDMENTS. The Company reserves the right to amend (retroactively
or prospectively) any or all of the provisions of the Plan at any time in any
manner that it may deem advisable; provided, however, that no such amendment
shall make it possible for any of the corpus or income of the Trust to be used
for, or diverted to, purposes other than the exclusive benefit of Participants
and their Beneficiaries under the Plan, nor shall any such amendment make it
possible to deprive any Participant of a previously accrued benefit, except to
the extent permitted by Section 412(c)(8) of the Code. Any such amendment to the
Plan may be adopted by the Board or by one or more officers of the Company
delegated by the Board to act on behalf of the Company; provided, however, that
any amendment to the Plan which would increase the contributions (other than
401(k) Contributions) that an Employer would be obligated to make to the Plan
must be approved by the Board or by the Compensation Committee of the Board.
14.2 MERGER, CONSOLIDATION OR TRANSFER. In the event of any merger or
consolidation with, or transfer of assets or liabilities to, any other plan, the
benefit that each Participant would be entitled to receive if the Plan were to
terminate immediately after the merger, consolidation or transfer shall not be
less than the benefit that he or she would have been entitled to receive if the
Plan had terminated immediately before the merger, consolidation or transfer. In
the event a Participant's benefits are transferred to another qualified plan
maintained by the Employer or any Affiliate of the Employer, if such transfer
would result in the elimination or reduction of any benefits protected under
Section 411(d)(6) of the Code, such transfer of benefits shall be conditioned
upon a voluntary, fully informed election by the Participant to transfer such
Participant's benefits to such other qualified plan in accordance with
regulations under Section 411(d)(6) of the Code.
14.3 RIGHT TO TERMINATE PLAN.
(a) An Employer has established the Plan with the bona fide
intention and expectation that the Plan will continue indefinitely and that the
Employer will be able to make its contributions indefinitely, but the Employer
shall be under no obligation to continue making contributions or to maintain the
Plan for any given length of time and may, in its sole and absolute discretion,
discontinue its contributions or terminate the Plan with respect to such
Employer, at any time without any liability whatsoever.
(b) The Company reserves the right to terminate the Plan at any
time with respect to any or all Employers.
14.4 EMPLOYER'S RIGHTS AND OBLIGATIONS UPON PLAN TERMINATION. Any other
provision of the Plan to the contrary notwithstanding, upon any termination of
the Plan, the Employer shall have no obligation or liability whatsoever to make
any further payments (including any Employer Matching Contributions payable
prior to such termination) to the Trustee for benefits under the Plan. Neither
the Trustee nor any Participant, Employee or Beneficiary shall have any right to
compel the Employer to make any payment after the termination of the Plan.
60.
<PAGE> 69
14.5 PARTICIPANTS' RIGHTS UPON PLAN TERMINATION. If the Plan is
terminated or partially terminated, or if contributions are completely
discontinued, then each Participant who then is an Employee and who is directly
affected by such event shall have a one hundred percent (100%) vested interest
in his or her Account (including all subaccounts), without regard to his or her
Years of Service.
61.
<PAGE> 70
ARTICLE 15
TOP-HEAVY PROVISIONS
15.1 TOP-HEAVY PLAN DEFINED. Notwithstanding any other provision of
this Plan to the contrary, this Article 15 shall apply if the Plan is a
"Top-Heavy Plan" as defined herein. The Plan shall be a Top-Heavy Plan in a Plan
Year if, as of the "Determination Date" (as defined in Section 15.2), the
aggregate Account balances of "Key Employees" (as defined in Section 15.2) under
the Plan exceeds sixty percent (60%) of the aggregate Account balances under the
Plan of all Employees, but excluding the Account balances of former Key
Employees.
For purposes of this Article 15, an Employee's Account balance is the sum of (i)
his or her Account balance as of the most recent Valuation Date within the
twelve (12) month period ending on the Determination Date, (ii) any
contributions allocated to his or her Account after the Valuation Date and on or
before the Determination Date, and (iii) the aggregate distributions (including
distributions made on account of death and distributions from any terminated
qualified retirement plan previously maintained by the Employer that would be
included in the "Required Aggregation Group" (as defined in Section 15.2) if not
terminated) made with respect to such Employee during the five-year period
ending on the Determination Date and not reflected in the value of his or her
Account as of the most recent Valuation Date.
In determining whether this Plan is a Top-Heavy Plan, all employers that are
aggregated under Section 414(b), (c), (m) or (o) of the Code shall be treated as
a single employer. In addition, all plans that are part of the Required
Aggregation Group shall be treated as a single plan.
Notwithstanding the foregoing provisions of this Section 15.1, the following
shall not be taken into consideration when determining an Employee's Account
balance, except to the extent provided by regulations:
(a) Any Rollover Contribution (or similar transfer) initiated by
the Employee to this Plan (see Section 416(g)(4)(A) of the Code);
(b) The Account balance of any individual who has not performed
services for the Employer at any time during the five-year period ending on the
Determination Date (see Section 416(g)(4)(E) of the Code).
15.2 OTHER DEFINITIONS. For purposes of this Article 15, the following
terms shall have the following meanings:
(a) "Compensation," as used in this Article 15, shall have the same
meaning given that term in Section 2.13.
(b) "Determination Date" means the last day of the preceding Plan
Year.
(c) "Employee" means (i) a current Employee or (ii) a former
Employee who was credited with an Hour of Service during the Plan Year
containing the Determination Date or any of the four (4) preceding Plan Years.
62.
<PAGE> 71
(d) "Key Employee" means an Employee, a former Employee, or the
Beneficiary under the Plan of a former Employee who, in the Plan Year containing
the Determination Date, or any of the four (4) preceding Plan Years, is:
(1) An officer of the Employer having an annual Compensation
greater than fifty percent (50%) of the amount in effect under Section
415(b)(1)(A) of the Code for any such Plan Year. Not more than fifty (50)
Employees or, if less, the greater of three (3) Employees or ten percent (10%)
of the Employees shall be considered as officers for purposes of this paragraph.
(2) One of the ten (10) Employees owning (or considered as
owning within the meaning of Section 318 of the Code) the largest interest in
the Employer, which is more than one-half percent (.5%) ownership interest in
value, and whose Compensation exceeds the maximum dollar limitation under
Section 415(c)(1)(A) of the Code as in effect for the calendar year in which the
Determination Date falls.
(3) A five percent (5%) owner of the Employer.
(4) A one percent (1%) owner of the Employer having an annual
Compensation from the Employer of more than $150,000.
Whether an Employee is a five percent (5%) owner or a one percent (1%) owner
shall be determined in accordance with Section 416(i)(1)(B) of the Code.
(e) "Non-Key Employee" means any Employee who is not a Key Employee
or any Beneficiary under the Plan of a former Employee who was not a Key
Employee.
(f) "Required Aggregation Group" means:
(1) Each stock bonus, pension or profit sharing plan of the
Employer in which a Key Employee participates and which is intended to qualify
under Section 401(a) of the Code; and
(2) Each other such stock bonus, pension or profit sharing
plan of an Employer which enables any plan in which a Key Employee participates
to meet the requirements of Section 401(a)(4) or Section 410 of the Code.
15.3 TOP-HEAVY ACCRUAL RULES. If the Plan is a Top-Heavy Plan in a Plan
Year, the aggregate Employer Matching Contributions, Discretionary
Contributions, Qualified Nonelective Contributions, Qualified Matching
Contributions, and Forfeitures allocated to each "Eligible Non-Key Employee" (as
defined below) shall not be less than the lesser of the following percentages of
the Eligible Non-Key Employee's Compensation for the Plan Year:
(a) Three percent (3%) or, if the Employer has a defined benefit
plan which designates this Plan to satisfy the requirements for a minimum
contribution or benefit under Section 416 of the Code, five percent (5%); or
63.
<PAGE> 72
(b) The highest percentage of Compensation provided in the form of
all contributions under the Plan (including 401(k) Contributions and Employer
Matching Contributions) on behalf of any Key Employee for the Plan Year,
including if that percentage is zero, zero percent (0%).
For purposes of this Section 15.3, "Eligible Non-Key Employee" shall mean a
Non-Key Employee who is an Eligible Employee and who has not separated from
service at the end of the Plan Year, regardless of (i) whether he or she has
completed a Year of Service during the Plan Year, (ii) his or her level of
Compensation, or (iii) whether he or she has declined to make any 401(k)
Contributions.
Notwithstanding any other provisions of this Plan, in computing the Deferral
Rate and the Contribution Rate for an Eligible Non-Key Employee, there shall not
be included in the amount in Subsection 2.16(a) (for purposes of the Deferral
Rate) or in the amount in Subsection 2.14(a) (for purposes of the Contribution
Rate) any contributions otherwise required or permitted to be taken into account
for such purposes to the extent that such contributions are applied by the
Employer to meet the minimum allocation required for such Employee by this
Subsection 15.3(a) except that this limitation shall not apply to any Qualified
Nonelective Contributions or to any Employer contributions that constitute
"qualified nonelective contributions" (within the meaning of Section
401(m)(4)(C) of the Code). Any such contributions that are so excluded for
purposes of computing the Deferral Rate and Contribution Rate of an Eligible
Non-Key Employee shall satisfy the nondiscrimination requirements of Section
401(a)(4) of the Code without regard to Section 401(k) or 401(m) of the Code.
15.4 IMPACT ON CONTRIBUTION LIMITATIONS. For any Plan Year during which
the Plan is a Top-Heavy Plan, the number "1.0" shall be substituted for the
number "1.25" wherever it appears in Section 415(e)(2)(B) and (3)(B) of the Code
and Sections 2.17 and 2.18 of this Plan.
64.
<PAGE> 73
ARTICLE 16
GENERAL PROVISIONS
16.1 NO IMPLIED EMPLOYMENT CONTRACT. The adoption and maintenance of
the Plan shall not be deemed to be a contract of employment between an Employer
and any Employee. Accordingly, the Plan shall not be deemed (i) to give any
Employee or other person any right to be retained in the employ of an Employer
nor (ii) to interfere with the right of an Employer to discharge any Employee or
other person at any time and for any reason, which right is hereby reserved.
16.2 BENEFITS NOT ASSIGNABLE. Except as otherwise provided in Article
10 or as provided in Section 414(p) of the Code with respect to qualified
domestic relations orders, or as otherwise provided under Section 401(a)(13) of
the Code, no interest, whether vested or not, of a Participant or Beneficiary in
the Plan, no Account balance nor distribution or payment under the Plan to any
Participant or Beneficiary shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge, whether
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber or charge the same shall be void; nor shall
any distribution or payment in any way be liable for or subject to the debts,
contracts, liabilities, engagements or torts of any Participant or Beneficiary.
If any Participant or Beneficiary has been adjudicated a bankrupt or has
purported to anticipate, alienate, sell, transfer, assign, pledge, encumber or
charge any distribution or payment, voluntarily or involuntarily, then the
Company, in its discretion, may direct the Trustee to hold or apply the
distribution or payment or any part thereof to or for the benefit of such
Participant or Beneficiary in such manner as the Company shall direct.
16.3 QUALIFIED DOMESTIC RELATIONS ORDERS. In accordance with Section
414(p) of the Code, the Company shall establish reasonable written procedures to
determine the qualified status of domestic relations orders received with
respect to Participants and to administer distributions to alternate payees
under such qualified domestic relations orders. Notwithstanding any other
provision of the Plan, benefits under the Plan that are the subject of a
qualified domestic relations order may be distributed to any alternate payee in
compliance with the provisions of such qualified domestic relations order,
without regard to whether the Participant to whose benefits the qualified
domestic relations order relates has terminated employment with an Employer or
has reached "earliest retirement age," as that term is defined in Section 414(p)
of the Code. Any payment to an alternate payee, or to his or her legal
representative or beneficiary, pursuant to the terms of a qualified domestic
relations order, shall be in full satisfaction of all claims under such order
against the Trustee or an Employer, any of who may require such alternate payee,
or his or her legal representative or beneficiary, to execute a receipt
therefore in such form as shall be determined by the Trustee or an Employer, as
the case may be.
16.4 PAYMENTS OF BENEFITS TO INFANTS OR INCOMPETENTS. If the Company
determines that any person entitled to payments under the Plan is an infant or
is incompetent by reason of a physical or mental disability, then it may cause
all payments thereafter becoming due to such person to be made to any other
person for his or her benefit, without responsibility for the application of
amounts so paid. Payments made pursuant to this provision shall completely
discharge an Employer and the Trustee.
65.
<PAGE> 74
16.5 UNCLAIMED BENEFITS. If any benefit would be distributable under
the Plan but the Company is unable, after reasonable and diligent effort, to
locate the Participant or Beneficiary to whom the distribution is payable for
three (3) consecutive Plan Years, then the Participant's Account may be closed
after the third consecutive Plan Year during which such distribution is payable
but the Participant or Beneficiary cannot be found. The amount of the unpaid
benefit shall be reallocated as determined by the Company, unless mandatory
provisions of applicable escheat laws require another application, in which
event such benefit shall be applied as such laws require. If, however, the
Participant or Beneficiary subsequently makes a proper claim to the Company for
any benefit that was reallocated and that was not lost by escheat, then such
benefit (without income, gains or other adjustment) shall be restored to the
Participant's Account from a special contribution made by the Employer for this
purpose. The benefit shall thereafter be distributable in accordance with the
terms of the Plan. Notification by certified or registered mail to the last
known address of the Participant or Beneficiary will be deemed a reasonable and
diligent effort to locate such person.
16.6 SOURCE OF BENEFITS. The Trust shall be the sole source of benefits
under the Plan, and each Participant, Beneficiary or other person who claims the
right to any payment or benefit under the Plan shall only be entitled to look to
the Trust for such payment or benefit and shall not have any right, claim or
demand therefor against an Employer or any officer or director of an Employer.
16.7 FORMS OF PLAN COMMUNICATIONS. All communications from a
Participant or Beneficiary with regard to the Plan shall become effective only
when made in writing and filed with the Company. If the Company has adopted
prescribed forms for any communications, such communications shall be effective
only if filed on such forms.
16.8 IRS QUALIFICATION. The Employer intends that the Plan (including
the Trust Agreement forming a part thereof) shall be a qualified defined
contribution plan for the exclusive benefit of Employees and their
Beneficiaries, as provided in Sections 401(a), 401(k) and 501(a) of the Code.
16.9 CONSTRUCTION OF PLAN. Any gender, where appearing in the Plan,
shall be deemed to include the other gender, the singular shall include the
plural, and the plural shall include the singular, unless the context otherwise
requires. Titles are for reference only. In the event of a conflict between a
title and the text of the Plan, the text of the Plan shall control. In the event
of a conflict between the text of the Plan and any summary, description or other
information regarding the Plan, the text of the Plan shall control.
16.10 GOVERNING LAW. The provisions of the Plan shall be construed,
administered and governed according to ERISA and, to the extent not superseded
by ERISA, the laws of the State of Colorado.
16.11 SEVERABILITY. If any provision of the Plan shall be held by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions of the Plan shall continue to be fully effective.
66.
<PAGE> 75
ARTICLE 17
EXECUTION
To record the amendment and restatement of the Plan to read as set
forth herein, effective as of January 1, 1997, the Company has caused its
authorized officer to execute this document this _____ day of _______________,
1998.
J.D. EDWARDS & COMPANY
BY:
--------------------------------
PRINTED NAME:
----------------------
TITLE:
-----------------------------
67.
<PAGE> 76
J.D. EDWARDS & COMPANY RETIREMENT SAVINGS PLAN
APPENDIX A
SCHEDULE OF AFFILIATED EMPLOYERS AND
GRANTS OF PAST SERVICE CREDIT
<TABLE>
<CAPTION>
AFFILIATED EMPLOYERS PAST SERVICE CREDIT
<S> <C>
1. J.D. Edwards World None
Solutions Company
2. J.D. Edwards World None
Service Company
</TABLE>
1.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION
- ------------------ ------------
<S> <C>
J.D. Edwards World Solutions Company Colorado
J.D. Edwards World Source Company Colorado
J.D. Edwards Netherlands B.V., Baarn Netherlands
J.D. Edwards (U.K.) Ltd. United Kingdom
J.D. Edwards France SA France
J.D. Edwards Deutschland GmbH Germany
J.D. Edwards Italia S.p.A. Italy
J.D. Edwards (Singapore) Pte. Ltd. Singapore
Nippon J.D. Edwards Japan
J.D. Edwards de Mexico y Compania en N.C. de C.V. Mexico
J.D. Edwards Brasil Limitada Brazil
J.D. Edwards Canada Ltd. Canada
J.D. Edwards S.A. (Proprietary) Limited South Africa
J.D. Edwards (Hong Kong) Limited Hong Kong
J.D. Edwards (China) Software Systems Co., Ltd. China
J.D. Edwards Austria GmbH Austria
J.D. Edwards Shanghai Co., Ltd. Shanghai
J.D. Edwards (Schweiz) AG Switzerland
J.D. Edwards World Solutions Australia Australia
J.D. Edwards & Company Foreign Sales, Inc. Barbados
</TABLE>
World Technology Services LLC (J.D. Edwards & Company is a 50% owner of this
company)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8/S-3 (No. 333-36227) of J.D. Edwards & Company of our
report dated November 30, 1998 appearing on Page F-1 of this Annual Report on
Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Broomfield, Colorado
January 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT OCTOBER 31, 1998 AND STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED
OCTOBER 31, 1998 AS FILED ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 183,115
<SECURITIES> 28,667
<RECEIVABLES> 278,604
<ALLOWANCES> 12,900
<INVENTORY> 0
<CURRENT-ASSETS> 510,309
<PP&E> 124,443
<DEPRECIATION> 63,754
<TOTAL-ASSETS> 950,473
<CURRENT-LIABILITIES> 338,931
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 583,893
<TOTAL-LIABILITY-AND-EQUITY> 950,473
<SALES> 386,081
<TOTAL-REVENUES> 933,982
<CGS> 43,404
<TOTAL-COSTS> 393,093
<OTHER-EXPENSES> 434,251
<LOSS-PROVISION> 7,211
<INTEREST-EXPENSE> 843
<INCOME-PRETAX> 118,203
<INCOME-TAX> 43,735
<INCOME-CONTINUING> 74,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,468
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.68
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT OCTOBER 31, 1997 AND STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED
OCTOBER 31, 1997 AS FILED ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 224,437
<SECURITIES> 30,464
<RECEIVABLES> 184,332
<ALLOWANCES> 9,800
<INVENTORY> 0
<CURRENT-ASSETS> 450,869
<PP&E> 99,557
<DEPRECIATION> 43,852
<TOTAL-ASSETS> 643,037
<CURRENT-LIABILITIES> 212,584
<BONDS> 0
0
0
<COMMON> 93
<OTHER-SE> 396,768
<TOTAL-LIABILITY-AND-EQUITY> 643,037
<SALES> 248,707
<TOTAL-REVENUES> 647,812
<CGS> 36,444
<TOTAL-COSTS> 281,084
<OTHER-EXPENSES> 306,472
<LOSS-PROVISION> 8,434
<INTEREST-EXPENSE> 829
<INCOME-PRETAX> 59,326
<INCOME-TAX> 22,098
<INCOME-CONTINUING> 37,228
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,228
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.39
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT OCTOBER 31, 1996 AND STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED
OCTOBER 31, 1996 AS FILED ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 25,554
<SECURITIES> 0
<RECEIVABLES> 121,329
<ALLOWANCES> 5,600
<INVENTORY> 0
<CURRENT-ASSETS> 166,584
<PP&E> 81,309
<DEPRECIATION> 29,954
<TOTAL-ASSETS> 243,786
<CURRENT-LIABILITIES> 146,015
<BONDS> 0
47,024
0
<COMMON> 79
<OTHER-SE> 69,847
<TOTAL-LIABILITY-AND-EQUITY> 243,786
<SALES> 180,366
<TOTAL-REVENUES> 478,048
<CGS> 27,443
<TOTAL-COSTS> 212,289
<OTHER-EXPENSES> 222,132
<LOSS-PROVISION> 1,387
<INTEREST-EXPENSE> 899
<INCOME-PRETAX> 41,954
<INCOME-TAX> 15,628
<INCOME-CONTINUING> 26,326
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,326
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.30
</TABLE>
