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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 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)
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DELAWARE 84-0728700
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
ONE TECHNOLOGY WAY, DENVER, CO 80237
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (303) 334-4000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of March 13, 1999, there were 109,641,617 shares of the Registrant's
Common Stock outstanding.
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J.D. EDWARDS & COMPANY
TABLE OF CONTENTS
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PAGE
NO.
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of October 31, 1999 and
January 31, 2000............................................ 3
Consolidated Statements of Operations for the Three Months
Ended January 31, 1999 and 2000............................. 4
Consolidated Statements of Cash Flows for the Three Months
Ended January 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... 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 29
Item 2. Changes in Securities and Use of Proceeds................... 29
Item 3. Defaults upon Senior Securities............................. 29
Item 4. Submission of Matters to a Vote of Security Holders......... 29
Item 5. Other Information........................................... 29
Item 6. Exhibits and Reports on Form 8-K............................ 29
SIGNATURES
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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
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
ASSETS
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OCTOBER 31, JANUARY 31,
1999 2000
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Current assets:
Cash and cash equivalents................................. $113,341 $ 116,920
Short-term investments in marketable securities........... 62,546 77,386
Accounts receivable, net of allowance for doubtful
accounts of $12,000 at October 31, 1999 and January 31,
2000................................................... 236,216 277,361
Other current assets...................................... 34,936 64,668
-------- ----------
Total current assets.............................. 447,039 536,335
Long-term investments in marketable securities.............. 246,564 225,569
Property and equipment, net................................. 86,332 89,796
Non-current portion of deferred income taxes................ 82,572 93,627
Other assets, net........................................... 78,021 72,446
-------- ----------
$940,528 $1,017,773
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 46,004 $ 49,396
Unearned revenue and customer deposits.................... 114,865 160,365
Accrued liabilities....................................... 162,635 153,598
-------- ----------
Total current liabilities......................... 323,504 363,359
Unearned revenue, net of current portion, and other......... 24,304 26,626
-------- ----------
Total liabilities................................. 347,808 389,985
Commitments and contingencies (Note 8)
Common shares subject to repurchase, at redemption amount... -- 69,477
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 108,501,678 issued and
outstanding as of October 31, 1999 and January 31,
2000, respectively..................................... 107 109
Additional paid-in capital................................ 456,387 406,268
Deferred compensation..................................... (283) (227)
Retained earnings......................................... 138,100 137,948
Accumulated other comprehensive income (loss): unrealized
gain on equity securities and foreign currency
translation adjustments................................ (1,591) 14,213
-------- ----------
Total stockholders' equity........................ 592,720 558,311
-------- ----------
$940,528 $1,017,773
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED
JANUARY 31,
-------------------
1999 2000
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Revenue:
License fees.............................................. $ 69,599 $ 83,287
Services.................................................. 153,338 148,419
-------- --------
Total revenue..................................... 222,937 231,706
Costs and expenses:
Cost of license fees...................................... 5,291 12,904
Cost of services.......................................... 99,462 88,571
Sales and marketing....................................... 69,413 81,245
General and administrative................................ 24,389 22,934
Research and development.................................. 22,715 29,364
Amortization of acquired software and other acquired
intangibles............................................ -- 5,878
-------- --------
Operating income (loss)..................................... 1,667 (9,190)
Other income (expense):
Interest income........................................... 5,344 3,963
Foreign currency gains (losses) and other, net............ (237) 4,986
-------- --------
Income (loss) before income taxes........................... 6,774 (241)
Provision for (benefit from) income taxes................. 2,506 (89)
-------- --------
Net income (loss)........................................... $ 4,268 $ (152)
======== ========
Net income (loss) per common share:
Basic..................................................... $ 0.04 $ 0.00
======== ========
Diluted................................................... $ 0.04 $ 0.00
======== ========
Shares used in computing per share amounts:
Basic..................................................... 103,111 107,649
Diluted................................................... 111,549 107,649
</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)
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THREE MONTHS ENDED
JANUARY 31,
-------------------
1999 2000
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Operating activities:
Net income (loss)........................................... $ 4,268 $ (152)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation.............................................. 5,732 7,675
Amortization of intangible assets and securities premiums
or discounts........................................... 2,107 7,620
Gain on sale of product line.............................. -- (5,686)
Benefit from deferred income taxes........................ (345) (4,064)
Other..................................................... 736 1,963
Changes in operating assets and liabilities:
Accounts receivable, net.................................. (12,910) (45,838)
Other assets.............................................. (2,216) (28,041)
Accounts payable.......................................... (16,159) 4,484
Unearned revenue and customer deposits.................... 34,625 50,029
Accrued liabilities....................................... (14,727) (14,744)
-------- --------
Net cash provided (used) by operating
activities....................................... 1,111 (26,754)
Investing activities:
Purchase of marketable securities......................... (46,454) (15,196)
Proceeds from maturities of marketable securities......... 37,765 49,514
Purchase of available for sale securities................. -- (4,500)
Purchase of property and equipment........................ (10,406) (11,612)
Proceeds from sale of assets and other, net............... 76 --
-------- --------
Net cash provided (used) for investing
activities....................................... (19,019) 18,206
Financing activities:
Proceeds from issuance of common stock.................... 13,792 13,675
-------- --------
Net cash provided by financing activities......... 13,792 13,675
Effect of exchange rate changes on cash..................... (249) (1,548)
-------- --------
Net increase (decrease) in cash and cash equivalents........ (4,365) 3,579
Cash and cash equivalents at beginning of period............ 183,115 113,341
-------- --------
Cash and cash equivalents at end of period.................. $178,750 $116,920
======== ========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Interest paid............................................. $ 203 $ 68
Income taxes paid......................................... 5,638 2,230
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Interim Financial Statements. The accompanying financial statements of J.D.
Edwards & Company (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. The unaudited consolidated financial statements included herein have
been prepared on the same basis as the annual consolidated financial statements
and reflect all adjustments, which include only normal recurring adjustments
necessary for a fair presentation in accordance with generally accepted
accounting principles. The results for the three-month period ended January 31,
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 the weighted
average shares outstanding for the fiscal 1999 periods have been adjusted to
include all common shares issuable under stock options using the treasury stock
method. Diluted loss per share for fiscal 2000 excludes 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 fiscal 2000 totaled 6.7 million shares. All
shares owned by the J.D. Edwards & Company Retirement Savings Plan were included
in the weighted average common shares outstanding for all periods.
At January 31, 2000, the Company held equity instruments, consisting of
forward contracts requiring the purchase of 2.2 million shares of its common
stock in addition to put obligations and call options for 790,000 shares of its
common stock. The equity instruments did not have an effect on EPS for the
quarter ended January 31, 2000; however, should the market price of the
Company's common stock price fall below the exercise price of the put
obligations, such contracts will increase the number of diluted shares
outstanding.
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The computation of basic and diluted EPS was as follows (in thousands,
except per share amounts):
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THREE MONTHS ENDED
JANUARY 31,
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1999 2000
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Numerator:
Net income (loss)......................................... $ 4,268 $ (152)
======== ========
Denominator:
Basic income (loss) per share -- weighted average shares
outstanding............................................ 103,111 107,649
Dilutive effect of common stock equivalents............... 8,438 --
-------- --------
Diluted net income (loss) per share -- adjusted weighted
average shares outstanding, assuming conversion of
common stock equivalents............................... 111,549 107,649
======== ========
Basic net income (loss) per share........................... $ 0.04 $ (0.00)
Diluted net income (loss) per share......................... $ 0.04 $ (0.00)
</TABLE>
(3) CERTAIN BALANCE SHEET COMPONENTS
Investments in Marketable Securities. In December 1999, the Company made a
minority equity investment in convertible preferred shares of Extensity, Inc.
(Extensity), an internet start-up company. The Extensity investment was
classified as available for sale as defined in Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." 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. In accordance with FAS No.
115, the Extensity investment is carried at fair value as determined by the
quoted market price and is included in short-term investments in marketable
securities to reflect management's intention to sell the shares within the next
12 months. The fair value of the investment at January 31, 2000 was $28.9
million. Gross unrealized gains of $24.4 million, net of tax of $9.2 million,
were included as a component of accumulated other comprehensive income. All
other investments, consisting of U.S., state, and municipal bonds, as well as
domestic corporate bonds, with maturities of up to 30 months, were classified as
held-to-maturity and were carried at amortized cost.
Other Balance Sheet Components. Other current assets increased from October
31, 1999 as a result of contractual obligations to prepay royalties associated
with certain strategic agreements. The components of other current assets are as
follows (in thousands):
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OCTOBER 31, JANUARY 31,
1999 2000
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Prepaid expenses............................... $13,305 $27,787
Other current assets........................... 21,631 36,881
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$34,936 $64,668
======= =======
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Common Shares Subject to Repurchase. At January 31, 2000, the Company held
forward contracts requiring the purchase of 2.2 million shares of its common
stock at an average cost of $28.73 per share. Additionally, the Company had
outstanding put obligations and call options for 790,000 shares of its common
stock at average exercise prices of $28.92 and $39.21 per share, respectively.
The equity instruments are exercisable only at their dates of expiration, which
range from September 2000 to June 2001. Forward purchase contracts require a
full physical settlement and the aggregate redemption cost of $69.5 million is
included in the accompanying balance sheet in temporary equity with a
corresponding decrease in additional
7
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
paid-in capital. The outstanding put obligations permit net share settlement at
the Company's option and, therefore, do not result in a put obligation
liability.
The equity instrument contracts were entered into during the quarter ended
January 31, 2000 in accordance with a share repurchase plan approved in August
1999 by the Company's board of directors, authorizing the repurchase of up to
eight million shares of the Company's common stock. Additional contracts were
entered into during the second quarter ending April 30, 2000. The plan is
designed to partially offset the effects of share issuances under the stock
option and employee stock purchase plans. 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, put and call transactions, or open
market purchases.
(4) 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 which do not affect retained
earnings. The Company's comprehensive income was comprised of net income (loss),
an unrealized gain on equity securities available for sale, and foreign currency
translation adjustments and was $3.6 million and $15.7 million for the first
quarters of fiscal 1999 and 2000, respectively.
(5) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses hedging instruments to mitigate foreign currency exchange
risk of assets and liabilities denominated in foreign currency. The hedging
instruments used are forward foreign exchange contracts with maturities of
generally three months or less in term. All contracts are entered into with
major financial institutions. Gains and losses on these contracts are included
with foreign currency gains and losses on the transactions being hedged and are
recognized as non-operating income or expense in the period in which the gain or
loss on the underlying transaction is recognized. All gains and losses related
to foreign exchange contracts are included in cash flows from operating
activities in the consolidated statements of cash flows.
At January 31, 2000, the Company had approximately $64.0 million of gross
U.S. dollar equivalent forward foreign exchange contracts outstanding as hedges
of monetary assets and liabilities denominated in foreign currency. Included in
other income and expense are net foreign exchange transaction losses of $4,000
and $500,000 for the first quarters of fiscal 1999 and 2000, respectively.
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," was issued in June 1998 and will require companies to value
derivative financial instruments, including those used for hedging foreign
currency exposures, at current market value with the impact of any change in
market value being charged against earnings in each period. SFAS No. 133 will be
effective for the Company in the first quarter of fiscal 2001. The Company
currently anticipates that the adoption of SFAS No. 133 will not have a material
impact on its consolidated financial statements.
(6) SALE OF PRODUCT LINE
In January 2000, the Company divested itself of its home building software
product line through an asset sale to BuildNet, Inc., a privately-held provider
of e-business, technology, and project management systems. BuildNet acquired all
rights to J.D. Edwards' homebuilder software, including its source code,
contracts, contractual rights, license agreements, maintenance agreements, and
customer lists. BuildNet also licensed the OneWorld Software application
development tools for the purpose of rewriting and revising the homebuilder
software so it can operate in and with the OneWorld Software platform and
prepaid licenses. The
8
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company received $6.5 million in a combination of cash and a secured promissory
note due in January 2001. The promissory note is convertible to BuildNet common
stock at the Company's option upon the closing of an initial public offering of
BuildNet common stock. The Company allocated the total proceeds to the
components of the agreement and recognized a one-time gain of approximately $5.7
million as other income in the first quarter of fiscal 2000.
(7) SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," for its fiscal year ended October 31, 1999.
SFAS No. 131 established standards for reporting certain information about
operating segments in annual and interim financial statements. Operating
segments are 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.
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THREE MONTHS ENDED
JANUARY 31,
-------------------
1999 2000
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REVENUES FROM UNAFFILIATED CUSTOMERS:
United States............................................... $137,053 $148,734
Europe, Middle East, and Africa............................. 53,787 44,109
Canada, Asia, and Latin America............................. 32,097 38,863
-------- --------
Consolidated................................................ $222,937 $231,706
======== ========
INCOME (LOSS) FROM OPERATIONS:
United States............................................... $ (7,192) $(17,402)
Europe, Middle East, and Africa............................. 8,500 4,009
Canada, Asia, and Latin America............................. 359 10,081
Amortization of acquired intangibles........................ -- (5,878)
-------- --------
Consolidated................................................ $ 1,667 $ (9,190)
======== ========
</TABLE>
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OCTOBER 31, JANUARY 31,
1999 2000
----------- -----------
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TOTAL ASSETS:
United States............................................... $551,758 $ 633,168
Europe, Middle East, and Africa............................. 154,766 155,173
Canada, Asia, and Latin America............................. 234,004 229,432
-------- ----------
Consolidated................................................ $940,528 $1,017,773
======== ==========
</TABLE>
9
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) 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 are collectively financing up
to $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 and the balances fluctuate based upon the
timing of dividend payments and investment maturity dates. At January 31, 2000,
investments totaling $123.3 million were designated as collateral for these
leases.
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 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.
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 is expected to have a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
(9) SUBSEQUENT EVENTS
Acquisition. On March 3, 2000, the Company completed an acquisition of its
longstanding business partner serving Australia and New Zealand, J.D. Edwards
New Zealand Ltd. With this acquisition, J.D. Edwards strengthens its sales and
service operations and expands its reach into the Asia Pacific region. The
integration of the two companies will enable J.D. Edwards to further leverage
joint business and sales channel strengths in Australia and New Zealand to
better serve its customers, while positioning the company for greater market
focus in the region.
The Company paid approximately $12.5 million in cash for 90% of the
outstanding common shares of J.D. Edwards New Zealand Ltd., making it a
wholly-owned subsidiary. The acquisition will be accounted for as a purchase in
the Company's second fiscal quarter. Accordingly, the total purchase price will
be allocated to the acquired assets and liabilities at their fair values as of
the closing date of the transaction, and the Company's consolidated statements
of operations will not include any revenues or expenses related to the
acquisition prior to the closing date. Such acquired assets include the in-place
workforce, customer base, and other intangibles that are expected to be
amortized on a straight-line basis over their estimated useful lives of four
years.
10
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Strategic Investment. In March 2000, the Company made a $10.0 million
minority equity investment in Tradex, Inc. (Tradex) and, upon the Ariba, Inc.
(Ariba) acquisition of Tradex, the Company's investment converted into common
shares of Ariba. This Ariba investment will be classified as available for sale
as defined in SFAS No. 115 and, accordingly, will be carried at fair value as
determined by the quoted market price. Unrealized gains or losses will be
included, net of tax, as a component of accumulated other comprehensive income.
The fair value will be recorded in short-term investments in marketable
securities to reflect management's intention to sell the shares within the next
12 months. The fair value of the investment at March 13, 2000 was $76.1 million,
and the investment had resulted in a gross unrealized gain of $66.1 million.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that have been made
pursuant to the provision of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates, and projections about J.D. Edwards' industry, management's beliefs,
and certain assumptions made by J.D. Edwards' management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words, and similar expressions are intended to identify such
forward-looking statements. The statements are not guarantees of future
performance and are subject to certain risks, uncertainties, and assumptions
that are difficult to predict; therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth in the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 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 January 31, 2000, the Company's results
of operations reflected an operating loss of $9.2 million compared to operating
income of $1.7 million for the first quarter of fiscal 1999. The net loss for
the first quarter of fiscal 2000 was $152,000, or $0.00 per share, in comparison
to net income of $4.3 million, or $0.04 per diluted share for the first quarter
last year. Included in the net loss was amortization of acquired intangibles
totaling $5.9 million, offset by a $5.7 million gain from the sale of the
Company's WorldSoftware homebuilder code and customer base. The operating loss
for the first quarter of fiscal 2000 was primarily due to the decline in
services revenue, the level of operating expenses, and acquisition-related
amortization. Total costs and expenses increased 9% in the first quarter of
fiscal 2000 compared to the same period last year, or an increase of 6%
excluding amortization charges related to the Company's business acquisitions.
During fiscal 1999, the Company completed acquisitions of two privately
held companies, Numetrix, Ltd. (Numetrix), and The Premisys Corporation. These
investments further extended the Company's supply chain and customer
relationship management solutions and its ability to compete for business beyond
the traditional back office applications of the enterprise resource planning
(ERP) market. Both acquisitions were accounted for using the purchase method,
and, accordingly, the total purchase price of each company was allocated to the
acquired assets and liabilities at their fair values as of the closing dates of
the acquisition. Operating expenses were impacted following the transaction
closing dates primarily as a result of amortization of intangible assets
purchased, as well as normal operating expenses associated with the additional
personnel and facilities acquired. The Company's consolidated statements of
operations do not include any revenue or expenses related to the acquisitions
prior to their closing dates.
One of the Company's goals has been to form strategic relationships with
organizations whose products enhance the J.D. Edwards solutions. This allows the
Company to offer its customers the spectrum of products and services needed,
while at the same time manage development costs. Over the past three fiscal
quarters, the Company has signed agreements with companies including Ariba, Inc.
(Ariba), Siebel Systems, Inc. (Siebel), Tradex Technologies (Tradex), Extensity,
Inc. (Extensity), and Proforma Corporation. Additionally, in January 2000, the
Company announced a new business initiative for its application hosting,
JDe.sourcing, that will add a direct business model to work with third-party
hosting infrastructure providers for data center and network services.
Management believes these partnerships and strategic investments will enable the
Company to deliver a fully-integrated end-to-end supply chain solution. The
terms of each third-party agreement vary; however, as the Company recognizes
license revenue under the reseller provisions in these agreements, a related
royalty is charged to cost of revenue. For the first quarter of fiscal 2000,
less than 15% of total license fee revenue was generated from sublicensing the
products included in these reseller
12
<PAGE> 13
arrangements. There can be no assurance that future license revenue from these
reseller arrangements will meet or exceed this amount.
Due to the volatile economic conditions in international markets,
particularly in Asia over the past 18 months, the Company continues to closely
monitor its 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 Asia and, during
fiscal 1999, the Company made personnel changes and reduced some layers of
management through a voluntary reduction in force program in Japan. 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 and other specific geographic areas that are currently being
impacted by adverse economic conditions. With the worldwide performance of the
Company continuing to be negatively impacted by certain economic conditions,
risks associated with these international investments may not be mitigated by
the broad geographic diversity of the Company's operations. As a result, the
Company's investments in certain international areas have had and may continue
to have a material negative impact on its future financial condition and results
of operations.
The Company has experienced and expects that it will continue to experience
a high degree of seasonality in the future; although, management believes that
quarterly operating results in fiscal 1999 were less consistent with historical
seasonality trends primarily due to the impact of Year 2000 issues on customers'
buying patterns. The Company has historically recognized a disproportionately
greater amount of its revenue and an even greater proportion of its net income
for any fiscal year in its fourth fiscal quarter. In the fourth quarter of 1998
and 1999, the Company recognized 32.9% and 27.3% of total revenue and 37.2% and
32.3% of license fee revenue, respectively. Because the Company's operating
expenses are relatively fixed in the near term, the Company's operating margins
historically have been significantly higher in its fourth fiscal quarter than in
its other quarters. The Company believes that such seasonality is primarily the
result of both the efforts of the Company's direct sales force to meet or exceed
fiscal year-end sales quotas and the tendency of certain customers to finalize
sales contracts at or near the end of the Company's fiscal year. The Company's
first quarter revenue historically has slowed during the holiday season in
November and December, and its total revenue, license fee revenue, service
revenue, and net income for its first fiscal quarter historically have been
lower than in the immediately preceding fourth quarter. For example, total
revenue, license fee revenue, service revenue, and net income (loss) in the
first quarter of fiscal 2000 decreased 10%, 18%, 5%, and 217%, respectively,
from the fourth quarter of fiscal 1999. In addition to the seasonal factors
described, the Company's first quarter of fiscal 2000 was impacted by issues
related to the Year 2000.
The Company is actively addressing its future operating plans and, given
the uncertainty and changes in the market, has taken the steps previously
described to remain competitive in the future. The uncertainty in the
traditional ERP market, challenges of entering new markets, global economic
conditions, and strong competitive forces could reduce the growth in the
Company's revenue. These uncertainties have made forward-looking projections of
future revenue and operating results even more 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 be adversely affected by unfavorable
factors.
13
<PAGE> 14
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
ENDED JANUARY 31,
-----------------
1999 2000
------ ------
<S> <C> <C>
Revenue:
License fees.............................................. 31.2% 35.9%
Services.................................................. 68.8 64.1
----- -----
Total revenue..................................... 100.0 100.0
Costs and expenses:
Cost of license fees...................................... 2.4 5.6
Cost of services.......................................... 44.6 38.2
Sales and marketing....................................... 31.2 35.0
General and administrative................................ 10.9 9.9
Research and development.................................. 10.2 12.7
Amortization of acquired software and other intangibles... -- 2.5
----- -----
Total costs and expenses.......................... 99.3 103.9
Operating income (loss)..................................... 0.7 (3.9)
Other income, net........................................... 2.3 3.8
----- -----
Income (loss) before income taxes........................... 3.0 (0.1)
Provision for (benefit from) income taxes................. 1.1 (0.0)
----- -----
Net income (loss)........................................... 1.9% (0.1)%
===== =====
Gross margin on license fee revenue......................... 92.4% 84.5%
Gross margin on services revenue............................ 35.1% 40.3%
</TABLE>
Total Revenue. Total revenue grew by 3.9% to $231.7 million for the quarter
ended January 31, 2000 from $222.9 million for the quarter ended January 31,
1999. The increase in total revenue for the first quarter of fiscal 2000
compared to the same period last year was a result of growth in license fee
revenue, while services revenue declined. The revenue mix between license fees
and services was 35.9% and 64.1%, respectively, for the first quarter of fiscal
2000 compared to 31.2% and 68.8%, respectively, for the same quarter last year.
The significant change in revenue mix was primarily due to the impact on
services revenue caused by the earlier slowing in license transactions during
fiscal 1999, coupled with the year over year growth in license fee revenue in
the first quarter of fiscal 2000 driven largely by the Company's ability to
offer a broad supply chain solution, including products such as those from
Numetrix, Ariba, and Siebel.
The geographic areas defined as the United States, EMEA, and the rest of
the world accounted for 64%, 19%, and 17% of total revenue, respectively, for
the quarter ended January 31, 2000. Comparatively, for the first quarter of
fiscal 1999, the United States, EMEA, and the rest of the world accounted for
61%, 24%, and 15% of total revenue, respectively. Geographically, the overall
revenue growth in the first quarter of fiscal 2000 compared to the same period
last year was led by sales performance in certain countries included in rest of
the world, followed by overall growth of 9% in the United States.
License Fees. License fee revenue grew by 20% to $83.3 million for the
quarter ended January 31, 2000 from $69.6 million for the quarter ended January
31, 1999. The license fee growth was primarily the result of license revenue
from products through reseller arrangements. Additionally, the overall average
transaction size increased compared to the same period in fiscal 1999. While
there were fewer total license transactions during the quarter ended January 31,
2000, there were a greater number of license transactions over $1.0 million for
both new and existing customers compared to the same period last year. A
significant amount of business was generated from the Company's installed base
of customers. The percentage of revenue from new customers dropped to 33% in the
first quarter of fiscal 2000 compared to 59% in the first quarter of fiscal 1999
primarily as a result of a few large transactions completed under the reseller
agreements to certain existing customers during the fiscal 2000 first quarter.
The mix of revenue from new and existing customers varies from quarter to
14
<PAGE> 15
quarter, and future growth is dependent on the Company's ability to 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 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 first quarter last year to approximately 5,600 at January 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 first
quarter of fiscal 2000, 34% of license activity was from customers using the
Windows NT or UNIX platforms compared to 27% in the first quarter of the
previous year. The Company expects that an increasing portion of the Company's
future license fee revenue will be generated from customers using Windows NT or
UNIX platforms compared to the previous year.
Services. Services revenue declined by 3% to $148.4 million for the quarter
ended January 31, 2000 from $153.3 million for the quarter ended January 31,
1999. The Company experienced a decrease in both consulting and training
services revenue in the first quarter of fiscal 2000 primarily as a result of
the decreased licensing activity during fiscal 1999. Support revenue increased
primarily as a result of the Company's growing installed base of customers
compared to the same period last year.
As a percentage of total revenue, services revenue decreased in the first
quarter of fiscal 2000 compared to the same period 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 and training services
during the first quarter of fiscal 2000. The Company has historically
experienced seasonality, and the Company's first quarter services revenue
historically has slowed during the holiday season in November and December.
Management believes that concerns surrounding the cross over into the Year 2000
magnified this traditionally slow period during the first quarter 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 number of Company and business partner consultants available to
staff engagements, the number of customers referred to alliance partners for
consulting and training services, the number of customers who have contracted
for support and the amount of the related fees, billing rates for consulting
services and training courses, and the number of customers attending training
courses.
Historically, the Company has been the primary service provider for its
customers, either directly or through subcontracted services from its business
partners. The subcontracted consulting and training services revenue from
business partners decreased 25% for the first quarter of fiscal 2000 compared to
the prior year, while direct services increased 6% in the first quarter of the
current fiscal year over the same period in fiscal 1999. The services revenue
generated through subcontracted work accounted for 40% of the total consulting
and training services revenue for the first quarter of fiscal 2000 compared to
49% for the same period last year. The overall decrease in demand for services
prompted the shift away from subcontracted work and a greater percentage of the
services engagements was staffed by internal consultants rather than business
partners during the first quarter of fiscal 2000 compared to previous periods.
In addition to subcontracting a substantial portion of its services work to
business partners, the Company is continuing to pursue a strategy of utilizing
third-party alliance partners to contract directly with the Company's customers
under a referral arrangement for OneWorld implementations and related services.
The Company established additional alliances during fiscal 1999 to achieve this
objective, and several existing alliance partners began providing significantly
more resources to implement OneWorld. However, migration to this services model
has been slower than originally anticipated. To the extent the Company is
successful in establishing this strategy, together with the level of license fee
revenue, consulting revenue as a percentage of total revenue is likely to
gradually decrease as compared to the historical revenue mix. However, there can
be no assurance that the Company will be successful in implementing its
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
15
<PAGE> 16
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 the first quarter
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 may issue additional interpretations related to SOP
97-2 in the future. Additionally, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," in December 1999 that provides further interpretive guidance for
public companies. SAB No. 101 will be effective for the Company's first quarter
of fiscal 2001. 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, documentation, and software delivery expenses. The total dollar amount
for the cost of license fees increased 144% to $12.9 million for the quarter
ended January 31, 2000 from $5.3 million last year primarily due to reseller
royalties on software. These royalties may increase in future quarters as a
result of transactions involving the sublicensing of products from Siebel,
Ariba, Tradex, and Extensity. Capitalized OneWorld costs were fully amortized
during the first quarter of fiscal 2000. However, additional development costs
are expected to be capitalized in the future given certain product development
plans of the Company. If the Company is successful with certain expanded sales
channel initiatives and business alliances that would increase expenses,
business partner costs in future periods may represent a larger percentage of
total license fee revenue compared to previous periods and gross margins could
be reduced. Software delivery expenses also may be higher in future periods as
compared to the same periods in fiscal 1999 primarily due to the Company's new
software reproduction and distribution facility located in Dublin, Ireland that
was opened in the second quarter of fiscal 1999. Accordingly, the total cost of
license fees is likely to increase in future periods as compared to the previous
fiscal year.
Gross margin on license fee revenue varies from quarter to quarter
depending upon the revenue volume in relation to certain fixed costs such as the
amortization of software development costs and the portion of the Company's
software products that are subject to royalty payments. The first quarter of
fiscal 2000 was significantly impacted primarily by the increase in royalty
expense. The gross margin on license fee revenue decreased to 84.5% for the
first quarter of fiscal 2000 from 92.4% for the first quarter last year as a
result of this increase. Due to the increased number of third-party royalty
arrangements, the expected increase in software
16
<PAGE> 17
delivery expenses, as well as possible increases in certain other costs, it is
expected that the gross margin on license fee revenue will continue to be
reduced as compared to fiscal 1999.
Cost of Services. Cost of services includes the personnel and related
overhead costs for services, including support, training, consulting, and
implementation, as well as fees paid to third parties for subcontracted
services. Cost of services decreased 11% to $88.6 million for the quarter ended
January 31, 2000 from $99.5 million for the quarter ended January 31, 1999. The
decrease was primarily due to a change in the mix of services revenue.
Generally, the gross margin on support revenue is higher than on consulting and
training revenue, and any change in the mix in types of services affects the
gross margin on total services revenue. Additionally, a smaller portion of
services revenue was generated through subcontracted work, which decreased the
related costs in the first quarter of fiscal 2000 compared to the same period
last year. As a result, the gross margin on services revenue increased to 40.3%
for the quarter ended January 31, 2000 from 35.1% for the quarter ended January
31, 1999. Management anticipates that the gross margin on services revenue for
the remainder of fiscal 2000 will decline from the level realized for the first
quarter of fiscal 2000. The extent to which the Company is successful in
implementing its strategy of utilizing 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 implementing its strategy or
that OneWorld will achieve substantial market acceptance.
Sales and Marketing. Sales and marketing expense consists of personnel,
commissions, and related overhead costs for the sales and marketing activities
of the Company, together with advertising and promotion costs. Sales and
marketing expense increased to $81.2 million for the quarter ended January 31,
2000 from $69.4 million for the quarter ended January 31, 1999, representing
35.0% and 31.2% of total revenue, respectively. The increase in expense was
primarily the result of sales incentives that resulted in higher commissions on
software license revenue during the first quarter of fiscal 2000 compared to
last year. Additionally, the average number of sales and marketing employees
during the quarter increased for fiscal 2000 compared to the first quarter of
fiscal 1999, and the average cost per employee increased in the fiscal 2000
quarter 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 decreased to $22.9
million for the quarter ended January 31, 2000 from $24.4 million for the
quarter ended January 31, 1999, representing 9.9% and 10.9% of total revenue,
respectively. The total dollar amount of expense was lower in the quarter ended
January 31, 2000 compared to the same period last year primarily due to cost
containment measurements, which were reflected in the decrease in certain
overhead costs, travel and entertainment, and contract professional services.
General and administrative expenses as a percentage of total revenue decreased
primarily due to license fee growth and increased efficiencies within support
functions to manage the overall growth in the Company's operations.
Research and Development. Research and development expense includes
personnel and related overhead costs for product development, enhancements,
upgrades, quality assurance, and testing. Research and development expense
increased to $29.4 million for the quarter ended January 31, 2000 from $22.7
million for the quarter ended January 31, 1999, representing 12.7% and 10.2% of
total revenue, respectively. The total dollar amount of research and development
expenses was higher in the quarter ended January 31, 2000 compared to the same
period last year primarily due to a substantial increase in number of and
average cost for employees, together with increases in related facilities and
computer systems costs necessary to meet product development objectives.
Development resources primarily were devoted to enhancements of the
Company's OneWorld application suites and integration of those applications with
third-party and acquired products during the first quarter of fiscal 2000. The
Company ceased capitalizing OneWorld development costs during fiscal 1997 in
connection with the general release of the software, and there were no
development costs during fiscal 1999 or the first quarter of fiscal 2000 that
met the criteria for capitalization. The Company anticipates that costs of
certain development projects will be capitalized in the future and also that
research and development expenses will increase in subsequent periods due
personnel additions and salary adjustments resulting from the competitive
17
<PAGE> 18
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, and advanced planning and scheduling,
utilizing third-party development alliances, such as Siebel and Ariba, for
certain development projects.
Acquisition-related Charges. Amortization of acquired intangibles resulting
from the acquisitions of Numetrix and The Premisys Corporation for the quarter
ended January 31, 2000, related to the software, in-place workforce, customer
base, and goodwill was $2.9 million, $650,000, $1.3 million, and $1.0 million,
respectively. Amortization of acquired intangibles is expected to increase in
future periods due to the acquisition of the Company's business partner
operating in Australia and New Zealand that was completed in March 2000.
A portion of the purchase prices of Numetrix and The Premisys Corporation
was allocated to in-process research and development (IPR&D) and charged to
expense at the time each acquisition was recorded. IPR&D consists of those
products that are not yet proven to be technically 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 are 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 $26.1 million. No such charges have been
incurred in fiscal 2000.
The most significant in-process technology was being designed by Numetrix
prior to the acquisition to offer an operational-level, discrete planning and
scheduling solution targeted at the middle market. As of the valuation date, the
beta release was scheduled for September 1999, and the development was estimated
to be almost 90% complete. This project continues to progress; however, the beta
release has been postponed until fiscal 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, and the project is currently postponed pending
further evaluation and project prioritization by management. 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, and development continues to progress. 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 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 continuing to be fully integrated with OneWorld. 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 such as those offered by Numetrix and
The Premisys Corporation are integral to its ability to remain competitive in
the extended ERP market.
Other Income (Expense). Other income (expense) includes interest income
earned on cash, cash equivalents and investments, interest expense, foreign
currency gains and losses, and other non-operating income and expenses. During
the first quarter of fiscal 2000, other income included a $5.7 million gain on
the sale of the Company's WorldSoftware homebuilder code and customer base.
Interest income decreased to $4.0 million for the quarter ended January 31, 2000
from $5.3 million, for the quarter ended January 31, 1999, primarily due to
lower cash and investment balances. Foreign currency losses were $500,000 during
the quarter ended January 31, 2000 compared to only a $4,000 loss for the
quarter ended January 31, 1999. The losses were impacted by the Company's
foreign exchange hedging program, but were due primarily to the strengthening of
the U.S. dollar against many other currencies during the first quarters of both
fiscal years and, in the first quarter of fiscal 2000, a devaluation of the euro
in particular.
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
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<PAGE> 19
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.
Other income may be positively impacted in future periods by the future
sale of the Company's strategic minority equity investment in Extensity, an
internet start up company that went public in January 2000. This investment was
carried at its fair value of $28.9 million as determined by the quoted market
price as of January 31, 2000. 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. Gross unrealized
gains of $24.4 million were included, net of tax of $9.2 million, as a component
of accumulated other comprehensive income. 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. In March 2000, the Company also made a $10.0 million
strategic minority equity investment in Tradex and, upon Ariba's acquisition of
Tradex, the Company's investment converted into common shares of Ariba. As of
March 13, 2000, the investment had resulted in a gross unrealized gain of $66.1
million. The Company may also invest in other companies in the future.
Investments in technology companies, and the internet sector 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.
Other Data Regarding Results of Operations. The impact of the charges for
amortization of intangibles on the net loss and net loss per share in fiscal
1999 is 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
JANUARY 31, 2000
---------------------------
BEFORE AFTER
AMORTIZATION AMORTIZATION
OF ACQUIRED OF ACQUIRED
INTANGIBLES INTANGIBLES
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Loss from operations................................. $(3,312) $(9,190)
Other income, net.................................... 8,949 8,949
Provision for (benefit from) income taxes............ 2,086 (89)
------- -------
Net income (loss).................................... $ 3,551 $ (152)
======= =======
Net income (loss) per share:
Basic.............................................. $ 0.03 $ (0.00)
======= =======
Diluted............................................ $ 0.03 $ (0.00)
======= =======
Shares used in computing net income (loss) per share:
Basic.............................................. 107,649 107,649
Diluted............................................ 114,326 107,649
</TABLE>
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<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2000, the Company's principal sources of liquidity
consisted of $116.9 million of cash and cash equivalents, $303.0 million of
short-term and long-term investments in marketable securities, and an unsecured,
revolving line of credit. Included in short-term investments in marketable
securities was the Company's strategic equity investment in shares of the stock
of Extensity, an internet start up company that went public in January 2000. The
Extensity investment is classified as available for sale and, accordingly, is
carried at its fair market value of $28.9 million as determined by the quoted
market price as of January 31, 2000. It is included in short-term marketable
securities to reflect management's intention to sell the shares subsequent to
expiration of a six month "lock-up" agreement, but within the next 12 months.
Gross unrealized gains of $24.4 million were included, net of tax of $9.2
million, as a component of accumulated other comprehensive income. No amounts
were outstanding under the line of credit during the three-month periods ended
January 31, 2000 or 1999. The Company had working capital of $173.0 million at
January 31, 2000 and a current ratio of 1.5 to one. Included in determining such
amounts are short-term unearned revenue and customer deposits of $160.3 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 $333.3 million.
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 for the quarter multiplied by 90 days. Calculated as such,
DSO decreased to 108 at January 31, 2000 compared to 111 at January 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 $26.8 million in cash for operating activities during the
quarter ended January 31, 2000 compared to generating $1.1 million during the
quarter ended January 31, 1999. The decrease in operating cash flow was
primarily due to the operating loss together with prepaid royalties made on
certain reseller agreements reflected in other assets.
Financing activities provided $13.7 million in cash from exercises of
common stock options and the Employee Stock Purchase Plan. The Company issued a
total of 1.4 million shares of common stock during the first three months of
fiscal 2000. The Company did not have other significant net financing activities
for the first quarter of fiscal 2000 or during the same period last year.
The Company generated $18.2 million in cash from investing activities for
the quarter ended January 31, 2000 compared to using $19.0 million for the
quarter ended January 31, 1999. The increase from the prior year was primarily
due to maturities of marketable securities that were not reinvested due to the
Company's cash requirements during the first quarter of fiscal 2000. During the
first three months of both fiscal years, the Company purchased furniture,
fixtures, and equipment necessary to keep pace with current technology
requirements and to support its expanding operations.
At January 31, 2000, the Company held forward contracts requiring the
purchase of 2.2 million shares of its common stock at an average cost of $28.73
per share. Additionally, the Company had outstanding put obligations and call
options covering 790,000 shares of its common stock at average exercise prices
of $28.92 and $39.21 per share, respectively. The equity instruments are
exercisable only at their dates of expiration, which range from September 2000
to June 2001. Forward purchase contracts require a full physical settlement and
the aggregate redemption cost of $69.5 million is included in the accompanying
balance sheet in temporary equity with a corresponding decrease in additional
paid-in capital. The outstanding put obligations permit net share settlement at
the Company's option and, therefore, do not result in a put obligation
liability. The equity instruments did not have an effect on EPS for the quarter
ended January 31, 2000; however, should the market price of the Company's common
stock price fall below the exercise price of the put obligations, such contracts
will increase the number of diluted shares outstanding. The equity instrument
contracts were entered into during the quarter ended January 31, 2000 in
accordance with a share repurchase plan approved in August 1999 by the Company's
board of directors, authorizing the repurchase of up to eight million shares of
the Company's common stock. Additional contracts were entered into during the
second quarter ending
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<PAGE> 21
April 30, 2000. The plan is designed to partially offset the effects of share
issuances under the stock option and employee stock purchase plans. 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, put and
call transactions, or open market purchases.
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 have collectively financed up to $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 and the balances fluctuate based upon the
timing of dividend payments and investment maturity dates. At January 31, 2000,
investments totaling $123.3 million were designated as collateral for these
leases.
Management believes its cash and cash equivalents balance, short-term and
long-term investments, funds generated from operations, and amounts available
under existing credit facilities will be sufficient to meet its cash needs for
at least the next 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. It has also entered into contracts to acquire treasury 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.
EURO
In January 1999, a new currency called the ECU or the "euro" was introduced
in certain Economic and Monetary Union ("EMU") countries. During 2002, all
participating EMU countries are expected to be operating with the euro as their
single currency. During the next two years, business in participating EMU member
states will be conducted in both the existing national currency and the euro. As
a result, companies operating in or conducting business in these EMU member
states will need to ensure that their financial and other software systems are
capable of processing transactions and properly handling these currencies,
including the euro. Although the Company currently offers software products that
are designed to be euro currency enabled and management believes it will be able
to accommodate any required euro currency changes, there can be no assurance
that the software will contain all the necessary changes or meet all of the euro
currency requirements. If the Company's software does not meet all the euro
currency requirements of its business, its operating results and financial
condition would be materially adversely affected. Nonetheless, the Company has
not had and does not expect a material impact on its results of operations from
foreign currency gains or losses as a result of its transition to the euro as
the functional currency for its subsidiaries based in EMU countries.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company will be required to apply recently issued accounting standards
in its future consolidated financial statements. SFAS No. 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. Additionally, the
Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements," in December 1999 that
provides further interpretive
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<PAGE> 22
guidance for public companies. SAB No. 101 will be effective for the Company's
first quarter of fiscal 2001. Management anticipates that the adoption of SAB
No. 101 will not have a material impact on the Company's financial condition or
results of operations and that it will not have a significant impact on its
current licensing or revenue recognition practices.
IMPACT OF THE YEAR 2000
To date, the Company has experienced no significant business interruptions
or material adverse effects from the Year 2000 computer systems issue. All
crucial internal information technology systems made a trouble-free transition
into the Year 2000. The Company had no notable problems with equipment or
systems which may have been affected by faulty software processors, embedded
chips, or other systems problems. The Company is not aware of any significant
Year 2000 problems at any of its customers' sites nor has the Company noted any
disruption in its supply chain related to Year 2000 issues.
To address the Company-wide internal Year 2000 readiness activities, the
Company established a corporate readiness program during fiscal 1998 to
coordinate efforts already then underway in the information technology (IT) and
software development departments and to expand the program to include all
business functions and geographic areas. The program addressed internal
operational and financial risks as well as those associated with business
partners and other third parties. Status reports on this program were
periodically presented to the Company's senior management and to the audit
committee of the Board of Directors. The Company's internal business operations
are significantly dependent upon the proprietary software products it licenses
to customers. Year 2000 issues related to the current versions of its
proprietary software products had been addressed prior to inception of the
corporate readiness program, and management believes the product to be generally
Year 2000 compliant. The Company encouraged its customers to migrate to current
product versions that are Year 2000 ready and provided regular correspondence
regarding Year 2000 preparations to its customers in the last several months
leading up to the new year.
The Company incurred direct costs to remediate Year 2000 issues of
approximately $2.0 million. The costs include the budget for the Company's
corporate readiness programs, IT and non-IT costs, including legal expenses,
expenses associated with a field readiness task force, equipment purchases, and
maintenance provided over the weekend of the actual date change to the Year
2000. Such costs do not include labor, overhead, or other resources that were
associated with the impact of Year 2000 compliance. Although the Company
currently offers software products that are designed and have been tested to be
ready for the Year 2000, there can be no assurance that the Company's software
products contain all necessary date code changes. Furthermore, it was been
widely reported that a significant amount of litigation surrounding business
interruptions will arise out of Year 2000 issues. It is uncertain whether, or to
what extent, the Company may be affected by such litigation.
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:
- demand for our software products and services
- the size and timing of our license transactions
- the level of product and price competition that we encounter
- the length of our sales cycle
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<PAGE> 23
- the timing of our new product introductions and enhancements and those of
our competitors
- market acceptance of our products
- changes in our pricing policies and those of our competitors
- announcements of new hardware platforms that may delay customer's
purchases
- variations in the length of our product implementation process
- the mix of products and services revenue
- the mix of distribution channels through which we license our software
- the mix of international and domestic revenue
- changes in our sales incentives
- changes in the renewal rate of our support agreements
- the life cycles of our products
- software defects and other product quality problems
- the expansion of our international operations
- the general economic and political conditions
- the budgeting cycles of our customers
Our software products 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. 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.
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<PAGE> 24
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, Tradex,
and Extensity. 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 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 investment we have made in such strategic
partnerships. If our expansion into these new business areas or our
relationships with our partners are 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:
- companies offering other products that run on Windows NT- or UNIX-based
systems, such as SAP Aktiengesellschaft, Oracle Corporation, PeopleSoft,
Inc., and Baan Company N.V.
- companies offering other products on the AS/400 platform, such as System
Software Associates, Inc., Mapics, Inc., and Infinium Software, Inc.
- 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, PeopleSoft, and Baan 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.
We continue to rely on a number of firms that provide systems consulting,
systems integration, services implementation, and customer support services and
that recommend our products during the evaluation stage by potential customers.
A number of our competitors have more well-established relationships with such
firms, and as a result, 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
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<PAGE> 25
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:
- responsiveness to customers' needs
- product flexibility and ability to handle business changes
- product functionality
- speed of implementation
- ease of use
- product performance and features
- product quality and reliability
- vendor and product reputation
- quality of customer support
- 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 have
adopted a strategy in which an increasing number of OneWorld implementations
will be performed by third parties that contract directly with our customers.
Executing this strategy requires our current third-party implementation
providers to allocate additional resources to our OneWorld customers. In
addition, we must continue to enter into additional third-party relationships.
Due to the limited resources and capacities of many third-party implementation
providers, there can be no assurance that we will establish or maintain
relationships with third parties having sufficient resources to provide the
necessary services to support the demand of our OneWorld customers. If we cannot
obtain sufficient resources, we will be required to perform the implementation
services ourselves. There is no assurance that we will have sufficient resources
available for such purposes. If we are unable to establish and maintain
effective long-term relationships with such third party implementation providers
or if such providers do not meet our customers needs, our business, operating
results, and financial condition could be materially adversely affected.
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, and 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.
Competition between these third parties and us could result in the deterioration
or termination of our relationship. This could have a material adverse effect on
our business and sales.
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 38 international sales offices located throughout Canada, Europe, Asia,
Latin America, and Africa. We intend to continue to substantially expand our
international operations and enter additional markets outside of the U.S. This
expansion will require significant management attention and financial resources.
Traditionally,
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<PAGE> 26
our international operations are characterized by higher operating expenses and
lower operating margins. As a result, if our international revenue increases as
a percentage of total revenue, our operating margins may be adversely affected.
Additionally, costs associated with international expansion include the
establishment of additional offices, hiring of additional personnel,
localization and marketing of our products 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:
- imposition of governmental controls
- export license requirements
- restrictions on the export of certain technology
- cultural and language difficulties
- the impact of a recessionary environment in economies outside the United
States
- reduced protection for intellectual property rights in some countries
- the potential exchange and repatriation of foreign earnings
- political instability
- trade restrictions and tariff changes
- localization and translation of products
- difficulties in staffing and managing international operations
- difficulties in collecting accounts receivable and longer collection
periods
- the impact of local economic conditions and practices
Our success in expanding our international operations depends, in part, on
our ability to anticipate and effectively manage these and other risks. We
cannot guarantee that these or other factors will not materially adversely
affect our business, operating results, or financial condition.
Due to the volatile economic conditions in international markets,
particularly in Asia over the past 18 months, the Company continues to closely
monitor its 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 Asia and, during
fiscal 1999, the Company made some personnel changes and reduced some layers of
management through a voluntary reduction in force program in Japan. 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 and other specific geographic areas that are currently being
impacted by adverse economic conditions. With the worldwide performance of the
Company continuing to be negatively impacted by certain economic conditions,
risks associated with these international investments may not be mitigated by
the broad geographic diversity of the Company's operations. As a result, the
Company's investments in certain international areas 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. We use a foreign exchange hedging program to
limit our exposure risk. In the first quarter of fiscal year 1999 and 2000, we
incurred foreign exchange losses of approximately $4,000 and $500,000,
respectively. Due to the substantial volatility of foreign exchange rates, there
can be no assurance that our hedging activities will effectively limit our
exposure or that such fluctuations will not 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
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<PAGE> 27
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.
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.
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 first quarter of fiscal 2000, 36% of the Company's total revenue was
generated from its international operations, and 44% of the Company's
consolidated net assets related to its foreign operations as of January 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 January 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 January 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 January
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. Investments, including cash equivalents, consist of U.S.,
state, and municipal bonds, as well as domestic corporate bonds, with maturities
of up to 30 months. All investments are classified as held-to-maturity as
defined in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and, accordingly, are carried at amortized cost. Additionally, the
Company has lease obligations calculated as a return on the lessor's costs of
funding based on LIBOR and adjusted from time to time to reflect any
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<PAGE> 28
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 January
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 January 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
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.
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 is 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
J.D. EDWARDS & COMPANY
By: /s/ RICHARD E. ALLEN
----------------------------------
Name: Richard E. Allen
Title: Chief Financial Officer,
Senior Vice President, Finance
and
Administration and Director
(principal financial officer)
Dated: March 15, 1999
By: /s/ PAMELA L. SAXTON
----------------------------------
Name: Pamela L. Saxton
Title: Vice President of Finance,
Controller and Chief Accounting
Officer
(principal accounting officer)
Dated: March 15, 1999
30
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT JANUARY 31, 2000 AND STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
JANUARY 31, 2000 AS FILED ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 116,920
<SECURITIES> 77,386
<RECEIVABLES> 289,361
<ALLOWANCES> 12,000
<INVENTORY> 0
<CURRENT-ASSETS> 536,335
<PP&E> 176,996
<DEPRECIATION> 87,200
<TOTAL-ASSETS> 1,017,773
<CURRENT-LIABILITIES> 363,359
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 558,202
<TOTAL-LIABILITY-AND-EQUITY> 1,017,773
<SALES> 83,287
<TOTAL-REVENUES> 231,706
<CGS> 12,904
<TOTAL-COSTS> 101,475
<OTHER-EXPENSES> 139,421
<LOSS-PROVISION> 1,119
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> (241)
<INCOME-TAX> (69)
<INCOME-CONTINUING> (152)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (152)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
