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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-23091
J.D. EDWARDS & COMPANY
(Exact name of Registrant as Specified in its Charter)
<TABLE>
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DELAWARE 84-0728700
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
ONE TECHNOLOGY WAY, DENVER, COLORADO 80237
(Address of principal executive offices) (Zip code)
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Registrant's Telephone Number, including area code 303/334-4000
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, par value $0.001 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of January 14, 2000, there were 108,245,698 shares of the Registrant's
common stock outstanding, and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on January 14, 2000) was approximately $3.5
billion. Shares of the Registrant's common stock held by each executive officer
and director and by each entity that owns 5% or more of the Registrant's
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the
2000 Annual Meeting of Stockholders to be held on March 29, 2000 are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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PART I
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates, and
projections about J.D. Edwards' industry, management's beliefs, and certain
assumptions made by J.D. Edwards' management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," variations of
such words, and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties, and assumptions
that are difficult to predict; therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth herein under "Factors Affecting
the Company's Business, Operating Results, and Financial Condition" on pages 14
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 and documents that the
Company files from time to time with the Securities and Exchange Commission,
particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form
8-K.
J.D. Edwards is a registered trademark of J.D. Edwards & Company. The names
of all other products and services of J.D. Edwards used herein are trademarks or
registered trademarks of J.D. Edwards World Source Company. All other product
names used herein are trademarks or registered trademarks of their respective
owners.
ITEM 1. BUSINESS
OVERVIEW
J.D. Edwards develops, markets, and supports enterprise software and supply
chain computing solutions that enable customers to translate ideas into
practical realities quickly and efficiently using the Company's Idea to
Action(TM) software. The Company's integrated applications deliver e-business
solutions that give customers control over their front office, manufacturing,
logistics/distribution, human resources, finance, and customer service
management processes for the consumer products, industrial, and services
industries. J.D. Edwards enables Idea to Action with ActivEra(TM), a collection
of tools and technologies that extends J.D. Edwards OneWorld(TM) and
WorldSoftware(TM) enterprise business software and its supply chain planning
solutions. ActivEra allows customers to change their software quickly and easily
during and after implementation.
The Company has developed and marketed enterprise software solutions for
over 20 years, principally for operation on AS/400 and other IBM mid-range
systems and, more recently, for multiple computing environments, including
Windows NT(R), UNIX(R), and OS/400(R) that are Java(TM) and HTML enabled. The
Company also provides implementation, training, and support services designed to
enable customers to rapidly achieve the benefits of the Company's solutions.
J.D. Edwards operates primarily in the United States, Europe, Africa, Canada,
Asia, and Latin America.
J.D. Edwards' family of application suites is designed to improve most
organizations' core business processes and supply chain management. In addition,
the Company extends its application suites to address certain vertical markets
with specific configurations, templates, and additional software features
designed to meet the business needs of particular industries. The Company offers
two versions of its application suites -- OneWorld and WorldSoftware. OneWorld
incorporates the Company's Configurable Network Computing(TM) (CNC) architecture
and operates on leading NT and UNIX servers, as well as the AS/400 platform.
Through its CNC architecture, the Company's enterprise software is specifically
designed to enable customers to make business changes quickly and easily. The
Company believes its network-centric CNC architecture provides a valuable
extension beyond traditional client/server architectures by masking complexity,
lowering cost of change, and facilitating greater scalability. WorldSoftware
operates in a host-centric environment on the AS/400 platform. With the addition
of the WorldVision(R) thin client interface, WorldSoftware applications can be
operated through a Windows-based graphical user interface. In addition, OneWorld
and World-
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Software are capable of operating together in a unified enterprise-wide
environment. The Company also provides OneWorld and WorldSoftware toolsets to
enable rapid implementation, customization, and modification of its application
suites.
The Company distributes, implements, and supports its products worldwide
through 62 offices and has more than 300 third-party business partners,
including sales and consulting partners with offices throughout the world. To
date, the Company has more than 5,500 customers with sites in over 110
countries.
The Company completed two acquisitions during the fiscal year ended October
31, 1999. On February 26, 1999, the Company acquired The Premisys Corporation, a
privately held Illinois corporation that provides visual configuration software
and consulting services. Technology acquired from The Premisys Corporation is
integrated with OneWorld, the Company's multi-platform solutions. On June 16,
1999, the Company completed an acquisition of privately held Numetrix Ltd., a
Toronto-based provider of Internet-enabled supply chain planning software. The
first phase of integration of OneWorld and the Numetrix product suite was
completed in fiscal 1999, and the second phase will be completed during fiscal
2000.
The Company was incorporated in Colorado in March 1977 and was
reincorporated in Delaware in August 1997. The Company's principal executive
office is located at One Technology Way, Denver, Colorado 80237, and its
telephone number is 303/334-4000. The Company's home page can be located on the
World Wide Web at www.jdedwards.com. Except as otherwise noted herein, all
references to "J.D. Edwards" or the "Company" shall mean J.D. Edwards & Company
and its subsidiaries.
J.D. EDWARDS IDEA TO ACTION AND ACTIVERA
One of the problems with complex enterprise software systems is that once
installed or implemented, the system becomes difficult to modify. In today's
changing business environment, a customer's inability to change its business
processes can be an impediment to growth. The Company's unique Idea to Action
concept enabled through ActivEra, a collection of tools and technologies that
extends the capabilities of the Company's solutions, enables customers to change
their technology as their business practices change and evolve. ActivEra
provides an unprecedented level of enterprise power, control, and simplicity so
that companies can take immediate action on real-world events in real-time.
ActivEra refocuses the emphasis of enterprise software on solving real-world
business problems.
J.D. EDWARDS' STRATEGY AND CUSTOMER BENEFITS
The Company's solutions are designed to provide customers with enterprise
software systems that continue to be the solution in the face of ongoing change.
J.D. Edwards solutions offer the following customer benefits:
Deliver and Support Comprehensive Solutions for Global Enterprises
The Company's enterprise business software supports an organization's core
business processes through a family of application suites, including
manufacturing, distribution/logistics, human resources, finance, and customer
service management. These application suites are designed to enable a customer
to integrate business information across its organization and throughout its
supply chain; accommodate diverse business practices across a geographically
dispersed organization; and support multiple languages, currencies, and
countries. The Company's experienced service organization provides training,
support, and a tested methodology to enable rapid implementation of J.D. Edwards
enterprise software solutions.
Facilitate Changes in Technology and Business Practices
The Company's CNC architecture is designed to mask the complexities of
underlying platform technologies, thus enhancing agility and simplifying
software modification. Using the Company's highly flexible software toolset,
customers can modify the Company's application suites to accommodate their
business practices without regard to the underlying hardware, software, and
network technologies. By masking the complexity of the underlying technology,
the Company's CNC architecture facilitates the incorporation of
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new technologies and enables customers to modify business practices without
extensive low-level software code modification or support.
Changes in business practices may require system modifications, and the
J.D. Edwards ActivEra technology offers discrete applications or utilities that
facilitate changes to the system and allow companies to quickly react to changes
in their business. The Company plans to continue to enhance this technology both
internally and through third parties over the next several years. Third-party
developed technology will be designed to "snap in" and operate within the
Company's application suites. The Company has developed this functionality for
both the business professional and technology professional that allow these
individuals to make changes to the system independently.
Provide Technology Choices for Different Market Segments
Customers can select between two versions of the Company's application
suites. The Company provides its OneWorld version to customers who want the
accessibility of information and ease of use typically associated with
client/server systems, without the burdens often associated with these complex
systems. OneWorld's object-based technology is designed to enhance programmer
productivity, facilitate modification of business practices, and leverage
network scalability. OneWorld, introduced in late 1996, operates on leading NT
and UNIX servers, in addition to the AS/400 platform. OneWorld is also Java and
HTML enabled, delivering full functionality to the web. The Company offers its
WorldSoftware version to customers who seek the reliable performance and the
lower cost of ownership associated with host-centric systems. By offering two
versions of its software, the Company addresses different segments and allows
customers to maintain consistent business functionality while combining
different technologies to meet their specific requirements.
Preserve and Extend Customer Investment
The Company designed OneWorld to provide customers with a migration path to
a network-centric architecture, while preserving the customers' existing
investments in AS/400 platforms. The Company's CNC architecture enables OneWorld
and WorldSoftware application suites to co-exist on the AS/400 platform,
allowing customers to incorporate the new technologies of OneWorld while
maintaining consistent functionality with their WorldSoftware systems. This
architecture minimizes disruptions and reduces the overall cost of change for
customers.
Lower Cost of Ownership
The Company's enterprise business software solutions are designed to reduce
overall cost of ownership through a combination of advanced technology and
comprehensive service and support. The Company's CNC architecture is
specifically designed to enable customers to change business practices or
technology environments without significant costs or business interruptions. In
addition, the Company's OneWorld software version is platform independent,
allowing customers to select the best price and performance solutions from
multiple hardware and software suppliers. The Company also offers implementation
services and support enabling more rapid deployment of the Company's enterprise
software solutions, thus reducing customers' overall cost of ownership.
Establish Long-term Customer Relationships
The Company has designed its enterprise software solutions with broad
business functionality and flexibility to reduce the need for significant custom
modifications. By minimizing custom modifications, the customer's ability to
benefit from subsequent releases is enhanced, as is the Company's ability to
support the software as implemented. The Company's investment in worldwide
customer support services and user groups facilitates customer communication and
feedback, enhancing customer satisfaction. This focus on standard software
functionality and flexibility and its investment in customer support and user
groups contributes to long-term customer relationships.
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ACTIVERA SOLUTIONS
With ActivEra Solutions, the agility that the Company has offered with its
enterprise application suites was expanded to include the full range of business
processes shared with customers and partners throughout the supply chain.
ActivEra Solutions allow customers to make rapid changes to their business,
maximizing the competitive advantage that comes from responsiveness. The
elements of the Company's ActivEra Solutions have a component-based architecture
with an openness to third-party technologies that the Company offers through
strategic product alliance partnerships or that it has acquired through its
recent acquisitions of The Premisys Corporation and Numetrix. Additionally,
certain suites contain self-service solutions for customers, suppliers, and
employees making collaboration easier.
Active Foundation/OneWorld
J.D. Edwards Active Foundation provides the infrastructure for J.D. Edwards
ActivEra Solutions in OneWorld. It comprises the integrated tools, advanced
middleware, and reusable business objects that speed solution development,
deployment, and maintenance. The Active Foundation is Web-capable, making the
information and capabilities within the enterprise available anywhere, anytime
over the Internet. The Active Foundation component architecture maximizes
flexibility and performance while separating business logic from underlying
technology.
Active Enterprise/Application Suites
J.D. Edwards Active Enterprise provides the agile software required to
conduct business in the global economy. This solution, an Internet-capable suite
of applications, enables day-to-day operations and individual capabilities and
cross-functional processes that can be added and configured, as needed, both
before and after implementation by the business user. With J.D. Edwards Active
Enterprise, organizations are able to quickly adapt operations and processes as
their organizational structure, employee workplace, and supplier and customer
business relationships change. J.D. Edwards Active Enterprise gives companies
the power to optimize their essential assets by helping them manage change.
Cross-industry Application Suites. The Company's family of application
suites includes manufacturing, distribution/logistics, human resources, finance,
and customer service management. The Company's application suites accommodate
different business practices across a geographically dispersed organization, as
well as multiple languages, currencies, and countries. Each suite can operate on
a stand-alone basis or can be integrated with other J.D. Edwards suites and
selected third-party applications and systems. The majority of the Company's
customers deploy multiple application suites.
The Company's application suites are licensed under perpetual, fully paid
licenses. The prices for such licenses are based on the functionality of the
application suite and the number and type of licensed users. Customers pay a
base amount per application suite plus a per user amount.
The following is a description of each application suite and the business
processes that each addresses:
- Manufacturing. The Company's manufacturing application suite is designed
to enable organizations to optimize their manufacturing operations
resources within a single plant or across multiple locations and to
provide information links to other departments within the organization.
This suite offers customers everything from product configuration to
enterprise facilities planning to position themselves for the challenges
faced in manufacturing operations.
- Distribution/Logistics. The distribution/logistics process continues to
face increasing demand for the fast delivery of a company's products,
emphasis on value-added services, and pressure to control costs. J.D.
Edwards' distribution/logistics application suite is designed to address
these changing needs. This suite offers an extensive breadth and depth of
functionality that allows companies to meet their customers' demands. The
distribution/logistics suite includes features that enable companies to
manage their warehouses, inventory, and transportation for a single site
or multiple sites around the world.
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- Human Resources. The human resources department requires efficient
solutions to meet its complex information needs. J.D. Edwards' human
resources application suite is designed to maximize the contributions of
a company's human resources staff. This suite enables companies to change
operational processes to support shifting business strategies, as well as
eliminate redundancies while providing immediate access to on-line
information.
- Finance. The expanding markets and changing processes of today require
flexible financial practices. The Company's finance application suite is
designed to provide structure, security, and the ability to audit a
company's financial systems without limiting the company's ability to
respond to operational and market changes. The application suite provides
a central repository of financial information with simplified transaction
processing. This suite enables companies to respond to the latest changes
in management and market trends.
- Customer Service Management. The customer service management suite allows
the Company's customers to communicate customer service information
across the supply chain from a single information source, tailor a
response to the needs of their customers, and streamline processes for
increased productivity and rapid identification of new service
opportunities. With CSM, the Company's customers receive the flexibility
to manage workflow for the unique and changing requirements of their
customers. CSM offers customer information management, installed-base
management, service contract management, call center management, service
order management, flexible reporting, and online inquiry.
Vertical Market Applications. The Company has significant vertical market
experience and expertise through developing, selling, and deploying enterprise
software solutions for over 5,500 customers across a variety of industries. The
Company has a strategic focus on select vertical markets directed at better
addressing those customers' needs. The Company's vertical focus offers customers
more finely tailored solutions, faster implementation, and broader
industry-specific expertise. The Company believes that by aligning the sales and
support organizations along vertical lines it will be able to broaden specific
industry offerings and better enable customers to quickly react to business
changes. The Company currently provides industry-specific solutions to the
following industry sectors:
- Consumer Products. The consumer products sector focuses on
consumer-packaged goods, pharmaceuticals, and energy and chemical
solutions.
- Industrial. The industrial sector focuses on high technology and
electronics, industrial fabrication and assembly, automotive supply, and
other industrial solutions.
- Services. The services industry sector focuses on engineering,
architecture, construction, real estate, mining, and public services
solutions.
The Company plans to continue its strategy of customizing application
suites and templates for vertical markets, as well as building in best business
practices. The Company also offers industry-specific training and services to
these markets.
Active Customer Relationship Management
J.D. Edwards Active Customer Relationship Management is a collection of
applications for managing all phases of the customer life cycle, from marketing
to sales and service. Active CRM automates customer interactions so that
organizations can concentrate on boosting sales, building additional market
share, and improving customer retention. Comprised of industry-proven solutions,
Active CRM can change as quickly as an organization's business requires.
The Company's customer service management suite is the first of the three
components of Active CRM. This suite allows the Company's customers to
communicate customer service information across the supply chain from a single
information source, tailor a response to the needs of their customers, and
streamline processes for increased productivity and rapid identification of new
service opportunities. Customers receive
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the flexibility to manage workflow for the unique and changing requirements of
their own customers. CSM offers customer information management, installed-base
management, service contract management, call center management, service order
management, flexible reporting, and online inquiry.
J.D. Edwards CustomWorks is a visual sales configurator that is integrated
with OneWorld. It allows products to be visually configured to customer
specifications in real-time. CustomWorks allows companies to deploy product
knowledge in the field, reduce quote and sales cycle times, eliminate costly
configuration errors, and accelerate customer communication. CustomWorks
combines data modeling, computer-aided design drawings, and flexible interfaces
to automate the product configuration process and the generation of technical
documents during the sales cycle and beyond.
J.D. Edwards' partnership with Siebel Systems, Inc. complements the CRM
capabilities of the Company's Customer Service Management System and visual
configurator, CustomWorks. The Company joined forces with Siebel to provide
customers with a high-performance sales force automation solution. This solution
integrates Siebel's Web-based front-office software with OneWorld, which allows
companies to fully integrate their supply chain and deliver real-time e-business
solutions. With software solutions from J.D. Edwards and Siebel, customers can:
- gain a complete view of their customers' life cycle
- extend their supply chain to customers
- integrate agencies, call centers, and alternate channels
- access Siebel eChannel, a dynamic forecasting tool that keeps the front
office in sync with its global distribution channels
This application functionality can be provided directly via the Internet
and displayed through a Web-browser, thus minimizing application deployment and
maintenance costs. By helping companies to integrate their sales force
information, J.D. Edwards and Siebel make it easier to measure, maintain, and
track sales strategies.
Active CRM allows companies to maximize the value that customer information
adds to the business. In addition, the Company's ActivEra Portal allows
organizations to differentiate their offerings with personalized information and
transactions for their own customers and partners.
Active Procurement
Active Procurement enables organizations to realize a rapid return on
investment by automating many of their paper-based processes and providing the
ability to collaborate with vendors and suppliers in real-time. Active
Procurement -- comprised of J.D. Edwards E-Procurement, Travel and Expense
Management, and Supplier Self-Service applications -- assists companies in
streamlining many of their business processes. In addition, the Company's
Numetrix xtr@ solution better enables customers to synchronize production
schedules with material suppliers and contract manufacturers. Designed with the
Company's flexible architecture, Active Procurement can easily change to
accommodate new business processes and help to improve the efficiency of
day-to-day operations.
J.D. Edwards and Ariba, Inc. have teamed up to provide companies with the
J.D. Edwards E-Procurement solution. This solution connects buyers to suppliers,
provides access to logistics information, and takes advantage of the latest
electronic payment technologies to integrate business into the global electronic
economy. J.D. Edwards E-Procurement is a complete operating resource management
system that allows companies to streamline the procurement of goods and services
by:
- establishing preferred suppliers and products through boundaries
determined by price, item, and vendor
- reducing the number of employees required to process, track, and approve
transactions
- decreasing cycle time, which allows employees to have the supplies and
services they need when they need them
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With J.D. Edwards E-Procurement, companies can better manage their internal
business operations and take advantage of business-to-business e-commerce for
rapid and efficient transactions with suppliers and reduce the time and cost for
purchasing operating goods and services.
Active Supply Chain
J.D. Edwards Active Supply Chain integrates agile planning and execution
software into one comprehensive supply chain management solution. This solution
is designed to integrate and extend a company's business lifecycle and execute
tailored supply chains for individual customers. The Company's functionally rich
components and advanced architecture provide customer focused supply chain
solutions that allow companies to understand the changing requirements of their
customers and then make the changes to their business to meet those customer
requirements. J.D. Edwards Active Supply Chain gives companies the capability to
take an order, price it, manufacture it, source it, package it, and ship it the
way the customer wants. Through xtr@, J.D. Edwards Active Supply Chain contains
Web-capable processes, messaging, and deployment that are configurable during
and after implementation to support and adapt to an organization's essential
supply chain relationships. J.D. Edwards xtr@ helps customers optimize their
global supply chain by leveraging the power of the Internet, and it allows for
optimization of the supply chain across the entire enterprise. The xtr@ solution
enables customers to construct channels of collaboration, helping them to share
real-time accurate and appropriate information across supply/demand networks and
extend the supply chain solution to the Internet. By extending supply chain
planning to the Internet, customers can deliver products for a lower cost.
RECENT DEVELOPMENTS IN J.D. EDWARDS E-BUSINESS
Partnerships
As part of its strategy to expand its full supply chain solution, the
Company recently signed agreements to form additional strategic relationships,
including the following:
- Proforma Corporation. In November 1999, the Company signed an agreement
with Proforma Corporation to enhance its Active CRM. Proforma will
provide business process modeling to improve an organization's ability to
react to their changing business needs.
- Tradex Technologies. In December 1999, the Company entered into a
strategic agreement with Tradex Technologies to further invest in its
future business-to-business solutions. Tradex specializes in digital
marketplaces and trading communities. This relationship allows J.D.
Edwards to resell the Tradex Commerce Center Platform in the U.S. and
allows J.D. Edwards to utilize the Tradex digital marketplace platform in
developing its own trading communities for vertical markets.
- Extensity, Inc. In December 1999, the Company entered into a reseller
agreement with Extensity, Inc., to offer Internet application solutions
for e-business employees. J.D. Edwards will resell Extensity's automated
travel and expense reporting software, which is designed to improve
employee productivity and operational efficiency.
Application Hosting Services/JDe.sourcing
In January 2000, the Company announced a new business initiative for its
application hosting solution. JDe.sourcing provides application hosting services
directly to an organization anywhere in the world. With this application hosting
service, J.D. Edwards e-business software resides at, and is accessed through
the Internet from, a centrally located and managed data center. This allows an
organization to take full advantage of the J.D. Edwards flexible e-business
solutions, while leaving the task of maintaining the system to others. In
addition, organizations can access a customer-centric environment that allows
direct access to J.D. Edwards' partners. JDe.sourcing allows organizations to
assemble a comprehensive Internet-enabled solution without dedicating their own
resources.
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THIRD-PARTY BUSINESS PARTNERS
Platform Partners
J.D. Edwards is able to provide its customers with system configuration
benchmarking standards and pre-engineered network solutions through its platform
partners. Each partner has personnel who can provide customers with customized
sizing and configuration support for large or unusually complex configurations.
Consulting Alliance Partners
The Company has established relationships with some of the world's foremost
consulting companies to provide both technology and application implementation
support. These global partners provide expertise in business process
reengineering and possess a broad range of knowledge in diversified industries.
The Company's consulting alliance partners have dedicated service organizations
to manage every aspect of a customer's implementation.
JDe.sourcing Partners
The JDe.sourcing initiative comprises selected application service provider
(ASP) partners with unique vertical industry expertise. These ASP partners are
differentiated according to industry or customer size, business process support,
and market reach.
International Sales and Service Partners
International sales and service partners strengthen the Company's worldwide
presence with sales and support services in areas without a direct J.D. Edwards
presence. They also maintain a value-added reseller program to complement their
direct offices, enhancing coverage of the small to medium enterprise market.
Genesis Channel Partners
The Company's solution for small emerging companies, the Genesis Channel,
extends J.D. Edwards' presence in the market of organizations with $100 million
or less in annual revenue. The Genesis Partners offer the full J.D. Edwards
solution, as well as the entire complement of sales, service, and support in
their respective areas.
Implementation Support Partners
The Company seeks to provide its customers with high-quality implementation
services in the most efficient and effective manner. In some cases where the
Company itself does not provide implementation services, it subcontracts such
services through third parties. The Company also has relationships with a number
of third-party implementation providers that contract directly with customers
for the implementation of the Company's software. The Company selects these
third-party providers carefully to ensure that they have the ability and
knowledge to represent the Company and implement its enterprise business
software solutions properly. Providers receive extensive training regarding the
Company's application suites and its implementation process. In addition, the
Company evaluates these providers on a regular basis to ensure quality service
and support to its customers. The Company continues to move toward reliance on
more third-party implementation providers to contract directly with customers
for the implementation of the OneWorld version of its applications suites. These
relationships will enable the Company to provide implementation services through
third-party personnel with extensive client/server expertise, while expanding
its service capacity, focusing on license fee revenue generation, and
concentrating its own service resources on those activities it can perform most
efficiently. The Company believes that this direct and third-party customer
service strategy will enable it to deliver comprehensive and timely services
worldwide.
Product Alliances Partners
One of the Company's ongoing goals is to form relationships with
organizations whose products enhance the J.D. Edwards solutions. This allows the
Company to manage development costs, while at the same time
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more quickly offering its customers the broadest spectrum of products and
services needed. The Company's product alliance partners allow customers to
benefit from well-rounded solutions and the assurance of compatible technology
and qualified support. The Company currently has over 70 product alliance
partners.
Hardware Remarketers
J.D. Edwards has established relationships with authorized hardware
remarketers. These remarketers possess the quality and proficiency required to
sell hardware platforms optimized for a OneWorld environment. The Company's
hardware remarketers take the lead in providing specialized knowledge and
training in J.D. Edwards' applications, hardware requirements, and technical
support.
TECHNOLOGY
Architecture
The Company offers two versions of its application suites -- OneWorld and
WorldSoftware. OneWorld incorporates the Company's CNC architecture and operates
on leading NT and UNIX servers, as well as the AS/400. One World is also Java
and HTML enabled, delivering full functionality to the web. WorldSoftware
operates in a host-centric environment on the AS/400 platform. In addition,
OneWorld and WorldSoftware are capable of operating together in a unified
enterprise-wide environment.
OneWorld is an object-based, event-driven technology designed to provide
the information access and other user benefits of traditional client/server
systems while masking complexity and accommodating future change. OneWorld's CNC
architecture enables the deployment of a single version of an application across
a network, regardless of the underlying technologies.
The CNC architecture consists of three components: the application layer,
the toolset layer, and the technology layer.
The OneWorld application layer contains the specific business functionality
of the OneWorld manufacturing, distribution/logistics, human resources, finance,
and customer service management application suites. OneWorld application suites
are composed of approximately 4,500 reusable objects. The applications are
distributed by the OneWorld deployment server in object form to individual
platforms where they are compiled and executed. A customer changes the
application logic by modifying the objects or creating new objects using the
OneWorld toolset. Applications containing the modified or newly created objects
are then redistributed to individual platforms. The Company believes that this
single-point-of-change architecture significantly reduces the cost of change
compared to traditional client/server architectures.
The OneWorld toolset is used to create or modify OneWorld objects, allowing
customers or the Company's developers to quickly create new application
functionality. The toolset also insulates users from lower-level technologies.
For example, OneWorld objects exist independent of any specific computer
language. Currently, the OneWorld toolset can generate objects in three computer
languages: C, C++, and Java. The Company believes it can readily incorporate new
languages in the future as market requirements dictate. The Company also
believes that this unified toolset approach significantly reduces customers'
cost of ownership when compared to traditional client/server systems that
require a variety of tools.
The OneWorld technology layer is designed to mask the differences between
underlying platforms and provide a uniform interface for OneWorld applications.
This uniformity allows a single object to execute on a wide variety of
platforms, a "write once, run anywhere" capability. The technology layer is able
to support IBM's AS/400 platform, Intel-based NT servers, IBM's RS/6000,
Hewlett-Packard's 9000, Sun Microsystems' platform, as well as other NT servers
from NEC and Fujitsu. Supported clients include personal computers running
Windows 95 and Windows NT or any desktop system running an Internet browser.
Supported databases include Oracle databases, the IBM DB2/400 database, and
Microsoft's SQL server. The Company intends to continue to integrate additional
platforms, servers, and software as necessary to meet market demands.
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The technology layer also integrates a variety of components not typically
integrated in traditional client/ server architectures, including an object
request broker, a transaction processing monitor, a workflow engine, a C/C++
generator, and a Java generator. In traditional client/server implementations,
customers often must integrate these components obtained from multiple
suppliers. The Company believes that its architecture and high degree of
integration reduce the cost of ownership and facilitate change when compared to
traditional client/server implementations.
WorldSoftware is a well-established, procedural-based technology designed
to take advantage of the security, integrity, and easily maintained architecture
of the AS/400 platform. Unlike many host-centric enterprise software systems,
WorldSoftware provides flexibility to make run-time changes in application
suites without the need to recompile software. WorldSoftware also incorporates
features such as an active data dictionary, user defined codes, and a variety of
run-time options. With the addition of the WorldVision thin client interface,
WorldSoftware applications can be operated through a Windows-based graphical
user interface.
ActivEra Technology
The ActivEra technology offers discrete applications or utilities that
facilitate changes to the system and allow companies to quickly react to changes
in their business. The Company plans to continue to develop these "activators"
both internally and through third parties over the next several years.
Third-party developed activators will be designed to "snap in" and operate
within the Company's application suites. The Company has developed this
functionality for both the business professional and technology professional
that allow these individuals to make changes to the system independently.
Business professionals use the activators to shape the way applications
work and the way the company conducts its business. Business solutions can be
composed visually in real-time with point-and-click, drag-and-drop ease. A
selection of intuitive graphical navigators -- such as automated
question-and-answer directors, flowcharts, menus, and user defined
shortcuts -- automatically direct the business professional to where they need
to go in the system to make changes. The Company has designed business
activators for the following purposes:
- Modify how individual users are able to interact with the enterprise
software applications and receive output and make immediate changes in
the areas of user interface, navigation, and output operations and
choices.
- Provide users with the ability to make modifications to the functionality
of the Company's applications.
- Provide users with the ability to engage in business scripting, a guided
path that provides users with a mechanism that enables or establishes
company characteristics and processing rules to support the business
process. Users are led through a set of questions and activities designed
to gather specific information about the business process. Once
completed, these activators implement the process changes that meet the
business process requirements.
The technology activators enable technology professionals to streamline
management of the information system infrastructure. This allows the systems
administrators, integrators, and developers to work with common technology that
insulates application programming and network configuration from the underlying
application database, operating system, hardware, messaging systems, and
telecommunications protocols. The Company has designed technology activators for
the following purposes:
- Deploy changes and enhancements instantaneously across the entire
network, allowing users to implement global modifications to the
company's system in a unified network environment.
- Modify the way enterprise software applications communicate with other
applications by enabling applications to share logic and data. This
interoperability allows users to leverage technology and to enhance the
productivity of their employees. This means technology professionals can
easily integrate third-party applications.
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Provide users with a simple object scripting methodology that allows
crucial business changes to easily be incorporated and deployed enterprise-wide
automatically.
ActivEra Portal
The ActivEra portal, a gateway released in 1999, connects users to the
ActivEra technology, the J.D. Edwards enterprise software system or to a legacy
system, Internet content, business intelligence system, or any other connected
application. It helps users by providing personalized Web-based access and the
power to customize their screen view. With the ActivEra Portal, users can access
everything from customer information to the latest industry trends and news from
a single screen. It enables users to easily navigate between their J.D. Edwards
system, third-party systems, and the Internet.
Toolsets
The Company's software application suites were developed with the Company's
OneWorld and WorldSoftware toolsets. These toolsets are also used for the
ongoing enhancement and modification of the Company's products. The advantages
of these toolsets include increased productivity, increased code consistency,
self-documenting code, and improved quality.
The OneWorld and WorldSoftware toolsets are bundled with the OneWorld and
WorldSoftware applications, respectively, providing companies the same
productivity, consistency, and quality benefits enjoyed by the Company's own
developers, thus reducing the complexities typically associated with upgrades to
new releases. Since modifications made by both the customers and the Company are
completed with the same toolset, it is easier and faster to upgrade to new
releases while preserving the customers' modifications. This capability enables
its customers to incorporate new functionality more rapidly, while also reducing
the Company's support costs.
The Company's OneWorld toolset incorporates more advanced technologies,
including object-based methods and event-driven models. The OneWorld toolset
generates code in C, C++, and Java for a multi-platform, network-centric
environment. Because the OneWorld toolset rigorously separates business logic
from underlying technologies, it also facilitates the incorporation of new
technologies. The Company believes that the ability to incorporate new
technologies by regenerating rather than rewriting applications provides a
competitive advantage.
The Company's WorldSoftware toolset provides a high-level architecture,
allowing the Company's development staff to express business practices as an
abstract model. The toolset then uses the model to generate RPG code that runs
on an AS/400 platform in a host-centric, procedural architecture.
DIRECT IMPLEMENTATION SERVICES AND TRAINING
The Company believes that delivery of its enterprise business
software -- together with high-quality consulting, implementation, support, and
training services -- enables the Company to achieve a high level of customer
satisfaction, strong customer references, and long-term relationships and
facilitates software improvement based on customer feedback. The Company offers
a step-by-step implementation approach, implementation tools, training, and
customer user education services both directly and through third parties to
assist its customers in rapidly achieving benefits from its enterprise software
solutions. As of October 31, 1999, the Company had 2,291 employees in its client
services, training, and support departments worldwide.
Implementation
The Company has designed an implementation process called J.D. Edwards
OnTrack. This process enables customers to implement quickly and gives customers
the flexibility to meet their changing business
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needs. OnTrack consists of a six-step process: define, train, model, configure,
go live, and refine. The Company and its partners enable on-time, on-budget
implementation utilizing the following:
- the OnTrack shared implementation approach
- accelerated implementation tools, which include the ActivEra technology
and pre-configured business process models
- custom user education, which includes a custom documentation tool and
computer-based training
- implementation and classroom training
In addition to its standard implementation services, the Company also
offers a full range of custom implementation services, including conversion
programs, upgrade assistance, custom modifications and interfaces, and technical
documentation. Implementation services are generally provided on a time and
materials basis.
Education and Training
The Company offers a comprehensive education and training program to its
customers and to the Company's third-party implementation providers. Classes are
offered at the Company's in-house facilities located throughout the world, as
well as at customer locations. The Company's instructors are certified for each
course they teach, and their backgrounds generally include cross-functional
experience in product testing, customer support, and implementation services.
Support
The Company believes that providing business solutions along with a high
level of ongoing support to its customers is a critical element in establishing
long-term relationships and maintaining a high level of customer satisfaction.
Specific components of the Company's support include knowledgeable support
consultants, quality surveys, frequent information updates, the Internet
customer solution center, and real-time phone support. The Company provides
support services for an annual fee, which entitles the customer to receive
telephone customer support, as well as enhancements and updates to its licensed
version of the Company's software. The Company provides customer support through
three customer support centers located in Denver, London, and Singapore, which
are connected through a wide area network. Customer support from these centers
is provided in nine languages on a 12-hour-per-day, five-day-per-week basis, and
in English-only on a 24-hour-per-day, seven-day-per-week basis. Customer support
personnel have the ability to access customer systems remotely to diagnose and
resolve problems. As of October 31, 1999, the Company had 592 employees in its
customer support department.
CUSTOMERS
The Company, to date, has licensed its application suites to over 5,500
customers. During each of the last three fiscal years, no customer accounted for
more than 10% of total revenue.
SALES AND MARKETING
Selling the Company's software to multinational organizations typically
requires the Company to engage in a lengthy sales cycle, generally between six
and eighteen months, and to expend substantial time, effort, and money educating
prospective customers regarding the use and benefits of the Company's products.
J.D. Edwards sells its software and services through direct sales and business
partner channels throughout the world. The Company also has more than 300
business partners, including sales and consulting partners with offices
throughout the world providing an indirect distribution channel to target
certain markets or geographic areas, in particular those areas in which the
Company has not invested resources to establish a direct presence. The Company
expects to continue to rely on indirect channels in order to enhance its market
penetration and implementation capabilities. International revenue as a
percentage of total revenue ranged between 37% and
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39% for each of the past three fiscal years, and the Company expects revenue
from international customers will continue to account for a significant portion
of the Company's total revenue in the future.
The Company's marketing strategy is to position itself as a premier
provider of enterprise software solutions and to increase recognition of the
J.D. Edwards name. In support of this strategy, the Company's marketing programs
include developing and maintaining industry analyst and public relations,
developing databases of targeted customers, conducting advertising and direct
mail campaigns, and maintaining a World Wide Web home page.
PRODUCT DEVELOPMENT
The Company has invested, and expects to continue to invest, substantial
resources in research and product development. The research and product
development department is organized into the following areas that work closely
together to provide the Company's software solutions:
- development technologies groups
- application development groups
- the software quality and release management group
- the documentation group
The Company's development process is enhanced by frequent solicitation of
customer feedback and close contact with customers through the Company's
implementation services. Additionally, cross-functional product teams that
consist of management representatives from development, customer support, and
marketing meet regularly to determine product direction. As of October 31, 1999,
the Company's research and product development organization included 1,056
employees, the majority of whom were located in Denver, Colorado. Research and
development expenditures, which include capitalized internal software
development costs, were $62.8 million, $89.4 million, and $109.2 million for the
fiscal years ended October 31, 1997, 1998, and 1999, respectively.
The Company's development technologies groups are responsible for the
development of the toolsets and underlying technologies of OneWorld,
WorldSoftware, CustomWorks, and the Numetrix supply chain planning applications.
The OneWorld development technologies team focuses on enhancing the flexibility,
scalability, simplicity, and performance of OneWorld, including OneWorld's
ActivEra Solution Accelerator suite and the CNC technological foundation. The
WorldSoftware development technologies team is primarily focused on maintaining
the toolset and underlying technologies for WorldSoftware. The development
technologies teams share responsibility for cross-functional coordination with
sales and support. Additionally, they work with the hardware and software
suppliers with whom the Company has relationships to identify, analyze,
prioritize, and schedule new features and functionalities. The Premisys
Corporation was acquired by the Company in February 1999, and its development
team continues its responsibilities for enhancements and OneWorld integration of
CustomWorks from their offices in Chicago, Illinois. In June 1999, J.D. Edwards
acquired Numetrix and its supply chain planning development group based in
Toronto, Canada. The Numetrix supply chain planning development team is
responsible for the ongoing enhancements of the Numetrix suite of products as
well as new supply chain planning solutions and the integration of those
solutions with OneWorld.
Separate application development teams use the toolsets developed by the
development technologies group to create and enhance each application suite. The
application development groups are responsible for developing, enhancing, or
maintaining the OneWorld and WorldSoftware application suites, including the
vertical market application suites, CustomWorks, and the Numetrix supply chain
planning application suites. The Company has designed its toolsets to enable
application programming to be performed by business analysts, or nonprogrammers,
responsible for business practices. These application development teams also
work with customers and third-party implementation providers to identify,
analyze, prioritize, and schedule new functionality in the Company's existing
application suites, as well as to establish specifications and priorities for
new vertical markets. The Premisys CustomWorks and Numetrix development teams
and the
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OneWorld integration efforts are organized as part of one of the applications
groups. Additionally, the integration of J.D. Edwards software solutions with
those of product alliance partners is primarily performed by the related
applications group.
The software quality and release management group works closely with both
the development tools and application development groups. It is primarily
responsible for quality assurance and measurement, release management, product
assembly, and distribution.
The Company's documentation group is responsible for the documentation,
localization, and translation of the Company's application suites for particular
foreign markets, as well as the vertical market application suites and
templates, for OneWorld, WorldSoftware, CustomWorks, and Numetrix supply chain
planning development. The documentation group works closely with domestic and
international customers and third-party implementation providers -- as well as
cross-functional Company teams of development, implementation, support, and
training professionals -- to ensure that appropriate enhancements are
incorporated into the documentation and implementation processes. The Company's
OneWorld application suites are currently translated into and operate in 19
languages, and the Company's WorldSoftware application suites currently are
translated into and operate in 21 languages. In addition, this group develops
and maintains a single database for documentation, which is currently translated
into eight languages. The Company intends to offer additional language
translations in the future.
COMPETITION
The Company competes in the enterprise software solutions market. This
market is highly competitive, subject to rapid technological change, and
significantly affected by new product introductions. The Company competes with a
large number of independent software vendors in this market, as well as with
suppliers of custom developed business application software. Some of the
Company's competitors have significantly greater financial, technical,
marketing, and other resources, and there can be no assurance that the Company
will be able to successfully compete. See "Factors Affecting the Company's
Business, Operating Results and Financial Condition -- The Enterprise Business
Software Industry is Highly Competitive and We may Be Unable to Successfully
Compete."
PROPRIETARY RIGHTS AND LICENSING
The Company's success depends, in part, on its ability to protect its
proprietary rights. To protect these rights the Company relies primarily on a
combination of copyright, trade secret, and trademark laws; confidentiality
agreements with employees and third parties; and protective contractual
provisions. While the Company seeks to protect its proprietary rights, there can
be no assurances that such protection is adequate. See "Factors Affecting the
Company's Business, Operating Results and Financial Condition -- We Have Limited
Protection of Our Proprietary Technology and Intellectual Property and Face
Potential Infringement Rights."
EMPLOYEES
As of October 31, 1999, the Company had 5,669 full-time employees: 1,056 in
research and development; 1,539 in sales and marketing; 1,699 in client services
and training; 592 in customer support; and 783 in management and administration.
The Company believes that its continuing success will depend, in part, on its
ability to retain a limited number of key employees and other members of senior
management, as well as its ability to attract and retain highly skilled
technical, marketing, and management personnel, who are in great demand. The
Company has not had a work stoppage, and no employees are represented under
collective bargaining agreements. The Company considers its employee relations
to be good.
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS, AND FINANCIAL
CONDITION
IN ADDITION TO OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM
10-K AND IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE
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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
- 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
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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 your investment may be
materially impacted.
Our Recent Expansion into New Business Areas and Partnerships Is Uncertain
and may not Be Successful. We have recently expanded our technology into a
number of new business areas to foster our long-term growth, including
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, Proforma,
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 computing software products is difficult to
predict because Internet computing represents a method of computing 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 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, Baan Company N.V., PeopleSoft,
Inc., and Oracle Corporation
- 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, Baan,
PeopleSoft, and Oracle 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
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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
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 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.
We Continue to Depend on the IBM AS/400 Platform for a Large Portion of Our
Revenues. We continue to be dependent on the market for software products on the
IBM AS/400 platform. Most of the revenue for fiscal 1997 and a substantial
portion for 1998 was derived from the licensing of our software product and
related services for the AS/400 market. During fiscal 1999, the percentage of
our revenue from the AS/400 continued to decline as the percentage of our
revenue from the non-AS/400 market increased. We will continue to offer enhanced
software products for the AS/400 market, but there is no guarantee that our
customers will buy or support these enhanced software products.
The AS/400 market is expected to grow at a minimal rate, and there can be
no assurance that it will grow at all in the future. Our future growth depends,
in part, on our ability to gain market share. There can be no assurance that we
can maintain or increase our relative share of the AS/400 market. As we
increasingly focus on our OneWorld software version, it may become more
difficult to gain market share with AS/400 users. We introduced OneWorld, our
software version that runs on leading NT and UNIX servers, as well as on the
AS/400, in late calendar 1996. If we lose AS/400 installed base customers or
AS/400 market share, we may suffer material adverse effects to our revenues and
business.
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Our Limited Deployment of OneWorld and Recent Entrance into New Markets may
Impact Our Business and Operating Results. We first shipped the OneWorld version
of our application suites in late calendar 1996, and as of October 31, 1999,
approximately 650 of our customers had implemented OneWorld. Our revenue growth
depends on our ability to market OneWorld and to license it to new customers. We
do not anticipate generating much OneWorld license revenue from our current
WorldSoftware users. We also have found that it takes longer to implement
OneWorld than WorldSoftware. We believe that certain new customers may not
license OneWorld or may find it difficult to implement OneWorld because:
- customers may lack the necessary hardware, software, or networking
infrastructure
- implementation may be too lengthy and/or costly for some customers
- OneWorld may not be perceived as competitive with other products on the
market
With the introduction of OneWorld, we also entered new markets -- the NT
and UNIX markets. In order to be competitive in these markets, we must continue
to overcome obstacles, such as competitors with significantly more experience
and name recognition, continue to establish relationships with third-party
implementation providers, and continue to add reference accounts in the open
systems market.
If we are unable to continue to successfully license or implement OneWorld,
our reputation would be damaged and we would suffer material adverse effects to
our revenues, business, operating results, and financial condition.
Additionally, failure to achieve success in marketing OneWorld could result in a
drop in our stock price.
Our Sales Cycle Is Often Lengthy and Unpredictable, Which Could Impact Our
Sales. Customers make a substantial capital investment in purchasing our
software for division or enterprise-wide essential business purposes. Potential
customers spend significant time and resources on determining which software to
purchase. This requires us to spend substantial time, effort, and money
educating and convincing prospective customers to purchase our software over our
competitors. Selling our products requires an extensive sales effort because the
decision to license software generally involves evaluation by a significant
number of customer personnel in various functional and geographic areas. We also
have no control over which company a customer favors or if the customer chooses
to delay or forego a purchase. Due to all of these factors, our sales cycle can
range from six to eighteen months. Since the sales cycle is unpredictable, we
cannot forecast the timing or amount of specific sales, and sales vary from
quarter to quarter. The delay to complete one or more large sales could have a
material adverse effect on our business, operating results, or financial
condition.
Our Implementation Process may Be Lengthy, Which Could Result in Customer
Dissatisfaction or Damage to Our Reputation. Our software is complex and affects
many different business functions across various functional or geographic areas
of an enterprise. This results in a complex and lengthy implementation process.
The implementation process requires the involvement of significant resources of
the customer and can also result in significant risks to the customer. Our
OneWorld implementation process is more complex than our WorldSoftware
implementation process. Delays in implementation by our business partners or by
us may result in customer dissatisfaction or damage to our reputation. This
could materially impact our revenues or business.
Our Continued Growth Depends on Our Ability to Develop and Maintain Our
Third-Party Relationships. We rely heavily on third-party implementation
providers to implement the OneWorld version of our application suites.
Additionally, we have adopted a strategy in which an increasing number of
OneWorld implementations will be performed by third parties that contract
directly with our customers. Executing this strategy requires our current
third-party implementation providers to allocate additional resources to
OneWorld implementations. In addition, we must continue to enter into additional
third-party implementation relationships. Due to the limited resources and
capacities of many third-party implementation providers, there can be no
assurance that we will establish or maintain relationships with third parties
having sufficient resources to provide the necessary implementation services to
support the demand of our OneWorld customers. If we cannot obtain 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
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unable to establish and maintain effective long-term relationships with such
third party implementation providers or if such providers do not meet our
customers needs, our business, operating results, and financial condition could
be materially adversely affected.
We have established relationships with a number of third parties, including
consulting and system integration firms, hardware suppliers, and database,
operating system, and other independent software vendors to enhance our sales,
marketing, and customer service efforts. Many of these third parties also have
relationships with one or more of our competitors and may, in some instances,
select or recommend the software offerings of our competitors rather than our
software. In addition, certain of these third parties compete with us directly
in developing and marketing 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.
We Depend to a Significant Extent on Our Service Revenue. We license our
software under non-cancelable license agreements and provide related services
such as consulting, implementation, support, and training. In the past, we have
subcontracted a portion of our consulting and training services to third
parties. We currently pursue a strategy of relying on third-party implementation
providers to contract directly with our OneWorld customers for implementation
and related services. To the extent we are successful with this strategy,
revenue from subcontracted services and service revenue as a percentage of total
revenue most likely will decrease. If such revenue decreases more than
anticipated, our operating results will be materially adversely affected. In
addition, there can be no assurances that we will be successful in implementing
this strategy or that such services will achieve market acceptance. The failure
of our strategy could have a material adverse effect on our business, operating
results, and financial condition.
Our Continued Success Depends on Our Ability to Manage Growth. Our ability
to successfully offer products and services and to implement our business plan
in a rapidly evolving market requires an effective planning and management
process. Continued growth of our business may place a significant strain on our
existing management systems and resources. To compete effectively and manage
future growth, we must continue to evaluate and improve the adequacy of our
management structure and existing procedures, including our financial and
internal controls. If we are not successful, our business, operating results,
and financial condition would be materially adversely affected. Additionally, we
have focused a significant amount of our resources on the NT and UNIX markets as
a result of the development and release of the OneWorld version of our
application suites. We also must continue to maintain a focus on the AS/400
market. If our efforts to maintain a focus on these markets are unsuccessful,
our revenues and business could be materially adversely impacted.
The Introduction of and Operation in the Euro Currency may Adversely Impact
Our Business. In January 1999, a new currency called the ECU or the euro was
introduced in certain Economic and Monetary Union countries. During 2002, all
EMU countries are expected to be operating with the euro as their single
currency. During the next two years, business in EMU member states will be
conducted in both the existing national currency and the euro. As a result,
companies operating in or conducting business in EMU member states will need to
ensure that their financial and other software systems are capable of processing
transactions and properly handling these currencies, including the euro.
Although we currently offer software products that are designed to be euro
currency enabled and we believe we will be able to accommodate any required euro
currency changes, there can be no assurance that our software will contain all
the necessary changes or meet all of the euro currency requirements. If our
software does not meet all the euro currency requirements our business,
operating results, and financial condition would be materially adversely
impacted. See "Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Euro."
Our International Operations and Sales Subject Us to Various Risks
Associated with Growth Outside the United States. We market and sell our
products in the United States and internationally. Our international revenue
continues to represent a significant portion of our total revenue. We currently
maintain 41 international sales offices located throughout Canada, Europe, Asia,
Latin America, and Africa. We intend to continue to substantially expand our
international operations and enter new international markets. This expansion
will require significant management attention and financial resources.
Traditionally, our interna-
19
<PAGE> 21
tional operations are characterized by higher operating expenses and lower
operating margins. As a result, if our international revenue increases as a
percentage of total revenue, our operating margins may be adversely affected.
Additionally, costs associated with international expansion include the
establishment of additional offices, hiring of additional personnel,
localization and marketing of our products in foreign markets, and the
development of relationships with international service providers. If
international revenue is not adequate to offset the expense of expanding foreign
operations, our business 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 deterioration of economic conditions in the Asian markets,
particularly in Japan and in certain other geographic regions, 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 made some personnel
changes and reduced some layers of management through a voluntary reduction in
force program in Japan. During the fiscal year ended October 31, 1999, a
significant portion of the Company's operating losses were a result of
operations in Asia. Consistent with its historical results, the Company expects
that during 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 and the global market focus on Year 2000 issues, 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 recently broadened our foreign exchange
hedging activities to limit our exposure risk. In fiscal year 1998 and 1999, we
incurred foreign exchange losses of approximately $2.8 million and $568,000,
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.
20
<PAGE> 22
Our Inability to Timely Complete In-process Development Projects Could
Materially Impact Our Revenues. Our inability to complete the in-process
development projects acquired in the Numetrix and The Premisys Corporation
acquisitions within the expected schedule could materially impact future revenue
and earnings. Management believes these supply chain solutions are integral to
its ability to remain competitive in the extended enterprise software market and
any delays in completion could materially impact our ability to effectively
compete.
We Face Risks Associated with New Versions and Products, Rapid Technology
Change, and Defects that Could Materially Impact Our Business and Revenues. The
software market in which we compete is characterized by rapid technological
change, evolving industry standards, changes in customer requirements, and
frequent new product introductions and enhancements. For instance, existing
products can become obsolete and unmarketable when products utilizing new
technologies are introduced or new industry standards emerge. As a result, the
life cycles of our software products are difficult to estimate. To be
successful, we must be able to enhance existing products, develop and introduce
new products that keep pace with technological development, satisfy our
customers' requirements, and achieve market acceptance. There can be no
assurances that we will successfully identify new product opportunities, develop
and bring new products to the market in a timely and cost-effective manner, or
that products, capabilities, or technologies developed by our competitors will
not render our products obsolete. We have addressed the need to develop new
products and enhancements primarily through internal development efforts, though
on occasion we have licensed third-party technology and will consider acquiring
technology. However, licensing third-party technology is risky. If we are unable
to develop new software products or enhancements, or if such products do not
achieve market acceptance, our business, operating results, or financial
condition may be materially adversely affected.
Historically, we have issued significant new releases of our software
products periodically with minor interim releases issued more frequently. As a
result of the complexities inherent in our software, major new product
enhancements and new products often require long development and testing periods
before they are released. On occasion, we have experienced delays in the
scheduled release date of new and/or enhanced products, and we cannot provide
any assurances that we will not miss future scheduled release dates. The delay
of product releases or enhancements or the failure of such products or
enhancements to achieve market acceptance could materially impact our business
and reputation.
Software products as complex as ours frequently contain undetected errors
or bugs when first introduced or as new versions are released. Despite extensive
testing, some bugs are not discovered until the product has been installed and
used by our customers. To date, our business, operating results, and financial
condition have not been materially impacted by the release of products
containing errors. There can be no assurance that any future errors will not
result in the delay or loss of revenue, diversion of development resources,
damage to our reputation, increased service or warranty costs, or impaired
market acceptance of these products.
We may Be Unable to Compete Effectively if We Are Forced to Offer a
Significant Number of Fixed-Price Service Contracts. We offer a combination of
software, implementation, and support services to our customers. We typically
enter into service agreements with our customers that provide consulting and
implementation services on a time and materials basis. We have, from time to
time, entered into fixed-price service contracts with certain of our customers.
These types of contracts specify that we must obtain certain milestones prior to
payment, regardless of the actual costs incurred by us. We believe that such
fixed-price service contracts may be offered more frequently by our competitors
to differentiate their products and services. As a result, we may be forced to
enter into more of such contracts. We can offer no assurance that we can
successfully complete these contracts on budget or that our inability to do so
would not have a material adverse effect on our business and ability to
effectively compete in the market.
We Depend to a Significant Extent on Certain Key Personnel and on Our
Continued Ability to Hire Qualified Personnel. Our success depends, to a
significant extent, upon a limited number of members of our senior management
and other key employees. The loss of one or more of our key employees could
result in a material adverse effect to our business. Additionally, we do not
maintain key-man life insurance on our chief executive officer or other key
personnel.
21
<PAGE> 23
We believe that our future success will also depend, in part, on our
ability to attract and retain highly skilled technical, managerial, sales and
marketing, service, and support personnel. Competition for such personnel in the
computer software industry is intense. There can be no assurance that we will be
successful in attracting or retaining such personnel. The failure to do so could
have a material adverse effect on our business, operating results, or financial
condition.
We Have Limited Protection of Our Proprietary Technology and Intellectual
Property and Face Potential Infringement Risks. Our success depends, in part, on
our ability to protect our proprietary rights. To protect our proprietary
rights, we rely primarily on a combination of copyright, trade secret, and
trademark laws; confidentiality agreements with employees and third parties; and
protective contractual provisions such as those contained in our license
agreements with consultants, vendors, and customers. We currently have six
patents and six patent applications pending on various aspects of our software
application suites. We pursue the registration of certain of our trademarks and
service marks in the United States and in certain other countries. However, the
laws of some foreign countries do not protect proprietary rights to the same
extent as do the laws of the United States, and effective copyright, trademark,
and trade-secret protection may not be available in other jurisdictions.
Nevertheless, we believe that the following factors are more essential to
protecting our technology leadership position:
- the technological and creative skills of our personnel
- new product developments
- frequent product enhancements
- name recognition
- customer training and support
- reliable product support
We generally enter into confidentiality or license agreements with our
employees, consultants, and vendors. These agreements control access to and
distribution of our software, documentation, and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
copy aspects of our products, obtain and use information that we regard as
proprietary, or develop similar technology through reverse engineering or other
means. Preventing or detecting unauthorized use of our products is difficult.
There can be no assurances that the steps we take will prevent misappropriation
of our technology or that our license agreements will be enforceable. In
addition, we may resort to litigation to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of
others' proprietary rights, or to defend against claims of infringement or
invalidity in the future. Such litigation could result in significant costs or
the diversion of resources. This could materially adversely affect our business,
operating results, or financial condition.
We generally license our products to end users through our standard license
agreement. Each agreement is negotiated individually and may contain variations.
We also license our products to independent third-party distributors with a
right to sub-license. Although we establish conditions under which our products
are licensed by our distributors to end users, there can be no assurances that
our distributors do not deviate from such conditions.
We may receive notice of claims of infringement of other parties'
proprietary rights in the normal course of business. Although we do not believe
that our products infringe on the proprietary rights of third parties, we cannot
guarantee that such infringement or invalidity claims will not be asserted or
prosecuted against us. Defending such claims, regardless of their validity,
could result in significant costs and diversion of resources. Such assertions or
defense of such claims may materially adversely affect our business, operating
results, or financial condition. In addition, such assertions could result in
injunctions against us. Injunctions that prevent us from distributing our
products would have a material adverse effect on our business, operating
results, and financial condition. If such claims are asserted against us, we may
seek to obtain a license to use such
22
<PAGE> 24
intellectual property rights. There can be no assurance that such a license
would be available on commercially reasonable terms.
We also rely on certain technology that we license from third parties,
including software that is integrated with our internally developed software. In
particular, we license the graphical user interface to our WorldSoftware, which
we market as WorldVision. There can be no assurances that these third-party
licenses will continue to be available to us on commercially reasonable terms.
The loss of, or inability to maintain, any of these licenses, would result in
delays or reductions in product shipments until we could identify, license, or
develop and integrate equivalent technology. Any such delays or reductions in
product shipments would materially adversely affect our business, operating
results, or financial condition. Although we are generally indemnified by third
parties against claims that such third-parties' technology infringes the
proprietary rights of others, such indemnification is not always available for
all types of intellectual property. Often such third-party indemnifiers are not
well capitalized and may not be able to indemnify us in the event that their
technology infringes the proprietary rights of others. As a result, we may face
substantial exposure in the event that technology licensed from a third party
infringes another party's proprietary rights. We currently do not maintain
liability insurance to protect against this risk. There can be no assurance that
such infringement claims will not be asserted against the company or that such
claims would not materially impact our business. Defending such infringement
claims, regardless of their validity, could result in significant costs and
diversion of resources.
We Face Risks Associated with the Security of Our Products. We have
included security features in certain of our Internet browser-enabled products
that are intended to protect the privacy and integrity of customer data. Despite
these security features, our products may be vulnerable to break-ins and similar
problems caused by Internet users. Such break-ins and other disruptions could
jeopardize the security of information stored in and transmitted through the
computer systems of our customers. Break-ins include such things as hackers
bypassing firewalls and misappropriating confidential information. Addressing
problems caused by such break-ins may have a material adverse effect on our
business.
Although our license agreements with our customers contain provisions
designed to limit our exposure as a result of the defects listed above, such
provisions may not be effective. Existing or future federal, state, or local
laws or ordinances or unfavorable judicial decisions could effect their
enforceability. To date, we have not experienced any such product liability
claims, but there can be no assurance that this will not occur in the future.
Because our products are used in essential business applications, a successful
product liability claim could have a material adverse effect on our business,
operating results, and financial condition. Additionally, defending such a suit,
regardless of its merits, could entail substantial expense and require the time
and attention of key management.
Downturns in General Economic and Market Conditions Could Materially Impact
Our Business. Various segments of the software industry have experienced
significant economic downturns characterized by decreased product demand, price
erosion, work slowdown, and layoffs. In addition, there is increasing
uncertainty in the enterprise software market attributed to many factors
including global economic conditions and strong competitive forces. Our future
license fee revenue and results of operations may experience substantial
fluctuations from period to period as a consequence of these factors, and such
conditions may affect the timing of orders from major customers and other
factors affecting capital spending. Although we have a diverse client base, we
have targeted a number of vertical markets. As a result, any economic downturns
in general or in our targeted vertical markets would have a material adverse
effect on our business, operating results, or financial condition.
Our Common Stock Price Is Volatile, Which Could Materially Impact Your
Investment. The market price of our common stock has fluctuated in the past and
is likely to fluctuate in the future. In addition, securities markets have
experienced significant price and volume fluctuations and the market prices of
high-tech companies have been especially volatile. Investors may be unable to
resell their shares of our common stock at or above the price they paid for it.
Companies that have experienced volatility in the market price of their stock
often have been the object of securities class action litigation. We are
currently the object of
23
<PAGE> 25
securities class action litigation. This litigation could result in substantial
costs to us and diversion of management's attention and resources, and your
investment could be materially impacted.
Control by Existing Shareholders Could Significantly Influence Matters
Requiring Stockholder Approval. As of January 14, 2000, J.D. Edwards' executive
officers, directors, and entities affiliated with both, in the aggregate,
beneficially owned approximately 20.5% of our outstanding common stock. These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by stockholders, including the election of directors
and the approval of mergers or other business combinations.
Our Antitakeover Provisions and Delaware Law Could Materially Impact Our
Stockholders. Certain provisions of our Amended and Restated Certificate of
Incorporation, Bylaws, and Delaware law could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our stockholders.
This could adversely affect the market price of our common stock and impact the
value of your investment.
ITEM 2. PROPERTIES
The Company's corporate headquarters and executive offices are in Denver,
Colorado, where the Company leases approximately 915,000 square feet of space in
multiple facilities. The leases on these facilities expire at various dates
ranging from 2000 through 2004. The Company also leases approximately 671,000
square feet of space, primarily for regional sales and support offices,
elsewhere in the United States. Additionally, the Company leases approximately
506,000 square feet of office space in countries outside the United States, used
primarily for sales and support offices. Expiration dates on sales and support
office leases range from 2000 to 2023. The Company believes that its current
domestic and international facilities will be sufficient to meet its needs for
at least the next twelve months. See Note 6 of Notes to Consolidated Financial
Statements for information regarding the Company's obligations under its
facilities leases and financing activities.
ITEM 3. 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. Subsequently, two additional suits were filed on behalf of
additional plaintiffs alleging the same violations and seeking the same recovery
as the first suit.
The Company believes these complaints are without merit and will vigorously
defend itself and certain of its officers and directors against such complaint.
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, that
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 these
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
24
<PAGE> 26
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company through October 31, 1999, and their
ages as of January 14, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Douglas S. Massingill................. 42 President and Chief Executive Officer
David E. Girard....................... 44 Executive Vice President and Chief
Operating Officer
Richard E. Allen...................... 42 Senior Vice President, Finance and
Administration and Chief Financial
Officer
Paul E. Covelo*....................... 44 Senior Vice President
Michael A. Schmitt.................... 42 Senior Vice President
Daniel B. Snyder*..................... 42 Vice President
Pamela L. Saxton...................... 47 Vice President of Finance, Controller,
and Chief Accounting Officer
Richard G. Snow, Jr. ................. 54 Vice President, General Counsel, and
Secretary
</TABLE>
- ---------------
* As of November 1, 1999, these individuals are no longer executive officers of
the Company.
Douglas S. Massingill has been President and Chief Executive Officer of the
Company since November 1998. From March 1997 to October 1998, he was Executive
Vice President and Chief Operating Officer. From February 1994 to March 1997, he
was Executive Vice President of Worldwide Operations, and from January 1993 to
March 1994, Mr. Massingill was Vice President and General Manager of the South
Area. He joined the Company in June 1990 as Account Executive for the Large
Accounts Program. Mr. Massingill holds a B.A. in accounting from Shorter College
and an M.B.A. from Georgia Southern University.
David E. Girard has been Executive Vice President and Chief Operating
Officer of the Company since November 1998. From November 1997 to October 1998,
he was Senior Vice President. He was Vice President and General Manager of the
East Area from May 1994 through October 1997. Mr. Girard holds a B.S. in
marketing from University of Connecticut and attended the Columbia Executive
Marketing Management Program at Columbia University.
Richard E. Allen has been Senior Vice President, Finance and Administration
since November 1997, and Chief Financial Officer, Treasurer and Assistant
Secretary since January 1990. From January 1990 through October 1997, he was
Vice President, Finance and Administration. From August 1985 to September 1994,
Mr. Allen served as Controller of the Company and as Secretary from March 1986
to January 1990. Mr. Allen holds a B.S. in business administration from Colorado
State University.
Paul E. Covelo has been Senior Vice President since November 1997. From
August 1994 to October 1997, he was Vice President of International Operations.
He served as Vice President and General Manager of the West Area from January
1992 to September 1994 and Manager of the Newport Beach Region from July 1988 to
January 1992. Mr. Covelo holds a B.A. in marketing from Loyola Marymount
University.
Michael A. Schmitt has been Senior Vice President since November 1997. From
September 1996 to October 1997, he held the position of Vice President and
General Manager of Central European operations, and from October 1994 to August
1996 he was Vice President and General Manager of the West area. Mr. Schmitt
holds a B.S. in Business Administration from California Polytechnic State
University.
Daniel B. Snyder has been Vice President of Leadership Development since
November 1999. From November 1997 to November 1999 he was Senior Vice President.
He was Vice President and General Manager of the Midwest Area from March 1992 to
October 1997, and from January 1992 to March 1992, he
25
<PAGE> 27
served as Director of Large Accounts for the Midwest Area. Mr. Snyder holds a
B.S. in business administration from Arizona State University and an M.B.A. in
finance from University of Southern California.
Pamela L. Saxton has been Vice President of Finance, Controller, and Chief
Accounting Officer since joining the Company in September 1994. Ms. Saxton holds
a B.S. in accounting from the University of Colorado.
Richard G. Snow, Jr., has been Vice President, General Counsel, and
Secretary since joining the Company in January 1990. He holds a B.S. in business
administration from the University of California, Berkeley, and a J.D. from
California Western University Law School.
The individuals who became executive officers of the Company as of November
1, 1999, and their ages as of January 14, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Gerry E. Bleau............................................ 48 Senior Vice President
James L. Foos............................................. 38 Senior Vice President
Brian A. McKeon........................................... 44 Senior Vice President
Nigel R. Pullan........................................... 43 Senior Vice President
Donald C. White........................................... 43 Senior Vice President
</TABLE>
Gerry E. Bleau has been Senior Vice President since November 1999. From
November 1997 to November 1999, he was Vice President and General Manager of
J.D. Edwards Canada and also managed the integration of Numetrix into J.D.
Edwards. From July 1993 to November 1997, he was Director of J.D. Edwards
Canada. Mr. Bleau holds a Bachelor of Commerce in quantitative methods and an
M.B.A. from Concordia University in Montreal.
James L. Foos has been Senior Vice President since July 1999. From November
1994 to July 1999, he was Vice President of Technology Development, and from May
1992 to November 1994 he was Director of Product Development for Manufacturing
and Distribution. Mr. Foos joined J.D. Edwards in 1984 and held various
positions with the Company from 1984 to 1992. Mr. Foos holds a B.S. in
Management Information Systems and Accounting from Colorado State University.
Brian A. McKeon has been Senior Vice President since November 1999. From
November 1997 to November 1999, he was Vice President of Client Services, and
from January 1991 to November 1997, he was Director of Client Services. Mr.
McKeon holds a B.S. in Accounting from Ramapo College.
Nigel R. Pullan has been Senior Vice President since November 1998. From
November 1995 to November 1998 he was Managing Director of the J.D. Edwards
United Kingdom office, and from November 1994 to November 1995 he served as Vice
President of Client Services EMEA. He joined the Company in 1990 as consulting
manager for manufacturing and distribution. Mr. Pullan holds a B.A. and an M.A.
in mathematics from Oxford University.
Donald C. White has been Senior Vice President since November 1999. From
November 1997 to November 1999, he was Vice President and General Manager of
U.S. Central. From November 1995 to November 1997 he was Vice President of
Worldwide Sales and from November 1994 to November 1995 he was Director of the
International Energy and Chemical Business Unit. Mr. White holds a B.A. in
marketing from the University of Northern Colorado.
26
<PAGE> 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
(a) The Company's common stock is listed on the Nasdaq National Market
under the symbol "JDEC." The following table sets forth the high and low closing
sale prices per share of the Company's common stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998
First Quarter............................................. $35.19 $26.31
Second Quarter............................................ 41.50 28.75
Third Quarter............................................. 46.25 32.75
Fourth Quarter............................................ 49.38 26.25
1999
First Quarter............................................. $37.38 $20.31
Second Quarter............................................ 20.88 11.06
Third Quarter............................................. 21.63 12.25
Fourth Quarter............................................ 24.81 14.56
</TABLE>
As of January 14, 2000, there were 727 holders of record of the Company's
common stock. Because many of the Company's shares of common stock are held by
brokers and other institutions on behalf of stockholders, the Company is unable
to estimate the total number of stockholders represented by these record
holders. The Company has never declared or paid any cash dividend on its common
stock. Since the Company currently intends to retain all future earnings to
finance future growth, it does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company should be
read in conjunction with "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations," the consolidated financial
statements and notes thereto, and other financial information included elsewhere
in this Annual Report on Form 10-K. The consolidated statements of operations
data set forth below for the years ended October 31, 1997, 1998, and 1999 and
the consolidated balance sheet data as of October 31, 1998 and 1999 are derived
from, and are qualified by reference to, the Company's consolidated financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, which
are included elsewhere in this Annual Report on Form 10-K. The consolidated
statements of operations data for the years ended October 31, 1995 and 1996 and
the consolidated balance sheet data as of October 31, 1995, 1996, and 1997 are
derived from consolidated financial statements audited by PricewaterhouseCoopers
LLP, independent accountants, which are not included in this Annual Report on
Form 10-K. Historical results are not necessarily indicative of
27
<PAGE> 29
results for any future period. The Company has never declared or paid any cash
dividend on its Common Stock. See "Consolidated Financial Statements" under Item
14(a).
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
Revenue:
License fees.......................... $134,138 $180,366 $248,707 $386,081 $ 312,817
Services.............................. 206,628 297,68 399,105 547,901 631,414
-------- -------- -------- -------- ----------
Total revenue................. 340,766 478,048 647,812 933,982 944,231
Costs and expenses:
Cost of license fees.................. 18,461 27,443 36,444 43,404 29,882
Cost of services...................... 128,144 184,846 244,640 349,689 408,293
Sales and marketing................... 102,310 128,759 176,031 261,400 334,201
General and administrative............ 38,677 53,052 69,850 83,450 94,241
Research and development.............. 24,296 40,321 60,591 89,401 109,206
Amortization of acquired software and
other acquired intangibles(1)...... -- -- -- -- 9,488
Acquired in-process research and
development(1)..................... -- -- -- -- 26,141
-------- -------- -------- -------- ----------
Total costs and expenses...... 311,888 434,421 587,556 827,344 1,011,452
Operating income (loss)................. 28,878 43,627 60,256 106,638 (67,221)
Other income (expense):
Interest income....................... 1,697 629 1,686 15,294 19,324
Foreign currency losses and other,
net................................ (987) (2,302) (2,616) (3,729) (268)
-------- -------- -------- -------- ----------
Income (loss) before income taxes....... 29,588 41,954 59,326 118,203 (48,165)
Provision for (benefit from) income
taxes.............................. 11,379 15,628 22,098 43,735 (8,941)
-------- -------- -------- -------- ----------
Net income (loss)............. $ 18,209 $ 26,326 $ 37,228 $ 74,468 $ (39,224)
======== ======== ======== ======== ==========
Net income (loss) per common share(2):
Basic................................. $ 0.23 $ 0.33 $ 0.46 $ 0.76 $ (0.37)
======== ======== ======== ======== ==========
Diluted............................... $ 0.22 $ 0.30 $ 0.39 $ 0.68 $ (0.37)
======== ======== ======== ======== ==========
Shares used in computing per share
amounts:
Basic................................. 79,139 79,044 80,546 98,264 105,378
Diluted............................... 82,504 87,667 96,500 109,993 105,378
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------------------------------
1995 1996 1997(3) 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 34,897 $ 25,554 $224,437 $183,115 $113,341
Short- and long-term investments....... -- -- 138,560 351,194 309,110
Total assets........................... 175,191 243,786 643,037 950,473 940,528
Mandatorily redeemable shares, at
redemption value..................... 19,973 47,024 -- -- --
Stockholders' equity................... 22,972 22,902 396,861 583,996 592,720
</TABLE>
- ---------------
(1) During fiscal 1999 the Company completed two acquisitions which resulted in
charges associated with the write-off of in-process research and development
and amortization of acquired intangible assets. See Note 7 of Notes to
Consolidated Financial Statements in Item 14.
(2) For a discussion of the computation of earnings per common share and
weighted average common shares outstanding see Note 1 of Notes to
Consolidated Financial Statements in Item 14.
(3) The Company completed an initial public offering (IPO) in September 1997
that generated $276.5 million in net proceeds for the Company. Upon closing
the IPO, the mandatory redemption feature of the mandatorily redeemable
shares was eliminated.
28
<PAGE> 30
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and notes
thereto included elsewhere in this Annual Report on Form 10-K. This item
contains forward-looking statements that involve risks and uncertainties. Actual
results may differ materially from those indicated in such forward-looking
statements. Factors that may cause such a difference include, but are not
limited to, those discussed in "Item 1: Business -- Factors Affecting the
Company's Business, Operating Results, and Financial Condition."
OVERVIEW
J.D. Edwards develops, markets, and supports enterprise and supply chain
computing solutions that enable customers to translate ideas into practical
realities quickly and efficiently using Idea to Action(TM) software. The
Company's integrated applications deliver e-business solutions that give
customers control over their front office, manufacturing,
logistics/distribution, human resources, finance, and customer service
management processes for the consumer products, industrial, and services
industries. J.D. Edwards enables Idea to Action with ActivEra(TM) Solutions, a
collection of tools and technologies that extends J.D. Edwards OneWorld(TM) and
WorldSoftware(TM) enterprise business software and its supply chain planning
solutions. ActivEra allows customers to change their software quickly and easily
during and after implementation. The Company has developed and marketed
enterprise software solutions for over 20 years, principally for operation on
AS/400(R) and other IBM mid-range systems and more recently for multiple
computing environments, including Windows NT(R), UNIX(R), and OS/400(R) that are
Java(TM) and HTML enabled. The Company also provides implementation, training,
and support services designed to enable customers to rapidly achieve the
benefits of the Company's solutions. Its operations are primarily in the United
States, Europe, Africa, Canada, Asia, and Latin America.
The Company distributes its products and services through both direct and
indirect sales channels. Currently, the Company has 62 direct sales and
consulting offices located throughout the world. The Company also has more than
300 business partners, including sales and consulting partners with offices
throughout the world providing an indirect distribution channel to target
certain markets or geographic areas. Generally, operating margins are higher on
domestic revenue than on international revenue. Additionally, operating margins
are generally higher in the geographic areas where the Company's operations are
more established than in the geographic areas where the Company is investing new
resources. International revenue as a percentage of total revenue ranged between
37% and 39% for each of the past three fiscal years.
During the fiscal year ended October 31, 1999, the Company's results of
operations reflected an operating loss of $67.2 million compared to operating
income of $106.6 million for fiscal 1998. The net loss for fiscal 1999 was $39.2
million, or $0.37 per share, compared to net income of $74.5 million, or $0.68
per diluted share for fiscal 1998. Included in the net losses were expenses for
in-process research and development (IPR&D) charges and amortization of acquired
intangibles totaling $35.6 million. The losses in the fiscal 1999 period were
primarily a result of a decline in license revenue for the fiscal year along
with increased operating expenses compared to last year. Total costs and
expenses increased 22% in fiscal 1999 compared to fiscal 1998, or an increase of
18% excluding charges related to the Company's two acquisitions during fiscal
1999.
During fiscal 1999, external market, competitive, and internal factors
significantly impacted the Company's results. Specifically, a slowing of
enterprise resource planning (ERP) software purchases, resulting from companies
focusing on their Year 2000 preparations, affected the Company's performance.
Management also believes that many companies had purchased ERP systems prior to
1999 in anticipation of the Year 2000. To remain competitive, the Company has
increasingly focused on the rapid expansion of e-business, supply chain, and
front-office solutions, other changes in the competitive environment, and
continued advances in technology.
The Company completed acquisitions of two privately held companies,
Numetrix, Ltd. (Numetrix), and The Premisys Corporation, in fiscal 1999. These
investments further extended the Company's supply chain and customer
relationship management solutions as well as its ability to compete for business
beyond the traditional ERP market. These acquisitions were accounted for as
purchases, and, accordingly, operating
29
<PAGE> 31
expenses were impacted in fiscal 1999 subsequent to the consummation dates of
the acquisitions primarily as a result of IPR&D charges and amortization of
acquired intangible assets, as well as normal operating expenses.
Recent agreements with third parties impacted the fiscal 1999 results and
may impact future operating results. In May 1999, the Company signed an
agreement with Siebel Systems, Inc. (Siebel), which extends its customer
relationship management offering to include the mobile sales professional. The
Company expanded its procurement solutions by providing an Intranet- and
Internet-based business-to-business electronic commerce solution for operating
resources through an agreement with Ariba, Inc. (Ariba), also signed in May
1999. In December 1999, the Company further invested in its future
business-to-business solutions through agreements with Tradex Technologies
(Tradex), specializing in digital marketplaces and trading communities. Also in
December 1999, the Company signed reseller agreements with Extensity, Inc.
(Extensity) to offer Internet application solutions for e-business employees.
Furthermore, recent product alliances with companies such as IET-Intelligent
Electronics, XRT-Cerg Finance, and Armstrong Laing Group, together with a
package supply chain solution with IBM Global Services and Synquest, Inc.,
extend the Company's solutions in e-business, customer relationship management,
knowledge management, and supply chain management. ActivEra capabilities are
expected to be enhanced through an agreement signed in November 1999 with
Proforma Corporation (Proforma) for business process modeling to improve
customers' ability to react to changing business needs. In January 2000, the
Company announced a new business initiative for application hosting,
JDe.sourcing, that will work with third-party hosting infrastructure providers
for data center and network services. These partnerships and investments enable
the Company to deliver a fully-integrated end-to-end supply chain solution.
Through the end of the fiscal year, license revenue from products of The
Premisys Corporation, Numetrix, Siebel, and Ariba was minimal and there can be
no assurance that the Company's investments in these partnerships will meet the
expectations set by management.
Fiscal 1999 results were also impacted by internal changes such as an
investment at the beginning of the fiscal year in hiring and training sales
account executives, marketing consultants, and vertical marketing support
personnel. The Company also realigned its sales force along vertical industries
effective in the first quarter of fiscal 1999. For the remainder of fiscal 1999,
the Company focused on controlling expenses by closely reviewing headcount
additions and added personnel only in critical positions. In addition, controls
over discretionary expenses were tightened throughout the Company. While
operational changes affected the Company's productivity and financial results,
these were investments for the long term, from which management believes the
Company will benefit in the future.
Due to the deterioration of economic conditions in the Asian markets,
particularly in Japan, and in certain other geographic regions, 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 made some personnel
changes and reduced some layers of management through a voluntary reduction in
force program in Japan. During the fiscal year ended October 31, 1999, a
significant portion of the Company's operating losses were a result of
operations in Asia. Consistent with its historical results, the Company expects
that during 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 and the global market focus on Year 2000 issues, 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.
Management believes that quarterly results in fiscal 1999 were not
consistent with historical trends primarily due to the impact of the Year 2000
on customers' buying patterns. However, the Company has experienced and expects
that it will continue to experience a high degree of seasonality in the future.
Historically, a disproportionately greater amount of the Company's revenue and
an even greater proportion of net income for any fiscal year were recognized 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
30
<PAGE> 32
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. Because total
revenue, operating margins, and net income historically were greater in the
fourth quarter, any shortfall from anticipated revenue, particularly license fee
revenue, in the fourth quarter would have a disproportionately large adverse
effect on the Company's operating results for the fiscal year. The Company's
first quarter revenue 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 in the first
quarter of fiscal 1999 decreased 27.4%, 51.5%, 6.3%, and 88.7%, respectively,
from the fourth quarter of fiscal 1998. In addition to the seasonal factors
described, the Company's first quarter of fiscal 2000 may be impacted by
continuing 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 continuing uncertainty in the
traditional ERP market that is attributed to a number of factors, including
global economic conditions, issues surrounding the Year 2000, and strong
competitive forces, could reduce the growth in the Company's license fee
revenue. This uncertainty has made forward-looking projections of future revenue
and operating results even more challenging. The first quarter of fiscal 2000 is
particularly uncertain due to the changing millennium and the fact that it
overlaps with the fourth quarters of several competitors. 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.
Revenue recognition. The Company licenses software under non-cancelable
license agreements and provides related services, including consulting,
training, and support. In October 1997, the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position (SOP) 97-2, "Software
Revenue Recognition," which provides guidance on recognizing revenue on software
transactions and supersedes SOP 91-1. Further guidance was published during 1998
in SOP 98-4, "Software Revenue Recognition," and SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, with Respect to Certain Transactions."
Additionally, the AICPA issued technical questions and answers on financial
accounting and reporting issues related to SOP 97-2 during 1999 and may issue
additional interpretations related to SOP 97-2 in the future.
The Company applied the provisions of SOP 97-2 on a prospective basis for
new software transactions entered into from the beginning of fiscal 1999. The
adoption of this guidance did not have a material impact on the Company's
financial condition or results of operations and did not have a significant
impact on its licensing or revenue recognition practices. However, there can be
no assurance that additional guidance pertaining to the new standards will not
result in unexpected modifications to the Company's current revenue recognition
practices that could 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
31
<PAGE> 33
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.
SOP 98-9 provides additional guidance regarding software revenue
recognition and is required to be adopted as of the beginning of the Company's
first quarter of fiscal 2000. The Company has determined that the adoption of
this standard will not have a material impact on its financial condition or
results of operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's consolidated statements of operations as a percentage of
total revenue (except for gross margin data):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenue:
License fees.............................................. 38.4% 41.3% 33.1%
Services.................................................. 61.6 58.7 66.9
----- ----- -----
Total revenue..................................... 100.0 100.0 100.0
Costs and expenses:
Cost of license fees...................................... 5.6 4.7 3.1
Cost of services.......................................... 37.8 37.4 43.2
Sales and marketing....................................... 27.2 28.0 35.4
General and administrative................................ 10.8 8.9 10.0
Research and development.................................. 9.3 9.6 11.6
Amortization of acquired software and other intangibles... -- -- 1.0
Acquired in-process research and development.............. -- -- 2.8
----- ----- -----
Total costs and expenses.......................... 90.7 88.6 107.1
Operating income (loss)..................................... 9.3 11.4 (7.1)
Other income (expense), net................................. (.2) 1.3 2.0
----- ----- -----
Income (loss) before income taxes........................... 9.1 12.7 (5.1)
Provision for income taxes................................ 3.4 4.7 (.9)
----- ----- -----
Net income (loss)........................................... 5.7% 8.0% (4.2)%
===== ===== =====
Gross margin on license fee revenue......................... 85.3% 88.8% 90.4%
Gross margin on service revenue............................. 38.7% 36.2% 35.3%
</TABLE>
Fiscal Years Ended October 31, 1998 and 1999
Total revenue. Total revenue increased by 1% to $944.2 million for fiscal
1999 from $934.0 million for fiscal 1998. The revenue mix between license fees
and services was 33.1% and 66.9%, respectively, for fiscal 1999 compared to
41.3% and 58.7%, respectively, for fiscal 1998. The increase in total revenue
for fiscal 1999 compared to fiscal 1998 was from growth in services revenue
while license fee revenue declined, resulting in a significant change in revenue
mix. Management believes the slowed growth was primarily due to companies
purchasing ERP systems prior to 1999 in anticipation of potential systems issues
associated with the Year 2000. During fiscal 1999, the Company experienced
sequential declines in quarterly license fee revenue in the first and second
quarters. However, sequential quarterly growth in license fees again was
realized in the third and fourth quarters. The growth in services revenue, which
typically trails license fee revenue, also was impacted, slowing from 37% growth
in fiscal 1998 to 15% in fiscal 1999. There can be no assurance that the
Company's revenue will not continue to be adversely affected by increased market
focus on Year 2000 compliance, economic conditions, or other factors.
32
<PAGE> 34
Geographically, the revenue mix shifted moderately toward international for
fiscal 1999 compared to last year. The geographic areas defined as the United
States, Europe, the Middle East, and Africa (EMEA), and the rest of the world
accounted for 61%, 24%, and 15% of total revenue, respectively, for fiscal 1999.
Comparatively, for fiscal 1998, the United States, EMEA, and the rest of the
world accounted for 63%, 22%, and 15% of total revenue, respectively. Management
believes this geographic shift in revenue may have been caused by companies in
the United States preparing earlier and more aggressively for the Year 2000 as
compared with companies in other parts of the world.
License fees. License fee revenue decreased 19% to $312.8 million for
fiscal 1999 from $386.1 million for fiscal 1998 due to fewer transactions and a
decline in the average transaction size as compared to last year. The decrease
in the average transaction size was experienced with both new and existing
customers and due to a number of factors, including a larger portion of licenses
for the Windows NT platform, which typically include fewer users than licenses
for the UNIX or AS/400 platforms. The percentage of license activity from new
customers declined to 49% in fiscal 1999 compared to 51% last fiscal year.
However, the Company expanded the number of its customers by 11% compared to the
end of fiscal 1998 to over 5,500 at October 31, 1999. Customers have
increasingly accepted the OneWorld applications available for Windows NT and
UNIX platforms in addition to the AS/400 platform. As an indication of
OneWorld's growing acceptance on non-AS/400 platforms, 33% of license activity
was from customers using the Windows NT or UNIX platforms in fiscal 1999
compared to 16% in the previous year. The remaining portion of license activity
was generated by customers using either WorldSoftware or OneWorld for the
AS/400. The Company expects that an increasing portion of the Company's total
future license fee revenue will be generated from customers using Windows NT,
UNIX platforms, or other Web-enabled computing environments.
As previously discussed in the overview of the Company's results of
operations, the Company has experienced increased uncertainty in its business
due to external market and competitive factors, as well as a slower than
anticipated realization of benefits from internal operational changes.
Management invested in its capacity to achieve future license revenue growth by
substantially expanding its direct sales force during the fourth quarter of
fiscal 1998 and first quarter of fiscal 1999. Additionally, in the first quarter
of fiscal 1999, the Company realigned the sales force along vertical industries
and increased resources in vertical marketing support. While these additions to
the sales force and the change to a vertical market focus contributed to
sequential growth in license fees in the last two quarters of fiscal 1999, there
can be no assurance that the Company's license fee revenue, results of
operations, and financial condition will not continue to be adversely affected
in future periods as a result of a continued focus in the market on Year 2000
readiness, global economic conditions, and intensified competitive pressures, or
that the Company's operational investments for the long-term will be successful.
Services. Services revenue grew 15% to $631.4 million for fiscal 1999 from
$547.9 million for the year ended October 31, 1998. This increase was due to
higher revenue from consulting, the largest component of services, and higher
maintenance revenue. The increase in consulting revenue was primarily due to
prior period license fee revenue, which resulted in demand for implementation
services. Maintenance revenue increased during the current year compared to last
year, primarily as a result of the Company's growing installed base of customers
and consistent maintenance renewal rates for existing customers. Training
revenue, which typically trails the fluctuations in license fee revenue,
decreased during fiscal 1999 compared to last year, primarily due to the
decrease in license fee revenue.
As a percentage of total revenue, services revenue increased during fiscal
1999 compared to the prior year. This was primarily due to the timing of
services revenue in relation to license fee growth in prior periods. Given the
decline in license fee activity in fiscal 1999 in relation to a year ago, demand
for services may decline in future periods. The continued focus by companies on
Year 2000 readiness may severely impact consulting and training services in the
first quarter of fiscal 2000, and maintenance renewal rates also may be
adversely affected. In any fiscal year, total services revenue is dependent upon
license transactions closed during the current and preceding periods, 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,
33
<PAGE> 35
billing rates for consulting services and training courses, and the number of
customers attending training courses. There can be no assurance that the
Company's services revenue will continue to grow or that the results of
operations and financial condition will not be adversely affected in future
periods.
Historically, the Company has been the primary service provider for its
customers, either directly or through subcontracted services from its business
partners. The subcontracted consulting and training services revenue from
business partners increased 19% for fiscal 1999 over the prior year, while
direct services increased 5% in the current fiscal year over fiscal 1998. The
services revenue generated through subcontracted work accounted for 48% for
fiscal 1999 of the Company's consulting and training services revenue compared
to 46% for fiscal 1998.
In addition to subcontracting a substantial portion of its services work to
business partners, the Company is continuing to pursue a strategy of relying on
third-party alliance partners to contract directly with the Company's customers
under a referral arrangement for OneWorld implementations and related services.
The Company established additional alliances during fiscal 1999 to achieve this
objective, and several existing alliance partners began providing significantly
more resources to implement OneWorld compared to last fiscal year. However,
migration to this services model has been slower than originally anticipated.
While the number of transactions involving the alliance partners who contracted
directly with the Company's customers increased during fiscal 1999 compared to
last year, the number of implementations referred to alliance partners to date
under this arrangement remains relatively limited. To the extent the Company is
successful in establishing this strategy and in generating license fee revenue,
consulting revenue as a percentage of total revenue is likely to gradually
decrease as compared to the previous fiscal year. However, there can be no
assurance that the Company will be successful in implementing its strategy.
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 decreased 31% to $29.9 million for the year ended
October 31, 1999, from $43.4 million last year primarily due to lower license
revenue and resulting decreases in royalty expenses and business partner
commissions. However, royalties are expected to increase in future quarters as a
result of royalties associated with revenue resulting from the agreements with
Siebel, Ariba, Proforma, Tradex, and Extensity. Amortization of internally
developed capitalized software costs decreased 20% in fiscal 1999 compared to
the last year as certain software development costs were fully amortized during
fiscal 1998. The capitalized OneWorld costs will be fully amortized after the
first quarter of fiscal 2000. Business partner costs may represent a larger
percentage of revenue compared to the previous year if the Company is successful
with certain expanded sales channel initiatives and business alliances that
would increase expenses and could reduce gross margins. Software delivery
expenses also may increase in future periods primarily due to the opening of a
software reproduction and distribution facility located in Dublin, Ireland, in
the second quarter of fiscal 1999. Accordingly, the total cost of license fees
is likely to increase in future periods.
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 internally developed capitalized software development costs,
and the portion of the Company's software products that are subject to royalty
payments and the amounts negotiated for such royalties. The gross margin on
license fee revenue increased to 90.4% for fiscal 1999 from 88.8% for fiscal
1998 year primarily due to lower royalty expense and business partner
commissions. Due to the expected increase in royalties and software delivery
expenses, as well as possible increases in other costs, it is likely that the
gross margin on license fee revenue will decline in future periods.
Cost of services. Cost of services includes the personnel and related
overhead costs for services, including consulting, training, and support, as
well as fees paid to third parties for subcontracted services. Cost of services
increased 17% to $408.3 million for fiscal 1999 from $349.7 million for fiscal
1998. The increase was primarily due to subcontracted business partner service
costs and increased personnel expenses to support the implementation and
consulting services demand, as well as an increase in the number of customer
support staff. During fiscal 1999, a larger percentage of consulting and
training services revenue was generated through subcontracted work, which
increased the related costs compared to last year. The gross margin on services
revenue dropped to 35.3% for fiscal 1999 compared to 36.2% for fiscal 1998. Due
to the slowing in license fee
34
<PAGE> 36
growth, the utilization rates for the Company's consulting organization declined
in fiscal 1999 compared to fiscal 1998.
Generally, the gross margin on maintenance revenue is higher than on
consulting and training revenue, and any change in the mix in types of services
will affect the gross margin on total services revenue. In particular, the
extent to which the Company is successful in establishing its strategy of
relying on alliance partners to contract directly with the Company's customers
for OneWorld implementations and related services will affect gross margin on
services revenue. However, there can be no assurance that the Company will be
successful in implementing its strategy.
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 $334.2 million for fiscal 1999 from $261.4
million for fiscal 1998, representing 35.4% and 28.0% of total revenue,
respectively. The increase in expense in fiscal 1999 was primarily the result of
additional personnel and increased advertising and promotion costs for the
Company's expanded marketing activities. The total number of sales and marketing
personnel increased 24% as of October 31, 1999, compared to a year ago,
primarily as the result of the Company adding personnel in direct sales and
support positions through the first quarter of fiscal 1999 to meet the Company's
future sales goals, to support the new vertical industry sales force alignment,
and to address the Windows NT and UNIX market growth opportunities from the
OneWorld version of its application suites.
General and administrative. General and administrative expense includes
personnel and related overhead costs for the support and administrative
functions of the Company. General and administrative expense increased to $94.2
million for the year ended October 31, 1999, from $83.5 million for fiscal 1998,
representing 10.0% and 8.9% of total revenue, respectively. The total dollar
amount of expense increased primarily due to an increase in general and
administrative personnel to support the larger number of total Company employees
in fiscal year 1999 compared to last year. General and administrative expenses
as a percentage of total revenue increased primarily due to the lower than
expected license fee revenue in fiscal 1999.
Research and development. Research and development expense includes
personnel and related overhead costs for product development, enhancements,
upgrades, documentation and translations, quality assurance, and testing.
Research and development expense increased to $109.2 million for fiscal 1999
from $89.4 million for fiscal 1998, representing 11.6% and 9.6% of total
revenue, respectively. The increase was primarily due to a 19% increase in the
number of personnel compared to the end of the last year. This increase in
personnel includes approximately 60 employees from the Company's acquisitions of
The Premisys Corporation and Numetrix.
Development resources primarily were devoted to enhancements of both the
Company's WorldSoftware and OneWorld application suites during both fiscal 1998
and 1999. The Company ceased capitalizing OneWorld development costs during
fiscal 1997, and there were no software development costs capitalized during
fiscal 1998 or 1999. The Company anticipates that future research and
development expenses will increase in subsequent periods due to a number of
development projects. The Company is continuing its ongoing internal product
enhancements in e-business and other areas and 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.
Amortization of acquired software and other intangibles. Amortization of
acquired intangibles was related to the acquisitions of Numetrix in June 1999
and The Premisys Corporation in February 1999. Acquired intangible assets
consist of core software, in-place workforce, customer base, and goodwill.
Amortization expense for the fiscal year ended October 31, 1999, related to the
software, in-place workforce, customer base, and goodwill was $4.6 million, $1.3
million, $1.9 million, and $1.7 million, respectively.
In-process research and development. IPR&D expenses were in connection with
the acquisitions of Numetrix in June 1999 and The Premisys Corporation in
February 1999. IPR&D consists of those products that are not yet proven to be
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
35
<PAGE> 37
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 were $26.1 million for
fiscal 1999. No such charges were incurred in fiscal 1998.
Numetrix is a provider of Internet-enabled supply chain planning software,
including demand planning, production scheduling, and distribution applications,
for medium and large manufacturing companies. The Numetrix product suite is
being integrated with the Company's existing enterprise application solutions to
link customers, suppliers, and trading partners in collaborative enterprise
networks. Numetrix software modules will also continue to be sold separately.
The Numetrix acquisition was accounted for as a purchase, and the Company
retained an independent appraiser to assist with assigning fair values to the
intangible assets. Specifically identified intangible assets include developed
technology, in-process technology, in-place workforce, and the existing customer
base. The valuations relied on methodologies that most closely related the fair
market value assignment with the economic benefits provided by each asset and
the risks associated with the assets. In valuing both the developed and
in-process technology, an income-based approach was determined to best quantify
the economic benefits and risks. The economic benefits were quantified using
projections of net cash flows and the risks by applying an appropriate discount
rate.
As of the acquisition date, Numetrix had completed a substantial amount of
research and development on a new discrete scheduling product that represents a
strategic product designed to address the market for discrete factory planning
for middle-market companies. Also underway was the development of a new demand
planning module and a new collaborative enabler. Numetrix also was developing
major revisions and enhancements of almost all of the modules of its product
suite as of the date of acquisition. Following is a description of the specific
nature of each of the new in-process development projects acquired:
- The most significant in-process technology is being designed to offer an
operational-level, discrete planning and scheduling solution targeted at
the middle market. Numetrix's current solution in the market relies on
process scheduling rather than discrete scheduling, and a large technical
difference exists between the two types of scheduling. Process scheduling
is used by manufacturers in industries, such as paper products and
processed foods, with significant capital investment in the machinery
compared to the investment in raw material products. These types of
industries require production and scheduling systems to coordinate with
the interruptible nature of the manufacturing process. In comparison,
discrete scheduling is utilized in industries with non-interruptible
processes with emphasis on the product materials rather than the
machinery, such as computer component manufacturing. The two types of
scheduling employ different data models, and users in each case require
different operating parameters from production scheduling solutions. As
of the valuation date, the beta release was scheduled for September 1999,
and the development was estimated to be nearly 90% complete. This project
continues to progress; however, the beta release was postponed until
fiscal 2000.
- A new demand-planning module was being designed to enhance
enterprise-wide collaborative forecasting and to address forecast
reconciliation. This application is intended to be marketed as a
component of both the Numetrix product suite and the new discrete
product. New features of this product include a full forecasting
graphical interface that allows for manipulation of variables and inputs
to optimize demand planning. As of the valuation date, Numetrix was
analyzing requirements for the product and had not begun to write code.
The first scheduled release was planned for the middle of calendar 2000.
As of the acquisition, date, this module was less than 10% complete. The
project is postponed pending further evaluation by management.
- Another in-process technology, a collaborative enabler, is designed to
efficiently interface the messaging architecture among applications to
allow real-time, alert-driven collaboration. The product automatically
detects changes to data in other applications and instantaneously
processes the impact of the changes among applications. It is designed to
integrate into the Numetrix product suite solution and offers a more
cost-effective solution for messaging optimization as compared to the
current technology. The initial product release was scheduled for the
middle of calendar 2000, and as of the acquisition date the technology
was estimated to be 13% complete. The Company has not changed the product
schedule since the acquisition date.
36
<PAGE> 38
Both the developed technology and in-process development valuations were
based primarily on an income approach that examined all projected revenue and
expenses attributable to the assets over the economic life of each. A variation
of the income approach that applies a percentage of completion calculation was
also used to value in-process technology, and this method was used for recording
the fair value of in-process development. In this approach, the research and
development costs to complete the in-process technology are not deducted as an
expense. However, the net cash flows are multiplied by the percentage of
completion of the technology. The percentage of completion was based on the
development expense spent as of the valuation date as a percentage of the total
required development expense for each new product and each new release of the
existing products.
The basis of the financial projections used in the valuation analysis were
management projections of the revenue and expenses likely to be realized by
Numetrix. Projected revenue was split between developed, in-process, and future
technology to be developed subsequent to the valuation date. The classification
of each research and development project as complete or under development was
made in accordance with the guidelines of Statement of Financial Accounting
Standards (SFAS) No. 86, SFAS No. 2 and Financial Accounting Standards Board
(FASB) Interpretation No. 4. All expenses associated with those revenues were
deducted, including cost of goods sold, sales and marketing, general and
administrative expenses, and research and development expenses. Allocations of
revenue and expenses between developed, in-process, and future technology were
based on the development schedule of new products and new versions of existing
products and the estimated lines of code needed to complete each in-process
product phase as provided by Numetrix. Unless otherwise appropriate, these
expenses were allocated to developed, in-process, and future technology in the
same ratio as the revenue. An economic rent for use of other assets was
deducted, including the in-place workforce, working capital, fixed assets,
trademarks, and customer base. A royalty rate for the proprietary Distributed
Object Messaging Architecture (DOMA) was deducted where appropriate for
applications relying on this existing technology. Income taxes were deducted at
the estimated effective tax rate for the company. An appropriate discount rate
was applied to the projects to calculate the net present value of the developed
and in-process technology over their economic lives.
The valuations used a discounted cash flow analysis of financial
projections over the estimated useful lives of the existing technology. After
the end of the projection period, no further revenue was assumed, and no
residual value of the technologies was used. The projected revenue stream by
product -- developed, in-process, and future -- was determined by the existing
lines of software code and incremental lines of code for future releases of each
product. The discount rate was based on the weighted average cost of capital
method and was determined to be 22.5% for Numetrix. This same rate was used for
valuing the IPR&D due to the level of risk, which was considered the same as
that for the company as a whole. A discount rate of 17.5% was used for developed
technology due to the lower level of risk.
Financial projections used to value the intangibles included breakdowns of
revenue from license fees, implementation and consulting services, and
maintenance, along with costs of the revenue components, major operating expense
categories, and income taxes for the current fiscal year through Numetrix's
fiscal year ending February 28, 2009. Based on historical data provided by
management of Numetrix regarding the rate at which the code base for developed
technology would become obsolete, the expected replacement and augmentation of
existing software code for each product, as well as the rate at which
replacement technology would be developed, the projection period was deemed
appropriate. Significant changes were not anticipated from historical pricing or
gross margins. Management anticipates solid revenue growth consistent with
historical and projected results of competitors as well as general market
expectations for the supply chain management space and especially Web-enabled
applications, such as those currently and expected to be offered by Numetrix.
Also, the discrete scheduling product currently under development targets the
much larger market of mid-sized manufacturing companies in addition to the
company's traditional market of Fortune 500 customers. Operating expenses are
also expected to increase significantly but, as a percentage of revenue, are
projected to fall closer in line with industry averages consistent with the
major ERP providers, including J.D. Edwards, Oracle, and SAP. Accordingly, the
operating margin is expected to be at a break-even point in the current fiscal
year and gradually increase through Numetrix's fiscal year ending February 28,
37
<PAGE> 39
2009. The appraisal resulted in a value of $24.0 million for IPR&D and $32.8
million for developed technology.
The Premisys Corporation provides visual configuration software and
consulting services. At the date of acquisition, The Premisys Corporation was
developing major enhancements to its CustomWorks product, such as functionality
to address setup complexities and quoting. 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 currently being fully integrated with OneWorld,
furthering enhancements to the J.D. Edwards supply chain solution.
The percentage completion variation of the income approach also was used to
value the IPR&D from The Premisys Corporation acquisition based on projected
revenue and expenses likely to be realized. However, both a replacement cost
approach and market approach also were considered and provided further support
for the valuation. The percentage of completion for the in-process technology
was based on the development expense spent as of the valuation date as a
percentage of the total required development expense. The financial projections
include revenue from license fees, implementation and consulting services, and
maintenance, along with costs of the revenue components, major operating expense
categories, and income taxes for the current fiscal year through fiscal year
2003. Charges for other assets also were deducted, including a royalty for the
core technology, fixed assets, working capital, and other intangibles. Income
taxes were deducted at the estimated effective tax rate for the company. A
discount rate of 21% was deemed appropriate for the level of risk associated
with the development projects. This rate was used over the economic life to
calculate the net present value of $2.4 million for the developed and $2.1
million for the in-process technology.
The assumptions in the valuation reflect management's anticipation of solid
revenue growth consistent with the historical and projected results of
competitors, as well as general market expectations for the supply chain
management space and front office applications such as CustomWorks. Operating
expenses also are expected to increase significantly but are projected to
gradually fall in line with industry averages consistent with the major ERP
providers, including J.D. Edwards, Oracle, and SAP. Accordingly, the operating
margin in the financial model is expected to grow over the next two years, but
then gradually decline as the developed and in-process products mature.
If the Company is unable to complete the in-process development projects
within the expected schedule, future revenue and earnings could be materially
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. Interest
income increased to $19.3 million for fiscal 1999 from $15.3 million for fiscal
1998. The increase was primarily the result of higher yields on invested funds.
Interest income is expected to decline in future periods as a result of lower
cash and investment balances due primarily to the cash outlay for the Numetrix
acquisition. Other income also increased due to proceeds from a legal judgement
received during the second quarter of fiscal 1999. Net of hedging activities
during the current year, foreign currency losses decreased to $568,000 for
fiscal 1999 from $2.8 million in fiscal 1998 primarily due to an improved
hedging program.
During late fiscal 1998, the Company broadened its foreign exchange hedging
activities to help offset the effects of exchange rate changes on cash exposures
from receivables and payables denominated in foreign currencies. Such hedging
activities cannot completely protect the Company from the risk of foreign
currency losses due to the number of currencies in which the Company conducts
business, the volatility of currency rates, and the constantly changing currency
exposures. Foreign currency gains and losses will continue to result from
fluctuations in the value of the currencies in which the Company conducts its
operations as compared to the U.S. dollar, and future operating results will be
affected to some extent by gains and losses from foreign currency exposure.
38
<PAGE> 40
The Company uses hedging instruments to mitigate the 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 recognized
as non-operating income or expense in the period in which the gain or loss is
recognized from the settlement or translation of the underlying assets and
liabilities. All gains and losses related to foreign exchange contracts are
included in cash flows from operating activities in the consolidated statements
of cash flows.
Provision for (benefit from) income taxes. The Company's effective income
tax rate was 18.6% for fiscal 1999 compared to 37.0% for fiscal 1998. This
change was due primarily to differences between financial accounting and tax
treatment of certain acquisition-related charges that reduced the overall income
tax benefit for fiscal year ended 1999. Excluding the effect of the
acquisition-related permanent differences, the rate for fiscal 1999 was 37.0%.
Other data regarding results of operations. The impact of the charges for
acquired IPR&D costs and 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>
FISCAL YEAR ENDED
OCTOBER 31, 1999
--------------------------------------
BEFORE ACQUIRED AFTER ACQUIRED
IPR&D AND IPR&D AND
AMORTIZATION AMORTIZATION
OF ACQUIRED OF ACQUIRED
INTANGIBLES INTANGIBLES
-------------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Income (loss) from operations.......................... $(31,592) $(67,221)
Other income, net...................................... 19,056 19,056
Provision for (benefit from) income taxes.............. (4,638) (8,941)
-------- --------
Net income (loss)................................. $ (7,898) $(39,224)
======== ========
Net income (loss) per share:
Basic................................................ $ (0.07) $ (0.37)
======== ========
Diluted.............................................. $ (0.07) $ (0.37)
======== ========
Shares used in computing net income (loss) per share:
Basic................................................ 105,378 105,378
Diluted.............................................. 105,378 105,378
</TABLE>
Fiscal Years Ended October 31, 1997 and 1998
Total revenue. Total revenue increased to $934.0 million for fiscal 1998
from $647.8 million for fiscal 1997, representing an increase of 44%. The
Company achieved a greater acceptance of its software products by mid-sized
organizations in key domestic and international markets. Additionally, new
releases of the Company's application suites and enhanced services, support, and
custom programming capabilities further increased such acceptance. The total
revenue increase in fiscal 1998 was due to growth in both software license
transactions and services, with higher growth in license fees than services. The
revenue mix between license fees and services was 41.3% and 58.7%, respectively,
compared to 38.4% and 61.6%, respectively, for fiscal 1997. The Company
increased the number of large license transactions and the number of new
customers as compared to fiscal 1997, expanding its installed base of customers
by 16% compared to the end of fiscal 1997 to approximately 5,000 at October 31,
1998.
Geographically, the overall growth was led by strong performance in EMEA,
with a 61% increase in total revenue during fiscal 1998 compared to fiscal 1997.
The geographic areas defined as United States, EMEA, and the rest of the world
accounted for 63%, 22%, and 15% of total revenue, respectively, for fiscal 1998.
39
<PAGE> 41
Comparatively, during fiscal 1997, the United States, EMEA, and the rest of the
world accounted for 63%, 20%, and 17% of total revenue, respectively.
License fees. License fee revenue increased to $386.1 million for fiscal
1998 from $248.7 million for fiscal 1997, representing an increase of 55%. The
growth was primarily due to increases in the volume of license transactions, the
number of new customers added during the year, and the number of large license
transactions. The OneWorld version of application suites expanded the Company's
target market to include customers using Windows NT and UNIX platforms in
addition to those using the AS/400 platform. The portion of license fee revenue
generated from customers using either Windows NT or UNIX platforms increased to
16% in fiscal 1998 from 11% in fiscal 1997.
Services. Service revenue increased to $547.9 million for fiscal 1998 from
$399.1 million for fiscal 1997, representing an increase of 37%. The Company
continued to experience increased demand for services in fiscal 1998 compared to
the previous year. The increase in total service revenue was led by higher
revenue from consulting, the largest component of services, although training
and support revenue also increased. Consulting revenue increased primarily due
to the increase in license transactions and the demand for implementations, as
well as the expanded capacity from both internal personnel and business partner
resources. Support revenue increased primarily as a result of the Company's
growing installed base of customers. Training revenue increased primarily due to
the increase in license transactions, expanded capacity, additional personnel
resources, and an increase in prices for certain courses. As a percentage of
total revenue, services revenue remained higher than license fee revenue due to
the continued increases in demand and the Company's ongoing commitment to
provide consulting and training services that complement its software products.
The Company subcontracted a portion of its consulting and training services
to third parties. The portion of such service revenue generated through
subcontracted work accounted for 46% in fiscal 1998 compared to 43% in fiscal
1997. In addition to subcontracting out some of its service work to business
partners, the Company put a strategy in place during the previous fiscal year to
utilize third parties to contract directly with its customers to implement the
OneWorld version of its applications suites. During fiscal 1998, new business
alliances were established to achieve this objective, and several existing
alliance partners provided significantly more resources to implement OneWorld;
however, through the end of fiscal 1998 the Company had referred only a limited
number of its implementations to such third parties. The transition to this
referral strategy had a limited impact on the fiscal 1998 results due to direct
service contracts currently in place and established relationships with existing
customers.
Cost of license fees. Cost of license fees increased to $43.4 million for
fiscal 1998 from $36.4 million for fiscal 1997. The increase in the dollar
amount of costs in fiscal 1998 compared to the previous fiscal year was
primarily due to the volume of license transactions closed through business
partners, resulting in higher commissions to the business partners. The overall
increase in costs compared to fiscal 1997 was partially offset by the Company's
renegotiation of certain royalty agreements effective in fiscal 1998, which
lowered royalty expense compared to fiscal 1997. Amortization of capitalized
software development costs was relatively consistent at $6.1 million for fiscal
1998 compared to $6.0 million for fiscal 1997. Capitalized software costs
primarily relate to the OneWorld applications and will continue to be amortized
through the first quarter of fiscal 2000.
The gross margin on license fee revenue increased to 88.8% in fiscal 1998
from 85.3% in fiscal 1997. Gross margin on license fee revenue varies depending
upon the revenue volume in relation to certain fixed costs such as the
amortization of software development costs, the volume of license transactions
closed through business partners, internal terms, and the proportion of the
Company's software products that are subject to royalty payments. The fiscal
1998 results were positively impacted by the overall increase in license fee
revenue volume and lower royalty expense on complementary third-party software
products licensed through the Company in fiscal 1998 compared to fiscal 1997.
Cost of services. Cost of services increased to $349.7 million for fiscal
1998 from $244.6 million for fiscal 1997. The dollar amount increase was
primarily due to additional personnel and subcontracted service costs to support
the growth in demand for implementation and consulting services, as well as an
increase in customer
40
<PAGE> 42
support staff. During fiscal 1998, the Company invested additional resources for
training its personnel and business partners on the OneWorld applications and
related computer platforms. As a result, the gross margin on service revenue
decreased to 36.2% in fiscal 1998 from 38.7% in fiscal 1997.
Sales and marketing. Sales and marketing expense increased to $261.4
million for fiscal 1998 from $176.0 million for fiscal 1997, representing 28.0%
and 27.2% of total revenue, respectively. Increased license fee revenue impacted
sales and marketing expenses during fiscal 1998 by driving higher sales
commission expense as compared to fiscal 1997. The increase in the total dollar
amount of expense was also the result of additional personnel and increased
advertising and promotion costs for the Company's expanded publicity activities.
The total number of sales and marketing personnel increased 52% as of October
31, 1998, compared to a year ago. Sales and marketing expenses as a percentage
of total revenue increased primarily as a result of outside costs associated
with the Company's marketing, promotion, and advertising placement activity in
fiscal 1998 as compared to the previous year.
General and administrative. General and administrative expense increased to
$83.5 million for fiscal 1998 from $69.9 million for fiscal 1997, representing
8.9% and 10.8% of total revenue, respectively. The total dollar amount of
expense was higher in fiscal 1998 primarily due to an increase in personnel and
subcontracted services to facilitate the growth in the Company's operations.
General and administrative expenses as a percentage of total revenue declined
primarily as a result of the growth in revenue volume and increased efficiencies
within support functions to effectively manage the overall growth in the
Company's operations.
Research and development. Research and development expense increased to
$89.4 million for fiscal 1998 from $60.6 million for fiscal 1997. In addition,
no software development costs were capitalized in fiscal 1998, while $2.2
million was capitalized in fiscal 1997. Total research and development
expenditures were higher in fiscal 1998 primarily due to a 37% increase in
personnel, together with increases in related facilities and equipment costs.
Development resources were primarily devoted to enhancements of both the
Company's WorldSoftware and OneWorld application suites during both fiscal 1997
and 1998. Capitalized software development costs in fiscal 1997 primarily
consisted of OneWorld development costs, which the Company ceased capitalizing
during the first half of fiscal 1997 following the release of the version in
late calendar 1996. As a percentage of total revenue, research and development
expenditures, including capitalized software development costs in fiscal 1997,
were relatively consistent at 9.6% in fiscal 1998 and 9.7% in fiscal 1997.
Other income (expense). Interest income increased to $15.3 million for
fiscal 1998 from $1.7 million for fiscal 1997 primarily due to interest earned
on the investment of proceeds from the Company's IPO completed in September
1997. Foreign currency losses increased to $2.8 million for fiscal 1998 from
$2.0 million for fiscal 1997 primarily due to the strengthening of the U.S.
dollar against certain foreign currencies.
QUARTERLY RESULTS OF OPERATIONS/SUPPLEMENTARY FINANCIAL INFORMATION
The following table sets forth certain unaudited consolidated statements of
income data, both in absolute dollars and as a percentage of total revenue
(except for gross margin data), for each of the Company's last eight quarters.
This data has been derived from unaudited consolidated financial statements that
have been prepared on the same basis as the annual audited consolidated
financial statements and, in the opinion of the Company, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information. These unaudited quarterly results should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Annual Report on Form 10-K.
41
<PAGE> 43
The consolidated results of operations for any quarter are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS:
Revenue:
License fees....................... $ 67,990 $ 76,424 $ 98,122 $143,545 $ 69,599 $ 67,204 $ 74,949 $101,065
Services........................... 110,266 132,567 141,480 163,588 153,338 164,387 157,120 156,569
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue................ 178,256 208,991 239,602 307,133 222,937 231,591 232,069 257,634
Costs and expenses:
Cost of license fees............... 11,119 8,185 11,199 12,901 5,291 7,421 7,505 9,665
Cost of services................... 70,588 84,559 91,283 103,259 99,462 106,605 101,778 100,448
Sales and marketing................ 50,421 61,440 68,334 81,205 69,413 83,347 89,198 92,243
General and administrative......... 18,439 18,211 20,639 26,161 24,389 25,487 21,233 23,132
Research and development........... 19,938 20,640 22,399 26,424 22,715 28,996 27,096 30,399
Amortization of acquired software
and other acquired intangibles... -- -- -- -- -- 350 3,234 5,904
Acquired in-process research and
development...................... -- -- -- -- -- 2,141 24,000 --
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses..... 170,505 193,035 213,854 249,950 221,270 254,347 274,044 261,791
Operating income (loss).............. 7,751 15,956 25,748 57,183 1,667 (22,756) (41,975) (4,157)
Other income (expense), net.......... 2,449 3,620 2,907 2,589 5,107 6,249 3,337 4,363
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes.... 10,200 19,576 28,655 59,772 6,774 (16,507) (38,638) 206
Income tax provision (benefit)....... 3,774 7,243 10,602 22,116 2,506 (6,107) (5,416) 76
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............ $ 6,426 $ 12,333 $ 18,053 $ 37,656 $ 4,268 $(10,400) $(33,222) $ 130
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per common share:
Basic.............................. $ 0.07 $ 0.13 $ 0.18 $ 0.37 $ 0.04 $ (0.10) $ (0.31) $ 0.00
======== ======== ======== ======== ======== ======== ======== ========
Diluted............................ $ 0.06 $ 0.11 $ 0.16 $ 0.34 $ 0.04 $ (0.10) $ (0.31) $ 0.00
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing per share
amounts:
Basic.............................. 93,413 96,975 100,522 102,145 10 3,111 105,333 106,181 106,889
Diluted............................ 108,116 109,525 110,867 111,466 111,549 105,333 106,181 112,194
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
License fees....................... 38.1% 36.6% 41.0% 46.7% 31.2% 29.0% 32.3% 39.2%
Services........................... 61.9 63.4 59.0 53.3 68.8 71.0 67.7 60.8
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of license fees............... 6.2 3.9 4.7 4.2 2.4 3.2 3.2 3.7
Cost of services................... 39.6 40.5 38.1 33.6 44.6 46.0 43.9 39.0
Sales and marketing................ 28.3 29.4 28.5 26.5 31.2 36.1 38.4 35.8
General and administrative......... 10.4 8.7 8.6 8.5 10.9 11.0 9.1 9.0
Research and development........... 11.2 9.9 9.4 8.6 10.2 12.5 11.7 11.8
Amortization of acquired software
and other acquired intangibles... -- -- -- -- -- 0.1 1.4 2.3
Acquired in-process research and
development...................... -- -- -- -- -- 0.9 10.3 --
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses..... 95.7 92.4 89.3 81.4 99.3 109.8 118.0 101.6
Operating income (loss).............. 4.3 7.6 10.7 18.6 0.7 (9.8) (18.0) (1.6)
Other income (expense), net.......... 1.4 1.7 1.2 0.9 2.3 2.7 1.4 1.7
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes.... 5.7 9.3 11.9 19.5 3.0 (7.1) (16.6) 0.1
Income tax provision (benefit)....... 2.1 3.4 4.4 7.2 1.1 (2.6) (2.3) 0.0
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............ 3.6% 5.9% 7.5% 12.3% 1.9% (4.5)% (14.3)% 0.1%
======== ======== ======== ======== ======== ======== ======== ========
Gross margin on license fee
revenue............................ 83.6% 89.3% 88.6% 91.0% 92.4% 89.0% 90.0% 90.4%
Gross margin on service revenue...... 36.0% 36.2% 35.5% 36.9% 35.1% 35.1% 35.2% 35.8%
</TABLE>
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<PAGE> 44
In the last eight quarters, expenses and operating income as a percentage
of total revenue have varied primarily due to seasonality, which has resulted in
disproportionately higher license fee revenue in the fourth fiscal quarter, and
other factors such as the impact of Year 2000 preparations on customer buying
patterns. Expenses as a percentage of revenue have decreased in the fourth
quarter due to seasonally higher license fee revenue. Gross margin on license
fee revenue has varied quarterly from 83.6% to 92.4% within the last eight
quarters due to fluctuations in license volume and the mix of fixed and variable
costs of licenses. Gross margin on service revenue has moderately declined
primarily due to lower utilization and investments in resources for training
personnel and business partners. The Company's service revenue may be severely
impacted in its first fiscal quarter of fiscal 2000 by a lack of demand
resulting from Year 2000 preparations by customers as well as lower maintenance
renewal rates once the Year 2000 activities have subsided. Additionally, service
revenue is usually lower in the first quarter due to the holiday season in
November and December.
Based on all of the foregoing, the Company believes that future revenue,
expenses, and operating results are likely to vary significantly from quarter to
quarter. As a result, quarterly comparisons of operating results are not
necessarily meaningful or indicative of future performance. Furthermore, the
Company believes that in some future quarter, the Company's operating results
will be below the expectations of public market analysts or investors. In such
event, or in the event that adverse conditions prevail, or are perceived to
prevail, with respect to the Company's business or generally, the market price
of the Company's common stock likely would be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1999, the Company's principal sources of liquidity
consisted of $113.3 million of cash and cash equivalents, $309.1 million of
short-term and long-term investments, and a $10.0 million unsecured, revolving
line of credit that can be utilized for working capital requirements and other
general corporate purposes. As of October 31, 1999, the Company had working
capital of $123.5 million, and no amounts were outstanding under the Company's
bank line of credit. Short-term deferred revenue and customer deposits totaling
$114.9 million are included in determining this amount. The short-term deferred
revenue primarily represents annual maintenance payments billed to customers
that is recognized ratably as revenue over the support service period. Without
the short-term deferred revenue and customer deposits, working capital would
have been $238.4 million, and including long-term investments working capital
would have been $485.0 million.
The Company calculates accounts receivable days sales outstanding (DSO) on
a "gross" basis by dividing its accounts receivable balance at the end of the
quarter by revenue for the quarter multiplied by 90 days. Calculated as such,
DSO was 83 days as of October 31, 1999, compared to 78 days as of the previous
fiscal year end. The Company's DSO can fluctuate depending upon a number of
factors, including the concentration of transactions that occur toward the end
of each quarter and the variability of quarterly operating results. See "Factors
Affecting The Company's Business, Operating Results and Financial
Condition -- Quarterly Financial Results are Subject to Significant
Fluctuations."
The Company generated operating cash flow of $12.3 million for fiscal 1999
and $154.7 million and $74.2 million for fiscal 1998 and 1997, respectively. The
decrease in operating cash flow was due primarily to the fiscal 1999 net loss
before acquired IPR&D and cash payments for accrued liabilities, somewhat offset
by collections of accounts receivable.
The Company utilized cash for investing activities of $111.3 million in
fiscal 1999, compared to $245.1 million and $154.6 million for fiscal 1998 and
1997, respectively. Net cash payments totaled $93.2 million for the Numetrix
acquisition during the third quarter of fiscal 1999. The Company purchased The
Premisys Corporation for a net cash payment of $4.2 million and shares of J.D.
Edwards' common stock valued at $3.2 million during the second quarter of fiscal
1999. During fiscal 1998 and 1997, the primary investing activity was the
purchase of short- and long-term debt and equity securities with cash from the
IPO. During each of these fiscal years, the Company purchased furniture,
fixtures, and equipment that were necessary to support its expanding operations.
In fiscal 1997 and 1998, the Company's cash utilized for
43
<PAGE> 45
investing activities was offset in part by $8.7 million and $7.7 million,
respectively, of proceeds from the sale of assets.
Financing activities provided $31.6 million in cash from exercised common
stock options and Employee Stock Purchase Plan activity, and the Company issued
a total of 4.4 million shares of common stock during fiscal 1999. In September
1997, the Company completed its IPO of 18.2 million shares of common stock, of
which 12.8 million were issued by the Company, generating net proceeds of $276.5
million. The Company did not have other significant net financing activities for
the past three fiscal years. The Company utilized its bank line of credit for
working capital and other general corporate purposes during fiscal 1997 but
repaid all amounts borrowed within that fiscal year.
In August 1999, the Company authorized the repurchase of up to 8 million
shares of the Company's common stock under a share repurchase plan. 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 will be 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. Stock repurchases may be
effected from time to time at management's discretion through forward, put and
call transactions, or open market purchases.
The Company leases its corporate headquarters office buildings 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 $124.2 million in
purchase and construction costs through a combination of equity and debt. The
Company guarantees the residual value of each building up to approximately 85%
of its original cost. The Company's lease obligations are based on a return on
the lessor's costs. Management has elected to reduce the interest rate used to
calculate lease expense by collateralizing up to 97% of the financing
arrangements with investments consistent with the Company's investment policy.
The Company may withdraw the funds used as collateral at its sole discretion,
provided it is not in default under the lease agreement. At October 31, 1999,
investments totaling $121.4 million were designated as collateral for these
leases.
In December 1999, the Company committed to cash outlays totaling
approximately $30.0 million to be paid during the first or second quarter of
fiscal 2000 for certain strategic investments and other agreements. Additional
cash outlays related to these arrangements totaling approximately $15.0 million
may be made either at the Company's option or are contingent upon certain future
events.
Management believes its cash and cash equivalents balance, short-term and
long-term investments, amounts available under existing credit facilities, and
funds generated from operations will be sufficient to meet its cash needs for at
least the next 12 months. Additionally, the Company also may continue to use a
portion of its short- and long-term investments to acquire or invest in
businesses, products or technologies that are complementary to those of the
Company or to acquire treasury stock. There can be no assurance, however, that
the Company will not require additional funds to support its working capital
requirements or for other purposes, in which case the Company may seek to raise
such additional funds through public or private equity financing or from other
sources. There can be no assurance that such additional financing will be
available or that, if available, such financing will be obtained on terms
favorable to the Company and would not result in additional dilution to the
Company's stockholders.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is a result of computer systems and other electronic
equipment using software processors or embedded chips that use only two digit
entries in the date code field and may not be able to distinguish whether "00"
means 1900 or 2000. The potential for system errors and failures involves
substantially all aspects of the Company's internal operations, including
computer systems, voice and data networks, and the infrastructure of its
facilities.
To address the company-wide internal Year 2000 readiness activities, the
Company established a corporate readiness program during fiscal 1998 to
coordinate efforts already then underway in the information technology (IT) and
software development departments and to expand the program to include all
business
44
<PAGE> 46
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 have been periodically presented
to the Company's senior management and to the audit committee of the Board of
Directors.
State of Readiness. The Company completed a readiness program to assess the
Company's internal state of readiness and to direct preparations for the 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's internal business operations are significantly
dependent upon the proprietary software products it licenses to customers. To
date, no business interruptions associated with these applications have been
experienced and none are currently anticipated.
Following is the six-step process followed in the readiness program:
1) Awareness -- Make all levels of the organization aware of Year 2000
issues.
2) Inventory -- Obtain detailed lists of specific issues from
representatives in every area of the Company's operations.
3) Assessment -- Complete a detailed inventory review to determine and
prioritize areas of exposure; identify mission critical processes and
systems; initiate certification of Year 2000 compliance for
vendors/suppliers/landlords; and establish contingency plans.
4) Resolution -- Decide which systems to replace, retrofit, or retire;
initiate conversion to systems that are Year 2000 ready.
5) Testing -- Obtain assurance that conversions were completed
properly and that the systems and processes will function correctly;
finalize contingency plans.
6) Deployment -- Implement new or modified systems and processes back
into normal production; implement contingency plans where appropriate.
Costs. The Company estimates that when calculations are final, the direct
costs to remediate Year 2000 issues will total approximately $2.0 million and
does not anticipate such costs will have a material impact on its results of
operations. As the Company has now completed its readiness program, future costs
to monitor any additional potential problems are expected to be minimal.
The estimated 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 an estimate for labor, overhead, or other
resources that are associated with the impact of Year 2000 compliance but are
not directly involved in the project and also not expected to have a material
impact. Management believes that customers' and potential customers' purchasing
patterns have been affected in a number of ways, and the current slowing in
license fee growth may be primarily due to such changes. Many companies already
have expended significant resources to upgrade their systems. These expenditures
may result in reduced funds available to purchase software products such as
those the Company offers. Additionally, it is possible that certain of the
Company's customers purchased support contracts only to ensure that they are
Year 2000 ready and then will cancel such contracts. Many customers may have
deferred purchasing Year 2000 ready products as long as possible, accelerated
purchasing such products, switched to other systems or suppliers, or purchased
the Company's products only as an interim solution. Although the Company
currently offers software products that are designed and have been tested to be
ready for the Year 2000, there can be no assurance that the Company's software
products contain all necessary date code changes. Furthermore, it has been
widely reported that a significant amount of litigation surrounding business
interruptions will arise out of Year 2000 issues. It is uncertain whether, or to
what extent, the Company may be affected by such litigation.
45
<PAGE> 47
The Company mailed information regarding the Year 2000 issue along with a
questionnaire to its customers in March 1998 to assist them in preparations for
the century change as well as to help the Company assess its customer service
demands. Based upon the number of responses received and the number of customers
that originally licensed recent product versions, the Company estimated that a
significant majority of its customer base is currently operating with a version
of its software applications that is Year 2000 ready. However, the Company could
be faced with an inability to meet the demand for services to upgrade its
existing installed base of customers or to meet increased demand from potential
customers who still need to address their Year 2000 issues.
Factors outside the Company's control could cause significant disruptions
to business activities and affect the Company's operations in the Year 2000,
such as the failure of its third-party business partners, suppliers, government
entities, customers, and others to adequately prepare. Additionally, third-party
software and computer technology used internally may materially impact the
Company if not Year 2000 compliant. The Company's operations may be at risk and
a material adverse impact to the Company's results of operations, liquidity, and
financial condition could result if any third parties failed to adequately
address the problem or if software conversions result in system
incompatibilities with these third parties.
Contingency Plans. As part of the six-step process previously outlined,
specific contingency plans were developed in connection with the assessment and
resolution to the mission critical risks identified. Such planning was
complicated by the risk of multiple Year 2000 problems and the fact that many of
the Company's risks reside with third parties who may not have successfully
addressed their own risks. However, the Company established certain contingency
plans for both IT and non-IT systems for identified mission critical functions.
Such plans included backup power for the Company's facilities, explicit manual
"workaround" procedures, additional staffing at critical times, and the
identification of key contacts worldwide who are responsible for addressing
specific issues and implementing such plans.
EURO
In January 1999, a new currency called the ECU or the "euro" was introduced
in certain Economic and Monetary Union (EMU) countries. During 2002, all
participating EMU countries are expected to be operating with the euro as their
single currency. During the next 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, its business, operating results, and financial
condition would be materially adversely affected. The Company has not had and
does not expect a material impact on its results of operations from foreign
currency gains or losses as a result of its transition to the euro as the
functional currency for its subsidiaries based in EMU countries.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company will be required to apply recently issued accounting standards
in its future consolidated financial statements. SFAS No. 133, "Accounting for
Derivative Instruments and for Hedging Activities," will require companies to
value derivative financial instruments, including those used for hedging foreign
currency exposures, at current market value with the impact of any change in
market value being charged against earnings in each period. SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions," provides additional guidance regarding software revenue
recognition. The Company has determined that the adoption of these recently
issued standards will not have a material impact on its financial condition or
results of operations. SOP 98-9 will be effective for the Company's first
quarter of fiscal 2000. SFAS No. 133 will be effective for the Company's first
quarter of fiscal 2001.
46
<PAGE> 48
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of its operations, the Company is exposed to certain
market risks, primarily changes in foreign currency exchange rates and interest
rates. Uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax, other regulatory, or credit risks, are not included in
the following assessment of the Company's market risks.
Foreign currency exchange rates. Operations outside of the U.S. expose the
Company to foreign currency exchange rate changes and could impact translations
of foreign denominated assets and liabilities into U.S. dollars and future
earnings and cash flows from transactions denominated in different currencies.
During fiscal 1999, 39% of the Company's total revenue was generated from its
international operations, and the net assets of the Company's foreign operations
totaled 15% of consolidated net assets as of October 31, 1999. The Company's
exposure to currency exchange rate changes is diversified due to the number of
different countries in which it conducts business. The Company operates outside
the U.S. primarily through wholly owned subsidiaries in Europe, Africa, Asia,
Canada, and Latin America. These foreign subsidiaries use the local currency or,
more recently, 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 October 31, 1999, and its
exposure from anticipated foreign revenue in fiscal 2000 to assess the impact of
hypothetical changes in foreign currency rates. Based upon the results of these
analyses, a 10% adverse change in foreign currency rates from the 1999 fiscal
year end rates would not have a material adverse effect on the Company's results
of operations, cash flows, or financial condition for the next fiscal year.
Interest rates. Investments, including cash equivalents, consist of U.S.,
state, and municipal bonds, as well as domestic corporate bonds, with maturities
of up to 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 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. Based upon
the results of these analyses, a 10% adverse change in interest rates from the
1999 fiscal year-end rates would not have a material adverse effect on the fair
value of investments and would not materially impact the Company's results of
operations, cash flows, or financial condition for the next fiscal year.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required pursuant to this item are included in
Item 14 of this Annual Report on Form 10-K and are presented beginning on page
F-1. The supplementary financial information required by this item is included
in "Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the subsection entitled "Quarterly Results of
Operations/Supplementary Financial Information."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
47
<PAGE> 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the sections entitled
"Information About Nominees and Other Directors," "Directors' Compensation," and
"Section 16(a) Beneficial Ownership Compliance" in the Company's Proxy Statement
for the 2000 Annual Meeting of Stockholders (the "2000 Proxy Statement) to be
filed with the Commission within 120 days after the end of the Company's fiscal
year ended October 31, 1999, except that the information required by this item
concerning the executive officers of the Company is incorporated by reference to
the information set forth in the section entitled "Executive Officers of the
Company" at the end of Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the section entitled
"Compensation of Executive Officers" in the Company's 2000 Proxy Statement.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Beneficial Owners and
Management's Ownership of J.D. Edwards' Stock" in the Company's 2000 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Relationships and Related Transactions" in the
Company's 2000 Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. Consolidated Financial Statements.
The following consolidated financial statements of J.D. Edwards are
filed as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
2. Consolidated Financial Statements Schedules.
The following financial statement schedule of the Company for each of
the years ended October 31, 1997, 1998 and 1999 is filed as part of this
Form 10-K and should be read in conjunction with the Consolidated Financial
Statements, and the related notes thereto, of the Company.
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts........... S-1
</TABLE>
48
<PAGE> 50
Schedules other than those listed above have been omitted since they
are either not required, not applicable or the information is otherwise
included.
3. Exhibits. The exhibits listed on the accompanying index to exhibits
immediately following the financial statement schedule are filed as part
of, or incorporated by reference into, this Form 10-K.
(b) Reports on Form 8-K: The Company filed no Current Reports on Form 8-K
in the fourth quarter ended October 31, 1999.
49
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized on this
21st day of January 2000.
J.D. EDWARDS & COMPANY
By: /s/ RICHARD G. SNOW, JR.
----------------------------------
Name: Richard G. Snow, Jr.
Title: Vice President, General
Counsel
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on January 21, 2000 on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ DOUGLAS S. MASSINGILL President, Chief Executive Officer and
- ----------------------------------------------------- Director (principal executive officer)
Douglas S. Massingill
/s/ RICHARD E. ALLEN Chief Financial Officer, Senior Vice
- ----------------------------------------------------- President, Finance and Administration and
Richard E. Allen Director (principal financial officer)
/s/ PAMELA L. SAXTON Vice President of Finance, Controller and
- ----------------------------------------------------- Chief Accounting Officer (principal
Pamela L. Saxton accounting officer)
/s/ C. EDWARD MCVANEY Chairman of the Board
- -----------------------------------------------------
C. Edward McVaney
/s/ ROBERT C. NEWMAN Director
- -----------------------------------------------------
Robert C. Newman
/s/ GERALD HARRISON Director
- -----------------------------------------------------
Gerald Harrison
/s/ DELWIN D. HOCK Director
- -----------------------------------------------------
Delwin D. Hock
/s/ HARRY T. LEWIS, JR. Director
- -----------------------------------------------------
Harry T. Lewis, Jr.
/s/ MICHAEL J. MAPLES Director
- -----------------------------------------------------
Michael J. Maples
/s/ TRYGVE E. MYHREN Director
- -----------------------------------------------------
Trygve E. Myhren
</TABLE>
50
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
J.D. Edwards & Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)1. on page 48 present fairly, in all material
respects, the financial position of J.D. Edwards & Company and its subsidiaries
at October 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1999, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules listed in the index appearing under
Item 14(a)2. on page 48 present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statement. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Broomfield, Colorado
November 23, 1999
F-1
<PAGE> 53
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $183,115 $113,341
Short-term investments.................................... 28,667 62,546
Accounts receivable, net of allowance for doubtful
accounts of $12,900 and $12,000 at October 31, 1998
and 1999, respectively................................. 265,704 236,216
Other current assets...................................... 32,823 34,936
-------- --------
Total current assets.............................. 510,309 447,039
Long-term investments....................................... 322,527 246,564
Property and equipment, net................................. 60,689 86,332
Non-current portion of deferred income taxes................ 43,658 82,572
Other assets, net........................................... 13,290 78,021
-------- --------
$950,473 $940,528
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 60,366 $ 46,004
Unearned revenue and customer deposits.................... 121,092 114,865
Accrued liabilities....................................... 157,473 162,635
-------- --------
Total current liabilities......................... 338,931 323,504
Unearned revenue, net of current portion, and other......... 27,546 24,304
-------- --------
Total liabilities................................. 366,477 347,808
Commitments and contingencies (Note 6)...................... -- --
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none outstanding........................... -- --
Common stock, $.001 par value; 300,000,000 shares
authorized; 102,681,608 and 107,109,494 issued
and outstanding as of October 31, 1998 and 1999,
respectively........................................... 103 107
Additional paid-in capital................................ 406,886 456,387
Deferred compensation..................................... (677) (283)
Retained earnings......................................... 177,324 138,100
Accumulated other comprehensive income:
Foreign currency translation adjustments............... 360 (1,591)
-------- --------
Total stockholders' equity........................ 583,996 592,720
-------- --------
$950,473 $940,528
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 54
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
License fees............................................. $248,707 $386,081 $312,817
Services................................................. 399,105 547,901 631,414
-------- -------- --------
Total revenue.................................... 647,812 933,982 944,231
Costs and expenses:
Cost of license fees..................................... 36,444 43,404 29,882
Cost of services......................................... 244,640 349,689 408,293
Sales and marketing...................................... 176,031 261,400 334,201
General and administrative............................... 69,850 83,450 94,241
Research and development................................. 60,591 89,401 109,206
Amortization of acquired software and other acquired
intangibles........................................... -- -- 9,488
Acquired in-process research and development............. -- -- 26,141
-------- -------- --------
Total costs and expenses......................... 587,556 827,344 1,011,452
Operating income (loss).................................... 60,256 106,638 (67,221)
Other income (expense):
Interest income.......................................... 1,686 15,294 19,324
Foreign currency losses and other, net................... (2,616) (3,729) (268)
-------- -------- --------
Income (loss) before income taxes.......................... 59,326 118,203 (48,165)
Provision for (benefit from) income taxes................ 22,098 43,735 (8,941)
-------- -------- --------
Net income (loss).......................................... $ 37,228 $ 74,468 $(39,224)
======== ======== ========
Net income (loss) per common share:
Basic.................................................... $ 0.46 $ 0.76 $ (0.37)
======== ======== ========
Diluted.................................................. $ 0.39 $ 0.68 $ (0.37)
======== ======== ========
Shares used in computing per share amounts:
Basic.................................................... 80,546 98,264 105,378
Diluted.................................................. 96,500 109,993 105,378
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 55
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADJUSTMENT FOR
(INCLUDING MANDATORILY OTHER MANDATORILY
REDEEMABLE SHARES) ADDITIONAL COMPREHENSIVE REDEEMABLE
---------------------- PAID-IN RETAINED INCOME SHARES AND
SHARES AMOUNT CAPITAL EARNINGS (LOSS) OTHER, NET
------------ ------- ---------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1996............. 79,093,070 $ 79 $ 3,669 $ 65,628 $ 990 $(47,464)
Issuance of shares in public offering,
net................................. 12,790,004 13 276,452 -- -- --
Lapse of mandatorily redeemable
provision on ESOP shares............ -- -- -- -- -- 47,024
Tax benefit from stock compensation... -- -- 10,137 -- -- --
Stock option exercises and other,
net................................. 939,112 1 4,020 -- -- 51
Net income............................ -- -- -- 37,228 -- --
Other comprehensive loss -- change in
cumulative translation adjustment... -- -- -- -- (967) --
----------- ---- -------- -------- ------- --------
Balance, October 31, 1997............. 92,822,186 93 294,278 102,856 23 (389)
Stock option exercises, issuances
under employee stock purchase plan
and other........................... 9,859,422 10 54,346 -- -- (288)
Tax benefit from stock compensation... -- -- 58,262 -- -- --
Net income............................ -- -- -- 74,468 -- --
Other comprehensive income -- change
in cumulative translation
adjustment.......................... -- -- -- -- 337 --
----------- ---- -------- -------- ------- --------
Balance, October 31, 1998............. 102,681,608 103 406,886 177,324 360 (677)
Stock option exercises, issuances
under employee stock purchase plan
and other........................... 4,177,886 4 36,258 -- -- 394
Tax benefit from stock compensation... -- -- 10,077 -- -- --
Stock issuance for acquisition........ 250,000 -- 3,166 -- -- --
Net loss.............................. -- -- -- (39,224) -- --
Other comprehensive loss -- change in
cumulative translation adjustment... -- -- -- -- (1,951) --
----------- ---- -------- -------- ------- --------
Balance, October 31, 1999............. 107,109,494 $107 $456,387 $138,100 $(1,591) $ (283)
=========== ==== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 56
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................................... $ 37,228 $ 74,468 $ (39,224)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation........................................... 15,649 22,701 25,421
Amortization of intangible assets and securities
premiums or discounts................................ 6,022 9,941 18,376
Acquired in-process research and development........... -- -- 26,141
Benefit from deferred income taxes..................... (6,554) (1,933) (18,535)
Other.................................................. 1,692 3,433 4,965
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable, net............................... (59,398) (93,096) 25,212
Other assets........................................... (2,790) (11,744) (6,307)
Accounts payable....................................... 2,830 25,361 (14,843)
Unearned revenue and customer deposits................. 29,669 48,471 (11,452)
Accrued liabilities.................................... 49,882 77,119 2,558
--------- --------- ---------
Net cash provided by operating activities......... 74,230 154,721 12,312
Investing activities:
Purchase of investments................................... (138,560) (289,999) (284,284)
Proceeds from maturities of investments................... -- 73,481 322,322
Purchase of property and equipment........................ (22,436) (36,270) (52,019)
Purchase of acquired companies, net of cash acquired...... -- -- (97,378)
Proceeds from sale of assets and other, net............... 8,661 7,728 28
Capitalized internal software development costs........... (2,244) -- --
--------- --------- ---------
Net cash used for investing activities............ (154,579) (245,060) (111,331)
Financing activities:
Proceeds from issuance of common stock.................... 279,696 47,824 31,568
Proceeds from bank line of credit......................... 81,950 -- --
Repayment of bank line of credit.......................... (81,950) -- --
Purchase of common stock and other, net................... (15) -- --
--------- --------- ---------
Net cash provided by financing activities......... 279,681 47,824 31,568
Effect of exchange rate changes on cash..................... (449) 1,193 (2,323)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 198,883 (41,322) (69,774)
Cash and cash equivalents at beginning of period............ 25,554 224,437 183,115
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 224,437 $ 183,115 $ 113,341
========= ========= =========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Interest paid............................................. $ 829 $ 843 $ 868
Income taxes paid......................................... 17,168 12,447 22,717
Retirement savings plan contribution funded with common
stock.................................................. -- 6,050 4,694
Common stock issued in acquisition........................ -- -- 3,166
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 57
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
J.D. Edwards develops, markets, and supports enterprise and supply chain
computing solutions that enable customers to translate ideas into practical
realities quickly and efficiently using Idea to Action software. The Company's
integrated applications deliver e-business solutions that give customers control
over their front office, manufacturing, logistics/distribution, human resources,
finance, and customer service management processes for the consumer products,
industrial and services industries. J.D. Edwards enables Idea to Action with
ActivEra, a collection of tools and technologies that extend J.D. Edwards
OneWorld and WorldSoftware enterprise business software and its supply chain
planning solutions. ActivEra allows customers to change their software quickly
and easily during and after implementation. The Company has developed and
marketed enterprise software solutions for over 20 years, principally for
operation on AS/400 and other IBM mid-range systems and more recently for
multiple computing environments, including Windows NT(R), UNIX(R) and OS/400(R)
that are Java(TM) and HTML enabled. The Company also provides implementation,
training and support services designed to enable customers to rapidly achieve
the benefits of the Company's solutions. Its operations are primarily in the
United States, Europe, Africa, Canada, Asia and Latin America.
Principles of Consolidation and Basis of Presentation
The accounts of the Company have been consolidated. All intercompany
accounts and transactions have been eliminated. The consolidated financial
statements are stated in U.S. dollars and are prepared under U.S. generally
accepted accounting principles. Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform to the fiscal 1999
presentation.
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.
Cash and Cash Equivalents, Short-term Investments and Long-term Investments
All highly liquid investments with an original maturity of three months or
less when purchased are considered to be cash equivalents. All cash equivalents
are carried at cost, which approximates fair value. Investments consist of U.S.,
state and municipal bonds, as well as domestic corporate bonds, with maturities
of up to thirty months. All investments are classified as held-to-maturity as
defined in Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
accordingly are carried at amortized cost.
In connection with certain lease transactions discussed in Note 6,
management has elected to reduce the interest rate used to calculate lease
expense by collateralizing up to 97% of the financing arrangements with
investments consistent with the Company's investment policy. The Company may
withdraw the funds used as collateral at its sole discretion, provided it is not
in default under the lease agreement. At October 31, 1998 and 1999, long-term
marketable securities totaling $66.6 million and $121.4 million, respectively,
were designated as collateral for these leases.
F-6
<PAGE> 58
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the Company's total investments, consisting of those classified as cash
equivalents, short-term investments, and long-term investments, the amortized
cost basis, aggregate fair value and gross unrealized holding gains and losses
by major security type were as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE GROSS GROSS
COST FAIR UNREALIZED UNREALIZED
BASIS VALUE GAINS LOSSES
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
OCTOBER 31, 1998:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies............................. $ 14,178 $ 14,178 $ -- $ --
Debt securities issued by states of the
U.S. and political subdivisions of the
states................................... 382,751 384,800 2,078 29
Corporate debt securities.................. 61,825 61,819 34 40
Other debt securities...................... 17,000 17,000 -- --
-------- -------- ------ ------
Total investments................ $475,754 $477,797 $2,112 $ 69
======== ======== ====== ======
OCTOBER 31, 1999:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies............................. $ 67,716 $ 67,414 $ -- $ 302
Debt securities issued by states of the
U.S. and political subdivisions of the
states................................... 190,736 190,340 -- 396
Corporate debt securities.................. 73,675 73,068 -- 607
Other debt and equity securities........... 20,386 20,386 -- --
-------- -------- ------ ------
Total investments................ $352,513 $351,208 $ -- $1,305
======== ======== ====== ======
</TABLE>
Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method. The Company estimates a
useful life for furniture and fixtures of five to seven years and for computer
equipment of two years.
Internal Software Research and Development Costs
The Company capitalizes internally developed software costs in accordance
with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed." Capitalization of development costs of software
products begins once the technological feasibility of the product is
established. Based on the Company's product development process, technological
feasibility is established upon completion of a detailed program design.
Capitalization ceases when such software is ready for general release, at which
time amortization of the capitalized costs begins. The Company capitalized $2.2
million in software development costs in fiscal 1997. No internal software
development costs were capitalized in fiscal 1998 or 1999.
Amortization of capitalized internally developed software costs is computed
as the greater of: (a) the amount determined by ratio of the product's current
revenue to its total expected future revenue or (b) the straight-line method
over the product's estimated useful life, generally three years. During all
periods presented herein, the Company has used the straight-line method to
amortize such capitalized costs and such amortization is included in the cost of
license fees. Total amortization expense for internally developed software was
$6.0 million, $6.1 million and $4.8 million in fiscal 1997, 1998 and 1999,
respectively.
F-7
<PAGE> 59
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Research and development costs relating principally to the design and
development of products (exclusive of costs capitalized under SFAS No. 86) are
expensed as incurred. The cost of developing routine enhancements are expensed
as research and development costs as incurred because of the short time between
the determination of technological feasibility and the date of general release
of related products.
Acquired Software and Other Acquired Intangibles
From time to time the Company may acquire software or other intangible
assets in acquisitions of other companies. For business combinations accounted
for using the purchase method, acquired software and other acquired intangibles
include the amount of purchase price allocated to identified intangible assets
such as core software, in-place workforce, customer base, and goodwill at the
date of each respective acquisition. Goodwill represents the excess of purchase
price over fair value of the net assets acquired. Amortization of intangible
assets is computed on a straight-line basis over their estimated useful lives
which is generally three years for acquired core software and four years for
other acquired intangible assets. The amortization of acquired software and
other acquired intangible assets is presented in aggregate, as a separate line
item, in the consolidated statement of operations. Amortization expense for the
fiscal year ended October 31, 1999 related to the software, in-place workforce,
customer base and goodwill was $4.6 million, $1.3 million, $1.9 million, and
$1.7 million, respectively.
The Company evaluates the carrying value of its long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing this evaluation, the Company estimates the
future undiscounted cash flows of the operations to which the long-lived assets
relate to ensure that the carrying value has not been impaired.
Acquired In-process Research and Development
For business combinations accounted for using the purchase method, the
amount of purchase price allocated to acquired in-process research and
development (IPR&D) at the date of each respective acquisition is expensed
immediately as of the date of such acquisition in accordance with Financial
Accounting Standards Board (FASB) Interpretation No. 4, "Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase Method,
an interpretation of FASB Statement No. 2." IPR&D consists of products or
technologies which 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. When technological feasibility is not yet proven and
if no alternative future uses are believed to exist for in-process technologies,
the assigned values are expensed immediately upon the closing dates of the
acquisitions. Amounts allocated to IPR&D are presented as a separate line item
in the consolidated statement of operations.
Foreign Currency Translation
The functional currency of each subsidiary is the local currency or, in
certain countries in Europe, the euro. Translation of balance sheet amounts to
U.S. dollars is based on exchange rates as of each balance sheet date.
Cumulative currency translation adjustments, net of related deferred taxes, are
presented as a separate component of stockholders' equity. Accumulated foreign
currency translation balances consisted of a net gain of $360,000 and a net loss
of $1.6 million at October 31, 1998 and 1999, respectively.
Statements of operations and cash flows amounts are translated at the
average exchange rates for the period. Transaction gains and losses and
unrealized gains and losses on short-term intercompany receivables and payables
are included in income as incurred. Net foreign exchange transaction losses are
included in other income and expense and totaled $2.0 million, $2.8 million and
$568,000 in fiscal 1997, 1998 and 1999, respectively.
F-8
<PAGE> 60
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company licenses software under non-cancelable license agreements and
provides related services, including consulting, training and support. In
October 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
provides guidance on recognizing revenue on software transactions and supersedes
SOP 91-1. Further guidance was published during 1998 in SOP 98-4, "Software
Revenue Recognition," and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." Additionally, the AICPA
issued technical questions and answers on financial accounting and reporting
issues related to SOP 97-2 during 1999 and may issue additional interpretations
related to SOP 97-2 in the future.
The Company applied the provisions of SOP 97-2 on a prospective basis for
new software transactions entered into from the beginning of fiscal 1999. The
adoption of this guidance did not have a material impact on the Company's
financial condition or results of operations and did not have a significant
impact on its licensing or revenue recognition practices. However, there can be
no assurance that additional guidance pertaining to the new standards will not
result in unexpected modifications to the Company's current revenue recognition
practices that could 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 twelve-month period
from the date of delivery. Where software license contracts call for payment
terms in excess of twelve 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.
SOP 98-9 provides additional guidance regarding software revenue
recognition and is required to be adopted as of the beginning of the Company's
first quarter of fiscal 2000. The Company has determined that the adoption of
this standard will not have a material impact on its financial condition or
results of operations.
Stock-based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in
October 1995. This accounting standard permits the use of either a fair value
based method or the method defined in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees," (APB No. 25) to account for
stock-based compensation arrangements. Companies that elect to use the method
provided in APB No. 25 are required to disclose the pro forma net income (loss)
and earnings per share that would have resulted from the use of the fair value
based method. The Company has elected to continue to determine the value of
stock-based compensation arrangements under the provisions of APB No. 25 and,
accordingly, has included the pro forma disclosures required under SFAS No. 123
in Note 4.
F-9
<PAGE> 61
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting for Derivative Instruments and Hedging Activities
The Company uses hedging instruments to mitigate the foreign currency
exchange risk of certain assets and liabilities denominated in foreign currency.
The hedging instruments used are forward foreign exchange contracts with
maturities of generally three months or less in term. All contracts are entered
into with major financial institutions. At October 31, 1999, the Company had
approximately $108.7 million of gross U.S. dollar equivalent forward foreign
exchange contracts outstanding as hedges of monetary assets and liabilities
denominated in foreign currency. Gains and losses on these contracts are
included in other income or expense and recognized in the period in which the
gain or loss is recognized from the settlement or translation of the underlying
assets and liabilities. All gains and losses related to foreign exchange
contracts are included in cash flows from operating activities in the
consolidated statements of cash flows.
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and for Hedging Activities," was issued in June 1998 and
will require companies to value derivative financial instruments, including
those used for hedging foreign currency exposures, at current market value with
the impact of any change in market value being charged against earnings in each
period. SFAS No. 133 will be effective for the Company in the first quarter of
fiscal 2001. The Company currently anticipates that the adoption of SFAS No. 133
will not have a material impact on its consolidated financial statements.
Income Taxes
Deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying consolidated balance
sheets, as well as operating loss and tax credit carryforwards. Deferred tax
assets may be reduced by a valuation allowance if current evidence indicates
that it is likely that these benefits will not be realized.
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 1997 and 1998 periods have been
adjusted to include all common shares issuable under stock options using the
treasury stock method. Diluted loss per share for fiscal 1999 exclude common
stock equivalents because the effect of their inclusion would be anti-dilutive,
or would decrease the reported loss per share. Using the treasury stock method,
the weighted average common stock equivalents for fiscal 1999 totaled 6.1
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.
F-10
<PAGE> 62
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):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income (loss)................................... $37,228 $ 74,468 $(39,224)
======= ======== ========
Denominator:
Basic income (loss) per share -- weighted average
shares outstanding............................... 80,546 98,264 105,378
Dilutive effect of common stock equivalents......... 15,954 11,729 --
------- -------- --------
Diluted net income (loss) per share -- adjusted
weighted average shares outstanding, assuming
conversion of common stock equivalents........... 96,500 109,993 105,378
======= ======== ========
Basic net income (loss) per common share.............. $ 0.46 $ 0.76 $ (0.37)
Diluted net income (loss) per common share............ $ 0.39 $ 0.68 $ (0.37)
</TABLE>
Comprehensive Income
The Company implemented SFAS No. 130, "Reporting Comprehensive Income," in
fiscal 1999. This standard requires disclosure in the financial statements of
the total changes in equity resulting from revenue, expenses, and gains and
losses, including those which do not affect retained earnings. The Company's
comprehensive income or loss was comprised of net income or loss and foreign
currency translation adjustments for all periods presented. The Company's
comprehensive income was $36.3 million and $74.8 million for fiscal 1997 and
1998, respectively. In fiscal 1999, the Company had a comprehensive loss of
$41.2 million.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables. The Company has cash investment policies that limit investments to
investment grade securities. Management believes the risk with respect to trade
receivables is mitigated to some extent by the fact that the Company's customer
base is widespread geographically and is highly diversified. No single customer
accounted for ten percent or more of revenue for fiscal 1997, 1998, or 1999 or
of accounts receivable at October 31, 1998 or 1999.
F-11
<PAGE> 63
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
OTHER CURRENT ASSETS:
Prepaid expenses.......................................... $ 4,912 $ 13,305
Other current assets...................................... 27,911 21,631
-------- --------
$ 32,823 $ 34,936
======== ========
PROPERTY AND EQUIPMENT:
Furniture and fixtures.................................... $ 66,094 $ 97,042
Computer equipment........................................ 49,359 62,432
Land...................................................... 8,990 9,240
-------- --------
124,443 168,714
Less: accumulated depreciation............................ (63,754) (82,382)
-------- --------
$ 60,689 $ 86,332
======== ========
ACCRUED LIABILITIES:
Accrued compensation and related expenses................. $ 97,377 $105,539
Other taxes payable....................................... 8,642 9,302
Accrued income taxes...................................... 19,780 9,553
Other accrued expenses.................................... 31,674 38,241
-------- --------
$157,473 $162,635
======== ========
</TABLE>
(3) BANK LINE OF CREDIT
The Company has a $10 million, unsecured, revolving line of credit (the
"Revolver) which expires on July 31, 2000. Borrowings under the Revolver are for
working capital requirements and other general corporate purposes. The rate of
interest is the bank's prime rate minus 0.25% or LIBOR plus 1.00% at the option
of the Company. The credit agreement associated with the Revolver requires that
the Company remain in compliance with certain affirmative and negative covenants
and representations and warranties. The financial covenant includes a liquidity
measure. At October 31, 1998 and 1999, the Company was in compliance with the
covenants under the credit agreement, and there were no borrowings outstanding.
(4) EMPLOYEE RETIREMENT SAVINGS PLAN AND STOCK-BASED BENEFIT PLANS
Employee Retirement Savings Plan
The J.D. Edwards & Company Retirement Savings Plan (the "401(k) Plan") is
an Internal Revenue Code Section 401(k) plan, commonly known as a salary
reduction retirement plan. The Company established the 401(k) Plan subject to
the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) in
1988 and made certain amendments during fiscal 1998. The Company merged the U.S.
employee portion of its ESOP into the 401(k) Plan in August 1998.
Employees are eligible to participate in the 401(k) Plan on the first day
of the calendar quarter following one complete calendar month of service. The
401(k) Plan allows for both matching and discretionary contributions. Generally,
the Company matches 50% of an employee's eligible contributions to the 401(k)
Plan, up to a maximum match of 3% of eligible compensation for each calendar
year. Employees must complete 1,000 hours of service and be employed by the
Company on the last day of the calendar year to receive the matching
contribution, which is fully vested when made for all participants. The Company
F-12
<PAGE> 64
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized expense for matching contributions of $2.1 million, $5.4 million, and
$4.2 million for fiscal 1997, 1998, and 1999, respectively. Discretionary
contributions to the 401(k) Plan are subject to a five-year vesting schedule
based on number of years of service with the Company. In fiscal 1999, the
Company accrued $1.2 million for discretionary contributions to be made in
Company common stock.
ESOP and Mandatorily Redeemable ESOP Shares
The Company established the ESOP effective January 1, 1989, subject to the
provisions of ERISA, and in August 1998 the Company merged the U.S. employee
portion of its ESOP into the 401(k) Plan. A total of 8,108,373 shares owned by
the ESOP transferred to individual frozen accounts in the 401(k) Plan. Remaining
shares in the Plan for non-U.S. participants may be maintained in the account up
to the end of calendar year 2000.
The Company made discretionary contributions of cash and/or shares of
common stock of the Company to the ESOP trust fund maintained in the form of
individual participant accounts that vested over a seven-year period.
Allocations to these accounts were made on the basis of each participant's
proportionate share of total compensation paid by the Company to all ESOP
participants during each calendar year. At the discretion of the Company,
unvested shares forfeited by a terminated participant could be used to offset
future Company contributions to the ESOP or be reallocated to the remaining
participants of the ESOP. With certain limitations, Company employees in the
United States who were at least 21 years old and had completed one year of
service were eligible ESOP participants. Upon termination of employment, the
ESOP provided that a terminating employee would receive his or her vested
shares. Prior to the Company's IPO, a terminating employee could elect to
receive a distribution of Company common stock for shares vested or require the
Company to purchase the vested shares. In the event the Company was required to
purchase such shares from a terminating employee, the Company would purchase the
vested shares at the fair value determined by independent appraiser annually. In
accordance with the requirements of the SEC, the redemption value of shares held
by the ESOP was reflected in the balance sheets prior to completion of the IPO
as mandatorily redeemable shares with the offsetting adjustments included as a
reduction of stockholders' equity. Upon completion of the IPO, the Company's
obligation to purchase the ESOP shares terminated, and the amount related to the
mandatorily redeemable shares was reclassified to stockholders' equity.
Compensation cost was measured as the estimated fair value of shares
contributed to or committed to be contributed to the ESOP plus the cash
contributed to or committed to be contributed to the ESOP. For the years ended
October 31, 1997 and 1998, the Company recognized as compensation cost $5.3
million and $7.3 million, respectively. The ESOP owned 8,558,270 and 7,888,494
shares of common stock at October 31, 1997 and 1998, respectively. All shares
owned by the ESOP had been allocated to participants. During fiscal 1999, the
Company accrued $1.2 million for discretionary contributions to be made in
Company common stock to the 401(k) Plan.
Equity Incentive Plans
In August 1997, the Company established an Equity Incentive Plan (the "1997
Plan"). A total of 10,000,000 shares of common stock are reserved for issuance
under the 1997 Plan, of which 5,430,410 and 5,024,969 were available for grant
as of October 31, 1998 and 1999, respectively. The number of shares of common
stock reserved for issuance is increased on each anniversary date of the
adoption of the 1997 Plan by a number of shares equal to the number of shares
needed to restore the maximum aggregate number of shares to 10,000,000 or a
lesser amount determined by the Company's Board of Directors. The 1997 Plan
provides for the granting of incentive stock options to employees and the
granting of nonstatutory stock options and stock purchase rights to employees,
directors, and consultants.
In November 1992, the Company established an Incentive Stock Option Plan
and a Nonqualified Stock Option Plan (the "1992 Option Plans"). The Company does
not anticipate granting additional options under
F-13
<PAGE> 65
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the 1992 Option Plans. The options that were granted vest over a period of time
ranging from four to five years with a term of not more than ten years. A total
of 35,000,000 shares of common stock are authorized for issuance under the 1992
Option Plans, of which 12,982,200 and 13,495,090 shares were available for grant
as of October 31, 1998 and 1999, respectively.
Employee Stock Purchase Plans
In August 1997, the Company established employee stock purchase plans (the
"Employee Stock Purchase Plans"), which took effect upon completion of the IPO.
A total of 2,000,000 shares of common stock were reserved for issuance under the
Employee Stock Purchase Plans. An annual increase will be made to the Employee
Stock Purchase Plans on each anniversary date of the plans in an amount equal to
the number of shares of common stock required to restore the maximum number of
shares reserved for issuance to 2,000,000, or a lesser amount determined by the
Company's Board of Directors. The Employee Stock Purchase Plans permit eligible
employees to purchase common stock totaling up to 10% of an employee's
compensation through payroll deductions. The Employee Stock Purchase Plan for
U.S. employees is intended to qualify under Section 423 of the Internal Revenue
Code. The price of common stock to be purchased is 85% of the lower of the fair
market value of the common stock on the first or last day of each purchase
period. During the years ended October 31, 1998 and 1999, a total of 864,000 and
1,090,000 shares, respectively, were issued under the Employee Stock Purchase
Plans, generating total proceeds to the Company of $16,995,000 and $19,652,000,
respectively. At October 31, 1999, a total of $5.2 million had been withheld
from employees' payroll for the purchase offering period ending on December 31,
1999. Subsequent six-month purchase offering periods will commence on January 1,
2000 and June 1, 2000.
Stock-based Compensation
The Company records compensation expense related to its stock plans using
the intrinsic value based method and includes a pro forma disclosure in the
footnotes for compensation value measured using the fair value accounting
treatment. Generally, stock options are granted with an exercise price equal to
the fair value at the date of grant. Based on calculations using a Black-Scholes
option pricing model, the weighted-average grant date fair value of options was
$2.67, $16.24, and $10.65 in fiscal 1997, 1998, and 1999, respectively. The
weighted-average grant date fair value of shares issued through the Employee
Stock Purchase Plans in fiscal 1998 and 1999 was $3.52 and $8.91, respectively.
For the fair value disclosure below, compensation value is estimated for
each option grant under the 1992 and 1997 Option Plans on the date of grant
using a Black-Scholes option pricing model. The following weighted-average
assumptions were used for grants in fiscal 1997, 1998, and 1999:
<TABLE>
<CAPTION>
RISK-FREE
STOCK-BASED EXPECTED LIFE EXPECTED INTEREST
COMPENSATION (IN YEARS) VOLATILITY RATE
------------ ------------- ---------- -------------
<S> <C> <C> <C>
Options:
1997 -- Pre-IPO.................................. 4.20 --% 5.99%
1997 -- Post-IPO................................. 3.36 46% 5.85%
1998............................................. 3.57 50% 5.51%
1999............................................. 3.38 60% 4.64%
ESPP:
1998............................................. 0.55 --% 5.25%
1999............................................. 0.53 60% 4.63%
</TABLE>
F-14
<PAGE> 66
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma impact on the Company's net income (loss) and net income
(loss) per share had compensation cost been recorded as determined under the
fair value method is shown below (in thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net income (loss):
As reported.......................................... $37,228 $74,468 $(39,224)
Pro forma............................................ 35,058 58,183 (73,421)
Basic net income (loss) per share:
As reported.......................................... 0.46 0.76 (0.37)
Pro forma............................................ 0.44 0.59 (0.70)
Diluted net income (loss) per share:
As reported.......................................... 0.39 0.68 (0.37)
Pro forma............................................ 0.36 0.53 (0.70)
</TABLE>
Activity of the 1992 and 1997 Option Plans is summarized in the following
table:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE OPTIONS AVERAGE
SHARES EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Options outstanding, October 31,
1996................................ 19,934,880 $ 3.77 5,895,960 $ 2.79
Options granted..................... 2,506,500 11.40
Less: options exercised............. (940,515) 3.44
Less: options forfeited............. (249,340) 6.15
----------
Options outstanding, October 31,
1997.............................. 21,251,525 4.66 8,964,695 3.15
Options granted..................... 4,648,590 38.57
Less: options exercised............. (8,769,329) 3.37
Less: options forfeited............. (337,870) 19.11
----------
Options outstanding, October 31,
1998.............................. 16,792,916 14.40 4,478,186 4.17
Options granted..................... 5,975,428 23.29
Less: options exercised............. (2,937,932) 4.06
Less: options forfeited............. (1,513,327) 22.75
----------
Options outstanding, October 31,
1999.............................. 18,317,085 18.25 6,381,692 11.29
==========
</TABLE>
F-15
<PAGE> 67
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The status of total stock options outstanding and exercisable under the
1992 and 1997 Option Plans as of October 31, 1999 follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
- --------------------------------------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
- ------------------------ ---------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 2.66-3.44................... 3,874,954 4.6 $ 3.00 3,224,654 $ 2.91
6.24.................. 3,090,005 6.3 6.24 1,357,505 6.24
10.71-15.56................... 1,914,005 7.1 10.91 543,695 10.71
17.25-25.31................... 5,332,818 7.3 23.37 2,800 23.00
28.00-41.13................... 4,072,003 6.4 38.43 1,242,397 38.51
42.56-43.88................... 33,300 6.7 43.20 10,641 43.19
---------- ---------
2.66-43.88................... 18,317,085 6.3 18.25 6,381,692 11.29
========== =========
</TABLE>
(5) INCOME TAXES
Income (loss) before income taxes consists of the following, and the
components of the provision for (benefit from) income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic............................................ $34,667 $ 89,624 $ (3,738)
Foreign............................................. 24,659 28,579 (44,427)
------- -------- --------
$59,326 $118,203 $(48,165)
======= ======== ========
Components of the provision for (benefit from) income
taxes:
Current:
U.S. Federal..................................... $ 9,342 $ 24,146 $ (2,258)
State............................................ 1,798 4,417 276
Foreign.......................................... 17,512 17,105 11,576
------- -------- --------
28,652 45,668 9,594
Deferred:
U.S. Federal..................................... (6,292) (324) (13,098)
State............................................ (715) (36) (1,552)
Foreign.......................................... 453 (1,573) (3,885)
------- -------- --------
(6,554) (1,933) (18,535)
------- -------- --------
Total provision for (benefit from) income
taxes..................................... $22,098 $ 43,735 $ (8,941)
======= ======== ========
</TABLE>
F-16
<PAGE> 68
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions for (benefits from) income taxes are different from the
amounts computed by applying the U.S. Federal statutory rate to income before
income taxes. The amounts are reconciled as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Statutory rate......................................... $20,764 $41,371 $(16,858)
Foreign income taxed at higher rates................... 3,915 7,119 6,752
Non-deductible expenses/non-taxable income............. 563 (1,067) (3,015)
State income taxes, net of U.S. Federal benefit........ 1,431 2,847 (830)
Income tax credits..................................... (5,796) (5,590) (4,983)
Other.................................................. 1,221 (945) 1,113
Acquisition-related permanent differences.............. -- -- 8,880
------- ------- --------
Provision for (benefit from) income taxes.............. $22,098 $43,735 $ (8,941)
======= ======= ========
</TABLE>
Deferred tax assets and liabilities included in the balance sheet are
comprised of the following components (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Revenue deferred for book purposes........................ $ 10,219 $ 7,747
Foreign tax credit carryforwards.......................... 15,818 14,893
Allowance for doubtful accounts........................... 3,388 1,586
Vacation and other accruals............................... 4,499 8,441
Fixed assets.............................................. 4,560 2,290
Research and development credit carryforward.............. 6,591 2,735
Net operating loss carryforwards.......................... 28,241 62,251
Other..................................................... 2,047 9,475
-------- --------
Total deferred tax assets......................... 75,363 109,418
Deferred tax liabilities:
Capitalized software development costs.................... (2,168) --
Revenue deferred for tax.................................. (8,610) (10,774)
Other..................................................... -- (2,109)
-------- --------
Total deferred tax liabilities.................... (10,778) (12,883)
Less -- valuation allowance................................. (9,651) (9,651)
-------- --------
Net deferred tax asset...................................... $ 54,934 $ 86,884
======== ========
Current portion of deferred taxes........................... $ 11,276 $ 4,312
Non-current portion of deferred taxes....................... 43,658 82,572
-------- --------
Net deferred tax asset...................................... $ 54,934 $ 86,884
======== ========
</TABLE>
The Company has available approximately $14.9 million of foreign tax credit
carryforwards, of which $4.9 million will expire in 2003 and $10.0 million will
expire in 2004. The Company has a U.S. net operating loss carryforward of
approximately $164.9 million, of which $125.7 million will expire in 2013 and
$39.2 million will expire in 2014. Additionally, a research and development
credit carryforward of approximately $2.7 million is available, which will
expire in 2014.
F-17
<PAGE> 69
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At October 31, 1998 and 1999, unremitted earnings of foreign subsidiaries
totaled $17.7 million and $15.2 million, respectively, and were deemed to be
permanently invested. The unrecognized deferred tax liability for such earnings
is immaterial.
The Company has provided a valuation allowance of $9.7 million relating to
foreign tax credits due to the fact that the Company could not utilize such
credits in the current year and there is uncertainty that the credits will be
utilized prior to expiration in 2003 and 2004. The valuation allowance may be
adjusted in future periods to the extent evidence becomes available that these
foreign tax credits will be utilized before they expire.
(6) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space and equipment under various operating
leases. Rent expense for office space and equipment during fiscal 1997, 1998,
and 1999 was $27.9 million, $42.8 million, and $59.6 million respectively. The
minimum future lease commitments under non-cancelable leases as of October 31,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- --------
<S> <C>
2000..................................................... $ 56,355
2001..................................................... 40,016
2002..................................................... 27,857
2003..................................................... 23,014
2004..................................................... 20,368
Thereafter............................................... 18,194
--------
$185,804
========
</TABLE>
The Company leases its corporate headquarters office buildings 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 $124.2 million in
purchase and construction costs through a combination of equity and debt. The
Company guarantees the residual value of each building up to approximately 85%
of its original cost. The Company's lease obligations are based on a return on
the lessor's costs. Management has elected to reduce the interest rate used to
calculate lease expense by collateralizing up to 97% of the financing
arrangements with investments consistent with the Company's investment policy.
The Company may withdraw the funds used as collateral at its sole discretion,
provided it is not in default under the lease agreement. At October 31, 1998 and
1999, investments totaling $66.6 million and $121.4 million, respectively, were
designated as collateral for these leases.
Legal Matters
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. Subsequently, two additional suits were filed on behalf of
additional plaintiffs alleging the same violations and seeking the same recovery
as the first suit.
F-18
<PAGE> 70
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company believes these complaints are without merit and will vigorously
defend itself and certain of its officers and directors against such complaint.
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, that
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.
(7) ACQUISITIONS
The Company completed two acquisitions during the fiscal year ended October
31, 1999. 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. For purposes of allocating the purchase price to the identified
acquired assets, the term "fair value" is defined as fair market value, or the
price at which an asset would change hands between a willing buyer and a willing
seller when the former is not under any compulsion to buy and the latter is not
under any compulsion to sell, and both parties are able, as well as willing, to
trade and are well-informed about the asset and the market for that asset. The
Company's consolidated statements of operations do not include any revenue or
expenses related to the acquisitions prior to their closing dates.
Numetrix Ltd. On June 16, 1999, the Company completed an acquisition of
privately held Numetrix Ltd. (Numetrix), a Toronto-based provider of
Internet-enabled supply chain planning software. Numetrix's current product
suite is being integrated with the Company's existing enterprise application
solutions to link customers, suppliers, and trading partners in collaborative
enterprise networks and is also being sold separately. The purchase price was
paid in cash and consisted of $83.0 million for outstanding common and preferred
shares of Numetrix. The Company incurred direct costs related to the transaction
totaling $5.2 million. Additionally, the Company repaid debt and assumed net
liabilities from Numetrix totaling $10.6 million. The total purchase price of
$98.8 million was allocated to the acquired assets and liabilities at their fair
values as of June 16, 1999. The acquired intangible assets consisted of
capitalized software valued at $32.8 million, the in-place workforce valued at
$5.3 million, and the existing customer base valued at $19.9 million. The
remaining excess purchase price of $16.4 million was recorded as goodwill.
Additionally, $24.0 million of the purchase price was allocated to IPR&D.
Pro forma results of operations have been prepared as though the companies
had combined at the beginning of the two most recently completed fiscal years.
These unaudited pro forma results of operations have been prepared for
comparative purposes only and include certain adjustments, including the
write-off of in-process research and development, additional amortization
expense as a result of goodwill and other intangibles, interest, and income tax
adjustments. Giving effect to such adjustments as of the beginning of the fiscal
year ended October 31, 1998, pro forma total revenue, net income and diluted net
income per share were $961.1 million, $35.0 million, and $0.32, respectively.
Reflecting these same adjustments as of the beginning of the fiscal year ended
October 31, 1999, pro forma total revenue, net loss, and net loss per share were
$957.1 million, $51.9 million, and $0.49, respectively. This information is not
intended to be indicative of the results of operations that would have actually
resulted had the acquisitions occurred at the beginning of the period presented
or of results for any future period.
The Company retained an independent appraiser to assist with assigning fair
values to the intangible assets. The valuations relied on methodologies that
most closely related the fair market value assignment with the economic benefits
provided by each asset and the risks associated with the assets. In valuing both
the developed and in-process technology, an income-based approach was determined
to best quantify the economic benefits using projections of net cash flows and
the risks by applying an appropriate discount rate.
F-19
<PAGE> 71
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Numetrix was developing major revisions and enhancements of almost all of
the modules of its product suite as of the date of acquisition. A substantial
amount of research and development had been completed on a new discrete
scheduling product that represents a strategic product designed to address the
market for discrete factory planning for middle-market companies. Also underway
was the development of a new demand planning module and a new collaborative
enabler. Following is a description of the specific nature of each of the new
in-process development projects acquired:
- The most significant in-process technology is being designed to offer an
operational-level, discrete planning and scheduling solution targeted at
the middle market. Numetrix's current solution in the market relies on
process scheduling rather than discrete scheduling, and a large technical
difference exists between the two types of scheduling. Process scheduling
is used by manufacturers in industries, such as paper products and
processed foods, with significant capital investment in the machinery
compared to the investment in raw material products. These types of
industries require production and scheduling systems to coordinate with
the interruptible nature of the manufacturing process. In comparison,
discrete scheduling is utilized in industries with non-interruptible
processes with emphasis on the product materials rather than the
machinery, such as computer component manufacturing. The two types of
scheduling employ different data models and users in each case require
different operating parameters from production scheduling solutions. As
of the valuation date the beta release was scheduled for September 1999,
and the development was estimated to be nearly 90% complete. This project
continues to progress; however, the beta release was postponed until
fiscal 2000.
- A new demand-planning module was being designed to enhance
enterprise-wide collaborative forecasting and to address forecast
reconciliation. This application is intended to be marketed as a
component of both the Numetrix product suite and the new discrete
product. New features of this product include a full forecasting
graphical interface that allows for manipulation of variables and inputs
to optimize demand planning. As of the valuation date Numetrix was
analyzing requirements for the product and had not begun to write code.
The first scheduled release was planned for the middle of calendar 2000.
As of the acquisition date this module was less than 10% complete.
Currently, the project was postponed pending further evaluation by
management.
- Another in-process technology, a collaborative enabler, is designed to
efficiently interface the messaging architecture among applications that
allow real-time, alert-driven collaboration. The product automatically
detects changes to data in other applications and instantaneously
processes the impact of the changes among applications. It is designed to
integrate into the Numetrix product suite solution and offers a more
cost-effective solution for messaging optimization as compared to the
current technology. The initial product release was scheduled for the
middle of calendar 2000, and as of the acquisition date the technology
was estimated to be 13% complete. The Company has not changed the product
schedule since the acquisition date.
Both the developed technology and in-process development valuations were
based primarily on an income approach that examined all projected revenue and
expenses attributable to the assets over the economic life of each. A variation
of the income approach that applies a percentage of completion calculation was
also used to value in-process technology, and this method was used for recording
the fair value of in-process development. In this approach, the research and
development costs to complete the in-process technology are not deducted as an
expense. However, the net cash flows are multiplied by the percentage of
completion of the technology. The percentage of completion was based on the
development expense spent as of the valuation date as a percentage of the total
required development expense for each new product and each new release of the
existing products.
The basis of the financial projections used in the valuation analysis were
management projections of the revenue and expenses likely to be realized by
Numetrix. Projected revenue was split between developed,
F-20
<PAGE> 72
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in-process, and future technology to be developed subsequent to the valuation
date. The classification of each research and development project as complete or
under development was made in accordance with the guidelines of SFAS No. 86,
SFAS No. 2 and FASB Interpretation No. 4. All expenses associated with those
revenues were deducted, including cost of goods sold, sales and marketing,
general and administrative expenses, and research and development expenses.
Allocations of revenue and expenses between developed, in-process, and future
technology were based on the development schedule of new products and new
versions of existing products and the estimated lines of code needed to complete
each in-process product phase as provided by Numetrix. Unless otherwise
appropriate, these expenses were allocated to developed, in-process, and future
technology in the same ratio as the revenue. An economic rent for use of other
assets was deducted, including the in-place workforce, working capital, fixed
assets, trademark, and customer base. A royalty rate for the proprietary
Distributed Object Messaging Architecture (DOMA) was deducted where appropriate
for applications relying on this existing technology. Income taxes were deducted
at the estimated effective tax rate for the company. An appropriate discount
rate was applied to the projects to calculate the net present value of the
developed and in-process technology over their economic lives.
The valuations used a discounted cash flow analysis of financial
projections over the estimated useful lives of the existing technology. After
the end of the projection period, no further revenue was assumed and no residual
value of the technologies was used. The projected revenue stream by
product -- developed, in-process and future -- was determined by the existing
lines of software code and incremental lines of code for future releases of each
product. The discount rate was based on the weighted average cost of capital
method, and was determined to be 22.5% for Numetrix. This same rate was used for
valuing the IPR&D due to the level of risk, which was considered the same as
that for the company as a whole. A discount rate of 17.5% was used for developed
technology due to the lower level of risk.
Financial projections used to value the intangibles included breakdowns of
revenue from license fees, implementation and consulting services, and
maintenance, along with costs of the revenue components, major operating expense
categories, and income taxes for the current fiscal year through Numetrix's
fiscal year ending February 28, 2009. Based upon historical data provided by
management of Numetrix regarding the rate at which the code base for developed
technology would become obsolete, the expected replacement and augmentation of
existing software code for each product, as well as the rate at which
replacement technology would be developed, the projection period was deemed
appropriate. Significant changes were not anticipated from historical pricing or
gross margins. Management anticipates solid revenue growth consistent with
historical and projected results of competitors as well as general market
expectations for the supply chain management space and especially web-enabled
applications such as those currently and expected to be offered by Numetrix.
Also, the discrete scheduling product currently under development targets the
much larger market of mid-sized manufacturing companies in addition to the
company's traditional market of Fortune 500 customers. Operating expenses are
also expected to increase significantly but, as a percentage of revenue, are
projected to fall closer in line with industry averages consistent with the
major ERP providers, including J.D. Edwards, Oracle, and SAP. Accordingly, the
operating margin is expected to be at a break-even point in the current fiscal
year and gradually increase through the fiscal year ending February 28, 2009.
The Premisys Corporation. On February 26, 1999, the Company completed an
acquisition of The Premisys Corporation, a privately-held Illinois corporation
that provides visual configuration software and consulting services. Technology
acquired from The Premisys Corporation is being integrated with OneWorld, the
Company's multi-platform applications. The purchase price was paid with a
combination of J.D. Edwards' common stock and cash. The acquisition was
accounted for as a purchase and the purchase price of $7.1 million was allocated
to the acquired assets and liabilities at their fair values as of February 26,
1999. Acquired intangible assets consisted of $2.4 million of capitalized
software and $5.0 million of in-place workforce, including a gross up for
deferred taxes. Additionally, $2.1 million was allocated to IPR&D. Future
consideration that may be paid in fiscal 2001 based upon the occurrence of
certain future events is being recorded as compensation expense through the
second quarter of fiscal 2001.
F-21
<PAGE> 73
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The percentage completion variation of the income approach was used to
value the IPR&D from The Premisys Corporation acquisition based on projected
revenues and expenses likely to be realized. However, both a replacement cost
approach and market approach were also considered and provided further support
for the valuation. The percentage of completion for the in-process technology
was based on the development expense spent as of the valuation date as a
percentage of the total required development expense. The financial projections
include revenues from license fees, implementation, and consulting services and
maintenance, along with costs of the revenue components, major operating expense
categories, and income taxes for the current fiscal year through fiscal year
2003. Charges for other assets were also deducted, including a royalty for the
core technology, fixed assets, working capital, and other intangibles. Income
taxes were deducted at the estimated effective tax rate for the company. A
discount rate of 21% was deemed appropriate for the level of risk associated
with the development projects. This rate was used over the economic life to
calculate the net present value for the developed and in-process technology.
The financial model used in the valuation anticipated revenue growth
consistent with the historical and projected results of competitors as well as
general market expectations for the supply chain management space and front
office applications such as CustomWorks. Operating expenses are also expected to
increase significantly, but are projected to gradually fall in line with
industry averages consistent with established enterprise and supply chain
solutions providers. Accordingly, the operating margin in the financial model is
expected to grow over the next two years, but then gradually decline as the
developed and in-process products mature.
(8) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's quarterly financial information for fiscal 1998 and 1999 is
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1998:
Total revenue.............................. $178,256 $208,991 $239,602 $307,133
Less: costs and expenses................. 170,505 193,035 213,854 249,950
-------- -------- -------- --------
Operating income........................... 7,751 15,956 25,748 57,183
-------- -------- -------- --------
Income before income taxes................. 10,200 19,576 28,655 59,772
Net income................................. $ 6,426 $ 12,333 $ 18,053 $ 37,656
======== ======== ======== ========
Net income per common share:
Basic.................................... $ 0.07 $ 0.13 $ 0.18 $ 0.37
Diluted.................................. $ 0.06 $ 0.11 $ 0.16 $ 0.34
YEAR ENDED OCTOBER 31, 1999:
Total revenue.............................. $222,937 $231,591 $232,069 $257,634
Less: costs and expenses................. 221,270 254,347 274,044 261,791
-------- -------- -------- --------
Operating income (loss).................... 1,667 (22,756) (41,975) (4,157)
-------- -------- -------- --------
Income (loss) before income taxes.......... 6,774 (16,507) (38,638) 206
Net income (loss).......................... $ 4,268 $(10,400) $(33,222) $ 130
======== ======== ======== ========
Net income (loss) per common share:
Basic.................................... $ 0.04 $ (0.10) $ (0.31) $ 0.00
Diluted.................................. $ 0.04 $ (0.10) $ (0.31) $ 0.00
</TABLE>
F-22
<PAGE> 74
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in fiscal 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. Total revenue from each country
outside of the United States was less than ten 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.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
REVENUES FROM UNAFFILIATED CUSTOMERS:
United States........................................ $406,521 $591,887 $578,804
Europe, Middle East, and Africa...................... 128,878 206,922 224,601
Canada, Asia, and Latin America...................... 112,413 135,173 140,826
-------- -------- --------
Consolidated......................................... $647,812 $933,982 $944,231
======== ======== ========
INCOME (LOSS) FROM OPERATIONS:
United States........................................ $ 41,171 $ 86,380 $(24,808)
Europe, Middle East, and Africa...................... 11,196 14,584 (10,027)
Canada, Asia, and Latin America...................... 7,889 5,674 3,243
IPR&D and amortization of acquired intangibles....... -- -- (35,629)
-------- -------- --------
Consolidated......................................... $ 60,256 $106,638 $(67,221)
======== ======== ========
TOTAL ASSETS:
United States........................................ $524,396 $779,523 $551,758
Europe, Middle East, and Africa...................... 67,269 109,603 154,766
Canada, Asia, and Latin America...................... 51,372 61,347 234,004
-------- -------- --------
Consolidated......................................... $643,037 $950,473 $940,528
======== ======== ========
</TABLE>
(10) SUBSEQUENT EVENTS (UNAUDITED)
In December 1999, the Company committed to cash outlays totaling
approximately $30.0 million to be paid during the first or second quarter of
fiscal 2000 for certain strategic investments and other agreements. Additional
cash outlays related to these arrangements totaling approximately $15.0 million
may be made either at the Company's option or are contingent upon certain future
events.
F-23
<PAGE> 75
SCHEDULE II
J.D. EDWARDS & COMPANY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO TRANSLATION END
CLASSIFICATION PERIOD OPERATIONS WRITE-OFFS ADJUSTMENTS OF PERIOD
- -------------- ------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Fiscal Year Ended:
October 31, 1997.................... $ 5,600 $8,434 $(4,078) $(156) $ 9,800
October 31, 1998.................... 9,800 7,211 (4,527) 416 12,900
October 31, 1999.................... 12,900 6,615 (7,301) (214) 12,000
</TABLE>
F-24
<PAGE> 76
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<S> <C>
2.1 -- Share Purchase Agreement, dated May 17, 1999, which is
incorporated herein by reference to Exhibit 10.13 to the
Registrant's Form 10-Q for the period ended July 31, 1999.
3.1(i) -- Amended and Restated Certificate of Incorporation of
Registrant, which is incorporated herein by reference to
Exhibit 3.1(i) to the Registrant's Statement on Form S-1,
Registration No. 333-30701, as Amended (Registrant's Form
S-1).
3.1(ii) -- Bylaws of Registrant, which is incorporated herein by
reference to Exhibit 3.1(ii) to the Registrant's Form S-1.
4.1 -- Specimen stock certificate of Registrant's Common Stock,
which is incorporated herein by reference to Exhibit 4.1 to
the Registrant's Form S-1.
10.1 -- Original Software Vendor Marketing and License Agreement
between Seagull Business Software and J.D. Edwards & Company
dated August 19, 1994, which is incorporated herein by
reference to Exhibit 10.1 to The Registrant's Form S-1.
10.2 -- Amended and Restated Credit Agreement by and Between Wells
Fargo Bank (Colorado), N.A., as Lender and as Agent Bank,
Harris Trust and Savings Bank, as Lender, Key Bank of
Colorado, as Lender, and J.D. Edwards & Company, as a
Borrower, J.D. Edwards World Solutions Company, as a Borrower,
J.D. Edwards World Source Company, as a Borrower dated as of
July 25, 1997, which is incorporated herein by reference to
Exhibit 10.2 to the Registrant's Form S-1.
10.3 -- Form of Indemnification Agreement entered into between the
Registrant and each of its officers and directors, which is
incorporated herein by reference to Exhibit 10.13 to the
Registrant's Form S-1.
10.4 -- J.D. Edwards & Company Retirement Savings Plan, Amended and
Restated as of January 1, 1997, which is incorporated herein
by reference to Exhibit 10.4 to the Registrant's Form 10-K for
the period ended October 31, 1998.
10.5 -- J.D. Edwards & Company 1992 Incentive Stock Option Plan,
which is incorporated herein by reference to Exhibit 10.16 to
the Registrant's Form S-1.
10.6 -- J.D. Edwards & Company 1992 Nonqualified Stock Option Plan,
which is incorporated herein by reference to Exhibit 10.17 to
the Registrant's Form S-1.
10.7 -- Restricted Stock Grant Plan for employees of J.D. Edwards &
Company, which is incorporated herein by reference to Exhibit
10.18 to the Registrant's Form S-1.
10.8 -- Stock Plan for Employees of J.D. Edwards & Company, which
is incorporated herein by reference to Exhibit 10.19 to the
Registrant's Form S-1.
10.9 -- J.D. Edwards & Company 1997 Employee Stock Purchase Plan,
which is incorporated herein by reference to Exhibit 10.20 to
the Registrant's Form S-1.
10.10 -- J.D. Edwards & Company 1997 Equity Incentive Plan, which is
incorporated herein by reference to Exhibit 10.21 to the
Registrant's Form S-1.
10.11 -- J.D. Edwards & Company 1997 Employee Stock Purchase Plan
for Non-U.S. Employees, which is incorporated herein by
reference to Exhibit 10.23 to the Registrant's Form S-1.
21.1* -- Subsidiaries of Registrant
23.1* -- Consent of PricewaterhouseCoopers LLP
27.1* -- Financial Data Schedule for fiscal year ended October 31,
1999
</TABLE>
* Filed herewith
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION
- ------------------ ------------
<S> <C>
J.D. Edwards World Solutions Company Colorado
J.D. Edwards World Source Company Colorado
J.D. Edwards International B.V. Netherlands
J.D. Edwards (U.K.) Ltd. United Kingdom
J.D. Edwards France SA France
J.D. Edwards Deutschland GmbH Germany
J.D. Edwards Italia S.p.A. Italy
J.D. Edwards (Asia Pacific) Pte. Ltd. Singapore
J.D. Edwards (Japan) K.K. Japan
J.D. Edwards de Mexico y Compania en N.C. de C.V. Mexico
J.D. Edwards Brasil Limitada Brazil
J.D. Edwards Canada Ltd. Canada
J.D. Edwards S.A. (Proprietary) Limited South Africa
J.D. Edwards (Hong Kong) Limited Hong Kong
J.D. Edwards (China) Software Systems Co., Ltd. China
J.D. Edwards Austria GmbH Austria
J.D. Edwards (Schweiz) AG Switzerland
J.D. Edwards Company Pty. Ltd. Australia
J.D. Edwards & Company Foreign Sales, Inc. Barbados
J.D. Edwards Europe Ltd. Ireland
J.D. Edwards (Malaysia) Sdn. Bhd. Malaysia
J.D. Edwards Belgium N.V./S.A. Belgium
J.D. Edwards Espana S.L. Spain
J.D. Edwards (Taiwan) Pte. Ltd. Taiwan
J.D. Edwards Nordic A.B. Sweden
J.D. Edwards Netherlands B.V. Netherlands
J.D. Edwards Holdings Inc. Colorado
J.D. Edwards Nova Scotia Company Nova Scotia
J.D. Edwards Numetrix Company Nova Scotia
Numetrix Deutschland GmbH Germany
Numetrix SA Belgium
Numetrix B.V. Netherlands
Numetrix, Ltd. United Kingdom
Numetrix, Inc. Connecticut
Numetrix France S.A. France
Numetrix GmbH Switzerland
Numetrix Asia Pte. Ltd. Singapore
The Premisys Corporation Delaware
</TABLE>
World Technology Services LLC (J.D. Edwards & Company is a 50% owner of this
company)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8/S-3 (No. 333-36227) of J.D. Edwards & Company of our
report dated November 23, 1999 relating to the financial statements and
financial statement schedules, which appears in this Form 10-K.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Broomfield, Colorado
January 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT OCTOBER 31, 1999 AND STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED
OCTOBER 31, 1999 AS FILED ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 113,341
<SECURITIES> 62,546
<RECEIVABLES> 248,216
<ALLOWANCES> 12,000
<INVENTORY> 0
<CURRENT-ASSETS> 447,039
<PP&E> 168,714
<DEPRECIATION> 82,382
<TOTAL-ASSETS> 940,528
<CURRENT-LIABILITIES> 323,504
<BONDS> 0
0
0
<COMMON> 107
<OTHER-SE> 592,613
<TOTAL-LIABILITY-AND-EQUITY> 940,528
<SALES> 312,817
<TOTAL-REVENUES> 944,231
<CGS> 29,885
<TOTAL-COSTS> 438,175
<OTHER-EXPENSES> 573,277
<LOSS-PROVISION> 6,615
<INTEREST-EXPENSE> 1,153
<INCOME-PRETAX> (48,165)
<INCOME-TAX> (8,941)
<INCOME-CONTINUING> (39,224)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,224)
<EPS-BASIC> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
