<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 000-23091
J.D. EDWARDS & COMPANY
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-0728700
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
ONE TECHNOLOGY WAY, DENVER, CO 80237
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (303) 334-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of September 6, 2000, there were 111,829,953 shares of the Registrant's
Common Stock outstanding.
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J.D. EDWARDS & COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of October 31, 1999 and July 31, 2000.............. 3
Consolidated Statements of Operations for the Three Months and Nine Months Ended
Ended July 31, 1999 and 2000.................................................... 4
Consolidated Statements of Cash Flows for the Nine Months Ended
July 31, 1999 and 2000.......................................................... 5
Notes to Consolidated Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................... 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk......................... 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 30
Item 2. Changes in Securities and Use of Proceeds........................................ 30
Item 3. Defaults upon Senior Securities.................................................. 30
Item 4. Submission of Matters to a Vote of Security Holders.............................. 30
Item 5. Other Information................................................................ 30
Item 6. Exhibits and Reports on Form 8-K................................................. 30
SIGNATURES
</TABLE>
J.D. Edwards is a registered trademark of J.D. Edwards & Company. The names of
all other products and services of J.D. Edwards used herein are trademarks or
registered trademarks of J.D. Edwards World Source Company. All other product
and service names used are trademarks or registered trademarks of their
respective owners.
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1999 2000
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 113,341 $ 112,273
Short-term investments in marketable securities ................... 62,546 46,322
Accounts receivable, net of allowance for doubtful accounts of
$12,000 at October 31, 1999 and $13,000 at July 31, 2000 ....... 236,216 258,944
Other current assets .............................................. 34,936 74,342
----------- ---------
Total current assets ...................................... 447,039 491,881
Long-term investments in marketable securities ...................... 246,564 161,973
Property and equipment, net ......................................... 86,332 89,557
Non-current portion of deferred income taxes ........................ 82,572 125,081
Other assets, net ................................................... 78,021 87,219
----------- ---------
$ 940,528 $ 955,711
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 46,004 $ 41,351
Unearned revenue and customer deposits ............................ 114,865 149,582
Accrued liabilities ............................................... 162,635 187,737
----------- ---------
Total current liabilities ................................. 323,504 378,670
Unearned revenue, net of current portion, and other ................. 24,304 21,751
----------- ---------
Total liabilities ......................................... 347,808 400,421
Commitments and contingencies (Note 9)
Common shares subject to repurchase, at redemption amount ........... -- 93,682
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized;
none outstanding ................................................ -- --
Common stock, $.001 par value; 300,000,000 shares authorized;
107,109,494 and 111,784,024 issued and outstanding as of
October 31, 1999 and July 31, 2000, respectively ................ 107 112
Additional paid-in capital ........................................ 456,387 408,127
Treasury stock, at cost; 1,743,468 shares as of July 31, 2000 ...... -- (64,721)
Deferred compensation .............................................. (283) (135)
Retained earnings .................................................. 138,100 113,012
Accumulated other comprehensive income (loss): unrealized
gains (losses) on equity securities and foreign currency
translation adjustments, net ...................................... (1,591) 5,213
----------- ---------
Total stockholders' equity ................................ 592,720 461,608
----------- ---------
$ 940,528 $ 955,711
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 4
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
---------------------- ----------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
License fees ............................................. $ 74,949 $ 116,675 $ 211,752 $ 281,704
Services ................................................. 157,120 144,441 474,845 442,167
--------- --------- --------- ---------
Total revenue .................................... 232,069 261,116 686,597 723,871
Costs and expenses:
Cost of license fees ..................................... 7,505 15,457 20,217 42,483
Cost of services ......................................... 101,778 96,319 307,845 277,029
Sales and marketing ...................................... 89,198 94,222 241,958 267,257
General and administrative ............................... 21,233 25,319 71,109 73,471
Research and development ................................. 27,096 28,787 78,807 86,879
Amortization of acquired software and other acquired
intangibles ............................................ 3,234 6,470 3,584 18,740
Acquired in-process research and development ............. 24,000 -- 26,141 --
Restructuring and related charges ........................ -- 30,113 -- 30,113
--------- --------- --------- ---------
Total costs and expenses ......................... 274,044 296,687 749,661 795,972
Operating loss ............................................. (41,975) (35,571) (63,064) (72,101)
Other income (expense):
Interest income .......................................... 4,485 3,745 15,441 11,320
Gains on sales of equity investments and product line .... -- 1,018 -- 24,582
Foreign currency gains (losses) and other, net ........... (1,148) (1,177) (748) 270
--------- --------- --------- ---------
Loss before income taxes ................................... (38,638) (31,985) (48,371) (35,929)
Benefit from income taxes ................................ (5,416) (9,382) (9,017) (10,841)
--------- --------- --------- ---------
Net loss ................................................... $ (33,222) $ (22,603) $ (39,354) $ (25,088)
========= ========= ========= =========
Net loss per common share:
Basic .................................................... $ (0.31) $ (0.21) $ (0.38) $ (0.23)
========= ========= ========= =========
Diluted .................................................. $ (0.31) $ (0.21) $ (0.38) $ (0.23)
========= ========= ========= =========
Shares used in computing per share amounts:
Basic .................................................... 106,181 110,024 104,875 109,145
Diluted .................................................. 106,181 110,024 104,875 109,145
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
----------------------
1999 2000
--------- ---------
<S> <C> <C>
Operating activities:
Net loss ............................................................ $ (39,354) $ (25,088)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation ...................................................... 18,104 22,369
Amortization of intangible assets and securities premiums
or discounts .................................................... 10,508 21,726
Gain on sale of product line ...................................... -- (5,686)
Gain on sale of investments ....................................... -- (18,896)
Benefit from deferred income taxes ................................ (7,898) (17,000)
Acquired in-process research and development ...................... 26,141 --
Other ............................................................. 2,339 5,889
Changes in operating assets and liabilities:
Accounts receivable, net .......................................... 12,743 (23,312)
Other assets ...................................................... (15,167) (40,688)
Accounts payable .................................................. (21,057) (4,535)
Unearned revenue and customer deposits ............................ (1,129) 27,749
Accrued liabilities ............................................... (9,748) 26,128
--------- ---------
Net cash used by operating activities ..................... (24,518) (31,344)
Investing activities:
Purchase of marketable securities ................................. (229,411) (58,604)
Proceeds from maturities of marketable securities ................. 263,920 179,193
Purchase of investments ........................................... -- (14,500)
Proceeds from sale of investments ................................. -- 26,434
Purchase of property and equipment and other, net ................. (42,196) (27,753)
Payment for purchase of acquired companies, net of cash
acquired ......................................................... (98,904) (10,151)
Capitalized software development costs ............................ -- (17,144)
--------- ---------
Net cash provided by (used for) investing activities ...... (106,591) 77,475
Financing activities:
Proceeds from issuance of common stock ............................ 29,971 39,980
Repurchase of common stock ........................................ -- (84,104)
--------- ---------
Net cash provided by financing activities ................. 29,971 (44,124)
Effect of exchange rate changes on cash ............................. (3,526) (3,075)
--------- ---------
Net decrease in cash and cash equivalents ........................... (104,664) (1,068)
Cash and cash equivalents at beginning of period .................... 183,115 113,341
--------- ---------
Cash and cash equivalents at end of period .......................... $ 78,451 $ 112,273
========= =========
Supplemental disclosure of other cash and non-cash investing and
financing transactions:
Income taxes paid ................................................. $ 13,781 $ 3,671
Retirement Savings Plan contribution funded with
common stock .................................................... 4,694 2,782
Common stock issued for acquired company .......................... 3,166 --
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
5
<PAGE> 6
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Interim Financial Statements. The accompanying financial statements of J.D.
Edwards & Company (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. The unaudited consolidated financial statements included herein have
been prepared on the same basis as the annual consolidated financial statements
and reflect all adjustments, which include only normal recurring adjustments
necessary for a fair presentation in accordance with generally accepted
accounting principles. The results for the nine-month period ended July 31, 2000
are not necessarily indicative of the results expected for the full fiscal year.
These consolidated financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended October 31, 1999.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(2) EARNINGS PER COMMON SHARE
Basic earnings per share (EPS) excludes the dilutive effect of common stock
equivalents and is computed by dividing net income (loss) by the weighted
average number of shares outstanding during the period. Diluted EPS includes the
dilutive effect of common stock equivalents and is computed using the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares consist of stock options and certain equity
instruments. For periods in which the Company reports net income, the weighted
average shares outstanding is adjusted to include all common shares issuable
under stock options using the treasury stock method and the dilutive impact of
any put obligations that are below the current market price using the reverse
treasury stock method. Diluted loss per share for the fiscal 1999 and fiscal
2000 periods exclude common stock equivalents because the effect of their
inclusion would be anti-dilutive, or would decrease the reported loss per share.
Using the treasury stock method, the weighted average common stock equivalents
for third quarter and the nine-month period ended 1999 were 5.4 million shares
and 6.4 million shares, respectively, and 3.0 million shares and 5.4 million
shares for the third quarter and the nine-month period ended July 31, 2000,
respectively. All shares owned by the J.D. Edwards & Company Retirement Savings
Plan were included in the weighted average common shares outstanding for all
periods.
The computation of basic and diluted EPS was as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
----------------------- -----------------------
1999 2000 1999 2000
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net loss................................................... $ (33,222) $ (22,603) $ (39,354) $ (25,088)
========= ========== ========== ==========
Denominator:
Basic loss per share -- weighted average shares
outstanding (1)......................................... 106,181 110,024 104,875 109,145
Dilutive effect of common stock equivalents................ -- -- -- --
--------- ---------- ---------- ----------
Diluted net loss per share -- adjusted weighted
average shares outstanding, assuming conversion of
common stock equivalents................................ 106,181 110,024 104,875 109,145
========= ========== ========== ==========
Basic net loss per share..................................... $ (0.31) $ (0.21) $ (0.38) $ (0.23)
========= ========== ========== ==========
Diluted net loss per share................................... $ (0.31) $ (0.21) $ (0.38) $ (0.23)
========= ========== ========== ==========
</TABLE>
(1) Reflected net of the treasury shares acquired during the third quarter
of fiscal 2000.
6
<PAGE> 7
(3) CERTAIN BALANCE SHEET COMPONENTS
Other Current Assets. Other current assets increased from October 31, 1999
as a result of prepayments made and contractual obligations for software
licenses and royalties in accordance with certain strategic agreements. The
components of other current assets were as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1999 2000
----------- ---------
<S> <C> <C>
Prepaid expenses................................ $ 13,305 $ 31,270
Other current assets............................ 21,631 43,072
--------- ---------
$ 34,936 $ 74,342
========= =========
</TABLE>
Common Shares Subject to Repurchase. In August 1999, the Company's board of
directors authorized the repurchase up to eight million shares of the Company's
common stock. This stock repurchase plan was designed to partially offset the
effects of share issuances under the Company's stock option plans and Employee
Stock Purchase Plans (ESPP). The number of shares to be purchased and the timing
of purchases is based on several factors, including the level of stock issuances
under the stock plans, the price of J.D. Edwards' stock, general market
conditions, and other factors. The stock repurchases may be effected at
management's discretion through forward purchases, put and call transactions, or
open market purchases. During the period from December 1999 to March 2000 the
Company entered into equity derivative contracts for the purchase of 5.2 million
common shares in accordance with this share repurchase plan.
On March 16, 2000, the Emerging Issues Task Force (EITF) reached a consensus
on the application of EITF Issue No. 96-13, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" with
Issue No. 00-7, "Equity Derivative Transactions that Require Net Cash Settlement
if Certain Events Outside the Control of the Issuer Occur" (EITF 00-7). EITF
00-7 required that equity derivatives that contain any provision that could
require net cash settlement (except upon the complete liquidation of the
Company) must be marked to fair value through earnings. On July 20, 2000, the
EITF reached a tentative conclusion on Issue No. 00-19, "Determination of
Whether Share Settlement is Within the Control of the Issuer for Purposes of
Applying Issue No. 96-13, `Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock'" (EITF 00-19).
EITF 00-19 addresses questions that have arisen due to the application of EITF
00-7 and sets forth a tentative model that could be used to determine whether
equity derivative contracts could be recorded as equity. Under the tentative
transition provisions of EITF 00-19, all contracts existing prior to the date of
the as yet unissued final consensus are grandfathered until June 30, 2001 with
cumulative catch-up adjustment to be recorded at that time. The Company
currently has outstanding equity derivative contracts that may remain unsettled
at June 30, 2001 and, therefore, may require a cumulative catch-up adjustment at
that time. The Company is currently unable to determine the amount of the
cumulative catch-up adjustment, if any. In addition, until a final consensus is
reached on EITF 00-19, the Company is unable to determine the impact of EITF's
00-7 and 00-19 on its future equity derivative contracting activities.
On May 18, 2000, the Company settled two equity repurchase contracts,
entered into on March 20, 2000, prior to their maturity dates due in part to the
uncertainty about the ultimate resolution of broad implementation issues
surrounding the application of EITF 00-7. Settlement of the contracts resulted
in the repurchase of 363,000 shares for a total of $14.6 million in cash. On
June 2, 2000, the Company was required to settle contracts for the purchase of
1.9 million shares for $69.5 million as a result of the decline in the price of
its common stock to a value below the value stipulated in the contracts.
Approximately 524,000 of the repurchased shares were reissued to fund the June
30, 2000 ESPP purchase and the approximately 1.7 million remaining shares will
be held as treasury stock to fund future stock issuances. The treasury shares
are recorded at cost and reissuances are accounted for by a first-in, first-out
method.
At July 31, 2000, the Company held forward contracts requiring the purchase
at a future date of 2.9 million shares of its common stock at an average cost of
$31.43 per share. Forward purchase contracts require a full physical settlement
and the aggregate redemption cost of $93.7 million is included in the
accompanying balance sheet in temporary equity with a corresponding decrease in
additional paid-in capital. The equity instruments are exercisable by the
Company only at their dates of expiration, which range from September 2000 to
September 2001. However, the counter-party has the right to require an early
settlement based on the market price of J.D. Edwards' common stock as stipulated
in the contracts. Additionally, a decline in the Company's common stock price
below the stipulated price in the contracts may trigger the requirement to
collateralize the outstanding exposure.
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(4) INVESTMENTS IN MARKETABLE SECURITIES
In May and June 2000, the Company liquidated a portion of its portfolio of
marketable securities prior to their maturity dates in order to settle certain
equity contracts. As a result, the Company's entire held to maturity portfolio
was reclassified to available for sale. Beginning in the third quarter of fiscal
2000, the Company classified all investments in marketable securities as
available for sale as defined in Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, these investments were carried at fair value as
determined by their quoted market prices and included as appropriate in either
short-term or long-term investments in marketable securities. Unrealized gains
or losses were included, net of tax, in stockholders' equity as a component of
accumulated other comprehensive income.
Ariba, Inc. In March 2000, the Company made a $10.0 million minority equity
investment in Tradex, Inc. (Tradex), a privately held internet commerce company.
Upon the Ariba, Inc. (Ariba) acquisition of Tradex, the Company's investment
converted into 511,000 shares of Ariba common stock. During July 2000, the
Company sold 10,000 shares of Ariba common stock resulting in a realized gain of
$1.0 million, which is shown on the accompanying statement of operations as a
component of other income for the quarter ended July 31, 2000. During the nine
months ended July 31, 2000, the Company realized gains of $18.9 million from the
sales of a total of 385,000 shares of Ariba common stock, shown on the
accompanying statement of operations as a component of other income. The
investment had a fair value at July 31, 2000 of $14.6 million and a gross
unrealized gain of $12.1 million.
Extensity, Inc. In December 1999, the Company made a minority equity
investment in convertible preferred shares of Extensity, Inc. (Extensity), an
e-business time and expense solutions company. In January 2000, Extensity
completed an initial public offering of its common stock, at which time the
preferred stock of Extensity held by the Company converted automatically into
common stock. It is included in short-term marketable securities to reflect
management's intention to sell the shares within the next 12 months, subsequent
to expiration of a six-month lock-up agreement. The investment had a fair value
at July 31, 2000 of $8.1 million and a gross unrealized gain of $3.6 million.
Other Investments in Marketable Securities. The Company holds certain other
investments in marketable securities consisting of U.S., state, and municipal
bonds, as well as domestic corporate bonds, with maturities of up to 30 months.
The investments had a fair value at July 31, 2000 of $185.6 million and a gross
unrealized loss of $1.1 million.
(5) STRATEGIC RESTRUCTURING
In May 2000, the Board of Directors approved a global restructuring plan to
reduce the Company's operating expenses and strengthen both its competitive and
financial positions. Overall expense reductions were necessary both to lower the
Company's existing cost structure and to reallocate resources to pursue its
future operating strategies. Management effected the restructuring plan during
the third quarter of fiscal 2000 by eliminating certain employee positions,
reducing office space and related overhead expenses, and modifying the Company's
approach for providing training alternatives for customers. Restructuring and
related charges primarily included severance related costs for the involuntarily
terminated employees, operating lease termination payments, and office closure
costs. The Company recorded a $30.1 million restructuring charge during the
third quarter ended July 31, 2000, of which $13.0 million consisted of cash
payments during the quarter. The majority of the restructuring activity occurred
during the third quarter of fiscal 2000 and management expects that remaining
actions, such as office closures or consolidations and lease terminations, will
be completed within a one-year time frame. Employee severance and related costs
totaled $16.7 million, office closures totaled $12.7 million, and equipment
lease buy-outs totaled $647,000. Additionally, the Company recorded a loss of
$116,000 on the disposal of redundant computers and office equipment.
Reduction of Employee Positions. The Company decreased its workforce by a
total of 775 employees across essentially all geographic areas and functions of
its business. The reduction included administrative, professional, and
management positions. Specifically targeted were areas with opportunities for
more efficient processes that would reduce staffing, where operations were
suffering and resulting in losses, or where redundancy among positions existed.
The total workforce reduction was effected through a combination of involuntary
terminations and reorganizing operations to permanently eliminate open positions
resulting from normal employee attrition. The Company did not incur costs
related to the voluntary reductions in workforce and, accordingly, only costs
for involuntarily terminated employees are included in the restructuring charge.
Severance packages were provided to the 688 employees involuntarily terminated.
8
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The following tables summarize the number of employee positions eliminated
in accordance with the restructuring plan during the quarter ended July 31, 2000
by geographic region and function:
<TABLE>
<CAPTION>
GEOGRAPHIC REGION: FUNCTION:
<S> <C> <C> <C>
US................................... 472 Sales and marketing........................ 265
Asia Pacific......................... 143 Consulting and technical support........... 208
EMEA................................. 96 Research and development................... 100
Canada and Latin America............. 64 Training services......................... 80
---- Finance, human resources, legal, and other
Total............................. 775 general and administrative............... 63
==== Information technology..................... 33
Customer support and product delivery...... 26
----
Total.................................. 775
====
</TABLE>
Reduction in Office Space. In addition to the decrease in employee
positions, the restructuring plan provided for reduction in office space and
related overhead expenses. The Company has closed or consolidated several
offices worldwide, including offices in Denver, Colorado, U.S. regional offices,
Europe, and the Asia Pacific region. During the third quarter of fiscal 2000,
the majority of Denver-based personnel were consolidated into the main corporate
headquarters premises, with the remaining moves expected to be completed by
April 2001. Other significant reductions, such as those that occurred in Japan
and certain European countries, were substantially completed by July 31, 2000.
Modification in Training Approach. The Company is closing or downsizing
several underutilized training facilities in order to modify its training
approach. Certain regional facilities, including Denver, Colorado; Chicago,
Illinois; Dallas, Texas; Secaucus, New Jersey; Rutherford, New Jersey, and
Toronto, Canada are being closed, downsized, or significantly reduced. These
closures and reductions are expected to be completed by December 2000.
Costs. The following tables summarize the components of the restructuring
charge, the amounts settled during the quarter, and the remaining accrual as of
July 31, 2000 by overall geographic regions (in thousands):
<TABLE>
<CAPTION>
Geographic Region Impact: Employee Total
Severance & Operating Restructuring Asset Disposal Restructuring
Termination Office Lease Buy- Costs Losses and and Related
Costs(1) Closures(2) Outs(3) Subtotal Other Costs(4) Charges
----------- ----------- ---------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
US ............................ $ 8,447 $ 10,815 $ 597 $ 19,859 $ 81 $ 19,940
EMEA .......................... 4,155 458 -- 4,613 35 4,648
Canada, Asia Pacific, and
Latin America ............... 4,081 1,394 50 5,525 -- 5,525
----------- ----------- ---------- --------- -------- --------
Consolidated .................. 16,683 12,667 647 29,997 116 30,113
Cash payments and non-cash
charges(5) .................. (12,176) (1,860) (223) (14,259) (116) (14,375)
----------- ----------- ---------- --------- -------- --------
Accrual balance,
July 31, 2000 ............... $ 4,507 $ 10,807 $ 424 $ 15,738 $ -- $ 15,738
=========== =========== ========== ========= ======== ========
</TABLE>
Notes:
(1) Employee severance and termination costs are the termination salaries,
benefits, stock compensation, outplacement, counseling services, legal
costs, and other related costs paid to the employees involuntarily
terminated worldwide. All employee terminations occurred during the third
quarter fiscal 2000. A limited number of involuntarily terminated employees
continued to provide transitional services to the Company (generally 30-60
days from the termination date); salary and benefits earned during the
transition period were not included in the restructuring charge.
(2) Office and training facility closure and consolidation costs are the
estimated costs to close specifically identified facilities, costs
associated with obtaining subleases, lease termination costs, and other
related costs, all of which are in accordance with the restructuring plan.
All facility closures or consolidations are expected to be completed within
a one-year period.
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(3) Operating lease buy-outs and related costs are the actual or estimated
costs associated with the early termination of leases for computer
equipment, phones, and automobiles that were no longer necessary for
operations due to the reduced workforce and facilities.
(4) The Company wrote-off certain assets, consisting primarily of leasehold
improvements, computer equipment, and furniture and fixtures, that were
deemed unnecessary due to the reduction in workforce. These assets were
taken out of service and disposed of in the quarter ended July 31, 2000.
(5) The employee severance and termination costs include $1.3 million in
non-cash stock compensation. The asset disposal losses and other costs
consist of asset write-offs resulting in a non-cash charge of $116,000.
(6) COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires disclosure in the
financial statements of the total changes in equity resulting from revenue,
expenses, and gains and losses, including those that do not affect retained
earnings. The Company's comprehensive income or loss is comprised of its net
income or loss, unrealized gains or losses on equity securities available for
sale, and foreign currency translation adjustments. For the third quarter and
nine-month period ended July 31, 1999, the Company had a comprehensive loss of
$35.0 million and $41.1 million, respectively. For the third quarter and
nine-month ended July 31, 2000, the Company had a comprehensive loss of $19.1
million and $18.3 million, respectively.
(7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses hedging instruments to mitigate foreign currency exchange
risk of assets and liabilities denominated in foreign currency. The hedging
instruments used are forward foreign exchange contracts with maturities of
generally three months or less in term. All contracts are entered into with
major financial institutions. Gains and losses on these contracts were included
with foreign currency gains and losses on the transactions being hedged and were
recognized as non-operating income or expense in the period in which the gain or
loss on the underlying transaction is recognized. All gains and losses related
to foreign exchange contracts were included in cash flows from operating
activities in the consolidated statements of cash flows.
At July 31, 2000, the Company had approximately $63.0 million of gross U.S.
dollar equivalent forward foreign exchange contracts outstanding as hedges of
monetary assets and liabilities denominated in foreign currency. Included in
other income were net foreign exchange transaction losses of $1.1 million and
$1.5 million for the third quarter and nine-month period of fiscal 1999,
respectively, a loss of $524,000 for the third quarter of fiscal 2000, and a
gain of $238,000 for the nine-month period of fiscal 2000. The primary reason
for the net gain in the first nine months of fiscal 2000 is related to the
overall strengthening of the U.S. dollar to European currencies.
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 2001. The Company
currently anticipates that the adoption of SFAS No. 133 will not have a material
impact on its consolidated financial statements.
(8) SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," established standards for reporting certain information about
operating segments in annual and interim financial statements. Operating
segments were defined as components of an enterprise for which discrete
financial information is available and is reviewed regularly by the chief
operating decision maker, or decision-making group, to evaluate performance and
make operating decisions. The Company identified its chief operating decision
makers as three key executives - the Chief Executive Officer, Chief Operating
Officer, and Chief Financial Officer. This chief operating decision-making group
reviews the revenue and overall results of operations by geographic regions. The
accounting policies of the operating segments presented below are the same as
those described in the summary of significant accounting policies included in
the Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1999. Total revenue from each country outside of the United States was less than
10 percent of the Company's consolidated revenue. The groupings presented below
represent an aggregation of financial information for countries meeting certain
criteria, including economic characteristics, similar customers, and the same
products, services, and distribution methods.
10
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
---------------------- ----------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES FROM UNAFFILIATED CUSTOMERS:
United States .................................. $ 142,437 $ 173,459 $ 424,988 $ 463,869
Europe, Middle East, and Africa ................ 53,521 47,756 162,497 143,955
Canada, Asia, and Latin America ................ 36,111 39,901 99,112 116,047
--------- --------- --------- ---------
Consolidated ................................... $ 232,069 $ 261,116 $ 686,597 $ 723,871
========= ========= ========= =========
INCOME (LOSS) FROM OPERATIONS:
United States .................................. $ (24,741) $ (8,801) $ (54,994) $ (51,525)
Europe, Middle East, and Africa ................ 7,045 10,675 21,876 20,406
Canada, Asia, and Latin America ................ 2,955 (862) (221) 7,871
Acquired IPR&D and amortization of acquired
intangibles .................................. (27,234) (6,470) (29,725) (18,740)
Restructuring and related charges .............. -- (30,113) -- (30,113)
--------- --------- --------- ---------
Consolidated ................................... $ (41,975) $ (35,571) $ (63,064) $ (72,101)
========= ========= ========= =========
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
Leases. The Company leases its corporate headquarters office buildings that
were constructed on land owned by the Company. The lessor, a wholly-owned
subsidiary of a bank, and a syndication of banks collectively financed $121.2
million in purchase and construction costs through a combination of debt and
equity. The Company guarantees the residual value of each building up to
approximately 85% of its original cost. The Company's lease obligations are
based on a return on the lessor's costs. Management has elected to reduce the
interest rate used to calculate lease expense by collateralizing up to 97% of
the financing arrangements with investments consistent with the Company's
investment policy. The Company may withdraw the funds used as collateral at its
sole discretion provided it is not in default under the lease agreement.
Investments designated as collateral, including a required coverage margin, are
held in separate investment accounts. At July 31, 2000, investments totaling
$123.3 million were designated as collateral for these leases. The lease
agreement requires that the Company remain in compliance with certain
affirmative and negative covenants and representations and warranties, including
certain defined financial covenants. At July 31, 2000, the Company was in
compliance with its covenants.
Litigation. On September 2, 1999, a complaint was filed in the United States
District Court for the District of Colorado against the Company and certain of
its officers and directors. The complaint purports to be brought on behalf of
purchasers of the Company's common stock during the period between January 22,
1998 and December 3, 1998. The complaint alleges that the Company and certain of
its officers and directors violated the Securities Exchange Act of 1934 through
a series of false and misleading statements. The plaintiff seeks to recover
unspecified compensatory damages on behalf of all purchasers of J.D. Edwards'
common stock during the class period. Two additional suits were filed on behalf
of additional plaintiffs alleging the same violations and seeking the same
recovery as the first suit. The three complaints were subsequently consolidated
into one action and a consolidated amended complaint was filed on March 21,
2000. On May 9, 2000, the Company and the individual defendants filed a motion
to dismiss the amended complaint. The court has scheduled a hearing on the
motion to dismiss for October 6, 2000.
The Company believes these complaints are without merit and will vigorously
defend itself and its officers and directors against such complaints.
Nevertheless, the Company is currently unable to determine (i) the ultimate
outcome of the lawsuits, (ii) whether resolution of these matters will have a
material adverse impact on the Company's financial position or results of
operations, or (iii) a reasonable estimate of the amount of loss, if any, which
may result from resolution of these matters.
The Company is involved in certain other disputes and legal actions arising
in the ordinary course of its business. In management's opinion, none of such
other disputes and legal actions are expected to have a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," in
December 1999. SAB No. 101, as amended, provides further interpretive guidance
for public companies on the recognition, presentation, and disclosure of revenue
in financial statements. On June 26, 2000, the SEC issued SAB No. 101B, delaying
the implementation of SAB No. 101 until the Company's fourth quarter of fiscal
2001. Management anticipates that the adoption of SAB No. 101 will not have a
material impact on its current licensing or revenue recognition practices.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT
TO THE PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES, AND
PROJECTIONS ABOUT J.D. EDWARDS' INDUSTRY, MANAGEMENT'S BELIEFS, AND CERTAIN
ASSUMPTIONS MADE BY J.D. EDWARDS' MANAGEMENT. WORDS SUCH AS "ANTICIPATES,"
"EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS OF
SUCH WORDS, AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES, AND ASSUMPTIONS
THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH
RISKS AND UNCERTAINTIES INCLUDE THOSE SET FORTH IN THE COMPANY'S ANNUAL REPORT
ON FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999 UNDER "FACTORS AFFECTING
THE COMPANY'S BUSINESS, OPERATING RESULTS, AND FINANCIAL CONDITION" ON PAGES 15
THROUGH 24. UNLESS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS, OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY
REVIEW THE RISK FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS THE COMPANY
FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION,
PARTICULARLY THE QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT REPORT ON FORM
8-K.
RESULTS OF OPERATIONS
Overview. During the quarter ended July 31, 2000, quarterly license fee
revenue and total revenue grew by 56% and 13%, respectively, compared to the
third quarter of fiscal 1999. The Company's results of operations reflected an
operating loss of $35.6 million compared to an operating loss of $42.0 million
for the third quarter of fiscal 1999. Included in the operating loss for the
third quarter of fiscal 2000 was a restructuring charge of $30.1 million and
amortization of acquired intangibles of $6.5 million. Comparatively, the
operating loss in the fiscal 1999 third quarter included expenses for acquired
in-process research and development (IPR&D) and amortization of acquired
intangibles totaling $27.2 million. Excluding restructuring and
acquisition-related charges, operating income was $1.0 million for the third
quarter of fiscal 2000 compared to an operating loss of $14.7 million for the
same quarter of fiscal 1999. The net loss for the third quarter of fiscal 2000
was $22.6 million, or $0.21 per share, in comparison to a net loss of $33.2
million, or $0.31 per share, for the third quarter last year. Excluding all
restructuring and acquisition-related charges and the gain on sale of equity
investments, net income for the third fiscal 2000 quarter was $2.3 million or
$0.02 per share compared to a net loss of $7.2 million, or $.07 per share, for
the same quarter last year.
For the first nine months of fiscal 2000, the Company had an operating loss
of $72.1 million compared to an operating loss of $63.1 million for the same
period last year. The net loss for the first nine months of fiscal 2000 was
$25.1 million, or $0.23 per share, compared to $39.4 million, or $0.38 per
share, for the same period last year. Reducing the net loss for the nine-month
period ended July 31, 2000 was an $18.9 million gain from the sale of a portion
of the Company's investment in certain marketable securities and a $5.7 million
gain from a product line sale. Excluding the restructuring charge and
acquisition-related charges, the operating loss was $23.2 million for the first
nine months of fiscal 2000 compared to an operating loss of $33.3 million for
the same period in fiscal 1999. Excluding all restructuring and
acquisition-related charges and the gains on equity investments and product line
sales, the net loss during the first nine months of fiscal 2000 was $7.3
million, or $.07 per share, compared to a net loss of $11.7 million, or $.11 per
share for the same period in fiscal 1999. See "Other Data Regarding Results of
Operations" for a reconciliation of the comparable results for the fiscal 2000
and prior year periods.
The Company completed acquisitions of two privately held companies,
Numetrix, Ltd. (Numetrix), and The Premisys Corporation, in fiscal 1999. These
investments further extended the Company's supply chain and customer
relationship management solutions as well as its ability to compete for business
beyond the traditional ERP market. Additionally, in the second quarter of fiscal
2000, the Company completed an acquisition of its longstanding business partner
serving Australia and New Zealand, J.D. Edwards New Zealand, Ltd., expanding its
reach into the Asia Pacific region. All acquisitions were accounted for as
purchases and, accordingly, operating expenses were impacted in fiscal 1999
subsequent to the consummation dates of the acquisitions primarily as a result
of IPR&D charges and amortization of acquired intangible assets, as well as
other operating expenses.
While all of the Company's crucial internal information technology systems
made a trouble-free transition into the Year 2000, the Company incurred
operating losses in fiscal 1999 and the first nine months of fiscal 2000 as a
direct result of the Year 2000 issues slowing revenue growth and causing a shift
in market focus, together with an expansion of the Company's infrastructure,
increased operating expenses, and acquisition-related charges. Revenue growth
was negatively affected as a result of companies purchasing enterprise software
systems prior to 1999 in anticipation of Year 2000 problems together with a
shift in market growth from traditional back office enterprise applications to
front office and supply chain solutions. The Company has strategically enhanced
its front office, supply chain and customer relationship management solutions
through business acquisitions, various strategic relationships and focused
development activities, which are expected to position the Company as a leader
in collaborative commerce, shifting away
12
<PAGE> 13
from its level of dependence on traditional enterprise software solutions for
its future revenue. JD Edwards' OneWorldXe (for extended enterprises) releases
in September and October 2000 will include additional enhancements to the
collaborative supply chain capabilities, such as production scheduling for
discrete manufacturers. Additionally, in the third quarter of fiscal 2000, the
Company implemented a restructuring plan directed towards reducing the Company's
infrastructure and operating expenses. As a part of the restructuring plan, the
Company will realize savings from, among other things, the elimination of 775
employee positions worldwide and a reduction in office space and related
overhead expenses. The Company took a $30.1 million restructuring charge in the
third quarter related to this restructuring plan. For further details on the
restructuring actions, see "Restructuring and Related Charges."
Since fiscal 1999, the Company has formed strategic relationships through
reseller or other types of product rights agreements with organizations whose
products enhance the J.D. Edwards' solutions. This allows the Company to manage
internal development costs, while at the same time offering its customers a
broad spectrum of products and services. Over the past several quarters, the
Company has signed reseller agreements with companies including Ariba, Inc.
(Ariba), Siebel Systems, Inc. (Siebel), Extensity, Inc. (Extensity).
Additionally, the Company has signed agreements with Active Software, Inc.
(Active), a provider of eBusiness integration software products, and Netfish
Technologies, Inc. (Netfish), a process integration provider. The Active and
Netfish agreements represent an investment in their products, currently being
embedded into the OneWorld software. The terms of each third-party agreement
vary; however, as the Company recognizes license revenue under the reseller
provisions in certain of these agreements, a related royalty is charged to cost
of license fees. The investments in Active and Netfish were capitalized as
software development costs in the third quarter of fiscal 2000 and will be
amortized to cost of license fees on a straight-line basis over the estimated
lives of the assets once the functionality is integrated and available for
general release in the J.D. Edwards product suite. As a result, the gross margin
on total license fee revenue has declined and may be reduced further in future
periods. For the three and nine-month periods ended fiscal 2000, a limited
portion of total license fee revenue was generated from sublicensing products
included in these reseller arrangements. There can be no assurance that future
license revenue from these reseller arrangements will increase or will be
sufficient to cover the Company's investments in these technologies.
Management believes that its traditional enterprise software along with its
strategic product enhancements and partner relationships will generate continued
license fee revenue growth followed by services revenue growth in fiscal 2001.
Based on current projections, management expects growth in license fee revenue
and total revenue, as well as an improvement in operating margins, during the
fourth quarter of fiscal 2000 and the fiscal year 2001. However, there can be no
assurance that the Company will experience continued revenue growth or a return
to net profitability. These forward looking 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 forecasted. See "Factors Affecting The Company's Business,
Operating Results, and Financial Condition" on pages 24 through 28 of this Form
10-Q.
As discussed above, the Company has actively addressed its future operating
plans and is taking the necessary steps, including its restructuring plans, to
remain competitive in the future. Management believes these actions taken will
allow the Company to continue building its leadership position in the
collaborative commerce market. However, the uncertainty in the traditional
enterprise application market, challenges of entering new markets, diversity in
global economic conditions, and strong competitive forces could reduce or
eliminate the growth in the Company's revenue. These uncertainties have made
forward-looking projections of future revenue and operating results particularly
challenging. There can be no assurance of the level of revenue growth, if any,
that will be achieved or that the Company's financial condition, results of
operations, and market price of the Company's common stock will not continue to
be adversely affected by the aforementioned factors.
13
<PAGE> 14
Statements of Operations. The following table sets forth, for the periods
indicated, certain items from the Company's consolidated statements of
operations as a percentage of total revenue (except for gross margin data):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JULY 31, JULY 31,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
License fees.................................. 32.3% 44.7% 30.8% 38.9%
Services...................................... 67.7 55.3 69.2 61.1
-------- -------- -------- --------
Total revenue......................... 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of license fees.......................... 3.2 5.9 3.0 5.9
Cost of services.............................. 43.9 36.9 44.8 38.3
Sales and marketing........................... 38.4 36.1 35.2 36.9
General and administrative.................... 9.1 9.7 10.4 10.1
Research and development...................... 11.7 11.0 11.5 12.0
Amortization of acquired software and other
acquired intangibles........................ 1.4 2.5 0.5 2.6
Acquired in-process research and development.. 10.3 -- 3.8 --
Restructuring and other related charges....... -- 11.5 -- 4.2
-------- -------- -------- --------
Total costs and expenses.............. 118.0 113.6 109.2 110.0
Operating loss.................................. (18.0) (13.6) (9.2) (10.0)
Other income, net............................. 1.4 1.4 2.2 5.0
-------- -------- -------- --------
Loss before income taxes........................ (16.6) (12.2) (7.0) (5.0)
Benefit from income taxes..................... (2.3) (3.5) (1.3) (1.5)
-------- -------- -------- --------
Net loss........................................ (14.3)% (8.7)% (5.7)% (3.5)%
======== ======== ======== ========
Gross margin on license fee revenue............. 90.0% 86.8% 90.5% 84.9%
Gross margin on services revenue................ 35.2% 33.3% 35.2% 37.3%
</TABLE>
Total Revenue. Total revenue of $261.1 million increased 13% in the quarter
ended July 31, 2000 compared to $232.1 million for the quarter ended July 31,
1999. The revenue mix between license fees and services was 45% and 55%,
respectively, for the third quarter of fiscal 2000 compared to 32% and 68%,
respectively, for the same quarter last year. For the first nine months of
fiscal 2000, total revenue grew by 5% to $723.9 million from $686.6 million for
the same period in fiscal 1999. The revenue mix between license fees and
services was 39% and 61%, respectively, for the first nine months of fiscal 2000
compared to 31% and 69%, respectively, for the first nine months of fiscal 1999.
The significant change in revenue mix was primarily due to the decline in
service revenue from the slowing license transactions. For the quarter and
nine-month period ended July 31, 2000 compared to the same periods in fiscal
1999, license fees increased 56% and 33%, respectively, offset by a decrease in
services revenue of 8% and 7%, respectively, due to slowing software licensing
activity during fiscal 1999 and the first half of 2000. The growth in license
fee revenue in the third quarter and nine-month period ended July 31, 2000
driven in part by the Company's ability to offer a broad supply chain solution,
including products from its acquisitions and reseller arrangements.
Geographically, the overall revenue growth in the third quarter and first
nine months of fiscal 2000 compared to the same periods last year was led by
sales performance in the United States. The geographic areas defined as the
United States, Europe, Middle East, and Africa (EMEA), and the rest of the world
accounted for 65%, 18%, and 17% of total revenue, respectively, for the quarter
ended July 31, 2000. Comparatively, for the third quarter of fiscal 1999, the
United States, EMEA, and the rest of the world accounted for 61%, 23%, and 16%
of total revenue, respectively. The geographic breakdown of total revenue for
the nine-month periods was 64%, 20%, and 16% for the United States, EMEA, and
the rest of the world, respectively, in fiscal 2000 and 62%, 24%, and 14% for
the United States, EMEA, and the rest of the world, respectively, in fiscal
1999.
The Company has experienced and expects that it will continue to experience
a high degree of revenue seasonality in the future. The Company typically
recognizes a disproportionately greater amount of revenue for any fiscal year in
the fourth quarter and, as a result, an even greater proportion of net income in
the fourth quarter. In the fourth quarters of fiscal 1998 and 1999, the Company
recognized 33% and 27% of total revenue and 37% and 32% of license fee revenue,
respectively. 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
operating results for the fiscal year. There can be no assurance that the
Company will experience continue to generate a disproportionately greater amount
of revenue in its fourth fiscal quarter.
14
<PAGE> 15
License Fees. License fee revenue grew by 56% to $116.7 million for the
quarter ended July 31, 2000 from $74.9 million for the quarter ended July 31,
1999. License fee revenue increased by 33% to $281.7 million for the nine-month
period ended July 31, 2000 from $211.8 million for the nine-month period ended
July 31, 1999. The most significant factors in the improvement in license fee
revenue was an increase in the number of transactions that exceeded $1.0 million
and an increase in average transaction size compared to the same periods in
fiscal 1999. For the three and nine-month periods ended July 31, 2000, the
average license transaction size for all customers increased 73% and 62%, and
for new customers the average license transaction size increased 66% and 46%,
respectively, over the same periods in the prior year. Approximately one-half of
the Company's total license fee revenue was generated from transactions over
$1.0 million during the third quarter of fiscal 2000. Transactions that involved
supply chain solutions, including those that the Company acquired in its June
1999 acquisition of Numetrix, contributed nearly 20% of license fees in the
third quarter of fiscal 2000. License fee revenue growth also benefited from
transactions to resell third-party products from Siebel, Ariba, and Extensity
during the third quarter and nine-month periods of fiscal 2000. The percentage
of revenue from new customers increased to 55% in the third quarter of fiscal
year 2000 compared to 52% in the third quarter of fiscal 1999 while decreasing
to 47% for the nine-month period ended July 31, 2000 compared to 52% for the
nine-month period ended July 31, 1999. The mix of revenue from new and existing
customers varies from quarter to quarter, and future growth is dependent on the
Company's ability to both retain its installed base and add new customers. There
can be no assurance that the Company's license fee growth, results of
operations, and financial condition will not be adversely affected in future
periods as a result of the Company's restructuring plan effected in the third
quarter of fiscal 2000, downturns in global economic conditions, and intensified
competitive pressures or that the Company's operational investments for the
long-term will be successful.
The Company expanded the number of its customers by 11% compared to the end
of the third quarter last year to approximately 5,900 at July 31, 2000.
Customers have increasingly accepted the OneWorld applications available for the
Windows NT and UNIX platforms in addition to the AS/400 platform. In the third
quarter of fiscal 2000, 54% of license activity was from customers using the
Windows NT or UNIX platforms compared to 34% in the third quarter of the
previous year. For the nine-month period ended July 31, 2000, 46% of license
activity was from customers using the Windows NT or UNIX platforms compared to
32% for the nine-month period ended July 31, 1999. The Company expects that an
increasing portion of the Company's future license fee revenue will be generated
from customers using Windows NT or UNIX platforms compared to the previous year.
However, there can be no assurance that the Company will generate increasing
amounts of revenue from non-AS/400 platforms.
Services. Services revenue includes the fees generated by Company personnel
for providing services to customers, including consulting, implementation,
support, and training, as well as fees generated through third parties for
subcontracted services and from referral fees from business partners. Services
revenue declined by 8% to $144.4 million for the quarter ended July 31, 2000
from $157.1 million for the quarter ended July 31, 1999. For the first nine
months of fiscal 2000, service revenue declined 7% to $442.2 million from $474.8
million for the same period last year. The Company is currently experiencing a
strong competitive environment for consulting services given an overall
decreased demand for consulting services. This, together with the decreased
licensing activity during fiscal 1999, has caused consulting services revenue to
decline in the third quarter and nine-month period ended July 31, 2000 compared
to the same periods last year. Training services increased in the third quarter
over the prior year quarter as a result of increased licensing activity in the
second quarter of fiscal 2000 but decreased for the nine-month period in fiscal
2000 compared to the prior year period as a result of reduced licensing activity
in fiscal 1999. Support revenue increased for the quarter and nine-month period
of fiscal 2000 primarily as a result of the Company's growing installed base of
customers and consistent maintenance renewal rates compared to the same periods
last year.
As a percentage of total revenue, services revenue decreased in the third
quarter and nine-month period ended July 31, 2000 compared to the same periods
in the prior year; however, services revenue as a percentage of total revenue
remained higher than license fee revenue. This decline in the services mix was
due to growth in license fee revenue coupled with decreased demand for
consulting services during the third quarter and nine-month period ended July
31, 2000 and the decline in training for first nine months of fiscal 2000. In
any quarter, total services revenue is dependent upon license transactions
closed during the current and preceding quarters, the growth in the Company's
installed base of customers, the amount and size of consulting engagements, the
level of competition from alliance partners for consulting and implementation
work, the number of Company and business partner consultants available to staff
engagements, the number of customers referred to alliance partners for
consulting and training services, the number of customers who have contracted
for support and the amount of the related fees, billing rates for consulting
services and training courses, and the number of customers purchasing training
services.
The Company seeks to provide its customers with high-quality implementation
and training services in the most efficient and effective manner. In some cases
where the Company does not provide the services directly, it subcontracts such
work through third-party implementation support partners. The Company recognizes
revenue for fees billed to customers and incurs costs of revenue for its payment
to the third-party business partners. The subcontracted consulting and training
services revenue from the implementation
15
<PAGE> 16
support partners decreased 30% for the third quarter and 32% for the nine-month
period ended July 31, 2000 for the same periods in fiscal 1999. Direct services
decreased 9% in the third quarter of fiscal 2000 and 1% for the nine-month
period ended July 31, 2000 from the same periods in fiscal 1999. The services
revenue generated through subcontracted work accounted for 41% of the total
consulting and training services revenue for the third quarter and 39% for the
nine-month period ended July 31, 2000, compared to 48% and 49% for the same
periods last year, respectively.
Following the release of OneWorld, the Company began to pursue a strategy of
utilizing such third-party consulting alliance partners and implementation
support partners under a referral arrangement for OneWorld implementations and
related services. The Company has relationships with a number of third-party
implementation support partners that contract directly with customers for the
implementation of the Company's software. In addition, the Company has
consulting alliance partnerships with leading consulting companies to provide
customers with both technology and application implementation support, offering
expertise in business process re-engineering and knowledge in diversified
industries. The Company recognizes revenue from a referral fee received from the
third-party and no related cost of services. The referral program was expanded
during fiscal 1998 and 1999, and several existing alliance partners began
providing significantly more trained personnel to implement OneWorld. The
referral strategy, together with the competitive marketplace for service
engagements, contributed to the overall reduction in the amount of total
consulting services revenue recognized by the Company during the past several
fiscal quarters compared to the previous fiscal year. In future periods,
management intends to continue to pursue business partner relationships under
both subcontract and referral arrangements, as appropriate, to best meet its
customers' needs. To the extent the Company continues these strategies, together
with the total demand for services, consulting revenue as a percentage of total
revenue is likely to continue to be lower as compared to the historical total
revenue mix. However, there can be no assurance that the Company will be
successful in implementing its services strategy.
Revenue Recognition. The Company licenses software under non-cancelable
license agreements and provides related services, including consulting,
training, and support. In October 1997, the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position (SOP) 97-2, "Software
Revenue Recognition," which provides guidance on recognizing revenue on software
transactions and supersedes SOP 91-1. Further guidance was published during 1998
in SOP 98-4, "Software Revenue Recognition," and SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, with Respect to Certain Transactions." SOP
98-9 provides additional guidance regarding software revenue recognition and was
adopted by the Company at the beginning of fiscal 2000. The adoption of this
standard did not have a material impact on its financial condition or results of
operations. The AICPA issued technical questions and answers on financial
accounting and reporting issues related to SOP 97-2 during 1999 and 2000 and may
issue further interpretation related to SOP 97-2 in the future. Additionally,
the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," in December 1999.
SAB No. 101, as amended, provides further interpretive guidance for public
companies on the recognition, presentation, and disclosure of revenue in
financial statements. On June 26, 2000, the SEC issued SAB No. 101B, delaying
the implementation of SAB No. 101 until the Company's fourth quarter of fiscal
2001. Management anticipates that the adoption of SAB No. 101 will not have a
material impact on its current licensing or revenue recognition practices. There
can be no assurance that additional guidance pertaining to revenue recognition
will not result in unexpected modifications to the Company's current revenue
recognition practices and will not materially adversely impact the Company's
future license fee revenue, results of operations, and financial condition.
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. Revenue from these services is recorded
separately from the license fee. The Company recognizes license fee revenue when
a non-cancelable, contingency-free license agreement has been signed, the
product has been delivered, fees from the arrangement are fixed or determinable,
and collection is probable. Revenue on all software license transactions in
which there are undelivered elements other than post-contract customer support
is deferred and recognized once such elements are delivered. Typically, the
Company's software licenses do not include significant post-delivery obligations
to be fulfilled by the Company, and payments are due within a 12-month period
from the date of delivery. Where software license contracts call for payment
terms in excess of 12 months from the date of delivery, revenue is recognized as
payments become due and all other conditions for revenue recognition have been
satisfied. Revenue from consulting, implementation, and training services is
recognized as services are performed. Revenue from agreements for supporting and
providing periodic upgrades to the licensed software is recorded as unearned
revenue and is recognized ratably over the support service period. Such unearned
revenue includes a portion of the related arrangement fee equal to the fair
value of any bundled support services. The Company does not require collateral
for its receivables, and reserves are maintained for potential losses.
Cost of License Fees. Cost of license fees includes business partner
commissions, royalties, amortization of internally developed capitalized
software (including payments to third parties related to internal projects),
documentation, and software delivery expenses. The total dollar amount for the
cost of license fees increased 106% to $15.5 million for the quarter ended July
31, 2000 from $7.5 million for the same period last year. The total dollar
amount for the cost of license fees increased 110% to $42.5 million for the
nine-month period ended July 31, 2000 from $20.2 million for the same period
last year. The increase for the quarter and nine-month
16
<PAGE> 17
period ended July 31, 2000 was primarily due to reseller royalties on software
associated with various transactions with Siebel and Ariba, in addition to
royalties for certain products embedded in OneWorld. Royalties may increase in
future quarters as a result of the sublicensing of products from third parties
and gross margins could be reduced.
Capitalized OneWorld costs were fully amortized during the first quarter of
fiscal 2000. Amortization of the capitalized OneWorld costs was $1.0 million for
the first nine months of fiscal 2000 and $1.2 million and $3.6 million,
respectively, for the third quarter and nine-month period ended July 31, 1999.
The Company capitalized additional software development costs in the amount of
$8.6 million and $17.2 million for the third quarter ended July 31, 2000 and the
first nine months of fiscal 2000, respectively. These costs related to major
investments in third party products that will be embedded into OneWorld new
functionality, and other major product enhancements. Amortization of the
majority of these capitalized costs is expected to begin in the fourth quarter
of fiscal 2000 and will continue over the estimated useful lives of the
products, which are generally three years. Additional development projects are
expected to be capitalized in future periods given certain product development
plans of the Company.
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 capitalized software development costs and the portion of the
Company's software products that are subject to royalty payments. The gross
margins in the third quarter and first nine months of fiscal 2000 were
significantly impacted primarily by the increase in reseller royalty expense
from sublicensed products. The gross margin on license fee revenue decreased to
87% and 85% for the third quarter and nine-month period ended July 31, 2000 from
90% and 91% for the same periods last year as a result of this increase in
costs. Due to the arrangements with Siebel, Ariba, and other third parties,
reseller royalties and capitalized software amortization are expected to
increase and it is expected that the gross margin on license fee revenue will
decline compared to prior periods.
Cost of Services. Cost of services includes the personnel and related
overhead costs for providing services to customers, including consulting,
implementation, support, and training, as well as fees paid to third parties for
subcontracted services. Cost of services decreased 5% to $96.3 million for the
quarter ended July 31, 2000 from $101.8 million for the quarter ended July 31,
1999. Cost of services decreased 10% to $277.0 million for the nine-month period
ended July 31, 2000 from $307.8 million for the nine-month period ended July 31,
1999. The decrease was primarily due to a smaller portion of services revenue
being generated through subcontracted work, the corresponding decrease in
business partner costs, and a change in the mix of type of services revenue
between consulting, support, and training. The gross margin on services revenue
decreased to 33% for the third quarter of fiscal 2000 compared to 35% for the
same period last year primarily due to the decline in consulting and
implementation revenue, decreased productivity, and an increase in average
salaries for services employees primarily due to the competitive market for
personnel. Gross margins improved for the nine-month period ended July 31, 2000
to 37% compared to 35% for the same period last year primarily due to a decrease
in costs associated with subcontracted services work in relation to the total
services revenue generated through business partners. Management anticipates
that the gross margin on services revenue for the remainder of fiscal 2000 may
increase by the as a smaller portion of services revenue is generated through
subcontracted work, which will decrease the related costs. The extent to which
the Company utilizes third parties to contract directly with the Company's
customers for OneWorld implementations and related services will affect gross
margin on services revenue in future periods. However, there can be no assurance
that the Company will be successful in shifting a significant portion of its
subcontracted services business to the referral arrangement.
Sales and Marketing. Sales and marketing expense consists of personnel,
commissions, and related overhead costs for the sales and marketing activities,
together with advertising and promotion costs. Sales and marketing expense
increased 6% to $94.2 million for the quarter ended July 31, 2000 from $89.2
million for the quarter ended July 31, 1999, representing 36% and 38% of total
revenue, respectively. Sales and marketing expense increased 10% to $267.3
million for the nine-month period ended July 31, 2000 from $242.0 million for
the same period in fiscal 1999, representing 37% and 35% of total revenue,
respectively. The increase is primarily a result of commissions associated with
the growth in software license fee revenue. In addition, the Company experienced
increased promotional costs and higher average costs per employee in fiscal 2000
due to the competitive market for personnel.
General and Administrative. General and administrative expense includes
personnel and related overhead costs for the support and administrative
functions of the Company. General and administrative expense increased 19% to
$25.3 million for the quarter ended July 31, 2000 from $21.2 million for the
quarter ended July 31, 1999, representing 10% and 9% of total revenue for both
periods, respectively. General and administrative expense increased 3% to $73.5
million for the nine-month period ended July 31, 2000 from $71.1 million for the
nine-month period ended July 31, 1999, representing 10% of total revenue for
both periods. The total dollar amount of expense was slightly higher in the
periods ended July 31, 2000 compared to the same periods last year primarily due
to an increase in cost per employee, office occupancy, telephone, legal costs,
and contract professional services. General and administrative expenses as a
percentage of total revenue remained flat primarily due to increased
efficiencies within support functions to manage the overall growth in the
Company's operations.
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<PAGE> 18
Research and Development. Research and development expense includes
personnel and related overhead costs for product development, enhancements,
upgrades, quality assurance, documentation, translation, and testing. Research
and development expense of $28.8 million for the quarter ended July 31, 2000
increased by 6% compared to $27.1 million for the quarter ended July 31, 1999,
representing 11% and 12% of total revenue, respectively. Research and
development expense of $86.9 million for the nine-month period ended July 31,
2000 increased by 10% from $78.8 million for the nine-month period ended July
31, 1999, representing 12% of total revenue for both periods. The quarterly
increase was primarily a result of additional personnel costs and contracted
third-party service expense, offset by costs capitalized during the fiscal 2000
period. The increase in the first nine months of fiscal 2000 as compared to the
first nine months of fiscal 1999 was due to an increase in headcount and higher
salaries due to the competitive market, together with increases in related
facilities and computer systems costs necessary to meet product development
objectives, offset by the capitalization of software development costs.
For the third quarter and the first nine months of fiscal 2000, development
resources devoted to major enhancements and new products associated with the
Company's OneWorld application suites and integration of those applications with
third-party and acquired products resulted in the capitalization of $3.0 million
and $6.5 million, respectively, associated with internal costs and $5.6 million
and $10.7 million, respectively, of third party payments primarily to Active and
Netfish for software products that will be embedded into OneWorld. OneWorldXe is
expected to be released in September 2000 and will provide the next generation
of collaborative commerce (C-commerce) solutions. OneWorldXe, the Company's
extended enterprise software, enables customers to extend the reach of
applications well beyond the four walls of their enterprise and to collaborate
with customers, suppliers, and partners in the Internet economy. The Company
anticipates that costs of certain other development projects will also be
capitalized in the future and that research and development expenses will
increase in subsequent periods due to the addition of essential personnel and
salary adjustments resulting from the competitive market for personnel. The
Company is continuing its ongoing internal product enhancements in e-business
and other areas, as well as its integration of modules such as sales force
automation, advanced planning and scheduling, and e-procurement. Certain of
these projects utilize third-party development alliances, such as Siebel, Ariba,
Extensity, Active, and Netfish.
Amortization of Acquired Software and Other Intangibles. Amortization of
acquired intangibles resulting from the acquisition of the Company's
longstanding business partner serving Australia and New Zealand began in the
second quarter of fiscal 2000 and amortization related to the fiscal 1999
acquisitions of Numetrix and The Premisys Corporation continued for the quarter
ended July 31, 2000. Total amortization amounts related to the software,
in-place workforce, customer base, and goodwill were $2.9 million, $867,000,
$1.5 million, and $1.2 million, respectively, for the third quarter of fiscal
2000, and $8.9 million, $2.3 million, $4.1 million, and $3.4 million,
respectively, for the nine-month period ended July 31, 2000.
The Numetrix purchase agreement included provisions under which the Company
is able to make claims upon funds held in escrow related to certain liabilities,
anticipated liabilities, and other representations and warranties made in the
purchase agreement. In June 2000, the Company notified the escrow agent of such
a claim. The amount that may be received from the claim, if any, cannot
currently be reasonably estimated.
Acquired In-Process Research and Development. IPR&D expenses were in
connection with the acquisitions of Numetrix in June 1999 and The Premisys
Corporation in February 1999. IPR&D consists of those products that are not yet
proven to be technologically feasible but have been developed to a point where
there is value associated with them in relation to potential future revenue.
Because technological feasibility was not yet proven and no alternative future
uses were believed to exist for the in-process technologies, the assigned values
were expensed immediately upon the closing dates of the acquisitions. Aggregate
IPR&D expenses recorded in the second and third quarters of fiscal 1999 were
$2.1 million and $24.0 million, respectively. No such charges have been incurred
in fiscal 2000 related to the acquisitions.
The most significant in-process technology acquired was being developed by
Numetrix prior to the acquisition to offer an operational-level, planning and
scheduling optimization solution targeted at discrete manufacturing industries.
As of the valuation date, the beta release was scheduled for September 1999, and
the development was estimated to be almost 90% complete. The beta version was
released in July 2000, delayed from the original target date in order to modify
the product specifications for additional functionality and due to concerns
surrounding the release of the product around Year 2000. The general release is
scheduled for October 2000. A new demand-planning module was being designed by
Numetrix to enhance enterprise-wide collaborative forecasting and to address
forecast reconciliation. As of the acquisition date, this module was less than
10% complete; the general release date is now scheduled for October 2000.
Another in-process technology of Numetrix, a collaborative enabler, is designed
to efficiently interface the messaging architecture among applications to allow
real-time, alert-driven collaboration. As of the acquisition date, the
technology was estimated to be 13% complete. The technology was combined with
the J.D. Edwards Active Supply Chain development projects, and this module is
expected to be released in January 2001. As of the date of acquisition of The
Premisys Corporation, major enhancements of the CustomWorks product were
underway. Additionally, The Premisys Corporation and J.D. Edwards
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<PAGE> 19
began developing an interface between CustomWorks and OneWorld under a Product
Alliances Partner Agreement entered into by the two companies in August 1997.
Technology acquired in the Company's purchase of The Premisys Corporation is now
functionally integrated with OneWorld and was released in August 2000. If the
Company is unable to complete the in-process development projects within the
expected schedule, future revenue and earnings could be materially adversely
impacted as management believes supply chain solutions and customer relationship
management such as those offered by Numetrix and The Premisys Corporation are
integral to its ability to remain competitive in the extended enterprise
application market.
Restructuring and Related Charges. In May 2000, the Board of Directors
approved a global restructuring plan to reduce the Company's overall operating
expenses and strengthen both its competitive and financial positions. Overall
expense reductions were necessary both to lower the Company's existing cost
structure and to reallocate resources to pursue its future operating strategies.
Management effected the restructuring plan during the third quarter of fiscal
2000 by eliminating certain employee positions, reducing office space and
related overhead expenses, and modifying the Company's approach for providing
training alternatives for customers. The restructuring plan was precipitated by
declining gross margins and revenue per employee over the past several fiscal
quarters as the Company's headcount and operating expenses grew at a faster rate
than revenue. As discussed in prior periods, the Company has also been incurring
operating losses in certain geographic areas.
Restructuring and related charges primarily included severance related
costs for the involuntarily terminated employees, operating lease termination
payments, and office closure costs. The Company recorded a $30.1 million
restructuring charge during the third quarter ended July 31, 2000, of which
$13.0 million consisted of cash payments during the quarter. The majority of the
restructuring activity occurred during the third quarter of fiscal 2000 and
management expects that remaining actions, such as office closures or
consolidations and lease terminations, will be completed within a one-year time
frame. Employee severance and related costs totaled $16.7 million, office
closures totaled $12.7 million, and equipment lease buy-outs totaled $647,000.
Additionally, the Company recorded a loss of $116,000 on the disposal of
redundant computers and office equipment.
The Company decreased its workforce by a total of 775 employees across
essentially all geographic areas and functions of its business. The reduction
included administrative, professional, and management positions. Specifically
targeted were areas with opportunities for more efficient processes that would
reduce staffing, where operations were suffering and resulting in losses, or
where redundancy among positions existed. The total workforce reduction was
effected through a combination of involuntary terminations and reorganizing
operations to permanently eliminate open positions resulting from normal
employee attrition. The Company did not incur costs related to the voluntary
reductions in workforce and, accordingly, only costs for involuntarily
terminated employees are included in the restructuring charge. Severance
packages were provided to the 688 employees involuntarily terminated.
The Company has occupied several leased buildings in Denver, Colorado for
its corporate headquarters, a significant portion of its development
organization, and other operations. Under the restructuring plan, the majority
of Denver personnel occupying those leased buildings were consolidated onto the
main campus during the third quarter of fiscal 2000. The remaining
consolidations are expected to be completed by April 2001. Certain other
regional offices are also being closed or consolidated including significant
reductions in Japan and certain European offices. Future savings are anticipated
to result from reduced rent and other operating expenses. The Company is
subleasing the off-campus space where possible to offset its remaining financial
obligations. Ongoing savings are expected from the reduction in rent and related
operating expense.
The Company has incurred significant expense due to underutilized training
facilities. Under the restructuring plan, certain regional facilities, including
those in Denver, Colorado; Chicago, Illinois; Dallas, Texas; Secaucus, New
Jersey; Rutherford, New Jersey, and Toronto, Canada are being closed or
downsized. These training facility closures and downsizing actions are expected
to be completed by December 2000. Ongoing savings will result from the decrease
in office and equipment lease expense and reduced training personnel.
The Company anticipates that up to $4.0 million of other related charges
will be incurred during the fourth quarter of fiscal 2000 primarily for
additional asset write-offs and office consolidation costs. The Company expects
annual savings from these organization changes of approximately $45.0 to $50.0
million as a result of lower payroll and office costs. Management believes that
the restructuring will better allow the Company to continue building its
leadership position in the collaborative commerce market and provide a
reallocation of resources to invest in areas critical to its future success.
There can be no assurance of the Company's future level of operating expenses or
of other factors that may impact future operating results.
Other Income (Expense). Other income and expenses include interest income
earned on cash, cash equivalents and investments, interest expense, foreign
currency gains and losses, and other non-operating income and expenses. During
the first nine months of fiscal 2000, other income included an $18.9 million
gain on the sale of an investment in marketable securities and a $5.7 million
gain
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<PAGE> 20
from the sale of product line to BuildNet. Interest income decreased to $3.7
million and $11.3 million for the third quarter and nine-month period ended July
31, 2000 from $4.5 million and $15.4 million for the same periods in fiscal
1999, primarily due to lower cash and investment balances throughout the first
nine months of fiscal 2000. Included in other income and expense were net
foreign exchange transaction losses of $1.1 million and $1.5 million for the
third quarter and nine-month period of fiscal 1999, respectively, a loss of
$524,000 for the third quarter of fiscal 2000, and a gain of $238,000 for the
nine-month period of fiscal 2000. The primary reason for the overall gain in the
first nine months of fiscal 2000 is related to the overall strengthening of the
U.S. dollar to European currencies.
The Company uses hedging instruments to help offset the effects of exchange
rate changes on cash exposures from assets and liabilities denominated in
foreign currency. The hedging instruments used are forward foreign exchange
contracts with maturities of generally three months or less in term. All
contracts are entered into with major financial institutions. Gains and losses
on these contracts are included with foreign currency gains and losses on the
transactions being hedged and are recognized as non-operating income or expense
in the period in which the gain or loss on the underlying transaction is
recognized. All gains and losses related to foreign exchange contracts are
included in cash flows from operating activities in the consolidated statements
of cash flows.
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.
In March 2000, the Company made a $10.0 million strategic minority equity
investment in Tradex, a privately held internet commerce company. Upon Ariba's
acquisition of Tradex, the Company's investment converted into 511,000 shares of
Ariba common stock. During July 2000, the Company sold 10,000 shares of Ariba
stock resulting in a gross realized gain of $1.0 million. During the nine months
ended July 31, 2000, the Company realized a gain of $18.9 million from the sale
of a total of 385,000 shares of Ariba common stock. The fair market value of the
remaining investment at July 31, 2000 was $14.6 million and the gross unrealized
gain was $12.1 million. In December 1999, the Company also invested in
Extensity, a time and expense solutions start up company that completed an
initial public offering of its common stock in January 2000. The fair market
value of this investment at July 31, 2000 was $8.1 million and the gross
unrealized gain was $3.6 million. Both the remaining Ariba common stock and
Extensity common stock are included in short-term marketable securities to
reflect management's intention to sell the shares within the next 12 months.
Gross unrealized gains were included as a component of accumulated other
comprehensive income as of July 31, 2000. Additionally, the Company has a $5.9
million note receivable from BuildNet related to the sale of the Company's
WorldSoftware homebuilder code and customer base. The note is convertible into
equity at the Company's option upon the closing of an initial public offering of
BuildNet common stock. The Company may also invest in other companies in the
future. Investments in technology enterprises, and companies with recent initial
public offerings in particular, are highly volatile. Future results of
operations could be adversely affected should the values of these investments
decline below the amounts invested by the Company. There is no assurance that
the unrealized gains related to the Extensity and Ariba investments will be
realized or that other investments and possible future investments that the
Company may make will be profitable.
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<PAGE> 21
Other Data Regarding Results of Operations. The impact of
acquisition-related charges, restructuring and related charges, and significant
gains on the net loss and net loss per share in fiscal 1999 and 2000 are
presented below. This supplemental information does not reflect the Company's
results of operations in accordance with generally accepted accounting
principles (GAAP), and it is not intended to be superior to or more meaningful
than other information presented herein that was prepared in accordance with
GAAP.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------------ ------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(in thousands, (in thousands,
except per share data) except per share data)
Net loss, as reported ................... $ (33,222) $ (22,603) $ (39,354) $ (25,088)
Adjustments to net loss, net of tax:
Acquisition-related charges ........... 26,037 4,076 27,607 11,806
Gain on sale of product line .......... -- -- -- (3,582)
Gain on sale of equity investments .... -- (641) -- (11,904)
Restructuring and related charges ..... -- 21,425 -- 21,425
---------- ---------- ---------- ----------
Adjusted net income (loss) .............. $ (7,185) $ 2,257 $ (11,747) $ (7,343)
========== ========== ========== ==========
Diluted EPS, as reported ................ $ (0.31) $ (0.21) $ (0.38) $ (0.23)
Adjustments to net loss, net of tax:
Acquisition-related charges ........... 0.24 0.04 0.27 0.10
Gain on sale of product line .......... -- -- -- (0.03)
Gain on sale of equity investments .... -- -- -- (0.11)
Restructuring and related charges ..... -- 0.19 -- 0.20
---------- ---------- ---------- ----------
Adjusted diluted EPS .................... $ (0.07) $ 0.02 $ (0.11) $ (0.07)
========== ========== ========== ==========
</TABLE>
Acquisition-related charges consisted of $6.5 million in amortization of
acquired intangibles less $2.4 million in related benefit from income tax for
the three months ended July 31, 2000. For the first nine months of fiscal 2000,
amortization of acquired intangibles was $18.7 million less the income tax
benefit of $6.9 million. For the three months ended July 31, 1999 and the first
nine months of fiscal 1999, amortization of acquired intangibles was $3.2
million and $3.6 million, in-process research and development was $24.0 million
and $26.1 million, and the income tax benefit was $1.2 million and $2.1 million,
resulting in the acquisition-related charges, net of tax, shown above.
The restructuring charge consisted of a $30.1 million charge in the third
quarter of fiscal 2000, and the related benefit from income tax was $8.7
million. Other items consisted of a $1.0 million gross gain resulting from the
sale of equity investments less $376,000 in income taxes for the third quarter
of fiscal 2000. For the nine-month period ended July 31, 2000, other items
consisted of a $3.5 million net gain of the sale of the Company's World Software
homebuilder code and customer base to BuildNet, Inc., in the first quarter of
fiscal 2000, and the $11.9 million net gain resulting from the sale of equity
investments during the second and third quarters of fiscal 2000.
Provision for (benefit from) income taxes. The Company's effective income
tax rate was 29% for the third quarter of fiscal 2000 compared to 14% for the
third quarter of fiscal 1999. For the nine-month period ended July 31, 2000, the
Company's effective income tax rate was 30% compared to 19% for the same period
in fiscal 1999. This change was due primarily to differences in tax rates in
various countries where the restructuring costs were incurred in the nine-month
period ended July 31, 2000 and certain acquisition-related charges that reduced
the overall income tax benefit for the nine-month period ended July 31, 1999.
Excluding the effect of the restructuring charges and acquisition-related
permanent differences, the rate for the third quarters and nine-month periods of
both fiscal 2000 and fiscal 1999 was 37%.
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<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2000, the Company's principal sources of liquidity consisted
of $112.3 million of cash and cash equivalents, $208.3 million of short-term and
long-term investments in marketable securities, and a $100.0 million unsecured,
revolving line of credit. No amounts were outstanding under the line of credit
as of July 31, 2000. The Company had working capital of $113.2 million at July
31, 2000 and a current ratio of 1.3 to 1.0. Included in determining such amounts
were short-term unearned revenue and customer deposits of $149.6 million. The
majority of short-term unearned revenue represents annual support payments
billed to customers, which are recognized ratably as revenue over the support
service period. Without the short-term unearned revenue and customer deposits,
working capital would have been $262.8 million and its current ratio would have
been 2.1 to 1.0.
In May and June 2000, the Company liquidated a portion of its portfolio of
marketable securities prior to their maturity dates in order to settle certain
equity contracts. As a result, the Company's entire held to maturity portfolio
was reclassified as available for sale as of July 31, 2000. Previously,
investments in marketable securities consisting of U.S., state, and municipal
bonds, as well as domestic corporate bonds, were classified as held-to-maturity
and were carried at amortized cost. Beginning in the third quarter of fiscal
2000, the Company reflected all investments in marketable securities at fair
value, and unrealized gains or losses were included, net of tax, as a component
of accumulated other comprehensive income. The gross aggregate unrealized loss
on the reclassified marketable securities was $1.1 million as of July 31, 2000.
Also included in short-term investments in marketable securities were the
Company's equity investments in shares of the common stock of Ariba and
Extensity. The investments were carried at their fair market value as determined
by the quoted market price as of July 31, 2000. Gross unrealized gains of $12.1
million and $3.6 million for Ariba and Extensity, respectively, were included as
a component of accumulated other comprehensive income, net of tax. The
investments were included in short-term marketable securities to reflect
management's intention to sell the shares within the next 12 months.
The Company calculates accounts receivable days sales outstanding (DSO) on a
"gross" basis by dividing the accounts receivable balance at the end of the
quarter by revenue recognized for the quarter multiplied by 90 days. The impact
of deferred revenue is not included in the computation. Calculated as such, DSO
decreased to 89 days at July 31, 2000 compared to 97 days at July 31, 1999. 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.
The Company used $31.3 million in cash for operating activities during the
nine-month period ended July 31, 2000 compared to $24.5 million during the
nine-month period ended July 31, 1999. In both periods, the use of cash was
primarily due to the Company's operating losses, including $13.0 for
restructuring costs, and contractual payments for third party software licenses
or prepaid royalties made in accordance with certain license or reseller
agreements.
The Company generated $77.5 million in cash from investing activities for
the nine-month period ended July 31, 2000 compared to using $106.6 million for
the nine-month period ended July 31, 1999. The increase from the prior year was
primarily the result of the liquidation of a portion of the Company's portfolio
of marketable securities together with the proceeds from the sale of a total of
385,000 shares of Ariba common stock. This was partially offset by the
investment in capitalized software development during the nine-month period
ended July 31, 2000 in the amount of $17.1 million.
The Company used $44.1 million in cash for financing activities during the
nine-month period ended July 31, 2000 compared to generating $30.0 million
during the nine-month period ended July 31, 1999. The majority of the cash used
during the first nine months of fiscal 2000 is due to the repurchase of 2.3
million shares of the Company's common stock for $84.1 million as a result of
the settlement of equity repurchase contracts in May and June 2000. This use is
offset by $40.0 million of proceeds from exercises of common stock options and
the Employee Stock Purchase Plan (ESPP) for the nine-month period ended July 31,
2000. The Company issued a total of 5.2 million shares of common stock during
the first nine months of fiscal 2000, including the re-issuance of approximately
524,000 of the repurchased shares for the ESPP. The Company did not have other
significant financing activities for the first nine months of fiscal 2000 or
during the same period last year.
The Company has used a portion of its cash and investments balances to
acquire other companies. In March 2000, a net cash payment of $10.2 million was
made in the acquisition of the Company's business partner serving Australia and
New Zealand. The Company acquired The Premisys Corporation in February 1999 for
a net cash payment of $4.3 million and shares of J.D. Edwards' common stock
valued at $3.2 million. Net cash payments totaled $93.2 million for the Numetrix
acquisition during the third quarter of fiscal 1999. The Numetrix purchase
agreement included provisions under which the Company is able to make claims
upon funds held in escrow related to certain liabilities, anticipated
liabilities, and other representations for a one-year period. In June 2000, the
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Company notified the escrow agent of such claims. The amount that may be
received from the claim, if any, cannot currently be reasonably estimated.
During the period from December 1999 to March 2000, the Company entered
into equity instrument contracts in accordance with a share repurchase plan
authorized by the Company's Board of Directors to repurchase up to eight million
shares of the Company's common stock. At July 31, 2000, the Company held forward
contracts requiring the purchase at a future date of 2.9 million shares of its
common stock at an average cost of $31.43 per share. Forward purchase contracts
require a full physical settlement and the aggregate redemption cost of $93.7
million is included in the accompanying balance sheet in temporary equity with a
corresponding decrease in additional paid-in capital. The equity instruments are
exercisable by the Company only at their dates of expiration, which range from
September 2000 to September 2001. However, the counter-party has the right to
require an early settlement based on the market price of J.D. Edwards' common
stock as stipulated in the contracts. Additionally, a decline in the Company's
common stock price below the stipulated price in the contracts may trigger the
requirement to collateralize the outstanding exposure.
The Company leases its corporate headquarters office buildings that were
constructed on land owned by the Company. The lessor, a wholly-owned subsidiary
of a bank, and a syndication of banks collectively financed $121.2 million in
purchase and construction costs through a combination of debt and equity. The
Company guarantees the residual value of each building up to approximately 85%
of its original cost. The Company's lease obligations are based on a return on
the lessor's costs. Management has elected to reduce the interest rate used to
calculate lease expense by collateralizing up to 97% of the financing
arrangements with investments consistent with the Company's investment policy.
The Company may withdraw the funds used as collateral at its sole discretion
provided it is not in default under the lease agreement. Investments designated
as collateral, including a required coverage margin, are held in separate
investment accounts. At July 31, 2000, investments totaling $123.3 million were
designated as collateral for these leases. The lease agreement requires that the
Company remain in compliance with certain affirmative and negative covenants and
representations and warranties, including certain defined financial covenants.
At July 31, 2000, the Company was in compliance with its covenants.
Management believes its cash and cash equivalents balance, short-term and
long-term investments, funds generated from operations, and amounts available
under existing credit facilities will be sufficient to meet its cash needs for
at least the next 12 months. The Company may use a portion of its short-term and
long-term investments to make strategic investments in other companies, acquire
businesses, products, or technologies that are complementary to those of the
Company or to settle equity contracts to acquire common stock in the future.
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.
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. 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. SFAS No. 133 will be effective for the
Company's first quarter of fiscal 2001. The Company currently anticipates that
the adoption of SFAS No. 133 will not have a material impact on its consolidated
financial statements.
Additionally, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," in December 1999. SAB No. 101, as amended provides further
interpretive guidance for public companies on the recognition, presentation, and
disclosure of revenue in financial statements. On June 26, 2000, the SEC issued
SAB No. 101B, delaying the implementation of SAB No. 101 until the Company's
fourth quarter of fiscal 2001. Management anticipates that the adoption of SAB
No. 101 will not have a material impact on its current licensing or revenue
recognition practices.
On March 16, 2000, the Emerging Issues Task Force (EITF) reached a consensus
on the application of EITF Issue No. 96-13, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" with
Issue No. 00-7, "Equity Derivative Transactions that Require Net Cash Settlement
if Certain Events Outside the Control of the Issuer Occur" (EITF 00-7). EITF
00-7 required that equity derivatives that contain any provision that could
require net cash settlement (except upon the complete liquidation of the
Company) must be marked to fair value through earnings. On July 20, 2000, the
EITF reached a tentative conclusion on Issue No. 00-19, "Determination of
Whether Share Settlement is Within the Control of the Issuer for Purposes of
Applying Issue No. 96-13, `Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock'" (EITF 00-19).
EITF 00-19 addresses questions that have arisen due to the application of EITF
00-7 and sets forth a tentative
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model that could be used to determine whether equity derivative contracts could
be recorded as equity. Under the tentative transition provisions of EITF 00-19,
all contracts existing prior to the date of the as yet unissued final consensus
are grandfathered until June 30, 2001 with cumulative catch-up adjustment to be
recorded at that time. The Company currently has outstanding equity derivative
contracts that may remain unsettled at June 30, 2001 and, therefore, may require
a cumulative catch-up adjustment at that time. The Company is currently unable
to determine the amount of the cumulative catch-up adjustment, if any. In
addition, until a final consensus is reached on EITF 00-19, the Company is
unable to determine the impact of EITF's 00-7 and 00-19 on its future equity
derivative contracting activities.
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS, AND FINANCIAL
CONDITION
IN ADDITION TO OTHER INFORMATION CONTAINED IN THIS QUARTERLY REPORT ON FORM
10-Q, THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING
THE COMPANY AND ITS BUSINESS BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT
IMPACT OR MAY HAVE A SIGNIFICANT IMPACT IN THE FUTURE ON THE COMPANY'S BUSINESS,
OPERATING RESULTS, OR FINANCIAL CONDITIONS.
Our Quarterly Financial Results Are Subject to Significant Fluctuations that
Could Adversely Impact the Price of Our Stock. Our revenues and operating
results are difficult to predict and have varied widely in the past. We expect
they will continue to vary significantly from quarter to quarter due to a number
of factors, including the following:
o demand for our software products and services
o the size and timing of our license transactions
o the level of product and price competition that we encounter
o the length of our sales cycle
o the timing of our new product introductions and enhancements and those of
our competitors
o market acceptance of our products
o changes in our pricing policies and those of our competitors
o announcements of new hardware platforms that may delay customer's purchases
o variations in the length of our product implementation process
o the mix of products and services revenue
o the mix of distribution channels through which we license our software
o the mix of international and domestic revenue
o changes in our sales incentives
o changes in the renewal rate of our support agreements
o the life cycles of our products
o software defects and other product quality problems
o the expansion of our international operations
o the general economic and political conditions
o the budgeting cycles of our customers
Our software products typically are shipped when we receive orders.
Consequently, license backlog in any quarter generally represents only a small
portion of that quarter's revenue. As a result, license fee revenue is difficult
to forecast due to its dependence on orders received and shipped in that
quarter. We also recognize a substantial amount of our revenue in the last month
of each quarter and increasingly in the last week of the quarter. Because many
of our operating expenses are relatively fixed, a shortfall in anticipated
revenue or delay in recognizing revenue could cause our operating results to
vary significantly from quarter to quarter and could result in future operating
losses. The timing of large individual transactions is also difficult for us to
predict. In some cases, transactions have occurred in quarters subsequent to
those anticipated by us. To the extent that one or more such transactions are
lost or occur later than we expected, operating results could be materially
impacted. If our revenues fall below our expectations in any particular quarter,
our business, operating results, and financial condition could be materially
adversely affected.
We continue to experience significant seasonality with respect to software
license revenues. We recognize a disproportionately greater amount of revenue
for any fiscal year in our fourth quarter and an even greater proportion of net
income in the fourth quarter.
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As a result of this and our relatively fixed operating expenses, our operating
margins tend to be significantly higher in the fourth fiscal quarter than other
quarters. We believe this seasonality is primarily the result of the efforts of
our direct sales force to meet or exceed fiscal year-end quotas and the tendency
of certain of our customers to finalize license contracts at or near our fiscal
year end. Because revenue, operating margins, and net income are greater in the
fourth quarter, any shortfall in revenue, particularly license fee revenue in
the fourth quarter, would have a disproportionately large adverse effect on our
operating results for the fiscal year. Additionally, our revenue and net income
in the first quarter is historically lower than in the preceding fourth quarter.
Our first fiscal quarter revenue also slows during the holiday season in
November and December.
As a result of the unpredictability of our revenue cycle and uncertainty in
the enterprise software market attributed to many factors, including global
economic conditions and strong competitive forces, we continue to have reduced
visibility of future revenue and operating results. Due to the foregoing
factors, we believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance. It is likely that in some
future quarter, our operating results may again be below expectations of public
market analysts or investors. In this event, the price of our common stock may
fall, and an investment in J.D. Edwards' common stock may be materially
impacted.
Our Recent Expansion into New Business Areas and Partnerships Is Uncertain
and May Not Be Successful. We have recently expanded our technology into a
number of new business areas to foster our long-term growth, including the areas
of electronic commerce, on-line business services, and Internet computing. In
addition, we entered into and invested in a number of strategic partnership
relationships in these same areas, including those with Siebel, Ariba,
Microstrategy, Inc., Extensity, Active, and Netfish. These areas are relatively
new to both our product development and sales and marketing personnel. There can
be no assurance that we will compete effectively or generate significant
revenues in these new areas or that we will be able to provide a product
offering that will satisfy new customer demands in these areas. The success of
Internet computing and, in particular, our current Internet product offering is
difficult to predict because Internet computing represents technology that is
relatively new to the entire computer industry. Additionally, if we are unable
to effectively provide a product offering or sell the products we have developed
through or with our partners, we could lose a significant amount of the
investments we have made in such strategic partnerships. If our expansion into
these new business areas or our relationships with our partners is not
successful, our business, revenues, and stock price would be materially
impacted.
The Enterprise Software Industry Is Highly Competitive, and We May Be Unable
to Successfully Compete. We compete in the enterprise 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 the NT and UNIX platforms. We compete for customers with a
large number of independent software vendors including:
o companies offering other products that run on Windows NT- or UNIX-based
systems, such as SAP Aktiengesellschaft, Oracle Corporation, PeopleSoft,
Inc., Manugistics Group, Inc., and i2 Technologies, Inc.
o companies offering other products on the AS/400 platform, such as Mapics,
Inc., and Infinium Software, Inc.
o companies offering either standard or fully customized products that run on
mainframe computer systems, which we do not offer, 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. We can offer no assurances that
we will be able to successfully compete with new or existing competitors or that
such competition will not materially adversely affect our business, operating
results, or financial condition.
Some of our competitors, SAP and Oracle in particular, have significantly
greater financial, technical, marketing, and other resources than we do. In
addition, they have wider name recognition and a larger installed customer base.
In contrast, we entered the NT and UNIX markets only three years ago. SAP,
Oracle, and PeopleSoft have significantly more experience and name recognition
with NT and UNIX implementations and platforms and have more reference accounts
than we have in these markets. They 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 established relationships might prevent us from competing effectively in
divisions or subsidiaries of such customers. Many of our competitors also have
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 other software providers. 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
increasingly discount our products. This could have a material adverse effect on
our operating margins.
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We continue to rely on a number of firms that provide systems consulting,
systems integration, services implementation, and customer support services and
that recommend our products during the evaluation stage by potential customers.
A number of our competitors have better established relationships with such
firms, and as a result, these 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 the
third parties that recommend, implement, or support our software, our revenue
may be materially impacted.
We believe the principal competitive factors affecting the market for our
software products are as follows:
o responsiveness to customers' needs
o product flexibility and ability to handle business changes
o product functionality
o speed of implementation
o ease of use
o product performance and features
o product quality and reliability
o vendor and product reputation
o quality of customer support
o overall cost
We believe that we compete favorably with respect to the above factors. In
order to be successful in the future, we must continue to respond promptly and
effectively to the challenges of technological change in our market and to 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.
Our Continued Growth Depends on Our Ability to Develop and Maintain Our
Third-Party Relationships. We rely heavily on third-party service providers to
implement the OneWorld version of our application suites. Additionally, we
adopted a strategy in which a significant portion of OneWorld implementations
will be performed by third parties that contract directly with our customers.
This strategy requires our current third-party implementation providers to
allocate resources to our OneWorld customers, and we must continue to enter into
additional third-party relationships. There can be no assurance that we will
establish or maintain relationships with third parties having sufficient
resources to provide the necessary services to support the demand of our
OneWorld customers. There is no assurance that we will continue to have
sufficient resources available to perform the implementation services ourselves.
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.
To enhance our sales, marketing, and customer service efforts, we have
established relationships with a number of third parties, including consulting
and system integration firms, hardware suppliers, database, operating system,
and other independent software vendors. 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 enterprise software applications. The Company is
currently experiencing a strong competitive environment for consulting services
given an overall decreased demand for consulting services. This, together with
the decreased licensing activity during fiscal 1999, has caused consulting
services revenue to decline in the third quarter and nine-month period ended
July 31, 2000 compared to the same periods last year. Competition between these
third parties and us could result in the deterioration or termination of our
relationship and could impact our services revenue and margins. This could have
a material adverse effect on our business and revenue.
Our International Operations and Sales Subject Us to Various Risks
Associated with Growth Outside the United States. We market and license our
products in the United States and internationally. Our international revenue
continues to represent a significant portion of our total revenue. We currently
maintain 43 international sales offices located throughout Canada, Europe, Asia,
Latin America, and Africa. We intend to expand our international operations and
enter additional markets outside of the U.S. in the future. 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
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expansion include the establishment of additional offices, hiring of additional
personnel, localization, and marketing of our products for international
customers, and the development of relationships with international service
providers. If revenue generated is not adequate to offset the expense of
expanding foreign operations, our business could be materially adversely
affected. Our international operations are also subject to other inherent risks,
including:
o imposition of governmental controls
o export license requirements
o restrictions on the export of certain technology
o cultural and language difficulties
o the impact of a recessionary environment in economies outside the United
States
o reduced protection for intellectual property rights in some countries
o the potential exchange and repatriation of foreign earnings
o political instability
o trade restrictions and tariff changes
o localization and translation of products
o difficulties in staffing and managing international operations
o difficulties in collecting accounts receivable and longer collection periods
o the impact of local economic conditions and practices
Our success in expanding our international operations depends, in part, on
our ability to anticipate and effectively manage these and other risks. We
cannot guarantee that these or other factors will not materially adversely
affect our business, operating results, or financial condition.
Due to the volatile business and economic conditions in international
markets, particularly in Asia where recovery from the 1999 economic crisis is
still in process, the Company continues to closely monitor any investments in
international areas to ensure that such opportunities are deemed appropriate and
are consistent with the Company's overall future growth strategies. The Company
has incurred operating losses in some geographic areas, including Asia and
certain European countries. As a result, Asia and Europe were significantly
affected by the Company's strategic restructuring in the third quarter of fiscal
2000. Consistent with its historical results, the Company expects that during
the remainder of fiscal 2000 it will continue to recognize a relatively small
percentage of its revenue from Asia, certain European countries, and other
geographic areas that are impacted by adverse conditions. With the worldwide
performance of the Company continuing to be negatively impacted by certain
economic conditions, risks associated with these international investments may
not be mitigated by the broad geographic diversity of the Company's operations.
As a result, the Company's investments in some international areas have had and
may continue to have a material negative impact on its future financial
condition and results of operations.
A significant portion of our revenue is received in currencies other than
United States dollars, and as a result we are subject to risks associated with
foreign exchange rate fluctuations. Included in other income were net foreign
exchange transaction losses of $1.1 million and $1.5 million for the third
quarter and nine-month period of fiscal 1999, respectively, a loss of $524,000
for the third quarter of fiscal 2000, and a gain of $238,000 for the nine-month
period of fiscal 2000. 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 have a material adverse
effect on our business, operating results, or financial condition.
Downturns in General Economic and Market Conditions Could Materially Impact
Our Business. 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 enterprise software market attributed to many factors
including global economic conditions and strong competitive forces. Our future
license fee revenue and results of operations may experience substantial
fluctuations from period to period as a consequence of these factors, and such
conditions may affect the timing of orders from major customers and other
factors affecting capital spending. Although we have a diverse client base, we
have targeted a number of vertical markets. As a result, any economic downturns
in general or in our targeted vertical markets would have a material adverse
effect on our business, operating results, or financial condition.
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The Company's Stock Price is Volatile and There Is a Risk of Continuing
Litigation. The trading price of J.D. Edwards & Company common stock has, in the
past, and may, in the future, be subject to wide fluctuations in response to
factors including, but not limited to, the following:
o revenue or results of operations in any quarter failing to meet the
expectations, published or otherwise, of the investment community
o announcements of technological innovations by the Company or its
competitors
o new products or the acquisition of significant customers by the Company or
its competitors
o developments with respect to patents, copyrights or other proprietary
rights of the Company or its competitors
o changes in recommendations or financial estimates by securities analysts
o the announcement of acquisitions or other significant transactions by the
Company or its competitors
o changes in management
o conditions and trends in the software industry generally, and
o general market conditions and other factors.
Fluctuation in the price of the Company's common stock may expose the
Company to the risk of securities class action lawsuits. As a result of the
declines in the price of its common stock during fiscal 1999, one such lawsuit
is being maintained against J.D. Edwards & Company. Although the Company
believes this lawsuit is without merit, defending against it could result in
substantial costs and divert management's attention and resources. In addition,
any settlement or adverse determination of this lawsuit could subject the
Company to significant liability. The Company cannot be assured that there will
not be additional lawsuits in the future.
The Company's Restructuring Could Result in Business Distractions. The
Company recently undertook a restructuring in the third quarter of fiscal 2000
involving, among other things, the reduction of its workforce by 775 employees
worldwide. Such a reduction could result in a temporary lack of focus and
reduced productivity by the Company's remaining employees, including those
directly responsible for revenue generation, which in turn may affect Company
revenue in a future quarter. In addition, prospects or customers may decide to
delay or not to purchase the Company's products due to the perceived uncertainty
caused by the Company's restructuring. There can be no assurances that the
Company will not reduce or otherwise adjust its workforce again in the future or
that the related transition issues associated with such a reduction will not be
incurred again in the future. In addition, employees directly affected by the
reduction may seek future employment with the Company's business partners,
customers, or even its competitors. Although all employees are required to sign
a confidentiality agreement with the Company at the time of hire, there can be
no assurances that the confidential nature of certain proprietary Company
information will be maintained in the course of such future employment. Further,
the Company believes that its future success will depend in large part upon its
ability to attract, train, and retain highly skilled managerial, sales, and
marketing personnel. There can be no assurances that the Company will not have
difficulty attracting skilled employees as a result of a perceived risk of
future workforce reductions. Additionally, employment candidates may demand
greater incentives in connection with employment by the Company. The Company may
grant options or other stock-based awards to attract and retain personnel, which
could dilute Company stockholders. Further, the failure to attract, train,
retain, and effectively manage employees could increase the Company's costs,
hurt the Company's development and sales efforts, and cause a degradation in the
quality of the Company's customer service.
Other Risks. For a more complete description of other risk factors that
affect the Company, see "Factors Affecting the Company's Business, Operating
Results and Financial Condition" in the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1999.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of its operations, the Company is exposed to certain
market risks, primarily changes in foreign currency exchange rates and interest
rates. Uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax, other regulatory, or credit risks, are not included in
the following assessment of the Company's market risks.
Foreign Currency Exchange Rates. Operations outside of the U.S. expose the
Company to foreign currency exchange rate changes and could impact translations
of foreign denominated assets and liabilities into U.S. dollars and future
earnings and cash flows from transactions denominated in different currencies.
During the third quarter and first nine months of fiscal 2000, 34%, and 36%,
respectively, of the Company's total revenue was generated from its
international operations, and 16% of the Company's consolidated net assets
related to its foreign operations as of July 31, 2000. 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 revenue is 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 July 31, 2000, and its
exposure from anticipated foreign revenue during the remainder of fiscal 2000 to
assess the impact of hypothetical changes in foreign currency rates. The
Company's analysis assumed a 10% adverse change in foreign currency rates in
relation to the U.S. dollar. At July 31, 2000, there was not a material charge
in the sources or the estimated effects of foreign currency rate exposures from
the Company's quantitative and qualitative disclosures presented in Form 10-K
for the year ended October 31, 1999. Based upon the results of these analyses, a
10% adverse change in foreign exchange rates from the July 31, 2000 rates would
not result in a material impact to the Company's results of operations, cash
flows, or financial condition for a future quarter and the full fiscal year
ending October 31, 2000.
Interest Rates. The Company's portfolio of investments is subject to
interest rate fluctuations. Investments, including cash equivalents, consists of
U.S., state and municipal bonds, as well as domestic corporate bonds, with
maturities of up to thirty months. In May and June 2000, the Company liquidated
a portion of its portfolio of marketable securities prior to their maturity
dates in order to settle certain equity contracts. As a result, the Company's
entire held to maturity portfolio was reclassified to available for sale. The
Company classified all investments in marketable securities as available for
sale and these investments were carried at fair value as determined by their
quoted market prices. Unrealized gains or losses were included, net of tax, as a
component of accumulated other comprehensive income. 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 2000 to
assess the impact of hypothetical changes in interest rates. At July 31, 2000,
there was not a material charge in the sources or the estimated effects of
interest rate exposures from the Company's quantitative and qualitative
disclosures presented in Form 10-K for the year ended October 31, 1999.
Additionally, based upon the results of these analyses, a 10% adverse change in
interest rates from the July 31, 2000 rates would not have a material adverse
effect on the fair value of investments and would not materially impact the
Company's results of operations, cash flows, or financial condition for the
fiscal year ending October 31, 2000.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 2, 1999, a complaint was filed in the United States District
Court for the District of Colorado against the Company and certain of its
officers and directors. The complaint purports to be brought on behalf of
purchasers of the Company's common stock during the period between January 22,
1998 and December 3, 1998. The complaint alleges that the Company and certain of
its officers and directors violated the Securities Exchange Act of 1934 through
a series of false and misleading statements. The plaintiff seeks to recover
unspecified compensatory damages on behalf of all purchasers of J.D. Edwards'
common stock during the class period. Two additional suits were filed on behalf
of additional plaintiffs alleging the same violations and seeking the same
recovery as the first suit. The three complaints were subsequently consolidated
into one action and a consolidated amended complaint was filed on March 21,
2000. On May 9, 2000, the Company and the individual defendants filed a motion
to dismiss the amended complaint. The court has scheduled a hearing on the
motion to dismiss for October 6, 2000.
The Company believes these complaints are without merit and will vigorously
defend itself and its officers and directors against such complaints.
Nevertheless, the Company is currently unable to determine (i) the ultimate
outcome of the lawsuits, (ii) whether resolution of these matters will have a
material adverse impact on the Company's financial position or results of
operations, or (iii) a reasonable estimate of the amount of loss, if any, which
may result from resolution of these matters.
The Company is involved in certain other disputes and legal actions arising
in the ordinary course of its business. In management's opinion, none of such
other disputes and legal actions are expected to have a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
J.D. EDWARDS & COMPANY
By: /s/ RICHARD E. ALLEN
------------------------------------------
Name: Richard E. Allen
Title: Chief Financial Officer, Executive Vice
President, Finance and Administration and
Director (principal financial officer)
Dated: September 11, 2000
By: /s/ PAMELA L. SAXTON
------------------------------------------
Name: Pamela L. Saxton
Title: Vice President of Finance, Controller
and Chief Accounting Officer
(principal accounting officer)
Dated: September 11, 2000
<PAGE> 32
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
