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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, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-23091
J.D. EDWARDS & COMPANY
(Exact name of Registrant as Specified in its Charter)
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DELAWARE 84-0728700
(State or other jurisdiction 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 5, 2001, there were 111,202,876 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 5, 2001) was approximately $1.3
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
2001 Annual Meeting of Stockholders to be held on March 1, 2001, are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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J.D. EDWARDS & COMPANY
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000
TABLE OF CONTENTS
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PAGE NO.
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PART I
Item 1. Business.................................................... 1
Factors Affecting the Company's Business, Operating Results,
and Financial Condition................................... 18
Item 2. Properties.................................................. 28
Item 3. Legal Proceedings........................................... 29
Item 4. Submission of Matters to a Vote of Security Holders......... 29
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 31
Item 6. Selected Consolidated Financial Data........................ 32
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 34
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 53
Item 8. Consolidated Financial Statements and Supplementary Data.... 54
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 54
PART III
Item 10. Directors and Executive Officers of the Company............. 55
Item 11. Executive Compensation...................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 55
Item 13. Certain Relationships and Related Transactions.............. 55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 55
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
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The page numbers in the Table of Contents reflect actual page numbers, not EDGAR
page tag numbers.
J.D. Edwards is a registered trademark of J.D. Edwards & Company. The names of
all other products and services of J.D. Edwards used herein are trademarks or
registered trademarks of J.D. Edwards World Source Company. All other product
and service names used are trademarks or registered trademarks of their
respective owners.
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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 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 18
through 28. 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.
ITEM 1. BUSINESS
OVERVIEW
J.D. Edwards is a leading provider of agile, collaborative solutions for
the Internet economy. Our open solutions give organizations the freedom to
choose how they assemble internal software applications and how they collaborate
with partners and customers across the supply chain to increase competitive
advantage. For more than 20 years, we have developed, marketed, and supported
innovative, flexible solutions essential to running complex and fast-moving
multi-national organizations -- helping over 6,000 customers of all sizes
leverage existing investments and benefit from new technologies.
Our enterprise software was originally designed to help organizations
manage and execute internal business functions, such as manufacturing, finance,
distribution/logistics, and other core operational processes. These systems
manage and store large amounts of diverse business information, providing
continuous and simultaneous availability of information to geographically
dispersed employees, customers, and suppliers. With recent internal development
achievements, business acquisitions, and strategic partnerships, we now deliver
integrated software for supply chain planning, e-procurement, and customer
relationship management, in addition to our fulfillment and other solutions.
Customers can choose to operate our software on a variety of computing
environments, including Windows(R)/Intel(R), UNIX(R), and IBM OS/400(R). Our
software is also Web-enabled through Java(R) and HTML. The databases we support
include Oracle, IBM DB2/400(R), and Microsoft's SQL Server(R). In addition, our
software operates in hosted environments provided through third-party business
partners as part of the J.D. Edwards Application Service Provider (ASP)
Solution.
Our supply chain software is helping shape the next phase of e-business in
the Internet economy -- collaborative commerce, or c-commerce. C-commerce is the
ability to share information and processes among organizations, suppliers, and
customers across the supply chain, which increases value in business-to-business
(B2B) environments. We deliver our c-commerce solutions and enable B2B trading
communities by licensing our comprehensive set of integrated software
applications to customers. And our latest release of OneWorld(R), OneWorld
Xe(TM), offers significant new modules and enhancements to several existing
applications.
To assist our customers in rapidly achieving benefits from our solutions,
we provide implementation and education services through either our own direct
services organization or business partners. Our services organization is focused
on being a responsive and proactive extension of our agile, collaborative
software offerings, delivering services and solutions that are in sync with
market demands and customer expectations.
We completed three business acquisitions during the past two fiscal years
ended October 31, 1999 and 2000, all of which were accounted for using the
purchase method. In February 1999, we acquired The Premisys Corporation, a
privately held company that provided visual configuration software and
consulting services. In June 1999, we completed our acquisition of Numetrix Ltd.
(Numetrix), a leading provider of Internet-enabled
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supply chain planning software, including demand planning, production
scheduling, and distribution supply chain applications for medium and large
manufacturing companies. In March 2000, we acquired J.D. Edwards New Zealand
Ltd., our longstanding business partner serving Australia and New Zealand.
We distribute, implement, and support our solutions worldwide through 60
offices and nearly 400 third-party business partners. Our principal executive
office is located at One Technology Way, Denver, Colorado 80237. Our telephone
number is 303/334-4000, and our Internet home page is located at
www.jdedwards.com. The Company was incorporated in Colorado in March 1977 and
reincorporated in Delaware in August 1997. Except as otherwise noted herein, all
references to "J.D. Edwards" or the "Company" shall mean J.D. Edwards & Company
and its subsidiaries.
MARKET OPPORTUNITY
The competitive environment of business is changing as technology
progresses and the economy shifts more toward electronic commerce. Enterprises
in a number of different industries and disciplines are accelerating
improvements in their efficiency, agility, and responsiveness to changes in
market conditions. More demands are placed on companies to meet higher quality
standards; to accurately quote the costs and delivery schedules for products;
and to provide value and choices to customers. Greater pressure exists to
shorten product lead times and have the capability to adjust production
schedules for changes in customer specifications. Many companies are striving to
improve their business processes to reduce manufacturing cycle times, shift
toward order-driven manufacturing, and reduce inventories. Additionally,
companies are increasingly operating in a global environment, communicating with
trading partners in different countries around the world. Enterprises are
compelled by these competitive factors to collaborate with their upstream and
downstream trading partners -- their supply chain.
This supply chain collaboration is also being advanced by software
applications that facilitate operations over the Internet and provide
platform-independent, inter-enterprise communications networks. This has
prompted market demand for standards-based, interoperable technology to link
organizations with their trading partners and share information more readily
over the Internet. In addition, the Internet is impacting core business
functions, such as manufacturing, distribution/logistics, customer relationship
management, procurement, finance, and general administrative tasks. To help
optimize business operations, enterprises are seeking integrated,
Internet-enabled solutions for planning, fulfilling customer orders, managing
customer relationships, and handling a variety of other business functions.
Organizations need collaborative end-to-end software solutions to integrate
their own portfolio of enterprise applications and provide a link to the
information and processes of their trading partners. The goal is to optimize
end-to-end supply chain processes from back office functions to customer-facing
solutions. In addition, many organizations need software that will enable them
to rapidly and cost-effectively deploy and optimize Internet-based marketplace
and exchange management solutions.
We believe that the traditional enterprise software market will continue to
grow but at a slower pace than was evident in the past decade. The traditional
enterprise market focuses on automating internal operations, such as
manufacturing, distribution, finance, and human resources. Many companies have
already automated internal operations. The traditional enterprise market is now
largely a replacement market; we believe that companies will replace their
enterprise software approximately every five to seven years. While the
traditional enterprise market slows somewhat, we believe that there will be
growth in the emerging c-commerce market. However, it is possible this market
may grow slower that we anticipate or not at all. Now that enterprises have
largely automated their internal processes, they are turning their attention to
automating external processes in order to achieve further competitive advantage.
We believe that the growth in the c-commerce market will be notable, and we
intend to position ourselves as a leader in that market. We also believe that
interoperability and supply chain planning will be crucial for success in the
c-commerce market. During the fiscal year ended October 31, 2000, we
significantly improved our c-commerce product suite by incorporating
interoperability technologies and enhancing and integrating our OneWorld
Advanced Planning Solution.
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STRATEGY
Our corporate vision is to provide agile, collaborative solutions for the
Internet economy. The power to share processes and workflow with partners and
customers that use different software is a central theme in our vision. We
enable collaboration through our solutions for the supply chain -- the leading
edge of collaboration.
Our c-commerce initiative extends our Idea to Action(TM) value proposition
to inter-enterprise collaboration by providing customers with freedom from
proprietary standards, freedom to adopt new technologies, freedom of
interoperability between all applications, and the freedom to put the best ideas
into action. This results in customers' ability to become more competitive in
today's fast-moving B2B environment, intelligently plan for changes in the
market, and streamline intercompany processes. Customers are able to choose how
they assemble their internal and external applications and how they collaborate
with partners in the Internet economy. Through collaboration with strategic
partners, in-house development of new functionality and industry-specific
solutions, and the rapid integration of existing technologies, we deliver
end-to-end integrated supply chain solutions. Our strategy for achieving our
objectives includes the following elements:
Enable Collaboration
C-commerce redefines the end points of business processes from inside to
outside the enterprise. When enterprises collaborate, they automate the
information and process flow of their operations -- internally and with trading
partners. Enterprises rely on multiple systems and technology solutions. And,
the solutions that one company uses may not be the ones their key partners and
customers use.
Our collaborative enablement solutions improve internal enterprise systems
integration and are also designed to help B2B interoperability over the
Internet -- connecting customers' business software to that of their supply
chain partners with relative ease. We have taken the best of enterprise resource
planning (ERP), the best of enterprise application integration (EAI), and the
best of inter-enterprise process workflow and melded them together in one
solution to enable c-commerce, allowing our customers to benefit from the
following:
- Integrating their own portfolio of enterprise applications
- Linking processes with trading partners
- Integrating workflow engines between enterprises
By providing our customers with the freedom to also choose the best
partners and the best technologies for their other business needs, we empower
them to put their best ideas into action, regardless of where those ideas come
from or on what system they operate.
Facilitate Changes in Technology and Business Practices
The technology architecture of our software is designed to mask the
complexities of underlying platform technologies, thus enhancing agility and
simplifying software modification, enabling customers to make changes quickly
and easily. Using our highly flexible software toolset, customers can modify the
application suites to accommodate their business practices without regard to the
underlying hardware, software, and network technologies. Changes in business
practices may require system modifications, and our technology offers discrete
applications or utilities that facilitate changes to the system and allow
companies to quickly react to changes in their business. We have developed
functionality for both the business professional and technology professional
that allows these individuals to make changes to the system independently. Our
technology facilitates the incorporation of new technologies and enables
customers to modify business practices without extensive low-level software code
modification or support.
Maximize Value and Provide a Return on Investment
We strive to balance the innovation of the Internet economy with the
disciplined execution of the old economy. We believe the best way to achieve
this balance is to intensify collaboration through our enterprise software
solutions, enabling enterprises to tap into the extended "intelligence" of
business relationships.
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Employees can interact with their counterparts at all points in extended
networks to address common challenges and opportunities. Shared processes can be
optimized to unleash greater creativity. As more businesses join the network,
value increases exponentially.
We provide new "dot-com" and traditional "brick and mortar" organizations
with agile, collaborative software solutions that leverage digital assets,
allowing our customers to maximize the value of their investment. Pervasive
collaboration makes each business in the supply chain more efficient and
competitive. The more quickly enterprises are able to share information and
synchronize processes with partners, the sooner they can begin to optimize
shared resources and identify new opportunities. The benefits achieved by our
customers may include the following:
- Lower costs through elimination of redundant inventories and operational
assets
- More rapid response with collaborative demand planning and order
fulfillment
- Faster time-to-market with collaborative design and manufacturing
Our sales team uses a Total Value Management (TVM) methodology to help
customers and prospects assess their company's current financial performance,
set goals for improvement, and develop strategies for improvement. TVM is an
internally developed methodology and corresponding toolset that identifies the
value each specific solution may bring and is intended to enhance executive
decision-making via better information.
Our enterprise business software solutions are designed to reduce overall
cost of ownership through a combination of advanced technology and our
comprehensive client services. Our agile architecture is specifically designed
to enable customers to change business practices or technology environments
without significant costs or business interruptions, and our implementation
services enable more rapid deployment of our enterprise software solutions and
reduce customers' overall cost of ownership. Our investment in worldwide
customer support and user groups facilitates customer communication and
feedback, enhancing customer satisfaction. We believe our focus on agile,
standards-based software functionality and our investment in customer
satisfaction contribute to the value our customers receive and result in
long-term customer relationships.
COLLABORATIVE TECHNOLOGY
Our collaborative business model is based on the freedom to share
information and processes among disparate business systems along with the
knowledge that no single organization has a monopoly on good ideas. To have the
freedom to choose the best ideas or technology, regardless of where they
originate in the value chain, we believe the underlying technology must contain
the following features:
- Agile, component-based architecture for tailored implementations and
rapid change
- Standards-based interoperability to link an organization's operations
with supply chain partners that use different software
- Pre-integration of core business functions/packaged collaborative
solutions
Each technology level depends on the previous one. We start with a
component-based architecture that provides flexibility and allows customers to
quickly change the way they do business without reprogramming their system. We
integrate core business processes that enable customers to make the best use of
their assets and resources across all areas of the enterprise. Finally, we
provide links to partners and customers to optimize the business processes that
extend beyond the four walls of the organization.
We believe our architecture avoids two barriers to entry in the new digital
marketplace -- centralized, proprietary technology infrastructures and rigid,
internally focused business process models.
Agile, Component-based Architecture
The technology foundation for our c-commerce solutions is component-based
and event-driven. Components "modularize" system development for fast
action -- whether it's creating graphical user interfaces or integrating
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large-scale, inter-enterprise processes. Components support real-time,
standards-based interoperability options to link disparate systems and enable
integration with other industry-leading software solutions. Our rapid deployment
and change management automatically generates intuitive Windows, HTML, and Java
user interfaces from one set of business specifications that require little or
no training by users located anywhere in the "virtual" enterprise. We also
provide self-guided implementation and change management, employing an
easy-to-use Explorer interface.
Standards-based Interoperability
We deliver a comprehensive set of interoperability options, including EDI
and the middleware foundation, for seamless access and integration via COM/DCOM,
CORBA, Java, and MQSeries(R). Beginning in January 2001, we will offer the
XML-based eXtended Process Integration (XPI) interoperability engine with
OneWorld Xe. In one solution, XPI will provide an extensible, reliable, and
scalable architecture for:
- Application portfolio integration within the enterprise
- Data, process, and workflow integration between enterprises
Using technology acquired from webMethods, Inc. (formerly Active Software,
Inc.) and Netfish Technologies, Inc. (Netfish), OneWorld XPI will enable
plug-and-play interoperability of J.D. Edwards and non-J.D. Edwards enterprise
information systems, including packaged, custom, Internet, database, and legacy
applications.
The flexibility our interoperability provides for customers and integrators
includes a broad range of interface choices, together with the ability to access
OneWorld at a very granular or business-function level and incorporate emerging
technologies into OneWorld as they arise, such as Web clients or XML. It is not
necessary to create monolithic and rigid interfaces that must be adhered to by
the developer. Our solutions are designed to allow customers to make the right
interoperability choices for a particular system environment and business needs.
Integration is at the business component or specification level. These
components range from large- to fine-grained and can be shared among
applications. With the interoperability interface at the component level, users
can modify what, when, and how the business functions or components are called
without risk of "breaking" an interface for another application or screen. All
interoperability options call the same underlying component architecture used by
J.D. Edwards applications. Therefore, such services as security and database
management are implemented consistently.
OneWorld XPI is expected to provide broad application connection
capabilities with an integration broker and a "hub-and-spoke" interface
architecture, with XPI acting as the hub. At the end of each spoke is an
application, which for example could be OneWorld, Siebel(R) Systems Inc.
(Siebel), Ariba(R) Inc. (Ariba), or a legacy manufacturing suite. The
application passes a message down the spoke to the hub where it is translated
into a neutral format. The hub determines where the message is going -- again,
this could be a OneWorld, Siebel, Ariba, or other type of
application -- translates the message into the appropriate format, and sends it
up the appropriate spoke. The XPI technology offers a number of different
connectors, or application "spokes," on the hub, and adding new spokes is fairly
straightforward. A new application does not need to be "translated" to every
other existing application; rather, they only have to be translated once to the
neutral, or interoperable, format of the hub.
Packaged Collaborative Solutions for the Supply Chain
We allow customers to benefit from non-proprietary technological advances,
and we pre-integrate our enterprise applications with world-class software from
such strategic partners as Siebel, Ariba, Extensity(R) Inc. (Extensity), Atlas
Commerce, and Microstrategy Inc. (Microstrategy). OneWorld XPI(TM) will include
foundations for Siebel, Ariba, Extensity, plus all the integrators and adapters
that we currently offer. We own the interfaces for the pre-integrated
components, and we continue to maintain and enhance them. We believe a
significant advantage to our customers is the convenience of being able to
purchase their integrated collaborative solutions from a single software
provider, no matter which solutions they purchase. Through these pre-integrated
solutions, we combine best-of-breed application functionality with lower cost of
ownership. Total cost of ownership is reduced by eliminating the need for our
customers to develop and maintain their own custom integrations.
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J.D. EDWARDS SOLUTIONS FOR THE ENTERPRISE, SUPPLY CHAIN, AND CUSTOMER
RELATIONSHIP MANAGEMENT
J.D. Edwards enterprise business software supports an organization's core
business processes through a family of application suites designed to enable
customers to integrate business information across the organization and
throughout the supply chain; accommodate diverse business practices across a
geographically dispersed organization; and support multiple languages,
currencies, and countries. We design solutions to provide the functionality and
technology choices that best meet our customers' needs, and we believe that our
enterprise software systems continue to be the solution as business processes
and technology changes.
Solution Groups
We offer a wide range of solutions designed to meet a broad array of
enterprise software needs, as well as go beyond the walls of the enterprise to
facilitate collaboration with trading partners. Our agile, open architecture
allows us to leverage our own products with industry-leading components provided
by strategic partners. Included in some of the solution groups described below
are solutions from third-party vendors, which we have a license to resell. In
addition to the products listed here, we have partnership agreements with many
niche market solution providers that offer solutions specific to certain
industries. As a result, our customers have the freedom to choose the best
solutions to power their organizations. The software solutions we offer address
the following 13 functional areas to meet the operational needs and challenges
of a variety of enterprises:
- Advanced Planning
- Fulfillment Management
- Customer Relationship Management
- Procurement Management
- Project Management
- Asset Management
- Financial Management
- Workforce Management
- Implementation and Systems Management
- Knowledge Management
- Collaboration and Integration
- Marketplace and Exchange Management
- Foundation
Advanced Planning. Part of our supply chain management solutions, the
Advanced Planning Solution is designed to optimize collaboration with trading
partners and provide real-time planning, scheduling, order promising, and
visibility to relevant data within the entire supply chain. Real-time
responsiveness to operational changes is facilitated, enabling businesses to
reduce inventory, improve customer service, and ensure that the right products
reach their proper destination at the right time. In addition, "what if"
analyses can be performed to allow businesses to see how changes in their
processes could affect operations and plan accordingly. Since we acquired
Numetrix in June 1999, we have integrated the transaction and planning
environments, added new functionality, and expanded its Web capabilities. Our
solution delivers the tools and technology to collaborate, interoperate, and
adapt to change in today's supply chain environment. Effective supply chain
plans are those that can be adapted easily and extended to partners, suppliers,
and customers for real-time collaboration. We provide a full spectrum of
functionality with Web-enablement tools, including the following:
- Demand Planning
- Order Promising
- Strategic Network Optimization
- Production and Distribution Planning
- Production Scheduling
Fulfillment Management. Fulfillment Management helps companies ensure that
the raw materials needed to make their products arrive on schedule and determine
the best way to distribute products to customers as well as how to quickly and
effectively manage inventory, warehouses, and quality with one system, while
also helping to facilitate process changes.
The Fulfillment Management Solution includes our traditional manufacturing
and distribution suites, together with technology from our acquisition of The
Premisys Corporation, such as the Advanced Order Configurator and the Advanced
Web Order Configurator. The order configurators automate the sales order process
and, when required, the generation of technical documents necessary during the
sales cycle. In addition,
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our Fulfillment Management Solution includes multiple features and
functionalities that are necessary within a supply chain including, among
others, the following features:
- Requirements Planning
- Inventory Management
- Sales Order Entry and Processing
- Manufacturing Accounting
- Shop Floor Management
- Work Order Management
- Quality Management
- Advanced Pricing
- Warehouse Management
- Transportation Management
Customer Relationship Management. Our Customer Relationship Management
Solution helps companies manage customer relationships and effectively meet
customer needs. Customer Relationship Management consists of our products along
with strategic solutions from Siebel, which we resell. With these solutions,
field and sales organizations are able to more closely manage their clients'
business transactions and directly enter and track sales orders, obtain quotes,
check product availability, and verify and update customer information. Several
self-service applications are also included, allowing customers, their
employees, and trading partners, to take advantage of features directly.
Following are the primary components of this solution offering:
- Service and Warranty Management
- Customer Self-service
- Storefront Integration Adaptors
- Web Storefront
- Siebel's eBusiness Applications
- Microsoft(R) Site Server
Procurement Management. Our Procurement Management Solution enables
customers to improve efficiencies associated with purchasing direct materials
and non-inventory operating resources. The direct or inventory procurement
capabilities are part of our traditional ERP software. We have enhanced our
solution to provide better supplier self-service functions, including e-mail
alerts. For managing the acquisition of operating resources, we have a reseller
agreement with Ariba. We are also enhancing our indirect purchasing by improving
our integration to Extensity's travel, time, and expense management products.
Project Management. Our Project Management Solution helps organizations
manage complex projects, especially when they involve multiple entities
supplying multiple products through multiple logistics channels. Our solution is
an integrated suite of enterprise applications designed to improve profitability
of projects. The Project Management Solution includes contract and service
billing, project costing, revenue recognition features, project change
management, and subcontract management.
Asset Management. This solution group contains functionality to help
customers track and manage their assets -- from real estate to their property,
plants, and equipment. The Asset Management Solution includes the following
components:
- Fixed Asset Management
- Plant and Equipment Maintenance
- Real Estate Management
- Service and Warranty Management
- Basic Equipment Management
Financial Management. Our Financial Management Solution helps our
customers record, administer, and report financial data quickly and efficiently.
User-defined codes provide flexibility to tailor the software around the
enterprise's policies and procedures, provide internal controls, and meet
worldwide reporting needs for both internal management and regulatory
compliance. Specific functionality in Financial Management includes the
following:
- Accounts Payable
- General Accounting
- Financial Planning and Budgeting
- Multi-Currency Base
- Address Book
- Accounts Receivable
- Cash Basis Accounting
- Activity Based Costing
- Financial Reporting
- Time Accounting
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We believe Financial Management has been one of our long-term strengths,
and we have continued to enhance our solutions. Recent enhancements were aimed
at improving collaborative capabilities and extending our Activity Based Costing
functionality, among other general enhancements.
Workforce Management. Our Workforce Management Solution helps enterprises
record and administer information for their employees. Historically, this
solution was primarily a tactical module, oriented toward capturing
transactions. We believe our solution is now a strategic resource as a result of
our new enhancements and new modules, such as Manager Self-Service, that
complement our existing self-service functions. OneWorld Xe enhancements
include:
- Functionality for Health and Safety Management, Compensation Management,
History/Turnover Analysis, and improvements to Job Information for better
competency-based management
- Additional competency information in the Recruitment feature to improve
applicant-job matching
- Additional self-service functions in the Payroll module
- General improvements to Time Card Automation, Position Control, and
Employee Self-Service
- Payroll for additional countries
Implementation and Systems Management. This solution group is made up of
advanced technology tools that help simplify system management -- streamlining
the upgrade process and providing performance measurement, modeling, and
visualization tools. Major modules within the Implementation and Systems
Management Solution include:
- Advanced tools for system performance measurement, benchmarking, and
documentation, as well as a scripting tool for regression testing and
application verification
- Several types of modelers used to describe a business, its processes, and
the systems that it uses, including process modeling functionality, a
visualizer, and content management tools
Knowledge Management. Our Knowledge Management Solution, expected to be
generally available in January 2001, allows our customers to effectively manage
one of their greatest assets -- knowledge. Customers can administer and
integrate their database information into an effective and efficient reporting
resource. Our solution allows customers to make accurate, real-time decisions by
capturing, creating, organizing, accessing, and distributing information from
many data sources, and then delivering the resulting knowledge to their
employees, partners, and customers for integrated decision support.
Our Knowledge Management Solution includes sophisticated content management
tools, a custom documentation environment, and Web-based training. Among other
things, Web-based and computer-based training helps our customers stay current
on the latest tips, techniques, and enhancements to our products. We also offer
the freedom to choose a variety of partner products, including analytical
processing, data cubes, ad hoc queries, data marts, and document management
systems. Key components include the following:
- Our partnership with Microstrategy allows for a fully functional Business
Intelligence solution. The robust infrastructure integrates well with our
internally developed Knowledge Management applications and tools.
- Content Manager provides multi-language knowledge on demand, helping
customers deliver their organization's information in a variety of
languages and formats. Content Manager also enables version ancestry and
archiving, customized workflow processes, content permissions and
categorization, workgroup and enterprise collaboration, conditional
assembly and management of information, automatic change notification,
and intelligent full-text searches.
Collaboration and Integration. XPI, our XML-based interoperability engine
is expected to be generally available in January 2001. XPI will provide for
application portfolio integration within an enterprise, as well as data,
process, and workflow integration between enterprises. Our Collaboration and
Integration Solution includes
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the foundation for Siebel, Ariba, Extensity, plus all of the integrators and
adapters that we currently offer. Rather than providing point-to-point
integration, this technology enables "many-to-many" integration. XPI includes
two elements:
- XPIe provides the infrastructure for internal collaboration within the
enterprise walls
- XPIx provides the infrastructure for B2B collaboration beyond the
enterprise walls with suppliers and trading partners
Marketplace and Exchange Management. Our Marketplace and Exchange
Management Solution includes three primary components:
- Marketplace engine that is capable of administering the system,
organizing buyers and sellers, conducting auctions, and tracking the
parties involved in a transaction
- Fulfillment engine for building, shipping, and servicing the product that
was ordered
- Planning engine to optimize the process and help it run smoothly
OneWorld Xe provides the functionality for fulfillment management and
advanced planning. We have reseller agreements, such as with Atlas Commerce for
Atlas Metaprise and IBM for WebSphere Commerce Suite, Marketplace Edition, to
provide the marketplace engine. Pre-packaged integrations to both Atlas
Metaprise and IBM WebSphere Commerce Suite, Marketplace Edition are planned for
general availability in early fiscal year 2001.
Foundation. Our Foundation Solution represents the "basics" that make the
system work, including features and functions that are necessary to run the
engine of the OneWorld and WorldSoftware(TM) Foundation. This suite includes all
of the tools and deployment and security options to maintain OneWorld and
WorldSoftware, including interactive and batch engines and tools for forms
design, deployment and packaging, interoperability, and management of
application servers. Additional features include the following:
- Simpler, faster change management, including an Explorer interface and
workflow and interoperability tools. Users are guided through the steps
necessary to implement our software, make changes to existing processes,
activate additional capabilities, and manage upgrades
- Forms Design Aid enables users to develop Internet applications, such as
storefronts
Technology Choices for Different Market Segments
Customers can select between two versions of our application
suites -- OneWorld and WorldSoftware. By offering two versions of our software,
we address different market segments and allow customers to maintain consistent
business functionality while combining different technologies to meet their
specific requirements. We believe our software architecture provides the overall
system performance to efficiently process high volumes of activity, whether
through an online, client/server, or host-centric environment. In addition, our
solutions are highly scalable with different network configurations, server
platforms, and other architectural components.
We develop and enhance our software applications using either the OneWorld
or WorldSoftware toolset. We believe the use of toolsets increases code
consistency and improves quality. Toolsets are bundled with the respective
applications, providing companies with the same productivity, consistency, and
quality benefits enjoyed by our internal developers, thus reducing the
complexities typically associated with upgrades to new releases. Since
modifications made by both the customers and J.D. Edwards are completed with the
same toolset, it is easier and faster to upgrade to new releases while
preserving any customer modifications.
OneWorld. J.D. Edwards OneWorld is an object-based, event-driven
technology designed to provide the information access and other user benefits of
traditional client/server systems. OneWorld was introduced in late 1996 to
operate on a variety of computing environments and was specifically designed to
enable customers to make business changes quickly and easily without
programming. In September 2000, we released OneWorld Xe. The "Xe" stands for
extended enterprise, and the primary focus of this release was to improve our
customers'
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ability to extend their enterprise beyond physical walls to collaborate with
trading partners. OneWorld Xe provides customers with agile features and robust
functionality, along with additional tools for B2B commerce. OneWorld Xe
consists of all of the OneWorld tools and applications, our process modeling and
visualization tools, AutoPilot Scripting Tool, and, effective in January 2001,
it will also include OneWorld XPI.
OneWorld's Configurable Network Computing(TM) architecture consists of
three layers:
- Architecture layer, comprising the tools and components that provide
flexibility in our software
- Business layer, representing the enterprise applications -- and
efficiency controls
- Extended process layer, where collaboration is enabled and where we
believe we optimize our competitive advantage
The Configurable Network Computing architecture enables the deployment of a
single version of an application across a network, regardless of the underlying
technologies. Designed to mask the differences between underlying platforms, it
provides a uniform interface that allows a single object to execute on a wide
variety of platforms, or a "write once, run anywhere" capability. OneWorld
operates on a variety of servers, including the following:
- Windows/Intel -- Hewlett-Packard, IBM, Compaq, and others
- UNIX -- Sun Microsystems, Hewlett-Packard, IBM
- IBM OS/400 -- IBM eServer iSeries(TM) (formerly called AS/400(R))
Supported databases include Microsoft's SQL on Intel platforms, Oracle on
Intel and UNIX platforms, and IBM DB2/400 on the IBM eSeries platform. We intend
to continue to integrate additional platforms, servers, and software as
necessary to meet market demands.
The OneWorld toolset, used to create or modify OneWorld objects, allows
customers or our developers to quickly create new application functionality.
OneWorld's toolset incorporates advanced technologies, including object-based
methods and event-driven models. Because the toolset rigorously separates
business logic from underlying technologies, it also facilitates the
incorporation of new technologies by regenerating rather than rewriting
applications, which we believe provides a competitive advantage. The toolset
also insulates users from lower-level technologies. For example, OneWorld
objects exist independently of any specific computer language and can generate
objects in C, C++, and Java. We believe that we can readily incorporate new
languages in the future as market requirements dictate. We consider our unified
toolset approach to be a significant factor in reducing our customers' cost of
ownership and facilitating change when compared to traditional open systems that
require a variety of tools.
OneWorld's architecture incorporates a variety of components not typically
integrated in traditional open architectures, including an object request
broker, a workflow engine, a C/C++ generator, and a Java generator. In
traditional client/server implementations, customers must often integrate these
components obtained from multiple suppliers. The key benefits of components are
reusability and real-time interoperability, as well as the ability to mix and
match use of granular computing components. For example, business objects such
as customer and product records can be assembled and re-assembled into tasks
such as order taking and billing, which then make up larger enterprise and
inter-enterprise processes such as production management or order fulfillment.
This redeployment or reuse of discrete components makes the most of available
computing resources to save time and labor. We exploit the component-based,
event-driven architectural approach with a repository of thousands of reusable
business-related objects, as well as the completed applications and database
objects. Fine-grained components are "bundled" to provide an intuitive change
framework through which non-programmers or business professionals can easily
modify forms and processes. OneWorld application program interfaces (APIs) hide
the inner workings of the components and enable changes to the software through
guided navigation using common business language. The OneWorld component
environment allows customers to pick and choose only those components needed in
their organization. Additionally, OneWorld APIs can incorporate external
components or applications that can fulfill specialized application needs.
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The enterprise software applications, or "business" layer, are composed of
reusable objects and contain the specific business functionality of the
software, which is discussed in the preceding "Solutions Groups" section. The
OneWorld deployment server distributes applications in object form to individual
platforms where they are compiled and executed. Customers can change the
application logic by modifying the objects or creating new objects using the
OneWorld toolset. Applications containing the modified or newly created objects
then can be redistributed to individual platforms. We believe that this
single-point-of-change architecture significantly reduces the cost of change
compared to traditional client/server architectures.
The extended process layer enables B2C, B2B, and c-commerce in OneWorld Xe
with the XML-based XPI interoperability engine. OneWorld XPI acts as a broker
for application integration. Disparate applications can be viewed as the spokes
that fit into this broker, or "hub." The broker serves three primary functions:
data transformation; acting as a message broker between different applications;
and providing process control, using parameters to publish and subscribe
messages. This hub-and-spoke approach to application integration replaces the
need to program point-to-point integration between each separate application in
the customer's portfolio of enterprise software. In other words, OneWorld XPI
enables plug-and-play interoperability of J.D. Edwards and non-J.D. Edwards
enterprise information systems, including packaged, custom, Internet, database,
and legacy applications. For example, the OneWorld inventory application can
seamlessly communicate with a Siebel call center; Ariba Buyer can communicate
with WorldSoftware financials; or an organization's manufacturing legacy system
can communicate with OneWorld warehousing. Moreover, XPI helps orchestrate the
various workflow systems at each partner company as a process moves between
enterprises. Because the XPI interoperability engine is based on Internet, EDI,
and XML standards, organizations will be able to rapidly define secure, shared
information and processes with their suppliers, partners, and customers.
WorldSoftware. J.D. Edwards WorldSoftware is a host-centric software
solution for the IBM iSeries, the high-performance, integrated business server
for mid-market companies. Applications are also Web-enabled through Java and
HTML. WorldSoftware provides the breadth and depth of functional capabilities
customers need to effectively compete in the world of c-commerce. For more than
a decade, WorldSoftware customers have benefited from a solution that continues
to prove its strength in the marketplace. OneWorld and WorldSoftware are capable
of operating together in a unified, enterprise-wide environment.
The technology underlying our WorldSoftware applications is a
well-established, procedural-based design, which takes advantage of the
security, integrity, and easily maintained architecture of the iSeries platform.
Unlike many host-centric ERP systems, WorldSoftware provides flexibility to make
run-time changes in application suites without the need to recompile software.
WorldSoftware also incorporates such features as an active data dictionary,
user-defined codes, and a variety of run-time options. With the addition of the
WorldVision(R) thin client interface, WorldSoftware applications can be operated
through a Windows-based graphical user interface. In addition, WorldVision
includes Java and HTML capabilities that provide an intuitive, point-and-click,
browser-style look and feel on the front end of WorldSoftware applications.
Users can work in a visual environment traditionally associated with open
systems without compromising data integrity, disrupting ongoing operations, or
sacrificing existing hardware and software investments.
The WorldSoftware toolset provides a high-level architecture, allowing our
development team to express business practices as an abstract model. The toolset
then uses the model to generate RPG code that runs on the iSeries platform in a
host-centric, procedural architecture.
In order to address the interoperability needs of WorldSoftware customers
and deliver open tools and applications that will help our install-base
customers stay competitive in today's world of c-commerce, digital marketplaces,
and supply chain collaboration, we formed the J.D. Edwards WorldSoftware
Organization. Effective November 1, 2000, the WorldSoftware Organization is
focused on customer support and research and development, as well as sales,
service, and education for our WorldSoftware customers. The new organization
offers interoperability and e-business applications, including customer
relationship management, self-service applications, e-procurement, supply chain
planning and fulfillment, travel/expense management, and knowledge management.
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Vertical Market Applications
We have significant vertical market experience and expertise through
developing, selling, and deploying enterprise software solutions for over 6,000
customers across a variety of industries. We strategically focus on select
vertical markets to better address those customers' needs. Our vertical focus
offers customers more finely tailored solutions, faster implementation, and
broader industry-specific expertise. We believe that by aligning the sales and
support organizations along vertical lines we will be able to broaden specific
industry offerings and better enable customers to quickly react to business
changes. Currently, we provide industry-specific solutions to the following
industry sectors:
- Consumer Products. The consumer products sector focuses on consumer
packaged goods, pharmaceuticals, and energy and chemicals.
- Industrial. The industrial sector focuses on high technology and
electronics, industrial fabrication and assembly, automotive, and other
manufacturing disciplines.
- Services. The services industry sector focuses on professional services
organizations, construction, real estate, mining, and public services
such as state and local government and education.
We plan to continue our strategy of customizing application suites and
templates for vertical markets, as well as building in best business practices.
We also offer industry-specific education and services to these markets.
GLOBAL CUSTOMER SERVICES
The goal of our services organization is to be a responsive and proactive
extension of our agile, collaborative software offerings. We strive to deliver
services and solutions that are in sync with market demands and our customers'
expectations. We believe that providing high-quality client services and a high
level of ongoing support to customers are critical elements in establishing
long-term relationships, strong customer references, and a high level of
customer satisfaction. This strategy also facilitates software improvement based
on customer feedback. Our services organization offers a step-by-step
implementation approach, implementation tools, training, and customer user
education services both directly and through third parties to assist customers
in rapidly achieving benefits from enterprise software solutions. Our worldwide
client services organization consists of the following groups:
- Consulting Services
- Global Advanced Technology Services
- Global Support Services
- Education Services
Generally, our services organization generates revenue from billing
customers on a time and materials basis for implementation and other consulting
services. In addition, from time to time we may provide implementation or other
consulting services to our customers for a fixed fee. We invoice our customers
with maintenance contracts annually, and we recognize the revenue ratably over
the support period.
Consulting Services
The Consulting Services group is responsible for delivering implementation
and consulting services complementing our software applications. The consulting
services organization has developed a rapid deployment methodology -- the J.D.
Edwards Solution Kit. This methodology enables customers to implement quickly
and gives them the flexibility to meet their changing business needs. The
Solution Kit consists of a five-step process: select, adapt, go-live, optimize,
and extend. J.D. Edwards and our partners enable on-time, on-budget
implementation utilizing the following:
- The Solution Kit shared implementation approach
- Accelerated implementation tools, including pre-configured business
process models
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- Custom user education, including the custom documentation tools and
computer-based training
- Computer-based, Web-based, and standard classroom education
In addition to standard implementation services, we also offer a full range
of custom implementation services, including conversion programs, upgrade
assistance, custom modifications and interfaces, and technical documentation.
Also integral to our services strategy is our relationship with third-party
service providers, discussed in "Third-party Business Partners."
Global Advanced Technology Services
As a strategic technology unit, the Global Advanced Technology Services
group delivers advanced consulting services, complex performance and
architecture analysis, and deployment of evolving and emerging collaborative
technologies designed to help customers take advantage of our solutions. This
group also facilitates the exchange of ideas, knowledge, and solutions between
our development and client services organizations, thereby promoting creative
software innovations and delivery of practical, collaborative solutions that
further our customers' strategic advantage and add value to their businesses.
Global Support Services
Our Global Support Services organization delivers maintenance-based
services, including technical and application consulting via telephone and
Internet media, enabling our clients' success through timely, accurate, and
professional support. Specific components of our support include knowledgeable
consultants, quality surveys, frequent information updates, the Internet
customer solution center, and real-time phone support. We provide support
services for an annual fee, which entitles customers to receive telephone
support, as well as enhancements and updates to their licensed version of our
software. We provide customer support through three centers located in Denver,
London, and Singapore, and customers can choose different levels of service.
Customer support is provided in nine languages on a 12-hour-per-day,
five-day-per-week basis. We provide customer support in English 24 hours a day,
7 days a week. Customer support personnel also have the ability to access
customer systems remotely to diagnose and resolve problems.
Global Enterprise Solutions
The Global Enterprise Solutions (GES) group specializes in managing
implementations of our solution on an enterprise-wide level, where the customer
may have several worldwide sites, the breadth of applications is extensive, and
the client needs to blend the benefits of standardization with the need to meet
local requirements. The goal of this group is to provide our global customers
with superior professional services that are globally consistent.
The GES program helps manage the entire scope of an implementation by
providing the customer with multi-site project management support. This program
offers the services of a strategic enterprise manager who is responsible for the
customer's global relationship with J.D. Edwards at an executive level. By
directing the customer's global implementations, the enterprise manager helps
the customer achieve fast time-to-benefit. GES enterprise managers act on the
customer's behalf with the field organization, implementation partners, and
corporate operations to provide our involvement over and above standard
consulting, training, and local management support. The GES program provides the
following benefits to our large, global customers:
- A single point of contact improvement
- Partnership at executive levels
- Strategic management focus and support
- Priority attention to issues, questions, and needs
- Global consistency for enterprise-wide standards
- Business process
- Model company development for global implementations
- Strategic planning and resource blending
- Strategic and tangible return on investment
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Education Services
We offer a comprehensive education and practice management program to
customers and third-party implementation providers. Our instructors are
certified for each course they teach, and their backgrounds generally include
cross-functional experience in product testing, customer support, and
implementation services. We are committed to producing and delivering quality
education services, including training courses, products, and services that
enable our customers to maximize their knowledge and use of our software. Course
components are packaged together to create unique training programs based upon
the product and audience. Included in a course are product documentation,
hands-on class exercises, and support material. Educational services are
provided in a variety of formats, including:
- Classroom Education -- customers may complete courses at our education
centers around the world or on-site at our customer locations
- Distance Learning Solutions -- we offer a wide array of web conferences,
web classes, web workshops, computer-based training, web-based training
options for customers
PRODUCT DEVELOPMENT
We have invested, and expect to continue to invest, substantial resources
in research and product development. Our development process is enhanced by
frequent solicitation of customer feedback and close contact with customers
through our consulting services organization. Additionally, cross-functional
product teams that consist of management representatives from development,
global support services, and marketing meet regularly to determine product
direction. Research and development expenditures, which include capitalized
internal development costs, third party source code rights, and outsourced
software development costs, were $89.4 million, $109.2 million, and $159.9
million for the fiscal years ended October 31, 1998, 1999, and 2000,
respectively.
During fiscal 2000, we devoted development resources primarily to major
enhancements and new products associated with our OneWorld application suites,
such as the release of OneWorld Xe, as well as integration of our applications
with those of third parties. We also completed significant enhancements to our
WorldSoftware functionality, including advanced planning capabilities and Web
enablement. In addition to our internal R&D activities, we also outsourced the
development of software for a specialized industry, and we acquired source code
rights for certain enterprise interface applications and other embedded
technology. By forming relationships with organizations whose products enhance
our solutions, we are able to manage internal development resources, while at
the same time offering our customers a broad spectrum of products and services.
As of October 31, 2000, our research and product development organization
included 1,034 employees, the majority of whom were located in Denver, Colorado.
In addition, the development team that joined J.D. Edwards with our acquisition
of The Premisys Corporation continues its responsibilities for enhancements and
interoperability with OneWorld from their offices in Chicago, Illinois. The
advanced planning development group, formerly with Numetrix, is based in
Toronto, Canada, and is responsible for the ongoing enhancements of our advanced
planning solutions and their interoperability with OneWorld and WorldSoftware.
The research and product development organization department is structured into
groups that work closely together to efficiently develop and enhance our
software solutions.
Development Technologies
Our software applications are developed and enhanced using OneWorld,
WorldSoftware, or other toolsets. We believe the use of these toolsets provides
advantages including increased productivity and code consistency,
self-documenting code, and improved quality. The development technologies groups
are responsible for the development of the toolsets and underlying technologies
of our software. The OneWorld development technologies team focuses on enhancing
the flexibility, scalability, simplicity, and performance of OneWorld and the
Configurable Network Computing 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,
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they work with the hardware and software suppliers with whom we have
relationships to identify, analyze, prioritize, and schedule new features and
functionalities.
Application Development
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, and
maintaining our applications. We have designed our toolsets to enable
application programming to be performed by business analysts, or
non-programmers, 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
our existing application suites, as well as establish specifications and
priorities for new vertical markets. Additionally, the integration of our
software solutions with those of product alliance partners is primarily
performed by the related applications group.
Software Quality and Release Management
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.
Documentation
Our documentation group is responsible for the documentation, localization,
and translation of application suites for particular foreign markets, as well as
the vertical market application suites and templates. The documentation group
works closely with domestic and international customers and third-party
implementation providers -- as well as cross-functional internal teams of
development, implementation, support, and education professionals -- to ensure
that appropriate enhancements are incorporated into the documentation and
implementation processes. In addition, we rely on business partners to provide
localization and translation of our applications in certain countries. Our
OneWorld application suites are currently translated into and operate in 19
languages, and 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. We may offer additional language translations in the future.
SALES, MARKETING, AND DISTRIBUTION
We distribute, implement, and support our products worldwide through 60
offices in over 20 countries, and we have nearly 400 third-party business
partners, including sales, consulting, and outsourcing partners with offices
throughout the world.
Our marketing strategy is to position J.D. Edwards as a premier provider of
collaborative solutions for the Internet economy and to increase recognition of
the J.D. Edwards name. In support of this strategy, our 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. Marketing our
software to multi-national organizations typically requires that we engage in a
lengthy sales cycle, generally between six and 18 months, and expend substantial
time, effort, and money educating prospective customers regarding the use and
benefits of our products.
Software Licensing
We license software under non-cancelable license agreements via direct
sales and business partner channels throughout the world. As of October 31,
2000, we employed 272 direct account executives as well as a small number of
account executives to work with our business partners. Our nearly 400 business
partners (including sales and consulting partners) are located throughout the
world and provide an indirect distribution channel to target certain markets or
geographic areas. We expect to continue to rely on indirect channels in order to
enhance our market penetration and implementation capabilities.
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International revenue as a percentage of total revenue ranged from 35% to
39% for each of the past three fiscal years. No international region represented
10% or more of our revenue in any of the past three fiscal years. We directly
market our solutions in over 20 countries through foreign subsidiaries located
throughout Europe, the United Kingdom, South Africa, Asia, Australia, New
Zealand, North America, and South America. Many of our business partners have an
international presence, extending our reach to other geographic areas in which
we have not invested resources to establish a direct presence. We expect that
revenue from international customers will continue to account for a significant
portion of our total revenue in the future.
Services
We seek to provide our customers with high-quality consulting, support, and
education services in the most efficient and effective manner. As of October 31,
2000, we had 2,055 employees in the global customer services organization who
are located throughout the world. We also have relationships with a variety of
third-party service providers. In some cases, where we do not provide the client
services directly, we may subcontract a portion of the work through third-party
implementation support partners, depending upon available resources. Many of
these business partners enhance our international operations or provide services
in countries where we do not have direct operations. We also have alliances with
leading consulting companies who contract directly with our customers to provide
technology and application implementation support, offering expertise in
business process reengineering and knowledge in diversified industries.
Application Service Providers
Since introducing our application hosting strategy in 1998, we have
successfully delivered hosted solutions to customers of all sizes in a wide
array of vertical industries. Through select third-party business partners, our
ASP solution ensures that today's rapid-growth companies stay on the cutting
edge of technology by outsourcing enterprise application solutions so they can
focus more intently on the skills that bring them competitive advantage. Focused
primarily on fast-changing, global multi-national, and dot-com startup
companies, the J.D. Edwards ASP Solutions group offers the critical advantage of
quickly getting customers operational with our solutions and enabling general
businesses to become e-businesses. Customers may either rent or license our
software for their internal use. Generally, companies that select our ASP
solution are seeking more predictable IT costs. Customers can benefit from the
value-add offerings of our ASP partners and avoid investing in the hardware and
other costs necessary to run their systems internally.
CUSTOMERS
To date, we have licensed our application suites to over 6,000 customers.
Our installed base of customers is widespread geographically and is highly
diversified in terms of size and industry groups represented. Customers use our
software at over 9,400 sites in more than 100 countries. During each of the last
three fiscal years, no customer accounted for more than 10% of total revenue.
THIRD-PARTY BUSINESS PARTNERS
Our strategic partnerships include hardware platform manufacturers,
operating systems vendors, software and database developers, resellers, and
system integrators, which complement our solutions. In all, J.D. Edwards'
alliances encompass close to 400 partners, ranging from consulting firms to
small organizations, providing service to customers in remote locations. We have
introduced many programs to help partners become more successful, automate and
accelerate the overall implementation process, and open new markets not
currently served by J.D. Edwards directly.
Technology Partners
We provide customers with system configuration benchmarking standards and
pre-engineered network solutions through our technology partners. Each partner
has personnel who can provide customers with customized sizing and configuration
support for large or unusually complex configurations.
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Consulting Alliance Partners
We have established relationships with some of the world's foremost
consulting companies to provide both technology and application support. These
global partners provide expertise in business process reengineering and possess
a broad range of knowledge in diversified industries. Our consulting alliance
partners have dedicated service organizations to manage every aspect of a
customer's implementation.
ASP Partners
Our ASP initiative comprises selected 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 our worldwide presence
with sales and support services in areas without a direct J.D. Edwards presence.
These partners also maintain a value-added reseller program to complement their
direct offices, enhancing coverage of the small to medium enterprise market.
Genesis(R) Channel Partners
Our solution for small North American emerging companies, the Genesis
Channel, extends our 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
We seek to provide customers with high-quality implementation services in
the most efficient and effective manner. In some cases where we do not provide
implementation services directly, we may subcontract a portion of the services
through third parties. We also have relationships with a number of third-party
implementation providers that contract directly with customers for the
implementation of our software. We select these third-party providers carefully
to ensure that they have the ability and knowledge to represent J.D. Edwards and
implement our enterprise business software solutions properly. Our service
providers receive extensive training regarding our application suites and
implementation process. In addition, we evaluate these service providers on a
regular basis to ensure quality service and support to customers. We expect to
continue a relatively consistent level of reliance on third-party implementation
providers to contract directly with customers for the implementation of the
OneWorld version of application suites. These relationships will enable us to
provide implementation services through third-party personnel with extensive
client/server expertise, while expanding our service capacity, focusing on
license fee revenue generation, and concentrating our own service resources on
those activities we can perform most efficiently. We believe that this direct
and third-party customer service strategy will enable us to deliver
comprehensive and timely services worldwide.
Product Alliances Partners
One of our ongoing goals is to form relationships with organizations whose
products enhance our solutions. This allows us to manage development costs,
while more quickly offering customers the broadest spectrum of products and
services needed. Our product alliance partners allow customers to benefit from
well-rounded solutions and the assurance of compatible technology and qualified
support. We currently have over 70 product alliance partners.
COMPETITION
We compete in the market for supply chain and enterprise software
solutions. Our products are designed and marketed for the IBM iSeries and the NT
and UNIX platforms, including use over the Internet. This market is highly
competitive, subject to rapid technological change, and significantly affected
by new product introductions. We compete with a large number of independent
software vendors in this market, as well as with suppliers of custom-developed
business application software. We have recently expanded our technology into a
number of
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new business areas to foster our long-term growth, including the areas of
electronic commerce, online business services, and Internet computing. In
addition, we entered into and invested in a number of strategic partnership
relationships in these same areas. These areas are relatively new to both our
product development and sales and marketing personnel with different competitive
factors than the traditional enterprise software market. We believe we
differentiate ourselves by delivering technology that enables collaboration and
facilitates change, as well as by delivering services and solutions that are in
sync with market demands and our customers' expectations. See "Factors Affecting
the Company's Business, Operating Results, and Financial Condition -- The
enterprise software industry is highly competitive, and we may be unable to
successfully compete."
EMPLOYEES
As of October 31, 2000, we employed 5,072 people full time -- 1,034 in
research and development, 1,218 in sales and marketing, 1,454 in client services
and education, 601 in customer support, and 765 in management and
administration. We believe that our continuing success will depend, in part, on
our ability to retain a limited number of key employees and other members of
senior management, as well as our ability to attract and retain highly skilled
technical, marketing, and management personnel who are in great demand. We have
not had a work stoppage, and no employees are represented under collective
bargaining agreements. Management considers employee relations to be good. See
"Factors Affecting the Company's Business, Operating Results, and Financial
Condition -- We depend to a significant extent on certain key personnel and our
continued ability to hire qualified personnel."
PROPRIETARY RIGHTS AND LICENSING
Our success depends, in part, on our ability to protect our proprietary
rights. To protect these rights, we rely primarily on a combination of patent,
copyright, trade secret, and trademark laws; confidentiality agreements with
employees and third parties; and protective contractual provisions. While we
seek to protect our 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
claims."
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 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,
and a failure to meet expectations could adversely impact the price of our
stock. Our revenue and operating results are difficult to predict and have
varied widely from quarter to quarter in the past. We expect they will continue
to vary significantly from quarter to quarter due to a number of factors, many
of which are outside our control. Factors that could impact our quarterly
operating results include the following:
- Market acceptance of and demand for our software products and services
- Size and timing of our license transactions
- Length of our sales cycle
- Timing of our new product introductions and enhancements and those of our
competitors, along with the level of product and price competition that
we encounter
- Changes in our pricing policies and those of our competitors
- Mix of proprietary and reseller product revenue and of direct,
subcontracted, and referral services revenue
- Mix of domestic and international revenue, along with fluctuations in
foreign currency exchange rates
- Changes in our sales incentives
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- General economic and political conditions
- Budgeting cycles of our customers
- Changes in our strategic relationships
- Changes in our business strategy
Our software products typically are shipped when we receive orders.
Consequently, license backlog, if any, in a 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 revenue falls below our expectations in any particular quarter,
our business, operating results, and financial condition could be materially
adversely affected.
We have historically experienced and expect to continue to experience a
high degree of seasonality, with a disproportionately greater amount of revenue,
and an even greater proportion of net income, for any fiscal year typically
being recognized in our fourth fiscal quarter. Because our operating expenses
are relatively fixed in the near term, our operating margins have historically
been significantly higher in our fourth fiscal quarter than in other quarters
and we expect this to continue in future fiscal years. We believe that such
seasonality is primarily the result of both the efforts of our 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 our fiscal year end. First
quarter revenue has historically slowed during the holiday season in November
and December, and our total revenue, license fee revenue, service revenue and
net income in the first fiscal quarter have historically been lower than those
in the immediately preceding fourth quarter. We believe that these seasonal
factors are common in the software industry.
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 limited
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 during
some future quarters we may not meet the expectations of public market analysts
or investors. In this event, the price of our common stock may fall, and an
investment in our common stock may be materially impacted.
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 recent expansion into new business areas and partnerships is uncertain
and may not be successful. We have recently expanded our technology into a
number of new business areas to foster our long-term growth, including the areas
of c-commerce and Internet computing. In addition, we entered into and invested
in a number of strategic partnership relationships in these same areas,
including those with Siebel, Ariba, Microstrategy, Extensity, WebMethods, and
Netfish. These areas are relatively new to both our product development and
sales and marketing personnel. There can be no assurance that we will compete
effectively or generate significant
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revenue in these new areas or that we will be able to provide a product offering
that will satisfy new customer demands in these areas. The success of Internet
computing and, in particular, our current Internet product offering is difficult
to predict because Internet computing represents technology that is relatively
new to the entire software industry. Additionally, if we are unable to
effectively provide a product offering or sell the products we have developed
through or with our partners, we could lose a significant amount of the
investments we have made in such strategic partnerships. If our expansion into
these new business areas or our relationships with our partners are not
successful, our business, revenue, and stock price would be materially impacted.
If use of the Internet for commerce and communication does not increase as
we anticipate, our business will suffer. We are offering new and enhanced
products and services focused on collaboration with trading partners over the
Internet. Our strategy depends on increased acceptance and use of the Internet
as a medium for commerce and communication. Rapid growth in the use of the
Internet is a recent trend. As a result, acceptance and use may not continue to
develop at historical rates, and a sufficiently broad base of business customers
may not adopt or continue to use the Internet to conduct their operations.
Demand and market acceptance for recently introduced services and products over
the Internet are subject to a high level of uncertainty, and there exist few
proven services and products. Our business could be seriously harmed if:
- Use of the Internet and other online services does not continue to
increase or increases more slowly than expected
- The necessary communication and computer network technology underlying
the Internet and other online services does not effectively support any
expansion that may occur
- New standards and protocols are not developed or adopted in a timely
manner
- Concerns about security, reliability, cost, ease of use, accessibility,
quality of service, or other factors result in the Internet not becoming
established as a viable commercial marketplace, inhibiting the
development of electronic commerce and reducing the need for and
desirability of our products and services
The enterprise software industry is highly competitive, and we may be
unable to successfully compete. We compete for customers with a variety of
software vendors, including Internet application vendors in the enterprise
application software market segment, vendors in the manufacturing software
application market segment, vendors in the resource optimization software
solutions market segment, providers of financial management systems software
products, and numerous small firms that offer products with new or advanced
features. Our competitors include:
- Enterprise resource application software vendors, such as Oracle
Corporation, SAP AG, PeopleSoft Inc., each of which currently offers
sophisticated enterprise software solutions that incorporate applications
that are competitive with our products
- Supply chain software vendors, including i2 Technologies, Inc. and
Manugistics Group Inc.
- Other business application software vendors that may broaden their
product offerings by internally developing, or by acquiring or partnering
with independent developers of advanced planning and scheduling software
- Custom-developed business applications software, such as that from
systems consulting groups and IT departments of potential customers
We believe we differentiate ourselves by delivering technology that enables
collaboration and facilitates change, as well as by delivering services and
solutions that are in sync with market demands and our customers' expectations.
Some of our competitors may have an advantage over us due to their significantly
greater financial, technical, marketing, and other resources, or larger
installed base. In addition, Oracle Corporation is a competitor whose relational
database management system underlies a portion of our installed applications.
Furthermore, potential customers may consider outsourcing options, including
data center outsourcing and service bureaus, as viable alternatives to licensing
our software products. We began an outsourcing partner program in fiscal 1998,
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which we believe address the needs of the marketplace. Some competitors have
become more aggressive with their payment terms, discounting practices, and
service arrangements, which makes product differentiation more important. 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. Additionally, several of our
competitors have well-established relationships with our current or potential
customers. These established relationships might prevent us from competing
effectively in divisions or subsidiaries of such customers. Many of our
competitors also have announced their intention to offer vertical applications
to mid-sized organizations, which is the market that comprises a substantial
portion of our revenue. We can offer no assurances that we can successfully
compete against new or existing competitors or that such competition will not
materially adversely affect our business, operating results, or financial
condition.
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 to potential customers during the evaluation stage.
A number of our competitors have better established relationships with such
firms, and as a result, these firms may be more likely to recommend our
competitors' products over our products. In addition, certain of these third
parties compete with us directly in developing and marketing enterprise software
applications. 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 differentiating factors affecting the competitive
market for our software products are as follows:
- Responsiveness to customer needs
- Product flexibility and interoperability
- Product functionality and collaborative ability
- Speed of implementation
- Ease of use
- Product performance and features
- Product quality and reliability
- Vendor and product reputation
- Quality of customer support
- Overall cost
We believe that we compete favorably with respect to the above factors. In
order to be successful in the future, we must continue to respond promptly and
effectively to the challenges of technological change in our market and to our
competitors' innovations. We cannot guarantee that our products will continue to
compete favorably or that we will be successful in facing the increasing
competition from new products and enhancements introduced by our existing
competitors or new companies entering the market.
Our continued growth depends on our ability to develop and maintain our
third-party relationships. To enhance our sales, marketing, and customer
service efforts, we have established relationships with a number of third
parties, including consulting and system integration firms, hardware suppliers,
database, operating system, and other independent software vendors. Many of
these third parties also have relationships with one or more of our competitors
and may, in some instances, select or recommend the software offerings of our
competitors rather than our software. In addition, certain of these third
parties compete with us directly in developing and marketing enterprise software
applications.
We continue to depend on revenue from customers who use the IBM iSeries
platform for a large portion of our total revenue. We continue to be dependent
on customers using our software products on the IBM iSeries platform. Although
the percentage of our revenue from the iSeries declined as the percentage of our
revenue from customers using our products on other platforms increased during
fiscal 1999 and 2000, a substantial portion of our installed base of customers
uses our software on the iSeries platform. With the formation of the J.D.
Edwards WorldSoftware Organization described previously, we will continue to
offer enhanced software products for the iSeries market, but there is no
guarantee that our customers will license, or purchase support contracts for,
these enhanced software products. If we lose iSeries installed-base customers or
iSeries market share, we may suffer material adverse effects to our revenue and
business.
A decline in the price of our common stock beyond certain levels as
stipulated in the equity forward contracts may require an acceleration of cash
requirements. At October 31, 2000, we held forward contracts
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with an aggregate redemption cost of $89.1 million, which require the purchase
at a future date of 2.7 million shares of common stock. A decline in our common
stock price below the price stipulated in the contracts may trigger the
requirement to collateralize the outstanding exposure. Additionally, the
counter-party to the contracts has the right to require an early settlement
should the market price of our common stock fall below the price stipulated in
the contracts. There can be no assurance that the price of our common stock will
remain above the stipulated price and that we will not be required to provide
collateral to the counter party or settle the contracts, prior to the contracts'
scheduled settlement dates.
We depend on third-party technology that could result in increased costs or
delays in the production and improvement of our software offerings. J.D.
Edwards licenses numerous critical third-party software products that we
incorporate into our own software products. If any of the third-party software
vendors were to change their product offerings or terminate our licenses, we
might need to incur additional development costs to ensure continued performance
of our products. In addition, if the cost of licensing any of these third-party
software products significantly increases, our gross margins could significantly
decrease.
In some cases, we rely on existing partnerships with other software vendors
who are also competitors. If these vendors change their business practices in
the future, we may be compelled to find alternative vendors with complementary
software, which may not be available on attractive terms, or may not be as
widely accepted or as effective as the software provided by our existing
vendors.
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 can result in a complex and lengthy
implementation process. The implementation process requires the involvement of
significant customer resources 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 revenue or business.
We depend to a significant extent on our service revenue. We rely on
third-party service providers to implement the OneWorld version of our
application suites. Beginning in fiscal 1997, we initiated a strategy of
referring customers to business partners who contract directly with our
customers for the implementation of OneWorld. During fiscal 2000, our referral
revenue increased from fiscal 1999 and resulted in our recognition of less
direct consulting revenue and less subcontract consulting revenue, which is
generated through third parties. Additionally, compared to fiscal 1999, we had
fewer revenue generating consulting employees. In fiscal 2001, we intend to
increase the number of direct revenue generating consulting employees due to
expected demand for services as well as the intent to increase the number of
direct service engagements. We also intend to continue to pursue business
partner relationships under both subcontract and referral arrangements, as
appropriate, to best meet our customers' needs. This requires our current
third-party implementation providers to allocate resources to our OneWorld
customers, and we may continue to enter into additional third-party
relationships. There can be no assurance that we will establish or maintain
relationships with third parties having sufficient resources to provide the
necessary services to support the demand of our OneWorld customers. There is no
assurance that we can attract the right direct revenue generating consulting
employees or have sufficient resources available to perform the implementation
services ourselves. If we are unable to establish and maintain effective
long-term relationships with such third party implementation providers or if
such providers do not meet our customers' needs, our business, operating
results, and financial condition could be materially adversely affected.
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 limited control over which vendor 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 18 months. Since the sales cycle is unpredictable,
we cannot forecast the timing or amount of specific sales,
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and sales vary from quarter to quarter. Additionally, in fiscal 2000, we have
increased the overall average license fee transaction size, with approximately
45% or our total license fee revenue being generated from transactions exceeding
$1.0 million. The delay to complete one or more large sales could have a
material adverse effect on our business, operating results, or 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 iSeries
market. If our efforts to maintain a focus on these markets are unsuccessful,
our revenue 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 euro was introduced in
certain Economic and Monetary Union (EMU) countries. Currently, business in
member states of the EMU is conducted in both the existing national currency and
the euro. As of January 1, 2002, all EMU countries are expected to be operating
with the euro as their single currency. 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 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 related
requirements. If our software does not meet all the euro currency requirements,
our business, operating results, and financial condition would be materially
adversely impacted. In addition, our software may be used with third-party
products that may or may not meet the euro currency requirements. Although we
continue to take steps to address the impact, if any, of conversion to the euro
currency for third-party products, failure of any critical technology components
to operate properly in member states of the EMU may adversely affect sales or
require us to incur unanticipated expenses to remedy any problems.
Our international operations and sales subject us to various risks
associated with growth outside the U.S. We market and license our products in
the U.S. and internationally. Our international revenue continues to represent a
significant portion of our total revenue. We currently maintain 43 international
sales offices located throughout Canada, Europe, Asia, Latin America, and
Africa. We may to expand our international operations and enter additional
markets outside of the U.S. in the future. Expansion would require significant
management attention and financial resources. Traditionally, our international
operations are characterized by higher operating expenses and lower operating
margins. As a result, if our international revenue increases as a percentage of
total revenue, our operating margins may be adversely affected. Additionally,
costs associated with international expansion include the establishment of
additional offices, hiring of additional personnel, localization, and marketing
of our products for international customers and the development of relationships
with international service providers. If revenue generated is not adequate to
offset the expense of expanding foreign operations, our business could be
materially adversely affected. Our international operations are also subject to
other inherent risks, including:
- Imposition of governmental controls
- Export license requirements
- Restrictions on the export of certain technology
- Cultural and language difficulties
- The impact of local economic conditions and practices and the impact of a
recession in economies outside the U.S.
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- 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
Our success in expanding our international operations depends, in part, on
our ability to anticipate and effectively manage these and other risks. We
cannot guarantee that these or other factors will not materially adversely
affect our business, operating results, or financial condition.
Due to the volatile business and economic conditions in international
markets, particularly in Asia where recovery from the 1999 economic crisis is
still in process, we continue to closely monitor any investments in
international areas to ensure that such opportunities are deemed appropriate and
are consistent with our overall future growth strategies. We have incurred
operating losses in some geographic areas, including Asia and certain European
countries. Consistent with historical results, we expect that we will continue
to recognize a relatively small percentage of our revenue from Asia, certain
European countries, and other geographic areas that are impacted by adverse
conditions. With our worldwide performance continuing to be negatively impacted
by certain economic conditions, risks associated with these international
investments may not be mitigated by the broad geographic diversity of our
customers. As a result, our investments in some international areas have had,
and may continue to have, a material negative impact on our future financial
condition and results of operations.
A significant portion of our revenue is received in currencies other than
U.S. dollars and, as a result, we are subject to risks associated with foreign
exchange rate fluctuations. Changes in the value of major foreign currencies
relative to the value of the U.S. dollar adversely affected our total revenue
during fiscal 2000, particularly in Europe. For example, based on foreign
exchange rates in effect at the beginning of our fiscal year compared to actual
rates, total revenue would have been $21.7 million higher than the reported $1.0
billion, or an 8% increase over the prior year compared to the reported 6%
increase. Foreign exchange rates could continue to adversely affect our total
revenue throughout fiscal 2001 if the U.S. dollar strengthens relative to
foreign currencies. There can be no assurances that we will be able to
successfully address these challenges in the near term.
Included in other income were net foreign exchange transaction losses of
$422,000 in fiscal 2000 and $568,000 in fiscal 1999. 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.
The markets in which we compete experience rapid technological change, and
we face risks associated with new versions and products and defects that could
materially impact our business and revenue. 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, licensing third-party technology, and
acquiring technology. However, licensing third-party technology is risky. If we
are unable to develop new software
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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 assurance 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, which 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 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.
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 claims. 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 patent, 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 seven
U.S. patents, one Canadian patent, and one Japanese patent directed to various
aspects of our software application suites. We pursue the registration of
certain of our trademarks and service marks in the U.S. 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 U.S., and effective
patent, 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:
- Technological and creative skills of our personnel
- New product developments
- Frequent product enhancements
- Name recognition
- Customer education and support
- Reliable product support
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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 the conditions under which our
products are licensed by our distributors to end users, there can be no
assurance 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 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.
There can be no assurance 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 on 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 on 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 cost and diversion of resources.
Future regulation of the Internet may slow its growth, resulting in
decreased demand for our products and services and increased cost of doing
business. Due to increasing popularity and use of the Internet, it is possible
that state and federal regulators could adopt laws and regulations that impose
additional burdens on companies conducting business online. For example, the
growth and development of the market for Internet-based services may prompt
calls for more stringent consumer protection laws. Moreover, the applicability
to the Internet of existing laws in various jurisdictions governing issues such
as property ownership, sales tax, libel, and personal privacy is uncertain and
may take years to resolve. Any new legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could decrease the expansion of the Internet, causing
our costs to increase and our growth to be harmed.
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<PAGE> 29
We may not successfully integrate or realize the intended benefits of our
acquisitions. We acquired The Premisys Corporation in February 1999, Numetrix
in June 1999, and J.D. Edwards New Zealand, Ltd. in March 2000. In addition, we
have acquired product source code rights to help broaden and strengthen our
product portfolio. The success of these and future acquisitions depends
primarily on our ability to:
- Integrate acquired software with our existing products and services
- Retain, motivate, and integrate acquired personnel
- Integrate multiple information systems
While we have integrated operations and made significant progress with the
market acceptance of the products acquired and integrated from The Premisys
Corporation and Numetrix, we may not realize the full benefits that we
anticipated when we made these acquisitions. Our failure to successfully gain
market acceptance of these products or to gain market share in Australia and New
Zealand as a result of company acquisitions could seriously harm our business,
operating results and financial condition.
In addition, we may make future acquisitions or enter into other agreements
that may not be successful. In the future, we may acquire additional businesses,
products, and technologies, or enter into joint venture arrangements, that could
complement or expand our business. Management's negotiations of potential
acquisitions or joint ventures, and management's integration of acquired
businesses, products, or technologies, could divert their time and resources.
Future acquisitions could cause us to issue dilutive equity securities, incur
debt or contingent liabilities, amortize goodwill and other intangibles, or
write off in-process research and development and other acquisition-related
expenses that could seriously harm our financial condition and operating
results. Further, we may not be able to integrate any acquired business,
product, or technology with our existing operations or train, retain, and
motivate personnel from the acquired business. If we are unable to fully
integrate an acquired business, product, or technology, or train, retain, and
motivate personnel from the acquired business, we may not receive the intended
benefits of that acquisition.
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 accessing 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 affect 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.
Our stock price is volatile, and there is a risk of continuing
litigation. The trading price of our common stock has, in the past, and may, in
the future, be subject to wide fluctuations in response to factors including,
but not limited to, the following:
- Quarterly revenue or results of operations fail to meet the expectations,
published or otherwise, of the investment community
- Announcements of technological innovations made by us or our competitors
- Our or our competitors' new products or the acquisition of significant
customers
- Developments with respect to our or our competitors' patents, copyrights,
or other proprietary rights
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<PAGE> 30
- Changes in recommendations or financial estimates by securities analysts
- The announcement of acquisitions or other significant transactions by the
us or our competitors
- Changes in management
- Conditions and trends in the software industry in general
- General market and economic conditions and other factors
Fluctuation in the price of our common stock may expose us to the risk of
securities class action lawsuits. As a result of the declines in the price of
our common stock during fiscal 1998, one such lawsuit is being maintained
against J.D. Edwards & Company. Although we believe this lawsuit is without
merit, defending against it could result in substantial cost and divert
management's attention and resources. In addition, any settlement or adverse
determination of this lawsuit could subject us to significant liability. There
can be no assurance that there will not be additional lawsuits in the future.
Our restructuring could result in business distractions. We recently
undertook a restructuring in the third quarter of fiscal 2000 involving, among
other things, a reduction of the workforce by 775 employees worldwide. This
reduction could result in prospects or customers deciding to delay or not
purchase our products due to the perceived uncertainty caused by the
restructuring. There can be no assurances that we will not reduce or otherwise
adjust our workforce again in the future or that the related transition issues
associated with such a reduction will not be incurred again in the future. This
uncertainty could result in a lack of focus and reduced productivity by our
remaining employees, including those directly responsible for revenue
generation, which in turn may affect our revenue in a future quarter. In
addition, employees directly affected by the reduction may seek future
employment with our business partners, customers, or even our competitors.
Although all employees are required to sign a confidentiality agreement with the
Company at the time of hire, there can be no assurances that the confidential
nature of certain proprietary Company information will be maintained in the
course of such future employment. Further, we believe that our future success
will depend in large part upon our ability to attract, train, and retain highly
skilled managerial, sales, and marketing personnel. There can be no assurances
that we will not have difficulty attracting skilled employees as a result of a
perceived risk of future workforce reductions. Additionally, employment
candidates may demand greater incentives in connection with their employment. We
may grant options or other stock-based awards to attract and retain personnel,
which could dilute our existing stockholders. Further, the failure to attract,
train, retain, and effectively manage employees could increase our costs, hurt
our development and sales efforts, or cause a degradation in the quality of our
customer service.
Control by existing shareholders could significantly influence matters
requiring stockholder approval. As of January 5, 2001, J.D. Edwards' executive
officers, directors, and entities affiliated with both, in the aggregate,
beneficially owned approximately 21.3% 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 anti-takeover 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 benefit our stockholders. This could
adversely affect the market price of our common stock and impact the value of
our stockholders' investment.
ITEM 2. PROPERTIES
Our corporate headquarters and executive offices are in Denver, Colorado,
where we lease approximately 812,000 square feet of space in multiple
facilities. The leases on these facilities expire at various dates ranging from
2001 through 2004. We also lease approximately 430,000 square feet of space,
primarily for regional sales and support offices, elsewhere in the U.S.
Additionally, we lease approximately 522,000 square feet of office space in
countries outside the U.S., used primarily for sales and support offices.
Expiration dates on sales and support office leases range from 2000 to 2023. We
believe that our current domestic and international facilities
28
<PAGE> 31
will be sufficient to meet our needs for at least the next 12 months. See Note
11 of Notes to Consolidated Financial Statements for information regarding our
obligations under facilities leases and financing activities.
ITEM 3. LEGAL PROCEEDINGS
On September 2, 1999, a complaint was filed in the U.S. District Court for
the District of Colorado against J.D. Edwards and certain of our officers and
directors. The complaint purports to be brought on behalf of purchasers of our
common stock during the period between January 22, 1998, and December 3, 1998.
The complaint alleges that the Company and certain of our officers and directors
violated the Securities Exchange Act of 1934 through a series of false and
misleading statements. The plaintiff seeks to recover unspecified compensatory
damages on behalf of all purchasers of J.D. Edwards' common stock during the
class period. Two additional suits were filed on behalf of additional plaintiffs
alleging the same violations and seeking the same recovery as the first suit.
The three complaints were subsequently consolidated into one action, and a
consolidated amended complaint was filed on March 21, 2000. On May 9, 2000, the
Company and the individual defendants filed a motion to dismiss the amended
complaint. The court has scheduled a hearing on the motion to dismiss for
January 12, 2001.
We believe these complaints are without merit and we will vigorously defend
the Company and our officers and directors against such complaints.
Nevertheless, we currently are unable to determine (i) the ultimate outcome of
the lawsuits, (ii) whether resolution of these matters will have a material
adverse impact on our financial position or results of operations, or (iii) a
reasonable estimate of the amount of loss, if any, which may result from
resolution of these matters.
We are involved in certain other disputes and legal actions arising in the
ordinary course of business. In management's opinion, none of such other
disputes and legal actions is expected to have a material impact on our
consolidated financial position, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers as of October 31, 2000, and their ages as of January
5, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
C. Edward McVaney........... 60 President and Chief Executive Officer
David E. Girard............. 45 Executive Vice President and Chief Operating Officer
Richard E. Allen............ 43 Executive Vice President, Finance and Administration,
Chief Financial Officer
Gerry E. Bleau.............. 49 Senior Vice President, Canada, Asia Pacific, Latin
America
Nigel R. Pullan............. 44 Senior Vice President, Europe, Middle East, Africa
Donald C. White............. 44 Senior Vice President, United States
Glenn C. Tubb............... 47 Senior Vice President, Product Development
Brian A. McKeon............. 45 Senior Vice President, Global Customer Services
David A. Siebert............ 42 Group Vice President, WorldSoftware and Channel
Operations
Pamela L. Saxton............ 48 Vice President of Finance, Controller, and Chief
Accounting Officer
Richard G. Snow, Jr. ....... 55 Vice President, General Counsel, and Secretary
</TABLE>
C. Edward McVaney has been President and Chief Executive Officer of the
Company since April 2000 and has been Chairman of the Board of Directors of the
Company since inception. Mr. McVaney held the positions of President and Chief
Executive Officer from the Company's inception in March 1977 to October 1998,
except that Mr. McVaney did not act as President of the Company from September
1987 through September 1991.
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<PAGE> 32
Mr. McVaney holds a B.S. in mechanical engineering from the University of
Nebraska and an M.B.A. from Rutgers 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 the University of Connecticut and attended the Columbia Executive
Marketing Management Program at Columbia University.
Richard E. Allen has been Executive Vice President, Finance and
Administration, and Chief Financial Officer since August 2000. Mr. Allen was
Senior Vice President, Finance and Administration, from November 1997 to August
2000 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.
Gerry E. Bleau has been Senior Vice President, Canada, Asia Pacific, and
Latin America (CAPLA), 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.
Nigel R. Pullan has been Senior Vice President, Europe, Middle East, and
Africa (EMEA), 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 a 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, U.S., since November 1999.
From November 1997 to November 1999, he was Vice President and General Manager
of the U.S. Central Area. 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.
Glenn C. Tubb has been Senior Vice President, Product Development, since
September 2000. From March 2000 to August 2000, he was Vice President, Supply
Chain Systems. He held the position of Managing Director of J.D. Edwards New
Zealand, Ltd., a J.D. Edwards business partner that we acquired in March 2000.
Mr. Tubb holds a B.S. in accounting from Northern Arizona University and an
M.B.A. in finance from the University of Colorado.
Brian A. McKeon has been Senior Vice President, Global Customer Services,
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.
David A. Siebert has been Group Vice President, WorldSoftware and Channel
Operations, since June 2000. From November 1997 to June 2000, he was Business
Unit Director of the U.S. Central area. From May 1996 to November 1997, he was
Industry Marketing Director and Director of Worldwide Marketing Consulting. Mr.
Siebert holds a B.A. in business administration from Bethel College and an
M.B.A. in operations management from DePaul University.
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.
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<PAGE> 33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our 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 our common stock for the fiscal periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
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
2000
First Quarter............................................. $40.81 $22.81
Second Quarter............................................ 44.98 15.38
Third Quarter............................................. 18.50 10.50
Fourth Quarter............................................ 26.75 13.06
</TABLE>
As of January 5, 2001, there were 717 holders of record of our common
stock. Because many shares of our common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders. We have never
declared or paid any cash dividend on our common stock. Since we currently
intend to retain all future earnings to finance future growth, we do not
anticipate paying any cash dividends in the foreseeable future.
(b) We have an active stock repurchase program, that was primarily designed
to offset the effects of share issuances under our option plans and our employee
stock purchase plan. (See Note 4 of Notes to Consolidated Financial Statements.)
One element of the program is effecting such stock repurchases through forward
purchases and put and call transactions. During fiscal 2000, we entered into
equity derivative contracts for the purchase of 5.2 million common shares in
accordance with the share repurchase plan, and we settled contracts for the
repurchase of 2.5 million shares for a total of $90.5 million in cash. As of
October 31, 2000, approximately 1.9 million remaining shares were held as
treasury stock to fund future stock issuances and we held forward contracts
requiring the purchase at a future date of 2.7 million shares of common stock at
an average cost of $32.17 per share.
All of these transactions were exempt from registration under Section 4 (2)
of the Securities Act of 1933. Each transaction was privately negotiated, and
each purchaser of options was an accredited investor and qualified institutional
buyer. We did not make a public solicitation in the placement of these
securities.
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<PAGE> 34
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statements of operations data provided below for the years
ended October 31, 1998, 1999, and 2000, and the consolidated balance sheet data
as of October 31, 1999 and 2000, are derived from, and are qualified by
reference to, our 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, 1996 and 1997, and the
consolidated balance sheet data as of October 31, 1996, 1997, and 1998, are
derived from consolidated financial statements audited by PricewaterhouseCoopers
LLP, independent accountants, which are not included in this Annual Report on
Form 10-K. Historical results are not necessarily indicative of results for any
future period. We have never declared or paid any cash dividend on our common
stock. (See "Consolidated Financial Statements" under Item 14(a).) The following
selected consolidated financial data 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.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------
1996 1997 1998 1999 2000
--------- -------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
Revenue:
License fees............................................. $ 180,366 $248,707 $386,081 $ 312,817 $ 419,103
Services................................................. 297,682 399,105 547,901 631,414 581,962
--------- -------- -------- ---------- ----------
Total revenue...................................... 478,048 647,812 933,982 944,231 1,001,065
Costs and expenses:
Cost of license fees..................................... 27,443 36,444 43,404 29,882 59,963
Cost of services......................................... 184,846 244,640 349,689 408,293 366,081
Sales and marketing...................................... 128,759 176,031 261,400 334,201 367,050
General and administrative............................... 53,052 69,850 83,450 94,241 97,556
Research and development................................. 40,321 60,591 89,401 109,206 166,866
Amortization of acquired software and other acquired
intangibles(1)......................................... -- -- -- 9,488 25,044
Acquired in-process research and development(1).......... -- -- -- 26,141 --
Restructuring and other related charges(2)............... -- -- -- -- 28,016
--------- -------- -------- ---------- ----------
Total costs and expenses........................... 434,421 587,556 827,344 1,011,452 1,060,576
Operating income (loss).................................... 43,627 60,256 106,638 (67,221) (59,511)
Other income (expense):
Interest and dividend income............................. 629 1,686 15,294 19,324 14,980
Gain on sale of equity investments and product line...... -- -- -- -- 24,582
Foreign currency losses and other, net................... (2,302) (2,616) (3,729) (268) (683)
--------- -------- -------- ---------- ----------
Income (loss) before income taxes.......................... 41,954 59,326 118,203 (48,165) (20,632)
Provision for (benefit from) income taxes................ 15,628 22,098 43,735 (8,941) (5,210)
--------- -------- -------- ---------- ----------
Net income (loss).......................................... $ 26,326 $ 37,228 $ 74,468 $ (39,224) $ (15,422)
========= ======== ======== ========== ==========
Net income (loss) per common share(3):
Basic.................................................... $ 0.33 $ 0.46 $ 0.76 $ (0.37) $ (0.14)
========= ======== ======== ========== ==========
Diluted.................................................. $ 0.30 $ 0.39 $ 0.68 $ (0.37) $ (0.14)
========= ======== ======== ========== ==========
Shares used in computing per share amounts:
Basic.................................................... 79,044 80,546 98,264 105,378 109,376
Diluted.................................................. 87,667 96,500 109,993 105,378 109,376
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------------------------------
1996 1997(4) 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 25,554 $224,437 $183,115 $113,341 $180,674
Short and long-term marketable securities and other
investments............................................... -- 138,560 351,194 309,110 156,892
Total assets................................................ 243,786 643,037 950,473 940,528 951,041
Mandatorily redeemable shares, at redemption value(5)....... 47,024 -- -- -- 89,113
Stockholders' equity........................................ 22,902 396,861 583,996 592,720 470,998
</TABLE>
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<PAGE> 35
---------------
(1) During fiscal 1999 and 2000, we completed business acquisitions that
resulted in charges associated with amortization of acquired intangible
assets and the write-off of in-process research and development. See Note 8
of Notes to Consolidated Financial Statements in Item 14.
(2) In May 2000, our board of directors approved a global restructuring plan
resulting in charges to operations. For a discussion on the restructuring,
see Note 7 of Notes to Consolidated Financial Statements in Item 14.
(3) 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.
(4) We completed our 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 our mandatorily redeemable shares
was eliminated.
(5) At October 31, 2000, we held certain forward purchase contracts requiring
full physical settlement, and the aggregate redemption cost of $89.1 million
is included in temporary equity with a corresponding decrease in additional
paid-in capital. For a discussion on the share repurchase program, see Note
4 of Notes to Consolidated Financial Statements in Item 14.
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<PAGE> 36
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 is a leading provider of agile, collaborative solutions for
the Internet economy. Our open solutions give organizations the freedom to
choose how they assemble internal applications and how they collaborate with
partners and customers across the supply chain to increase competitive
advantage. For more than 20 years, we have developed, marketed, and supported
innovative, flexible solutions essential to running complex and fast-moving
multi-national organizations -- helping over 6,000 customers of all sizes
leverage existing investments and benefit from new technologies.
We distribute, implement, and support our products worldwide through 60
offices and nearly 400 third-party business partners, including sales,
consulting, and outsourcing partners with offices throughout the world. Our
customers use our software at over 9,400 sites in more than 100 countries.
Our total revenue exceeded $1.0 billion for fiscal 2000 compared to $944.2
million in total revenue for fiscal 1999, realizing the highest annual revenue
achieved in our history. This was driven by license fee revenue growth of 34% to
$419.1 million in fiscal 2000 from $312.8 million in fiscal 1999. Our financial
results reflected an operating loss of $20.6 million for fiscal 2000, an
improvement from an operating loss of $48.2 million for fiscal 1999. Our results
were negatively impacted by the weakening of the euro and other foreign
currencies against the U.S. dollar during fiscal 2000, and our operating loss
was $5.8 million greater as a result of the foreign exchange rates effective
during fiscal 2000 compared the fiscal 1999 exchange rates. Included in the
operating loss for fiscal 2000 was a restructuring charge of $28.0 million and
amortization of acquired software and other intangibles of $25.0 million.
Comparatively, the operating loss in fiscal 1999 included expenses for acquired
in-process research and development (IPR&D) of $26.1 million and amortization of
acquired software and other intangibles totaling $9.5 million. The net loss for
fiscal 2000 was $15.4 million, or $0.14 per share, an improvement from the net
loss of $39.2 million, or $0.37 per share for fiscal 1999. Reducing the reported
net loss for fiscal 2000 was an $18.9 million gain from sales of certain
investments and a $5.7 million gain related to the sale of a product line.
Excluding all acquisition-related charges, restructuring charges, and the gains
on equity investments and product line sales, we reached a fiscal 2000 profit of
$4.9 million, or $0.04 per share, compared to a net loss of $7.9 million, or
$0.07 per share for fiscal 1999 on a comparable basis. See "Other Data Regarding
Results of Operations" for a reconciliation of the comparable results for fiscal
1999 and 2000.
During fiscal 2000, we completed an acquisition of our longstanding
business partner serving Australia and New Zealand, J.D. Edwards New Zealand,
Ltd. (JDE-NZ), expanding our reach in the Asia Pacific region. Additionally, in
fiscal 1999, we completed acquisitions of two privately held companies,
Numetrix, Ltd. (Numetrix), and The Premisys Corporation. These investments
further extended our supply chain planning and fulfillment solutions as well as
our ability to compete for business beyond the traditional enterprise software
market. All acquisitions were accounted for as purchases and, accordingly,
operating expenses were impacted in fiscal 1999 and fiscal 2000 subsequent to
the consummation dates of the acquisitions primarily as a result of IPR&D
charges and amortization of acquired intangible assets and goodwill, as well as
other incremental operating expenses.
Additionally, during fiscal 2000, we implemented a restructuring plan
directed towards reducing our infrastructure and operating expenses. We will
continue to realize savings from, among other things, the elimination of 775
employee positions worldwide and a reduction in office space and related
overhead expenses as a result of the restructuring plan. We incurred a $28.0
million restructuring charge during fiscal 2000 related to this restructuring
plan. For further details on the restructuring actions, see "Restructuring and
Related Charges."
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Since 1998, we have formed reseller and product-right relationships with
organizations whose products enhance our solutions. This allows us to manage
internal development resources, while at the same time offering our customers a
broad spectrum of products and services. We have signed reseller agreements with
companies including Siebel(R) Systems, Inc. (Siebel), Ariba(R), Inc. (Ariba),
Extensity(R), Inc. (Extensity), Atlas Commerce, and MicroStrategy, Inc.
(Microstrategy). The terms of each third-party agreement vary; however, as we
recognize license revenue under the reseller provisions in these agreements, a
related royalty is charged to cost of license fees. Additionally, we have signed
agreements with Proforma, Inc. (Proforma), a provider of business process
modeling solutions, webMethods, Inc. (webMethods), formerly Active Software,
Inc., a provider of open solutions for business-to-business integration, and
Netfish Technologies, Inc. (Netfish), a process integration provider. The
Proforma, webMethods, and Netfish agreements represent an investment in their
products, embedded or currently being embedded into our OneWorld(R) software.
These product investments are capitalized as software development costs during
fiscal 2000 and are amortized to cost of license fees on a straight-line basis
over the estimated useful lives of the assets once the functionality is
integrated and available for general release in the J.D. Edwards software
solutions. As a result of the reseller agreements and product investments, the
gross margin on total license fee revenue has declined and may be reduced
further in future years. For fiscal 2000, a limited portion of total license fee
revenue was generated from sublicensing products included in reseller
arrangements. There can be no assurance that future license revenue from these
third-party arrangements will increase or will be sufficient to cover the cost
of these agreements.
We historically have experienced and expect to continue to experience a
high degree of seasonality. Because our operating expenses are typically
relatively fixed in the near term, our operating margins have historically been
significantly higher in our fourth fiscal quarter than in other quarters, and we
expect this to continue in future fiscal years. First fiscal quarter revenue and
results from operations historically have been lower than those in the
immediately preceding fourth quarter. We believe that these seasonal factors are
common in the software industry. See "Factors Affecting The Company's Business,
Operating Results, and Financial Condition -- Our quarterly financial results
are subject to significant fluctuations and a failure to meet expectations could
adversely impact the price of our stock."
We believe that the traditional enterprise software market will continue to
grow but at a slower pace than was evident in the past decade. The traditional
enterprise market focuses on automating internal operations, such as
manufacturing, human resources, finance, and distribution. Many companies have
already automated internal operations. The traditional enterprise market is now
largely a replacement market; we believe that companies will replace their
enterprise software approximately every five to seven years. While the
traditional enterprise market slows somewhat, we believe that there will be
strong growth in an emerging market generally described as collaborative
commerce (c-commerce). Now that enterprises have largely automated their
internal processes, they are turning their attention to automating external
processes in order to achieve further competitive advantage. External processes
are those processes that link an enterprise with its customers, suppliers, and
partners. We believe that the growth in the c-commerce market will be dramatic
and intend to position ourselves as a leader in that market. We also believe
that interoperability (the ability for unlike software packages to exchange
information with each other) and supply chain planning will be crucial for
success in the c-commerce market. During fiscal 2000, we significantly improved
our c-commerce product suite by incorporating interoperability technologies, and
by enhancing and integrating our OneWorld Advanced Planning module (formerly
Numetrix's technology). We believe we have enhanced our market position by
launching a major branding campaign around the concept of c-commerce and open
systems technologies. However, there can be no assurance that we will become a
leader in the c-commerce marketplace or that this emerging market will
experience substantial growth.
We have actively addressed our future operating plans and are taking the
necessary steps, including our restructuring plan, to remain competitive in the
future and to continue building a leadership position in the c-commerce market.
Based on current projections for fiscal 2001, we expect growth in license fee
revenue and total revenue, as well as an improvement in operating margins.
However, the uncertainty in the traditional enterprise applications market,
challenges of emerging new markets, potential slowdown in global economic
conditions, and strong competitive forces could reduce or eliminate our growth
in revenue and improvements in operating margins. These uncertainties have made
forward-looking projections of future revenue and operating results particularly
challenging. There can be no assurance of the level of revenue growth that will
be achieved, if
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<PAGE> 38
any, or of a return to net profitability or that our financial condition,
results of operations, and market price of our common stock will not continue to
be adversely affected by the aforementioned factors.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from our consolidated statements of operations as a percentage of total revenue
(except for gross margin data):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Revenue:
License fees.............................................. 41.3% 33.1% 41.9%
Services.................................................. 58.7 66.9 58.1
----- ----- -----
Total revenue..................................... 100.0 100.0 100.0
Costs and expenses:
Cost of license fees...................................... 4.7 3.1 5.9
Cost of services.......................................... 37.4 43.2 36.6
Sales and marketing....................................... 28.0 35.4 36.7
General and administrative................................ 8.9 10.0 9.7
Research and development.................................. 9.6 11.6 11.7
Amortization of acquired software and other acquired
intangibles............................................ -- 1.0 2.5
Acquired in-process research and development.............. -- 2.8 --
Restructuring and other related charges................... -- -- 2.8
----- ----- -----
Total costs and expenses.......................... 88.6 107.1 105.9
Operating income (loss)..................................... 11.4 (7.1) (5.9)
Other income, net........................................... 1.3 2.0 3.9
----- ----- -----
Income (loss) before income taxes........................... 12.7 (5.1) (2.0)
Provision for (benefit from) income taxes................. 4.7 (.9) (.5)
----- ----- -----
Net income (loss)........................................... 8.0% (4.2)% (1.5)%
===== ===== =====
Gross margin on license fee revenue......................... 88.8% 90.4% 85.8%
Gross margin on service revenue............................. 36.2% 35.3% 37.0%
</TABLE>
Fiscal Years Ended October 31, 1999 and 2000
Total revenue. We license software under non-cancelable license agreements
and provide related services, including consulting, support, and education. We
recognized revenue in accordance with Statement of Position (SOP) 97-2,
"Software Revenue Recognition," as amended and interpreted by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with respect to certain
transactions," as well as Technical Practice Aids (TPA) issued from time to time
by the American Institute of Certified Public Accountants. The Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," in December 1999. SAB No. 101, as
amended, provides further interpretive guidance for public companies on the
recognition, presentation, and disclosure of revenue in financial statements. In
June 2000, the SEC issued SAB No. 101B, delaying the implementation of SAB No.
101 until our fourth quarter of fiscal 2001. We have evaluated the impact of SAB
No. 101 and believe that it will not have a material impact on our consolidated
financial position, results of operations, or current licensing or revenue
recognition practices.
Consulting and education services are not essential to the functionality of
our software products, are separately priced, and are available from a number of
suppliers. Revenue from these services is recorded separately from the license
fee. We recognize 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, our software licenses do not include
significant post-delivery obligations to be fulfilled
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<PAGE> 39
by us, 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 and education services is recognized as services are performed.
Revenue from agreements for supporting and providing periodic unspecified
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. We do not require collateral for receivables and
reserves are maintained for potential losses.
We seek to provide our customers with high-quality implementation and
education services in the most efficient and effective manner. In some cases
where we do not provide the services directly, we subcontract such work through
third-party implementation support partners. In addition, we have consulting
alliance partnerships with leading consulting companies to provide customers
with both technology and application implementation support, offering expertise
in business process reengineering and knowledge in diversified industries. These
business partners contract directly with customers for the implementation of our
software, and we recognize revenue from a referral fee received from the
business partner and incur no related cost of services.
In fiscal 2000, our total revenue exceeded $1.0 billion compared to $944.2
million in total revenue for fiscal 1999, a 6% increase and the highest annual
revenue achieved in our history. This was driven by license fee revenue growth
of 34% to $419.1 million in fiscal 2000 from $312.8 million in fiscal 1999. The
revenue mix between license fees and services was 41.9% and 58.1%, respectively,
for fiscal 2000 compared to 33.1% and 66.9%, respectively, for fiscal 1999. The
significant change in revenue mix was primarily due to less demand for software
implementations and education following the reduced licensing activity in fiscal
1999, continuing through the transition to the Year 2000. Additionally, higher
license fee growth during fiscal 2000, fewer revenue-generating consulting
employees and our recognition of less direct consulting revenue and less
subcontract consulting revenue generated through third parties significantly
contributed to the change. The growth in license fees revenue for fiscal 2000
was driven in part by our ability to offer a broad and integrated supply chain
planning solution.
A substantial portion of our total revenue is derived from international
sales and is therefore subject to the related risks, including general economic
conditions in each country, the strength of international competitors, overlap
of different tax structures, difficulty of managing an organization spread over
various countries, changes in regulatory requirements, compliance with a variety
of foreign laws and regulations, longer payment cycles, and volatilities of
exchange rates in certain countries. A significant portion of our business is
conducted in currencies other than the U.S. dollar. Changes in the value of
major foreign currencies relative to the value of the U.S. dollar adversely
affected our total revenue during fiscal 2000, primarily as a result of the
weakening of the euro exchange rates against the U.S. dollar. Based on foreign
exchange rates in effect at the beginning of our fiscal year compared to actual
rates, total revenue would have been $21.7 million higher than the reported $1.0
billion, or an 8% increase over the prior year compared to the reported 6%
increase. Foreign exchange rates could continue to adversely affect our total
revenue throughout fiscal 2001 if the U.S. dollar strengthens relative to
foreign currencies.
Generally, operating margins are higher on domestic revenue than on
international revenue. Additionally, operating margins are usually higher in the
geographic areas where our operations are more established than in the
geographic areas we entered more recently. International revenue as a percentage
of total revenue ranged between 35% and 39% for each of the past three fiscal
years. Geographically, the overall revenue growth for fiscal 2000 compared to
fiscal 1999 was led by sales performance in the U.S. The geographic areas
defined as the U.S., Europe, the Middle East, and Africa (EMEA), and the rest of
the world accounted for 65%, 20%, and 15% of total revenue, respectively, for
fiscal 2000. For fiscal 1999, the U.S., EMEA, and the rest of the world
accounted for 61%, 24%, and 15% of total revenue, respectively.
License fees. License fee revenue increased 34% to $419.1 million for
fiscal 2000 from $312.8 million for fiscal 1999, primarily due to an increase in
the overall average license fee transaction size in fiscal 2000, with over 70
transactions exceeding $1.0 million compared to 35 transactions exceeding $1.0
million in fiscal 1999. Approximately 45% of our total license fee revenue was
generated from the transactions exceeding $1.0 million
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<PAGE> 40
during fiscal 2000. The percentage of revenue from new customers was 46% for
fiscal 2000 compared to 49% for fiscal 1999. The mix of revenue from new and
existing customers varies from year to year, and future growth is dependent on
our ability to both retain our installed base of customers while adding new
customers. There can be no assurance that our license fee growth, results of
operations, and financial condition will not be adversely affected in future
periods as a result of downturns in global economic conditions or intensified
competitive pressures, or that our operational investments for the long term
will be successful.
We increased our number of customers by 9% during fiscal 2000 to over 6,000
at October 31, 2000. Our revenue mix has continued to shift toward our OneWorld
applications available for the Windows NT and UNIX platforms. During fiscal
2000, 43% of license activity was due to customers using the Windows NT or UNIX
platforms compared to 33% in fiscal 1999. We expect that an increasing portion
of our future license fee revenue will be generated from customers using Windows
NT or UNIX platforms. However, there can be no assurance that we will generate
increasing amounts of revenue from NT and UNIX platforms.
Services. Services revenue includes fees generated by personnel providing
direct services to customers, including consulting, support, and education, and
fees generated through third parties for subcontracted services as well as
referral fees from service providers who contract directly with customers.
Services revenue declined by 8% to $582.0 million for fiscal 2000 from $631.4
million for the year ended October 31, 1999. This decrease was primarily a
result of less demand for software implementations and education following the
reduced licensing activity in fiscal 1999, continuing through the first half of
our fiscal year 2000 due to customers' concerns regarding potential Year 2000
systems issues. Additionally, our recognition of less direct consulting revenue
and less subcontract consulting revenue generated through third parties
significantly contributed to the change. Beginning in fiscal 1997, we initiated
a strategy of referring customers to service providers who contract directly
with our customers for the implementation of OneWorld. During fiscal 2000, our
referral revenue increased from fiscal 1999 and resulted in the recognition of
less direct consulting revenue and subcontract consulting revenue generated
through third parties. The subcontracted consulting and education revenue
decreased 35% in fiscal 2000 compared to last year. Direct services decreased 2%
in fiscal 2000 from fiscal 1999. The services revenue generated through
subcontracted work accounted for 39% of the total consulting and education
services revenue for fiscal 2000, compared to 49% for fiscal 1999. Additionally,
compared to fiscal 1999, we had fewer revenue-generating consulting employees,
which contributed to the decrease in direct services revenue. In fiscal 2001, we
intend to improve utilization of our existing consulting staff and increase the
number of direct revenue-generating consulting employees due to expected demand
for services and our intention to increase the number of direct service
engagements. We also intend to continue to pursue business partner relationships
under both subcontract and referral arrangements, as appropriate, to best meet
our objectives and our customers' needs.
Customer support revenue increased in fiscal 2000, which somewhat offset
the decline in consulting and education services, due to our growing installed
base of customers and consistent maintenance renewal rates compared to fiscal
1999. In fiscal 2001, customer support revenue is expected to rise due to an
overall increase in pricing for maintenance together with the strong license
revenue growth in fiscal 2000. Additionally, we are offering certain new premium
levels of support to our new and existing customers at a higher price. There can
be no assurance, however, that we will maintain consistent maintenance renewal
rates in the future due to the increase in prices or the level of maintenance
revenue growth, if any, that will result from the premium level of customer
support being offered.
As a percentage of total revenue, services revenue decreased during fiscal
2000 compared to fiscal 1999. This decline in the services mix was due to growth
in license fee revenue coupled with the decreases in consulting services and
decline in education revenue during fiscal 2000. In any fiscal year, total
services revenue is dependent on license transactions closed during the current
and preceding years, the growth in our installed base of customers, the amount
and size of consulting engagements, the level of competition from alliance
partners for consulting and implementation work, the number of Company and
service provider consultants available to staff engagements, the number of
customers referred to alliance partners for consulting and education services,
the number of customers who have contracted for support and the amount of the
related fees, billing rates for consulting services and education courses, and
the number of customers purchasing education services.
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<PAGE> 41
Cost of license fees. Cost of license fees includes business partner
commissions, royalties, amortization of internally developed capitalized
software (including payments to third parties related to internal projects and
contractual payments to third parties for embedded products), documentation, and
software delivery expenses. The total dollar amount for the cost of license fees
increased 101% to $60.0 million for the fiscal year 2000 from $29.9 million for
fiscal 1999. The increase for fiscal 2000 was primarily due to reseller
royalties on Siebel and Ariba software transactions, in addition to royalties
for certain embedded products.
Capitalized OneWorld costs were fully amortized early in fiscal 2000.
Amortization of capitalized OneWorld costs was $4.8 million for fiscal 1999 and
$1.0 million for fiscal 2000. We capitalized additional software development
costs in the amount of $43.4 million for fiscal 2000. These costs related to
investments in third-party products that have been or will be embedded into
OneWorld and provide new functionality. Additionally, we capitalized payments
for outsourced development and internal costs for major product enhancements.
Amortization of a significant portion of these capitalized costs is expected to
begin in the second quarter of fiscal 2001 and will continue over the estimated
useful lives of the products, which are generally three years. Additional costs
for these and other development projects are expected to be capitalized in
future periods given the current product development plans.
Gross margin on license fee revenue varies from year to year depending on
the revenue volume in relation to certain fixed costs, such as the amortization
of capitalized software development costs and the portion of our software
products that are subject to royalty payments. The gross margin for fiscal 2000
was significantly impacted primarily by the increase in reseller royalty expense
from Siebel and Ariba software transactions. The fiscal 2000 gross margin on
license fee revenue decreased to 86% from 90% for fiscal 1999 as a result of
these reseller royalties. Due to the reseller royalties and capitalized software
amortization, total cost of license fees are expected to increase in the future.
As a result, gross margins on license fee revenue are expected to decline
compared to prior years.
Cost of services. Cost of services includes the personnel and related
overhead costs for providing services to customers, including consulting,
implementation, support, and education, as well as fees paid to third parties
for subcontracted services. Cost of services decreased 10% to $366.1 million for
fiscal 2000 from $408.3 million in fiscal 1999. The decrease was primarily due
to a smaller portion of services revenue generated through subcontracted work,
which decreased the related third-party subcontract costs. The gross margin on
services revenue increased to 37% for fiscal 2000 compared to 35% for fiscal
1999 primarily due to a change in the mix of total services revenue. Customer
support revenue, which has a higher margin than consulting and education,
increased as a percentage of total services revenue. Gross margins on services
revenue for fiscal 2001 depend on the mix of total services revenue, the impact
of our maintenance price increase, the extent to which we are successful in
increasing the number of revenue-generating consulting employees and the number
of direct service engagements, improving utilization of our existing consulting
staff, and the extent to which we utilize our service partner relationships
under either subcontract or referral arrangements.
Sales and marketing. Sales and marketing expense consists of personnel,
commissions, and related overhead costs for the sales and marketing activities,
together with advertising and promotion costs. Sales and marketing expense
increased 10% to $367.1 million for fiscal 2000 from $334.2 million for fiscal
1999, representing 36.7% and 35.4% of total revenue, respectively. The increase
is primarily a result of commissions associated with the growth in software
license fee revenue, higher advertising and promotion expenditures, and
increased salaries due to the competitive market for personnel in fiscal 2000.
General and administrative. General and administrative expense includes
personnel and related overhead costs for support and administrative functions.
General and administrative expense increased 4% to $97.6 million for fiscal 2000
from $94.2 million for fiscal 1999, representing 9.7% and 10.0% of total
revenue, respectively. The total dollar amount of expense was slightly higher in
fiscal 2000 compared to the prior year primarily due to an increase in salaries,
contract professional services, and certain other costs. General and
administrative expenses as a percentage of total revenue remained essentially
flat primarily due to increased efficiencies within support functions to manage
the overall growth in our operations.
Research and development. Research and development (R&D) expense includes
personnel and related overhead costs for product development, enhancements,
upgrades, testing, quality assurance, documentation, and
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<PAGE> 42
translation, net of any capitalized costs. R&D expense increased 7% to $116.9
million for fiscal 2000 compared to $109.2 million for fiscal 1999, representing
11.7% and 11.6% of total revenue, respectively. The increase in dollar amount
was primarily due to an increase in headcount and higher salaries due to the
competitive market for personnel, together with increases in related facilities
and computer systems necessary to meet product development objectives, offset by
costs capitalized during fiscal 2000. Including capitalized development
expenditures, research and development expenditures were $159.9 million for
fiscal 2000, or 16% of total revenue.
During fiscal 2000, we devoted development resources primarily to major
enhancements and new products associated with our OneWorld application suites,
such as the September 2000 release of OneWorld Xe, as well as the integration of
our internally developed applications with acquired applications and those of
third parties. We also completed certain significant enhancements to our
WorldSoftware functionality, including advanced planning capabilities and
Web-enablement.
In addition to our internal R&D activities, we outsourced the development
of software for a specialized industry, and we acquired source code rights for
certain enterprise interface applications and other embedded technology. We
capitalize internally developed software costs and software purchased from third
parties in accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." During fiscal 2000, we capitalized $12.0 million associated
with internal costs and $31.4 million of third-party contractual obligations and
outsourced development.
We anticipate that costs of certain development projects will continue to
be capitalized in the future and that total development expenses will increase
in subsequent periods due to the addition of personnel and increasing salaries
resulting from competitive market pressures. We are continuing ongoing internal
product enhancements in e-business and other areas, as well as integration of
such modules as sales force automation, advanced planning and scheduling, and
e-procurement. Certain of these projects utilize third-party development
alliances, such as Siebel, Ariba, webMethods, Netfish, and Extensity.
Amortization of acquired software and other intangibles. Total
amortization for fiscal 2000 resulting from our three business acquisitions
related to software, in-place workforce, customer base, and goodwill was $11.8
million, $3.2 million, $5.6 million, and $4.5 million, respectively. In fiscal
1999, total amortization was $4.6 million, $1.3 million, $1.9 million, and $1.7
million, related to software, in-place workforce, customer base, and goodwill,
respectively.
Acquired in-process research and development. IPR&D expenses were in
connection with the acquisitions of Numetrix in June 1999 and The Premisys
Corporation in February 1999. IPR&D represents the value of acquired products
that are not yet proven to be technologically feasible but have been developed
to a point where there is value associated with them in relation to potential
future revenue. Because technological feasibility was not yet proven and no
alternative future uses were believed to exist for the in-process technologies,
the assigned values were expensed immediately upon the closing dates of the
acquisitions. Aggregate IPR&D expenses recorded during fiscal 1999 were $26.1
million. No such charges were incurred with respect to the fiscal 2000
acquisition of JDE-NZ.
The most significant in-process technology acquired was in development by
Numetrix prior to the fiscal 1999 acquisition to provide an operational-level
planning and scheduling optimization solution targeted at discrete manufacturing
industries. Additionally, prior to the fiscal 1999 acquisition, a new
demand-planning module was in the process of design by Numetrix to enhance
enterprise-wide collaborative forecasting and address forecast reconciliation.
Both technologies were released in October 2000. Another in-process technology
of Numetrix, a collaborative enabler, is designed to efficiently interface the
messaging architecture among applications to allow real-time, alert-driven
collaboration. This technology is now part of J.D. Edwards advanced planning
integration project. In-process technology acquired in our purchase of The
Premisys Corporation is now functionally integrated with OneWorld and was
released in August 2000. (See "Fiscal Years Ended October 31, 1998 and 1999,"
for further details.)
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Restructuring and related charges. During fiscal 2000, the Board of
Directors approved a global restructuring plan to reduce our operating expenses
and strengthen both our competitive and financial positions. Overall expense
reductions were necessary both to lower our existing cost structure and to
reallocate resources to pursue our future operating strategies. The
restructuring plan was precipitated by declining gross margins and other
performance measures such as revenue per employee over the past several fiscal
quarters, as our headcount and operating expenses grew at a faster rate than
revenue. As discussed in prior periods, we also had incurred operating losses in
certain geographic areas. We effected the restructuring plan during the third
quarter of fiscal 2000 by eliminating certain employee positions, reducing
office space and related overhead expenses, and modifying our approach for
providing certain services to our customers. Restructuring and related charges
primarily consist of severance-related costs for the involuntarily terminated
employees, operating lease termination payments, and office closure costs. The
majority of the restructuring activity occurred during the second half of fiscal
2000, and we expect that remaining actions, such as office closures or
consolidations and lease terminations, will be completed within a one-year time
frame.
Severance-related costs include the termination payments, benefits,
outplacement, and other related costs paid to the employees terminated
worldwide. The total workforce reduction was effected through a combination of
involuntary terminations and reorganizing operations to permanently eliminate
open positions resulting from normal employee attrition. Only costs for
involuntarily terminated employees are included in the restructuring charge.
Specifically targeted were areas with opportunities for more efficient
processes that would reduce staffing, where operations were generating losses,
or where redundancy existed. We decreased our workforce by a total of 775
employees across most geographic areas and functions of our business, including
administrative, professional, and management positions. All employee
terminations occurred during the third quarter of fiscal 2000, although a
limited number of involuntarily terminated employees continued to provide
transitional services (generally 30- to 60 days from their termination date).
Salary and benefits earned during the transition period were not included in the
restructuring charge and severance packages were only provided to the 688
involuntarily terminated employees.
In addition to the decrease in employee positions, the restructuring plan
provided for reduction in office space and related overhead expenses. Office and
training facility closure and consolidation costs are the estimated costs to
close specifically identified facilities, costs associated with obtaining
subleases, lease termination costs, and other related costs, all of which are in
accordance with the restructuring plan. We closed or consolidated several
facilities worldwide, including offices in Denver, Colorado and regional offices
in the U.S.; Europe, and the Asia Pacific region. During the third quarter of
fiscal 2000, the majority of Denver-based personnel were consolidated into the
main corporate headquarters campus, with the remaining moves expected to be
completed by February 2001. Other significant reductions, such as those that
occurred in Japan and certain European countries, were substantially completed
during fiscal 2000.
We also closed or downsized several under-utilized training facilities as a
result of our modified training approach. Certain regional facilities, including
Denver, Colorado; Chicago, Illinois; Dallas, Texas; Secaucus, New Jersey;
Rutherford, New Jersey; and Toronto, Canada were closed, downsized, or
significantly reduced. These closures and reductions were completed in December
2000.
The charge for operating lease buyouts and related costs represent the
actual or estimated costs associated with the early termination of leases for
computer equipment, phones, and automobiles that were no longer necessary for
operations due to our reduced workforce and facilities.
During fiscal 2000, we wrote off certain assets, consisting primarily of
leasehold improvements, computer equipment, and furniture and fixtures that were
deemed unnecessary due to the reduction in workforce. These assets were taken
out of service and disposed of during fiscal 2000.
We recorded adjustments to reduce the restructuring provision by $2.5
million in the fourth quarter of fiscal 2000. A portion of the adjustment
relates to favorable negotiations with a vendor through which we successfully
reduced a contractual termination fee by $1.5 million. We also successfully
negotiated higher sublease income associated with leased office space and
subleased some vacated premises more quickly than anticipated for a total
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of $1.2 million. Additionally, net employee outplacement, severance, and
termination costs were increased by $200,000 for other additional costs not
anticipated in the original restructuring plan.
We expect these organizational changes to result in annual savings across
all functional areas of approximately $45.0 million to $50.0 million, allowing
us to reallocate resources to further invest in areas critical to our future
success. We believe that the restructuring plan and resource reallocation will
better allow us to continue building our leadership position in the c-commerce
market. There can be no assurance of our future level of operating expenses or
of other factors that may impact future operating results.
Other income (expense). Other income and expenses include interest and
dividend income earned on cash, cash equivalents, investments, interest expense,
foreign currency gains and losses, and other non-operating income and expenses.
During fiscal 2000, other income included an $18.9 million gain on the sale of
an equity security and a $5.7 million gain from the sale of a product line.
Interest and dividend income decreased to $15.0 million for fiscal 2000 from
$19.3 million in fiscal 1999, primarily due to lower cash and investment
balances throughout much of fiscal 2000. Included in other income and expense
were net foreign exchange transaction losses of $422,000 for fiscal 2000 and a
loss of $568,000 last fiscal year. The losses related primarily to the overall
strengthening of the U.S. dollar against European currencies.
We use hedging instruments to help offset the effects of exchange rate
changes on cash exposures from assets and liabilities denominated in foreign
currency. The hedging instruments used are forward foreign exchange contracts
with maturities of generally three months or less. All contracts are entered
into with major financial institutions. Gains and losses on these contracts are
included with foreign currency gains and losses on the transactions being hedged
and are recognized as non-operating income or expense in the period in which the
gain or loss on the underlying transaction is recognized. All gains and losses
related to foreign exchange contracts are included in cash flows from operating
activities in the consolidated statements of cash flows.
Hedging activities cannot completely protect us from the risk of foreign
currency losses due to the number of currencies in which we conduct 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 we conduct operations as
compared to the U.S. dollar, and future operating results will be affected by
gains and losses from foreign currency exposure.
We held short- and long-term investments (excluding equity securities of
certain publicly traded or privately held technology companies) that had a fair
value at October 31, 2000, of $132.4 million and a gross unrealized loss of
$509,000. During fiscal 2000, we realized losses of $747,000 from the sales of
municipal bonds. These realized losses are shown in the accompanying statement
of operations as a component of other income. In addition, during fiscal 2000,
we made equity investments in certain publicly traded or privately held
technology companies of $16.7 million, and we realized gains of $18.9 million
from the sale of a portion of our investment. These realized gains are shown in
the accompanying statement of operations as a component of other income. At
October 31, 2000, these investments had a fair value of $24.5 million and a
gross unrealized gain of $9.6 million. One of the equity securities is subject
to a lock-up provision, which expires in January 2001. Additionally, we have a
$5.9 million note receivable from a privately held company related to the sale
of a product line. The note is convertible into equity at our option upon the
closing of an initial public offering of their common stock. We may also invest
in other companies in the future. Investments in technology enterprises, and
companies with recent initial public offerings in particular, are highly
volatile. Our future results of operations could be adversely affected should
the values of these investments decline below the amounts invested by us. As a
result of the highly volatile stock market, we cannot give assurance that the
unrealized gains related to these investments will be realized or that possible
future investments that we may make will be profitable.
Other data regarding results of operations. The impact of
acquisition-related charges, restructuring and related charges, and significant
gains on our net loss and net loss per share in fiscal 1999 and fiscal 2000 are
presented below (in thousands, except per share data). There were no
acquisition-related charges, restructuring and related charges, or other
significant one-time gains and losses for fiscal 1998. This supplemental
information does not reflect our results of operations in accordance with
generally accepted accounting principles (GAAP) in
42
<PAGE> 45
the U.S., 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 2000
-------- --------
<S> <C> <C>
Net loss, as reported....................................... $(39,224) $(15,422)
Adjustments to net loss, net of tax:
Acquisition-related charges............................ 31,326 15,778
Gain on sale of product line........................... -- (3,582)
Gain on sale of equity investments..................... -- (11,904)
Restructuring and related charges...................... -- 20,075
-------- --------
Adjusted net income (loss)................................ $ (7,898) $ 4,945
======== ========
Diluted EPS, as reported.................................... $ (0.37) $ (0.14)
Adjustments to net loss, net of tax:
Acquisition-related charges............................ 0.30 0.14
Gain on sale of product line........................... -- (0.03)
Gain on sale of equity investments..................... -- (0.11)
Restructuring and related charges...................... -- 0.18
-------- --------
Adjusted diluted EPS...................................... $ (0.07) $ 0.04
======== ========
Shares used in computing adjusted EPS....................... 105,378 114,618
</TABLE>
Acquisition-related charges consisted of $25.0 million in amortization of
acquired intangibles less $9.2 million in related benefit from income tax for
fiscal 2000. Fiscal 1999 resulted in amortization of acquired intangibles of
$9.5 million and IPR&D of $26.1 million. The associated fiscal 1999 income tax
benefit was $3.6 million and $9.8 million, respectively, resulting in the
acquisition-related charges, net of tax, shown above.
After adjustments, the restructuring charge consisted of a $28.0 million
charge for fiscal 2000, and the related benefit from income tax was $7.9
million. Other items during fiscal 2000 consisted of an $11.9 million net gain
resulting from the sale of a portion of our equity investment in a technology
company and a $3.6 million net gain from the sale of a product line.
For periods in which we report a net loss, common stock equivalents such as
stock options are not included in the computation of diluted loss per share. The
effect of including common stock equivalents would be to decrease the reported
losses per share, which is anti-dilutive and not acceptable under GAAP.
Provision for (benefit from) income taxes. Our effective income tax rate
was 25% for fiscal 2000 compared to 19% for fiscal 1999. This change was due
primarily to differences in tax rates in various countries where the
restructuring costs were incurred during fiscal 2000 and certain
acquisition-related charges that reduced the overall income tax benefit for
fiscal 1999. Excluding the effect of the restructuring charges and
acquisition-related permanent differences, the rate for fiscal 1999 and fiscal
2000 was 37%.
We have available approximately $14.6 million in foreign-tax-credit
carryforwards, of which $4.8 million will expire in 2003, $8.4 million will
expire in 2004, and $1.4 million will expire in 2005. We have a U.S. net
operating loss carryforward (NOL) of approximately $270.5 million, of which
$121.2 million will expire in 2018, $52.5 million will expire in 2019, and $96.8
million will expire in 2020. Additionally, an R&D credit carryforward of
approximately $7.1 million is available, of which $3.5 million will expire in
2019 and $3.6 million will expire in 2020.
We received a benefit from the tax deductions for compensation in excess of
compensation expense recognized for financial reporting purposes. Such credit
arises from an increase in the market price of the stock under employee option
agreements between the measurement date (as defined in Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees") and the
date at which the compensation deduction for income tax purposes is
determinable. Additional paid-in capital was increased by this tax benefit of
43
<PAGE> 46
$58.3 million, $10.1 million, and $22.6 million for fiscal years 1998, 1999, and
2000, respectively, and is included in the accompanying statement of changes in
stockholders' equity.
We have net deferred tax assets of $121.6 million at October 31, 2000,
which includes a valuation allowance of $9.7 million related to foreign tax
credits. This valuation allowance was recorded because we could not utilize the
foreign tax credits in fiscal 2000 and there is sufficient uncertainty as to
whether the credits will be utilized prior to expiration. Also included in the
deferred tax asset balance at October 31, 2000, are approximately $104.4 million
in tax-effected NOLs. Approximately $77.4 million of the deferred tax asset
related to NOLs was generated due to the benefit of dispositions from employee
stock plans, which were recorded directly to stockholders equity in the
accompanying consolidated balance sheets.
Realization of the deferred tax asset associated with the NOLs is dependent
upon generating sufficient taxable income to utilize the NOLs prior to their
expiration. The minimum amount of taxable income required to realize this asset
is $302.5 million. We believe that based on available evidence, both positive
and negative, it is more likely than not that currently recorded deferred tax
assets will be fully realized based on analysis of historical results,
projections of future operating results, including the future benefits of the
current year restructuring and improved operating margins, expected dispositions
from employee stock plans, and an assessment of the market conditions that have
and are expected to affect us in the future. The carryforward periods on the
NOLs and tax credit carryforwards were also considered.
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. We believe the slowed growth was primarily due to companies purchasing
enterprise resource planning (ERP) systems prior to 1999 in anticipation of
potential systems issues associated with the year 2000. During fiscal 1999, we
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.
Geographically, the revenue mix shifted moderately toward international for
fiscal 1999 compared to fiscal 1998. The geographic areas defined as the U.S.,
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
U.S., EMEA, and the rest of the world accounted for 63%, 22%, and 15% of total
revenue, respectively. We believe this geographic shift in revenue may have been
caused by companies in the U.S. 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 fiscal 1998. The decrease
in the average transaction size was experienced with both new and existing
customers and was due to a number of factors, including a larger portion of
licenses for the Windows NT platform, which typically includes fewer users than
licenses for the UNIX or iSeries (formerly AS/400(R)) platforms. The percentage
of license activity from new customers declined to 49% in fiscal 1999 compared
to 51% in fiscal 1998. However, we expanded the number of customers by 11%
compared to the end of fiscal 1998 to over 5,500 at October 31, 1999. Customers
increasingly accepted the OneWorld applications available for Windows NT and
UNIX platforms. As an indication of OneWorld's growing acceptance on non-iSeries
platforms, 33% of license activity was from customers using the Windows NT or
UNIX platforms in fiscal 1999 compared to 16% in fiscal 1998. The remaining
portion of license activity was generated by customers using either
WorldSoftware or OneWorld for the iSeries.
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
fiscal 1998
44
<PAGE> 47
license fee revenue, which resulted in demand for implementation services.
Maintenance revenue increased during fiscal 1999 compared to fiscal 1998,
primarily as a result of our growing installed base of customers and consistent
maintenance renewal rates for existing customers. Education services revenue,
which typically trails the fluctuations in license fee revenue, decreased during
fiscal 1999 compared to fiscal 1998, primarily due to the decrease in license
fee revenue. As a percentage of total revenue, services revenue increased during
fiscal 1999 compared to fiscal 1998. This was primarily due to the timing of
services revenue in relation to license fee growth in prior periods.
The subcontracted consulting and education services revenue from service
providers increased 19% for fiscal 1999 over fiscal 1998, while direct services
increased 5% in fiscal 1999 over fiscal 1998. The services revenue generated
through subcontracted work accounted for 48% for fiscal 1999 of our consulting
and education services revenue compared to 46% for fiscal 1998.
Cost of license fees. 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 in fiscal 1998 primarily due to lower license revenue and resulting
decreases in royalty expenses and service provider commissions. Amortization of
internally developed capitalized software costs decreased 20% in fiscal 1999
compared to fiscal 1998 as certain software development costs were fully
amortized during fiscal 1998.
Gross margin on license fee revenue varies from year to year depending on
the revenue volume in relation to certain fixed costs, such as the amortization
of internally developed capitalized software development costs, and the portion
of 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 primarily due to lower
royalty expenses and service provider commissions.
Cost of 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 service provider 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 education services revenue was generated through
subcontracted work, which increased the related costs compared to 1998. 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 growth, the utilization
rates for our consulting organization declined in fiscal 1999 compared to fiscal
1998.
Sales and marketing. 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 our expanded marketing activities. The total number of sales
and marketing personnel increased 24% as of October 31, 1999, compared to
October 31, 1998, primarily the result of adding personnel in direct sales and
support positions through the first quarter of fiscal 1999 to meet our future
sales goals, support the new vertical industry sales force alignment, and
address the Windows NT and UNIX market growth opportunities from the OneWorld
version of application suites.
General and administrative. 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 employees in
fiscal year 1999 compared to fiscal 1998. 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. R&D 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 fiscal 1998. This increase in personnel
included approximately 60 employees from the acquisitions of Numetrix and The
Premisys Corporation. Development resources primarily were devoted to
enhancements of both WorldSoftware and OneWorld application suites
45
<PAGE> 48
during both fiscal 1998 and 1999. We ceased capitalizing OneWorld development
costs during fiscal 1997, and there were no internal software development costs
capitalized during fiscal 1998 or 1999.
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 and The Premisys Corporation. IPR&D consists
of those products that are not yet proven to be technologically feasible but
have been developed to a point where there is value associated with them in
relation to potential future revenue. Because technological feasibility was not
yet proven and no alternative future uses 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.
The Numetrix acquisition was accounted for as a purchase, and we retained
an independent appraiser to assist with assigning fair values to the intangible
assets. Specifically identified intangible assets included 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
R&D on a new discrete scheduling product that represented 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 was being designed to offer an
operational-level, discrete planning and scheduling solution targeted at
the middle market. At the time, Numetrix's solution in the market relied
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 such industries 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 development was estimated to be nearly 90% complete.
- A new demand-planning module was being designed to enhance
enterprise-wide collaborative forecasting and address forecast
reconciliation. This application was intended to be marketed as a
component of both the Numetrix product suite and the new discrete
product. New features of this product included 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, the module was less than 10% complete.
- Another in-process technology, a collaborative enabler, was designed to
efficiently interface the messaging architecture among applications to
allow real-time, alert-driven collaboration. The product
46
<PAGE> 49
automatically detects changes to data in other applications and
instantaneously processes the impact of the changes among applications.
Designed to integrate into the Numetrix product suite solution, it
offered 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.
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 R&D 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 was
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 R&D project as complete or under development was made in accordance with
the guidelines of 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 R&D 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 was deducted where appropriate for applications relying on this
existing technology. Income taxes were deducted at the estimated effective tax
rate. 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 fiscal 1999 through Numetrix's fiscal year
ending February 28, 2009. Based on historical data provided by the 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 under development targeted the much larger market of mid size
manufacturing companies in addition to our 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
47
<PAGE> 50
expected to be at a break-even point in fiscal 1999 and gradually increase
through Numetrix's fiscal year ending February 28, 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.
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 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 fiscal 1999 through fiscal 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 technology 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
expense assumptions showed significant increases, gradually falling 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 was expected to grow over two years, but then gradually decline as the
developed and in-process products mature.
Other income (expense). Other income and expense includes interest and
dividend income earned on cash, cash equivalents, 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. Other income also increased due to proceeds from a legal
judgment received during the second quarter of fiscal 1999. During late fiscal
1998, we broadened our foreign exchange hedging activities to help offset the
effects of exchange rate changes on cash exposures from receivables and payables
denominated in foreign currencies. Net of hedging activities, foreign currency
losses decreased to $568,000 for fiscal 1999 from $2.8 million in fiscal 1998
primarily due to an improved hedging program.
Provision for (benefit from) income taxes. The effective income tax rate
was 18.6% for fiscal 1999 compared to 37% 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 1999. Excluding the effect of the acquisition-related permanent
differences, the rate for fiscal 1999 was 37%.
48
<PAGE> 51
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 our 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 our opinion, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such
information. These unaudited quarterly results should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this Annual Report on Form 10-K. The consolidated results of operations for
any quarter are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
1999 1999 1999 1999 2000 2000 2000 2000
----------- --------- -------- ----------- ----------- --------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS:
Revenue:
License fees............. $ 69,599 $ 67,204 $ 74,949 $101,065 $ 83,287 $ 81,742 $116,675 $137,399
Services................. 153,338 164,387 157,120 156,569 148,419 149,307 144,441 139,795
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue...... 222,937 231,591 232,069 257,634 231,706 231,049 261,116 277,194
Costs and expenses:
Cost of license fees..... 5,291 7,421 7,505 9,665 12,904 14,122 15,457 17,480
Cost of services......... 99,462 106,605 101,778 100,448 88,571 92,139 96,319 89,052
Sales and marketing...... 69,413 83,347 89,198 92,243 81,245 91,790 94,222 99,793
General and
administrative......... 24,389 25,487 21,233 23,132 22,934 25,218 25,319 24,085
Research and
development............ 22,715 28,996 27,096 30,399 29,364 28,728 28,787 29,987
Amortization of acquired
software and other
acquired intangibles... -- 350 3,234 5,904 5,878 6,392 6,470 6,304
Acquired in-process
research and
development............ -- 2,141 24,000 -- -- -- -- --
Restructuring and other
related charges........ -- -- -- -- -- -- 30,113 (2,097)
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses......... 221,270 254,347 274,044 261,791 240,896 258,389 296,687 264,604
Operating income (loss).... 1,667 (22,756) (41,975) (4,157) (9,190) (27,340) (35,571) (12,590)
Other income, net.......... 5,107 6,249 3,337 4,363 8,949 23,637 3,586 2,707
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes.................... 6,774 (16,507) (38,638) 206 (241) (3,703) (31,985) 15,297
Income tax provision
(benefit)................ 2,506 (6,107) (5,416) 76 (89) (1,370) (9,382) 5,631
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).......... $ 4,268 $(10,400) $(33,222) $ 130 $ (152) $ (2,333) $(22,603) $ 9,666
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
common share:
Basic.................... $ 0.04 $ (0.10) $ (0.31) $ 0.00 $ 0.00 $ (0.02) $ (0.21) $ 0.09
======== ======== ======== ======== ======== ======== ======== ========
Diluted.................. $ 0.04 $ (0.10) $ (0.31) $ 0.00 $ 0.00 $ (0.02) $ (0.21) $ 0.08
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing
per share amounts:
Basic.................... 103,111 105,333 106,181 106,889 107,649 109,763 110,024 110,066
Diluted.................. 111,549 105,333 106,181 112,194 107,649 109,763 110,024 114,657
</TABLE>
49
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
1999 1999 1999 1999 2000 2000 2000 2000
----------- --------- -------- ----------- ----------- --------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
License fees............. 31.2% 29.0% 32.3% 39.2% 35.9% 35.4% 44.7% 49.6%
Services................. 68.8 71.0 67.7 60.8 64.1 64.6 55.3 50.4
-------- -------- -------- -------- -------- -------- -------- --------
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..... 2.4 3.2 3.2 3.7 5.6 6.1 5.9 6.3
Cost of services......... 44.6 46.0 43.9 39.0 38.2 39.9 36.9 32.1
Sales and marketing...... 31.2 36.1 38.4 35.8 35.0 39.7 36.1 36.0
General and
administrative......... 10.9 11.0 9.1 9.0 9.9 10.9 9.7 8.7
Research and
development............ 10.2 12.5 11.7 11.8 12.7 12.5 11.0 10.8
Amortization of acquired
software and other
acquired intangibles... -- 0.1 1.4 2.3 2.5 2.7 2.5 2.3
Acquired in-process
research and
development............ -- 0.9 10.3 -- -- -- -- --
Restructuring and other
related charges........ -- -- -- -- -- -- 11.5 (0.7)
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses......... 99.3 109.8 118.0 101.6 103.9 111.8 113.6 95.5
Operating income (loss).... 0.7 (9.8) (18.0) (1.6) (3.9) (11.8) (13.6) 4.5
Other income (expense),
net...................... 2.3 2.7 1.4 1.7 3.8 10.2 1.4 1.0
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes.................... 3.0 (7.1) (16.6) 0.1 (0.1) (1.6) (12.2) 5.5
Income tax provision
(benefit)................ 1.1 (2.6) (2.3) 0.0 (0.0) (0.6) (3.5) 2.0
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).......... 1.9% (4.5)% (14.3)% 0.1% (0.1)% (1.0)% (8.7)% 3.5%
======== ======== ======== ======== ======== ======== ======== ========
Gross margin on license fee
revenue.................. 92.4% 89.0% 90.0% 90.4% 84.5% 82.7% 86.8% 87.3
Gross margin on service
revenue.................. 35.1% 35.1% 35.2% 35.8% 40.3% 38.3% 33.3% 36.3
</TABLE>
We believe 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, we believe that in some future quarter our
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 our business or generally, it is
likely that the market price of our common stock would be materially adversely
affected. See "Factors Affecting The Company's Business, Operating Results, and
Financial Condition -- Our quarterly financial results are subject to
significant fluctuations and a failure to meet expectations could adversely
impact the price of our stock."
50
<PAGE> 53
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2000, our principal sources of liquidity consisted of
$180.7 million of cash and cash equivalents, $156.9 million of short- and
long-term investments, and a $100.0 million unsecured, revolving line of credit
that can be utilized for working capital requirements and other general
corporate purposes. As of October 31, 2000, we had working capital of $157.7
million, and no amounts were outstanding under our bank line of credit.
Short-term deferred revenue and customer deposits totaling $135.4 million are
included in determining this amount. The short-term deferred revenue primarily
represents annual maintenance payments billed to customers and recognized
ratably as revenue over the support service period. Without the short-term
deferred revenue and customer deposits, working capital would have been $293.1
million; including long-term investments, working capital would have been $400.6
million.
During fiscal 2000, we liquidated a portion of our portfolio of marketable
securities prior to their maturity dates in order to settle certain equity
contracts. As a result, our entire held-to-maturity portfolio was reclassified
to available for sale as defined in SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, at October 31, 2000,
all investments were carried at fair value as determined by their quoted
marketprices and included as appropriate in either short- or long-term
investments. All unrealized gains or losses were included, net of tax, in
stockholders' equity as a component of accumulated other comprehensive income.
At October 31, 1999, all investments were classified as held-to-maturity and
were carried at amortized cost, accordingly.
We calculate accounts receivable days sales outstanding (DSO) on a "gross"
basis by dividing the accounts receivable balance at the end of the quarter by
revenue recognized for the quarter multiplied by 90 days. The impact of deferred
revenue is not included in the computation. Calculated as such, DSO was 81 days
as of October 31, 2000, compared to 83 days as of the previous fiscal year end.
Our DSO can fluctuate depending on 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 -- Our quarterly financial
results are subject to significant fluctuations and a failure to meet
expectations could adversely impact the price of our stock."
We generated cash flow from our operations of $4.3 million for fiscal 2000,
$12.3 million for fiscal 1999, and $154.7 million for fiscal 1998, respectively.
The decrease in operating cash flow between fiscal 2000 and fiscal 1999 was due
primarily to restructuring related liabilities and contractual obligations to
third parties for products and source code rights, offset somewhat by a
reduction in the net loss in fiscal 2000 resulting from increased license fee
revenue and gains on sales of equity investments and a product line. The
decrease in operating cash flow between fiscal 1999 and fiscal 1998 was due
primarily to the fiscal 1999 net loss before acquired IPR&D and cash payments
for accrued liabilities, which was offset somewhat by collections of accounts
receivable.
We generated $68.8 million of cash from investing and financing activities
for fiscal 2000 compared to using $79.8 million for fiscal 1999 and $197.2
million in fiscal 1998. The increase from the prior years was primarily the
result of the liquidation and sale of a portion of our portfolio of marketable
securities and a portion of the common stock of a publicly traded technology
company. The proceeds were primarily used to fund the $90.5 million repurchase
of 2.5 million shares of our common stock as a result of the settlement of
equity repurchase contracts, to invest in $24.8 million of capitalized software
development, and to acquire JDE-NZ for $10.1 million during fiscal 2000. In
fiscal 1999, net cash payments totaled $97.4 million for the Numetrix and The
Premisys Corporation acquisitions. During fiscal 1998, the primary investing
activity was the purchase of short- and long-term debt and equity securities
with cash from the initial public offering. During each of these fiscal years,
proceeds from the issuance of common stock under common stock options and the
Employee Stock Purchase Plan (ESPP) provided additional funding. During each of
these fiscal years, we purchased property and equipment that was necessary to
support operations.
We have a stock repurchase plan which was designed to partially offset the
effects of share issuances under our stock option plans and ESPP. The Board of
Directors authorized the repurchase up to 8 million shares of our common stock
under this plan. During fiscal 2000, we entered into equity derivative contracts
for the purchase of 5.2 million common shares in accordance with the share
repurchase plan, and we settled contracts for the
51
<PAGE> 54
repurchase of 2.5 million shares for a total of $90.5 million in cash.
Approximately 525,000 of the repurchased shares were reissued to fund the June
30, 2000 ESPP purchase. As of October 31, 2000, approximately 1.9 million
remaining shares were held as treasury stock to fund future stock issuances. The
treasury shares are recorded at cost and reissuances are accounted for by a
first-in, first-out method.
At October 31, 2000, we held forward contracts requiring the purchase at a
future date of 2.7 million shares of common stock at an average cost of $32.17
per share. Forward purchase contracts require a full physical settlement and the
aggregate redemption cost of $89.1 million is included in the accompanying
balance sheet in temporary equity with a corresponding decrease in additional
paid-in capital. The equity instruments are exercisable only at their dates of
expiration. At October 31, 2000 the dates of expiration ranged from December
2000 to September 2001. In December 2000, the Company rolled forward 502,500
shares expiring in December 2000 to December 2001, resulting in a new expiration
range of March 2001 to December 2001. The counter-party to the contracts has the
right to require an early settlement based on the market price of J.D. Edwards'
common stock as stipulated in the contracts. Additionally, a decline in our
common stock price below the stipulated price in the contracts may trigger the
requirement to collateralize the outstanding exposure. 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 our
stock, general market conditions, and other factors. Stock repurchases may be
effected from time to time at our discretion through forward, put and call
transactions, or open market purchases. See "Factors Affecting the Company's
Business, Operating Results, and Financial Condition -- A decline in the price
of our common stock beyond certain levels as stipulated in the equity forward
contracts may require an acceleration of cash requirements."
We lease our corporate headquarters office buildings that were constructed
on land we own. The lessor, a wholly owned subsidiary of a bank, and a
syndication of banks collectively financed $121.2 million in purchase and
construction costs through a combination of debt and equity. We guarantee the
residual value of each building up to approximately 85% of its original cost.
Our lease obligations are based on a return on the lessor's costs. We have
elected to reduce the interest rate used to calculate lease expense by
collateralizing up to 97% of the financing arrangements with investments
consistent with our investment policy. We may withdraw the funds used as
collateral at our sole discretion provided it is not in default under the lease
agreement. Investments designated as collateral, including a required coverage
margin, are held in separate investment accounts. At October 31, 1999 and 2000,
investments totaling $121.4 million and $123.3 million were designated as
collateral for these leases, respectively. The lease agreement requires that we
remain in compliance with certain affirmative and negative covenants and
representations and warranties, including certain defined financial covenants.
At October 31, 1999 and 2000, we were in compliance with the covenants.
We believe the cash and cash equivalents balance, short- and long-term
investments, funds generated from operations, and amounts available under
existing credit facilities will be sufficient to meet cash needs for at least
the next 12 months. We may use a portion of short- and long-term investments to
make strategic investments in other companies, acquire businesses, products, or
technologies that are complementary to our business, or settle equity contracts
to acquire common stock in the future. There can be no assurance, however, that
we will not require additional funds to support working capital requirements or
for other purposes, in which case we 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 us and would
not result in additional dilution to our stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," was issued in June 1998 and requires 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. In addition, SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
was issued in June 2000 and amends SFAS No. 133 to provide additional
implementation guidance related to SFAS No. 133. We will adopt SFAS No. 133 in
the first quarter of fiscal 2001 and are currently continuing to assess the
implications of SFAS No. 133 and SFAS No. 138. We anticipate that the adoption
will not have a material impact on our consolidated financial statements or
results of operations.
52
<PAGE> 55
The SEC issued SAB No. 101, "Revenue Recognition in Financial Statements,"
in December 1999. SAB No. 101, as amended, provides further interpretive
guidance for public companies on the recognition, presentation, and disclosure
of revenue in financial statements. In June 2000, the SEC issued SAB No. 101B,
delaying the implementation of SAB No. 101 until the fourth quarter of fiscal
2001. We have evaluated the impact of SAB No. 101 and believe that it will not
have a material impact on our consolidated financial position, results of
operations, or current licensing or revenue recognition practices.
In March 2000, the Emerging Issues Task Force (EITF) reached a consensus on
the application of EITF Issue No. 96-13, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," with
Issue No. 00-7, "Equity Derivative Transactions that Require Net Cash Settlement
if Certain Events Outside the Control of the Issuer Occur" (EITF 00-7). Equity
derivatives that contain any provision that could require net cash settlement
(except upon the complete liquidation of the Company) must be marked to fair
value through earnings under EITF 00-7. The EITF reached a consensus on Issue
No. 00-19, "Determination of Whether Share Settlement Is Within the Control of
the Issuer for Purposes of Applying Issue No. 96-13, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock,"' (EITF 00-19) in September 2000. EITF 00-19 addresses questions
regarding the application of EITF 00-7 and sets forth a model to be used to
determine whether equity derivative contracts could be recorded as equity. Under
the transition provisions of EITF 00-19, all contracts existing prior to the
date of the consensus are grandfathered until June 30, 2001, with cumulative
catch-up adjustment to be recorded at that time. We believe that the equity
derivative contracts that may remain unsettled at June 30, 2001, if any, will be
in accordance with the requirements of EITF 00-19 and do not anticipate that
such adoption will have a material impact on our consolidated financial
statements or results of operations. See "Factors Affecting the Company's
Business, Operating Results, and Financial Condition -- A decline in the price
of our common stock beyond certain levels as stipulated in the equity forward
contracts may require an acceleration of cash requirements."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of operations, we are 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 our market risks.
Foreign currency exchange rates. Operations outside the U.S. expose us 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. The exposure
to currency exchange rate changes is diversified due to the number of different
countries in which we conduct business. We operate outside the U.S. primarily
through wholly owned subsidiaries in Europe, Africa, Asia-Pacific, Canada, and
Latin America. These foreign subsidiaries use the local currency or, more
recently, the euro as their functional currency because revenue is generated and
expenses are incurred in such currencies.
A substantial portion of our total revenue is derived from international
sales and is therefore subject to the related risks, including general economic
conditions in each country, overlap of different tax structures, difficulty of
managing an organization spread over various countries, changes in regulatory
requirements, compliance with a variety of foreign laws and regulations, longer
payment cycles, and volatilities of exchange rates in certain countries. A
significant portion of our business is conducted in currencies other than the
U.S. dollar. During fiscal 2000, 35% of our total revenue was generated from
international operations, and the net assets of our foreign operations totaled
2% of consolidated net assets as of October 31, 2000. Changes in the value of
major foreign currencies relative to the value of the U.S. dollar adversely
affected our total revenue during fiscal 2000, primarily as a result of the
weakening of the euro exchange rates against the U.S. dollar. Based on foreign
exchange rates in effect at the beginning of our fiscal year compared to actual
rates, total revenue would have been $21.7 million higher than the reported $1.0
billion, or an 8% increase over fiscal 1999 compared to the reported 6%
increase. We do not enter into foreign exchange contracts to hedge the exposure
of currency revaluation in operating results. Foreign exchange rates could
continue to adversely affect our total revenue and results of operations
throughout fiscal 2001 if the U.S. dollar strengthens relative to foreign
currencies.
53
<PAGE> 56
In addition to the above, we have balance sheet exposure related to foreign
net asset and forward foreign exchange contracts. We enter 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 us from the risk of foreign
currency losses due to the number of currencies in which we conduct 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 we conduct operations as
compared to the U.S. dollar, and future operating results will continue to be
affected to by gains and losses from foreign currency exposure.
We prepared sensitivity analyses of our exposures from foreign net asset
and forward foreign exchange contracts as of October 31, 2000, and our exposure
from anticipated foreign revenue during fiscal 2001 to assess the impact of
hypothetical changes in foreign currency rates. Our analysis assumed a 10%
adverse change in foreign currency rates in relation to the U.S. dollar. Based
on the results of the forward foreign exchange contract analyses, a 10% adverse
change in foreign exchange rates from the October 31, 2000, rates would not
result in a material impact to our results of operations, cash flows, or
financial condition for the next fiscal year.
Interest rates. Our portfolio of investments is subject to interest rate
fluctuations. Investments, including cash equivalents, consist of U.S.
government, state, municipal, and corporate debt securities with maturities of
up to 30 months, as well as money market mutual funds and corporate equity
securities. We classify all investments in marketable securities as available
for sale and these investments were carried at fair value as determined by their
quoted market prices. Unrealized gains or losses were included, net of tax, as a
component of accumulated other comprehensive income. Additionally, we have lease
obligations calculated as a return on the lessor's costs of funding based on the
London Interbank Offered Rate and adjusted from time to time to reflect any
changes in our leverage ratio. Changes in interest rates could impact our
anticipated interest income and lease obligations or could impact the fair
market value of our investments.
We prepared sensitivity analyses of our interest rate exposures and our
exposure from anticipated investment and borrowing levels for fiscal 2000 to
assess the impact of hypothetical changes in interest rates. Based on the
results of these analyses, a 10% adverse change in interest rates from the
October 31, 2000, rates would not have a material adverse effect on the fair
value of investments and would not materially impact our results of operations,
cash flows, or financial condition for the fiscal year ending October 31, 2001.
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 titled "Quarterly Results of
Operations/Supplementary Financial Information."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
54
<PAGE> 57
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 titled
"Information About Nominees and Other Directors," "Directors' Compensation," and
"Section 16(a) Beneficial Ownership Compliance" in the Company's proxy statement
for the 2001 Annual Meeting of Stockholders (the 2001 Proxy Statement) to be
filed with the Commission within 120 days after the end of the Company's fiscal
year ended October 31, 2000, 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 titled "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 titled
"Compensation of Executive Officers" in the Company's 2001 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 titled "Beneficial Owners and Management's
Ownership of J.D. Edwards' Stock" in the Company's 2001 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 titled "Certain Relationships and Related Transactions" in the
Company's 2001 Proxy Statement.
PART IV
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>
55
<PAGE> 58
2. Consolidated Financial Statements Schedules.
The following financial statement schedule of the Company for each of
the years ended October 31, 1998, 1999, and 2000, is filed as part of this
Form 10-K and should be read in conjunction with the Consolidated Financial
Statements, and the related notes thereto, of the Company.
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts........... S-1
</TABLE>
Schedules other than the one 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, 2000.
56
<PAGE> 59
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
9th day of January 2001.
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 9, 2001, on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ C. EDWARD MCVANEY President, Chief Executive Officer, and
----------------------------------------------------- Director (principal executive officer)
C. Edward McVaney
/s/ RICHARD E. ALLEN Chief Financial Officer, Executive 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/ 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>
57
<PAGE> 60
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 55 present fairly, in all material
respects, the financial position of J.D. Edwards & Company and its subsidiaries
at October 31, 1999 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 2000, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a) (2) on page 56 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Broomfield, Colorado
November 30, 2000
F-1
<PAGE> 61
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $113,341 $180,674
Short-term marketable securities and other investments.... 62,546 49,434
Accounts receivable, net of allowance for doubtful
accounts of $12,000 and $14,000 at October 31, 1999 and
2000, respectively..................................... 236,216 247,919
Other current assets...................................... 34,936 59,205
-------- --------
Total current assets.............................. 447,039 537,232
Long-term investments in marketable securities.............. 246,564 107,458
Property and equipment, net................................. 86,332 83,677
Non-current portion of deferred income taxes................ 82,572 122,537
Software costs, net......................................... 31,657 61,352
Other assets, net........................................... 46,364 38,785
-------- --------
$940,528 $951,041
======== ========
LIABILITIES, COMMON SHARES SUBJECT TO REPURCHASE,
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 46,004 $ 59,591
Unearned revenue and customer deposits.................... 132,738 135,445
Accrued liabilities....................................... 162,635 184,542
-------- --------
Total current liabilities......................... 341,377 379,578
Unearned revenue, net of current portion, and other......... 6,431 11,352
-------- --------
Total liabilities................................. 347,808 390,930
Commitments and contingencies (Note 11)
Common shares subject to repurchase, at redemption amount... -- 89,113
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none outstanding........................... -- --
Common stock, $.001 par value; 300,000,000 shares
authorized; 107,109,494 issued and outstanding as of
October 31, 1999; 112,034,460 issued and 110,086,555
outstanding as of October 31, 2000..................... 107 112
Additional paid-in capital................................ 456,387 416,716
Treasury stock, at cost; 1,947,905 shares as of October
31, 2000............................................... -- (71,087)
Deferred compensation..................................... (283) (88)
Retained earnings......................................... 138,100 122,678
Accumulated other comprehensive income (loss): unrealized
gains (losses) on equity securities and foreign
currency translation adjustments, net.................. (1,591) 2,667
-------- --------
Total stockholders' equity........................ 592,720 470,998
-------- --------
$940,528 $951,041
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 62
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
License fees.............................................. $ 386,081 $ 312,817 $ 419,103
Services.................................................. 547,901 631,414 581,962
--------- --------- ---------
Total revenue..................................... 933,982 944,231 1,001,065
Costs and expenses:
Cost of license fees...................................... 43,404 29,882 59,963
Cost of services.......................................... 349,689 408,293 366,081
Sales and marketing....................................... 261,400 334,201 367,050
General and administrative................................ 83,450 94,241 97,556
Research and development.................................. 89,401 109,206 116,866
Amortization of acquired software and other acquired
intangibles............................................ -- 9,488 25,044
Acquired in-process research and development.............. -- 26,141 --
Restructuring and other related charges................... -- -- 28,016
--------- --------- ---------
Total costs and expenses.......................... 827,344 1,011,452 1,060,576
Operating income (loss)..................................... 106,638 (67,221) (59,511)
Other income (expense):
Interest and dividend income.............................. 15,294 19,324 14,980
Gain on sales of equity investments and product line...... -- -- 24,582
Foreign currency losses and other, net.................... (3,729) (268) (683)
--------- --------- ---------
Income (loss) before income taxes........................... 118,203 (48,165) (20,632)
Provision for (benefit from) income taxes................. 43,735 (8,941) (5,210)
--------- --------- ---------
Net income (loss)........................................... $ 74,468 $ (39,224) $ (15,422)
========= ========= =========
Net income (loss) per common share:
Basic..................................................... $ 0.76 $ (0.37) $ (0.14)
========= ========= =========
Diluted................................................... $ 0.68 $ (0.37) $ (0.14)
========= ========= =========
Shares used in computing per share amounts:
Basic..................................................... 98,264 105,378 109,376
Diluted................................................... 109,993 105,378 109,376
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 63
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
(INCLUDES SHARES ACCUMULATED
SUBJECT TO REPURCHASE) ADDITIONAL TREASURY STOCK OTHER
---------------------- PAID-IN --------------------- DEFERRED RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION EARNINGS INCOME (LOSS)
------------ ------- ---------- ---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 31,
1997.................... 92,822,186 $ 93 $294,278 -- $ -- $(389) $102,856 $ 23
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 --
Change in cumulative
translation
adjustment.............. -- -- -- -- -- -- -- 337
----------- ---- -------- ---------- -------- ----- -------- -------
Balance, October 31,
1998.................... 102,681,608 103 406,886 -- -- (677) 177,324 360
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) --
Change in cumulative
translation
adjustment.............. -- -- -- -- -- -- -- (1,951)
----------- ---- -------- ---------- -------- ----- -------- -------
Balance, October 31,
1999.................... 107,109,494 107 456,387 -- -- (283) 138,100 (1,591)
Stock option exercises,
issuances under employee
stock purchase plan and
other................... 4,924,966 5 26,488 524,595 19,399 195 -- --
Adjustment for redemption
amount of stock
repurchase contracts.... -- -- (89,113) -- -- -- -- --
Repurchase of shares of
common stock under
repurchase contracts,
net..................... -- -- 430 (2,472,500) (90,486) -- -- --
Tax benefit from stock
compensation............ -- -- 22,524 -- -- -- -- --
Net loss.................. -- -- -- -- -- -- (15,422) --
Unrealized gains on equity
securities, net......... -- -- -- -- -- -- -- 9,240
Change in cumulative
translation
adjustment.............. -- -- -- -- -- -- -- (4,982)
----------- ---- -------- ---------- -------- ----- -------- -------
Balance, October 31,
2000.................... 112,034,460 $112 $416,716 (1,947,905) $(71,087) $ (88) $122,678 $ 2,667
=========== ==== ======== ========== ======== ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 64
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss)........................................ $ 74,468 $ (39,224) $ (15,422)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.......................................... 22,701 25,421 31,039
Amortization of intangible assets and securities
premiums or discounts............................... 9,941 18,376 27,992
Gain on sale of product line.......................... -- -- (5,686)
Gain on sale of investments........................... -- -- (18,896)
Benefit from deferred income taxes.................... (1,933) (18,535) (14,050)
Acquired in-process research and development.......... -- 26,141 --
Other................................................. 3,433 4,965 6,993
Changes in operating assets and liabilities:
Accounts receivable, net.............................. (93,096) 25,212 (17,247)
Other assets.......................................... (11,744) (6,307) (23,944)
Accounts payable...................................... 25,361 (14,843) 14,250
Unearned revenue and customer deposits................ 48,471 (11,452) 7,511
Accrued liabilities................................... 77,119 2,558 11,783
--------- --------- ---------
Net cash provided by operating activities........ 154,721 12,312 4,323
Investing activities:
Purchase of marketable securities and other
investments........................................... (289,999) (284,284) (108,419)
Proceeds from sales or maturities of investments in
marketable securities................................. 73,481 322,322 292,595
Purchase of property and equipment and other, net........ (36,270) (52,019) (31,824)
Payment for purchase of acquired companies, net of cash
acquired.............................................. -- (97,378) (10,151)
Proceeds from sale of assets and other, net.............. 7,728 28 --
Capitalized software costs............................... -- -- (24,755)
--------- --------- ---------
Net cash (used in) provided by investing
activities..................................... (245,060) (111,331) 117,446
Financing activities:
Proceeds from issuance of common stock................... 47,824 31,568 41,829
Repurchase of common stock............................... -- -- (90,486)
--------- --------- ---------
Net cash provided by (used in) financing
activities..................................... 47,824 31,568 (48,657)
Effect of exchange rate changes on cash.................... 1,193 (2,323) (5,779)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... (41,322) (69,774) 67,333
Cash and cash equivalents at beginning of period........... 224,437 183,115 113,341
--------- --------- ---------
Cash and cash equivalents at end of period................. $ 183,115 $ 113,341 $ 180,674
========= ========= =========
Supplemental disclosure of other cash and non-cash
investing and financing transactions:
Interest paid............................................ $ 843 $ 868 $ 135
Income taxes paid........................................ 12,447 22,717 5,476
Retirement savings plan contribution funded with common
stock................................................. 6,050 4,694 2,782
Common stock issued for acquired company................. -- 3,166 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 65
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
J.D. Edwards (the Company) is a leading provider of agile, collaborative
solutions for the Internet economy. The Company's open solutions give
organizations the freedom to choose how they assemble internal applications and
how they collaborate with partners and customers across the supply chain to
increase competitive advantage. For more than 20 years, J.D. Edwards has
developed, marketed, and supported innovative, flexible solutions essential to
running complex and fast-moving multi-national organizations -- helping over
6,000 customers of all sizes leverage existing investments and benefit from new
technologies.
The Company distributes, implements, and supports products worldwide
through 60 offices and nearly 400 third-party business partners, including
sales, consulting, and outsourcing partners with offices throughout the world.
J.D. Edwards' customers use the Company's software at over 9,400 sites in more
than 100 countries.
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 in accordance with
accounting principles generally accepted in the U.S. Certain amounts in the
prior years' consolidated financial statements have been reclassified to conform
to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. 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, Cash Equivalents, and Investments
The Company's investment portfolio consists of investments classified as
cash equivalents, short-term investments, or 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. Short- and long-term investments
consist of U.S. government, state, municipal, and corporate debt securities with
maturities of up to 30 months, as well as money market mutual funds and
corporate equity securities. During fiscal 2000, the Company liquidated a
portion of its portfolio of marketable securities prior to their maturity dates
in order to settle certain equity contracts. As a result, the Company's entire
held-to-maturity portfolio was reclassified to available for sale as defined in
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Accordingly, at October 31,
2000, all investments were carried at fair value as determined by their quoted
market prices and included as appropriate in either short- or long-term
investments. All unrealized gains or losses were included, net of tax, in
stockholders' equity as a component of accumulated other comprehensive income.
At October 31, 1999, all investments were classified as held-to-maturity and
accordingly were carried at amortized cost. The aggregate book value of the
held-to-maturity portfolio at the time of the reclassification was approximately
$205.5 million, and the gross aggregate unrealized loss was approximately $1.8
million.
The Company's short- and long-term investments (excluding equity securities
of certain publicly traded or privately held technology companies) had a fair
value at October 31, 2000, of $132.4 million and a gross unrealized loss of
$509,000. During fiscal 2000, the Company realized losses of $747,000 from the
sales of certain municipal bonds. These realized losses are shown in the
accompanying statement of operations as a component of other income. At October
31, 1999 and 2000, $1.8 million and $14.6 million, respectively, of the total
investments were foreign mutual funds and other foreign short- and long-term
investments.
F-6
<PAGE> 66
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, during fiscal 2000 the Company invested $16.7 million in the
equity securities of certain publicly traded or privately held technology
companies. The Company classifies these investments as available for sale and
accounts for them as described above. At October 31, 2000, the aggregate fair
value of these investments was $24.5 million, resulting in a gross unrealized
gain of $9.6 million. During fiscal 2000, the Company realized gains of $18.9
million on the sale of certain investments. These realized gains are shown in
the accompanying statement of operations as a component of other income. One of
the investments is subject to a lock-up provision, which expires in January
2001.
The amortized cost basis, aggregate fair value, and unrealized gains or
losses for the Company's cash, cash equivalents, short- and long-term investment
portfolio is presented below. For fiscal 2000, the unrealized gains and losses
are included net of tax in stockholders' equity as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED AGGREGATE UNREALIZED UNREALIZED
COST BASIS FAIR VALUE GAINS LOSSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OCTOBER 31, 1999:
Debt securities issued by states of the
United States and political subdivisions
of the states............................ $190,736 $190,340 $ -- $ 396
Corporate debt securities.................. 73,675 73,068 -- 607
Debt securities issued by the United States
Treasury and other United States
government agencies...................... 67,716 67,414 -- 302
Other debt securities...................... 20,386 20,386 -- --
Cash....................................... 69,938 69,938 -- --
-------- -------- ------- ------
Total cash, cash equivalents, and
investments.................... $422,451 $421,146 $ -- $1,305
======== ======== ======= ======
OCTOBER 31, 2000:
Debt securities issued by the United States
Treasury and other United States
government agencies...................... $ 51,739 $ 51,554 $ -- $ 185
Corporate debt securities.................. 95,566 95,236 -- 330
Money market funds......................... 80,622 80,622 -- --
Debt securities issued by states of the
United States and political subdivisions
of the states............................ 15,333 15,321 -- 12
Corporate equity securities................ 9,203 24,510 15,307 --
Other debt and equity securities........... 8,559 8,559 -- --
Cash....................................... 61,764 61,764 -- --
-------- -------- ------- ------
Total cash, cash equivalents, and
investments.................... $322,786 $337,566 $15,307 $ 527
======== ======== ======= ======
</TABLE>
In connection with certain lease transactions discussed in Note 11,
management has elected to reduce the interest rate used to calculate lease
expense by collateralizing up to 97% of the financing arrangements with certain
of its investments. The Company may withdraw the collateral at its sole
discretion, provided it is not in default under the lease agreement. At October
31, 1999 and 2000, marketable securities totaling $121.4 million and $123.3
million, respectively, were designated as collateral for these leases.
F-7
<PAGE> 67
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment and Long-lived Assets
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, two to three
years for computer equipment, and three years for internal-use software.
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.
Capitalized Software Research and Development Costs
The Company capitalizes internally developed software costs and software
purchased from third parties in accordance with SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." The
Company's internal software costs include application and tools development,
translation, and localization costs incurred in producing software to be
licensed to customers. The Company also may contract with third parties to
develop software that will be licensed to customers. In addition, from time to
time the Company purchases source code or product rights from third parties that
will be integrated with the Company's software. The associated fees paid to
third parties are included as a component of capitalized internal software
costs. Capitalization of development costs related to these 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, or in certain cases
where a detailed program design has not been completed, a working model is used.
Capitalization ceases when such software is ready for general release, at which
time amortization of the capitalized costs begins. No internal software
development costs were capitalized in fiscal 1998 or 1999. The Company
capitalized $43.4 million of internal software development costs in fiscal 2000,
of which $31.4 million represented third-party purchases of source code or
product rights and outsourced software development.
Amortization of capitalized internal 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. Amortization expense for internally developed software is
included in the cost of license fees and was $6.1 million, $4.8 million, and
$1.3 million in fiscal 1998, 1999, and 2000, respectively.
Research and development (R&D) costs relating principally to the design and
development of products (exclusive of costs capitalized under SFAS No. 86) are
expensed as incurred. The costs of developing routine enhancements are expensed
as R&D 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 (see Note 8). For business
combinations accounted for using the purchase method of accounting, acquired
software and other acquired intangibles represent the amount of purchase price
allocated to such intangible assets, such as core software, in-place workforce,
customer base, and goodwill at the date of each 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 are 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.
During fiscal 1998, the Company did not incur any amortization
F-8
<PAGE> 68
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs associated with acquired intangibles. The gross allocated cost basis and
allocated cost net of accumulated amortization and currency translation
adjustments as of October 31, 1999 and 2000, along with the amortization expense
for fiscal 1999 and 2000 related to the software, in-place workforce, customer
base, and goodwill is presented in the following table (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ALLOCATED ALLOCATED AMORTIZATION
COST COST, NET EXPENSE
--------- --------- ------------
<S> <C> <C> <C>
OCTOBER 31, 1999:
Software.............................................. $35,293 $30,646 $ 4,622
In-place workforce.................................... 10,355 9,001 1,351
Customer base......................................... 19,941 18,071 1,857
Goodwill.............................................. 16,381 14,713 1,658
------- ------- -------
Total....................................... $81,970 $72,431 $ 9,488
======= ======= =======
OCTOBER 31, 2000:
Software.............................................. $34,186 $18,281 $11,767
In-place workforce.................................... 12,631 8,928 3,178
Customer base......................................... 21,642 15,267 5,578
Goodwill.............................................. 16,996 12,244 4,521
------- ------- -------
Total....................................... $85,455 $54,720 $25,044
======= ======= =======
</TABLE>
Acquired In-process Research and Development
For business combinations accounted for using the purchase method of
accounting, the amount of purchase price allocated to acquired in-process
research and development (IPR&D) at the date of 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 SFAS No. 2" (see Note 8). IPR&D consists of products or
technologies that are not yet proven to be technologically feasible, but have
been developed to a point where there is value associated with them in relation
to potential future revenue. 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.
Restructuring and Other Related Costs
Restructuring and related charges include the costs associated with the
Company's strategic restructuring during the third quarter of fiscal 2000. A
restructuring charge was recorded at the time the decision was made to
restructure operations and the Company's Board of Directors formally adopted the
restructuring plan (see Note 7). The charge primarily consisted of costs that
were incremental to the Company's ongoing operations and were incurred to exit
an activity or cancel an existing contractual obligation, employee termination
related charges, and the buyout of operating leases. A liability was recorded in
the third quarter only for those exit costs that could be reasonably estimated.
Additionally, the Company incurred certain other incremental costs that were
directly related to and separately identified in the restructuring plan. Other
related costs, consisting primarily of equipment disposals, consolidation of
office space, and employee relocation were expensed as incurred.
Foreign Currency Translation
The functional currency of each subsidiary is the local currency or, in
certain countries in Europe, the euro. Translation of asset and liability
balances to U.S. dollars is based on exchange rates as of each balance sheet
date.
F-9
<PAGE> 69
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 loss of $1.6 million and $6.6
million at October 31, 1999 and 2000, respectively. The deferred taxes allocated
to these amounts for fiscal 1999 and 2000 were $697,000 and $3.9 million,
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 $2.8 million, $568,000, and
$422,000 in fiscal 1998, 1999, and 2000, respectively.
Accounting for Derivative Instruments and Hedging Activities
The Company uses hedging instruments to mitigate foreign currency exchange
risk of assets and liabilities denominated in foreign currency. The hedging
instruments used are forward foreign exchange contracts with maturities of
generally three months or less in term. All contracts are entered into with
major financial institutions. At October 31, 2000, the Company had approximately
$69.7 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 were included with foreign
currency gains and losses on the transactions being hedged and were recognized
as a component of other income or expense in the period in which the gain or
loss on the underlying transaction is recognized. All gains and losses related
to foreign exchange contracts were included in cash flows from operating
activities in the consolidated statements of cash flows.
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," was issued in June 1998 and requires 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. In addition, SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
was issued in June 2000 and amends SFAS No. 133 to provide additional
implementation guidance related to SFAS No. 133. The Company will adopt SFAS No.
133 in the first quarter of fiscal 2001 and is currently continuing to assess
the implications of SFAS No. 133 and SFAS No. 138. Management anticipates that
the adoption will not have a material impact on its consolidated financial
statements or results of operations.
Revenue Recognition
The Company licenses software under non-cancelable license agreements and
provides related services, including consulting, support, and education. The
Company recognized revenue in accordance with Statement of Position (SOP) 97-2,
"Software Revenue Recognition," as amended and interpreted by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions," as well as Technical Practice Aids (TPA) issued from time to time
by the American Institute of Certified Public Accountants. The Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," in December 1999. SAB No. 101, as
amended, provides further interpretive guidance for public companies on the
recognition, presentation, and disclosure of revenue in financial statements. In
June 2000, the SEC issued SAB No. 101B, delaying the implementation of SAB No.
101 until the Company's fourth quarter of fiscal 2001. Management has evaluated
the impact of SAB No. 101 and believes that it will not have a material impact
on the Company's consolidated results of operations or on its current licensing
or revenue recognition practices.
Consulting and education 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
F-10
<PAGE> 70
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and education 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.
Stock-based Compensation
The Company has elected to determine the value of stock-based compensation
arrangements under the provisions of Accounting Principles Board (APB) Opinion
No. 25 "Accounting for Stock Issued to Employees;" and the pro forma disclosures
required under SFAS No. 123, "Accounting for Stock-Based Compensation," are
included in Note 5. SFAS No. 123 permits the use of either a fair value based
method or the method defined in 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.
In March 2000, the FASB issued Interpretation (FIN) No. 44 ("Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB No.
25. FIN No. 44 clarifies the application of APB No. 25 for: (a) the definition
of the employee for purposes of applying APB No. 25; (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan; (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award; and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 became effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 15, 2000. The adoption of the provisions of FIN
No. 44 did not have a material impact on the Company's consolidated financial
position or results of operations.
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 more likely than not 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 or 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 stock equivalents consist of stock options and certain equity
instruments, and the weighted average shares outstanding for the fiscal 1998
period was adjusted to include all common shares issuable under stock options
using the treasury stock method. Diluted loss per share for the fiscal 1999 and
fiscal 2000 periods exclude common stock equivalents because the effect of their
inclusion would be anti-dilutive, or would decrease the reported loss per share.
The fiscal 2000 amount is reflected net of the treasury shares acquired. Using
the treasury stock method, the weighted average common stock equivalents for
fiscal 1999 and fiscal 2000 were 6.1 million shares and 5.2 million shares,
respectively. All shares owned by the Employee Retirement Savings Plans (401(k)
Plan) were included in the weighted average common shares outstanding for all
periods.
F-11
<PAGE> 71
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,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income (loss).................................. $ 74,468 $(39,224) $(15,422)
======== ======== ========
Denominator:
Basic income (loss) per share -- weighted average
shares outstanding.............................. 98,264 105,378 109,376
Dilutive effect of common stock equivalents........ 11,729 -- --
-------- -------- --------
Diluted net income (loss) per share -- adjusted
weighted average shares outstanding, assuming
conversion of common stock equivalents.......... 109,993 105,378 109,376
======== ======== ========
Basic net income (loss) per share.................... $ 0.76 $ (0.37) $ (0.14)
Diluted net income (loss) per share.................. $ 0.68 $ (0.37) $ (0.14)
</TABLE>
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," requires disclosure in the
financial statements of the total changes in equity resulting from revenue,
expenses, and gains and losses, including those that do not affect retained
earnings. The Company's comprehensive income or loss is comprised of its net
income or loss, unrealized gains or losses on equity securities available for
sale, and foreign currency translation adjustments. The Company's comprehensive
income was $74.8 million for fiscal 1998. In fiscal 1999 and 2000, the Company
had a comprehensive loss of $41.2 million and $11.2 million, respectively.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables. In accordance with the Company's cash investment policies, the
majority of its investments are made in investment grade securities. Management
believes the risk with respect to trade receivables is mitigated by the fact
that the Company's customer base is geographically widespread and is highly
diversified. No single customer accounted for 10% or more of revenue for fiscal
1998, 1999, or 2000 or of accounts receivable at October 31, 1999 or 2000.
Fair Value of Financial Instruments
For certain Company financial instruments, including trade receivables and
accounts payable, the carrying amounts approximate fair market value due to
their short maturities.
F-12
<PAGE> 72
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) CERTAIN BALANCE SHEET COMPONENTS
The components of certain balance sheet line items are as follows (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
OTHER CURRENT ASSETS:
Prepaid expenses.......................................... $ 13,305 $ 33,541
Other receivables and current assets...................... 21,631 25,664
-------- --------
$ 34,936 $ 59,205
======== ========
PROPERTY AND EQUIPMENT:
Furniture and fixtures.................................... $ 97,042 $ 95,027
Computer equipment and software........................... 62,432 75,953
Land and improvements..................................... 9,240 9,897
-------- --------
168,714 180,877
Less: accumulated depreciation............................ (82,382) (97,200)
-------- --------
$ 86,332 $ 83,677
======== ========
ACCRUED LIABILITIES:
Compensation and related accruals......................... $105,539 $ 95,410
Accrued income taxes...................................... 9,553 11,177
Other accrued costs....................................... 47,543 77,955
-------- --------
$162,635 $184,542
======== ========
</TABLE>
(3) BANK LINE OF CREDIT
In June 2000, the Company obtained a $100.0 million unsecured, revolving
line of credit (the Revolver) that expires on June 29, 2001. Borrowings under
the Revolver are for working capital and other general corporate purposes. The
Company has a prime rate or London Interbank Offered Rate based borrowing
option. The credit agreement associated with the Revolver requires that the
Company remain in compliance with certain affirmative and negative covenants,
representations, and warranties. The financial covenants include a liquidity
coverage, leverage, and profitability measure.
The Company also had a $10 million unsecured, revolving line of credit that
expired on July 31, 2000. The credit agreement associated with the Revolver
required that the Company remain in compliance with certain affirmative and
negative covenants, representations, and warranties, including a liquidity
measure.
At October 31, 1999 and 2000, the Company was in compliance with the
covenants under the respective credit agreements, and there were no borrowings
outstanding.
(4) COMMON SHARES SUBJECT TO REPURCHASE
The Company has a stock repurchase plan which was designed to partially
offset the effects of share issuances under the stock option plans and Employee
Stock Purchase Plans (ESPP). The Company's Board of Directors authorized the
repurchase up to 8 million shares of J.D. Edwards' common stock under this plan
during fiscal 1999. The actual number of shares that are purchased and the
timing of the purchases are based on several factors, including the level of
stock issuances under the stock plans, the price of the Company's stock, general
market conditions, and other factors. The stock repurchases may be effected at
the Company's discretion through forward purchases, put and call transactions,
or open market purchases. During fiscal 2000 the Company entered into equity
derivative contracts for the purchase of 5.2 million common shares in accordance
with the share repurchase plan, and settled contracts for the repurchase of 2.5
million shares for a total of $90.5 million in cash.
F-13
<PAGE> 73
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximately 525,000 of the repurchased shares were reissued to fund the June
30, 2000 ESPP purchase. As of October 31, 2000, approximately 1.9 million
remaining shares were held as treasury stock to fund future stock issuances. The
treasury shares are recorded at cost and reissuances are accounted for by a
first-in, first-out method.
In March 2000, the Emerging Issues Task Force (EITF) reached a consensus on
the application of EITF Issue No. 96-13, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" with
Issue No. 00-7, "Equity Derivative Transactions that Require Net Cash Settlement
if Certain Events Outside the Control of the Issuer Occur" (EITF 00-7). Equity
derivatives that contain any provision that could require net cash settlement
(except upon the complete liquidation of the Company) must be marked to fair
value through earnings under EITF 00-7. The EITF reached a consensus on Issue
No. 00-19, "Determination of Whether Share Settlement Is Within the Control of
the Issuer for Purposes of Applying Issue No. 96-13, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" (EITF 00-19) in September 2000. EITF 00-19 addresses questions regarding
the application of EITF 00-7 and sets forth a model to be used to determine
whether equity derivative contracts could be recorded as equity. Under the
transition provisions of EITF 00-19, all contracts existing prior to the date of
the consensus are grandfathered until June 30, 2001, with cumulative catch-up
adjustment to be recorded at that time. The Company believes that the equity
derivative contracts that may remain unsettled at June 30, 2001, if any, will be
in accordance with the requirements of EITF 00-19 and management does not
anticipate that such adoption will have a material impact on the Company's
consolidated financial statements or results of operations.
At October 31, 2000, the Company held forward contracts requiring the
purchase at a future date of 2.7 million shares of its common stock at an
average cost of $32.17 per share. Forward purchase contracts require a full
physical settlement, and the aggregate redemption cost of $89.1 million is
included in the accompanying balance sheet in temporary equity with a
corresponding decrease in additional paid-in capital. The equity instruments are
exercisable by the Company only at their dates of expiration. At October 31,
2000 the dates of expiration ranged from December 2000 to September 2001. In
December 2000, the Company rolled forward 502,500 shares expiring in December
2000 to December 2001, resulting in a new expiration range of March 2001 to
December 2001. However, the counter-party has the right to require an early
settlement based on the market price of J.D. Edwards' common stock as stipulated
in the contracts. Additionally, a decline in the Company's common stock price
below the stipulated price in the contracts may trigger the requirement to
collateralize the outstanding exposure.
(5) EMPLOYEE RETIREMENT SAVINGS PLAN AND STOCK-BASED BENEFIT PLANS
Employee Retirement Savings Plan (401(k) Plan)
The Company established the 401(k) Plan subject to the provisions of the
Employee Retirement Income Security Act of 1974 in 1988 and made certain
amendments during fiscal 1998. The retirement savings plan is an Internal
Revenue Code Section 401(k) plan, commonly known as a salary reduction
retirement plan. The Company merged the U.S. employee portion of its Employee
Stock Ownership Plan (ESOP)into the 401(k) Plan in August 1998. 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. 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 401(k) Plan for non-U.S. participants
may be maintained in the account up to the end of calendar year 2000.
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 year ended October 31, 1998,
the Company recognized as compensation cost $7.3 million. The ESOP owned
F-14
<PAGE> 74
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7,888,494 shares of common stock at October 31, 1998, and all shares owned by
the ESOP had been allocated to participants.
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
recognized expense for matching contributions of $5.4 million, $4.2 million, and
$6.2 million for fiscal 1998, 1999, and 2000, 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 and 2000,
the Company accrued $1.2 million and $3.1 million, respectively, for
discretionary contributions to be made in Company common stock.
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 5,024,969 and 9,606,285 were available for grant
as of October 31, 1999 and 2000, 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 non-statutory 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 options that
were granted vest over a period of time ranging from four to five years with a
term of not more than 10 years. A total of 35 million shares of common stock are
authorized for issuance under the 1992 Option Plans, of which 13,495,090 and
13,888,000 shares were available for grant as of October 31, 1999 and 2000,
respectively. The Company does not anticipate granting additional options under
the 1992 Option Plans.
Employee Stock Purchase Plans
In August 1997, the Company established the ESPP. A total of 2,000,000
shares of common stock were reserved for issuance under the ESPP. An annual
increase is made to the ESPP on each anniversary date of the plan 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 shares, or a lesser amount
determined by the Company's Board of Directors. Eligible employees may purchase
common stock totaling up to 10% of an employee's compensation through payroll
deductions. The ESPP 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, 1999 and 2000, a
total of 1,090,000 and 1,085,744 shares, respectively, were issued under the
ESPP, generating total proceeds to the Company of $19,652,000 and $15,264,000,
respectively. At October 31, 2000, a total of $4.7 million had been withheld
from employees' payroll for the purchase offering period ending on December 31,
2000. Subsequent six-month purchase offering periods will commence on January 1,
2001, and June 1, 2001.
Stock-based Compensation
The Company records compensation expense related to its stock plans using
the intrinsic value based method and discloses a pro forma compensation value
measured using the fair value accounting method.
F-15
<PAGE> 75
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Generally, stock options are granted with an exercise price equal to the fair
value at the date of grant. For the fair value disclosure below, compensation
value is estimated for each option grant under the 1992 Option Plans and 1997
Plan on the date of grant using a Black-Scholes option pricing model. Based on
the calculations using a Black-Scholes option pricing model, the weighted
average grant date fair value of options was $16.24, $10.65, and $9.73 in fiscal
1998, 1999, and 2000, respectively. The weighted average grant date fair value
of shares issued through the ESPP in fiscal 1999 and 2000 was $8.91 and $7.35,
respectively.
The following weighted average assumptions were used for grants in fiscal
1998, 1999, and 2000:
<TABLE>
<CAPTION>
STOCK-BASED EXPECTED LIFE EXPECTED RISK-FREE
COMPENSATION (IN YEARS) VOLATILITY INTEREST RATE
------------ ------------- ---------- -------------
<S> <C> <C> <C>
Options:
1998............................................. 3.57 50% 5.51%
1999............................................. 3.38 60% 4.64%
2000............................................. 3.32 71% 6.23%
ESPP:
1998............................................. 0.55 --% 5.25%
1999............................................. 0.53 60% 4.63%
2000............................................. 0.50 71% 5.14%
</TABLE>
The pro forma impact on the Company's net income or loss and net income or
loss per share had compensation expense been recorded as determined under the
fair value method is shown below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1998 1999 2000
------- -------- --------
<S> <C> <C> <C>
Net income (loss):
As reported.......................................... $74,468 $(39,224) $(15,422)
Pro forma............................................ 58,183 (73,421) (52,130)
Basic net income (loss) per share:
As reported.......................................... 0.76 (0.37) (0.14)
Pro forma............................................ 0.59 (0.70) (0.48)
Diluted net income (loss) per share:
As reported.......................................... 0.68 (0.37) (0.14)
Pro forma............................................ 0.53 (0.70) (0.48)
</TABLE>
F-16
<PAGE> 76
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity of the 1992 Option Plans and 1997 Plan 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, 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
Options granted............................. 10,203,179 18.45
Less: options exercised..................... (4,270,704) 6.22
Less: options forfeited..................... (3,438,149) 25.56
----------
Options outstanding, October 31, 2000....... 20,811,411 19.59 6,536,434 18.53
==========
</TABLE>
The status of total stock options outstanding and exercisable under the
1992 Option Plans and 1997 Plan as of October 31, 2000, 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.................... 1,292,444 3.5 $ 3.03 1,289,644 $ 3.03
6.24.................... 1,901,437 4.9 6.24 1,281,237 6.24
10.50-15.56.................... 6,387,061 7.2 10.82 593,046 10.88
15.81-23.63.................... 1,041,105 7.5 18.94 228,232 17.71
23.94-35.88.................... 7,068,944 6.5 25.73 1,636,431 24.57
36.00-44.88.................... 3,120,420 5.4 38.84 1,507,844 38.80
---------- ---------
2.66-44.88.................... 20,811,411 6.3 19.59 6,536,434 18.53
========== =========
</TABLE>
F-17
<PAGE> 77
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
Income or loss before income taxes consists of the following, and the
components of the provision for or benefit from income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic............................................ $ 89,624 $ (3,738) $ 2,150
Foreign............................................. 28,579 (44,427) (22,782)
-------- -------- --------
$118,203 $(48,165) $(20,632)
======== ======== ========
Components of the provision for (benefit from) income
taxes:
Current:
U.S. Federal..................................... $ 24,146 $ (2,258) $ 1,349
State............................................ 4,417 276 80
Foreign.......................................... 17,105 11,576 7,411
-------- -------- --------
45,668 9,594 8,840
Deferred:
U.S. Federal..................................... (324) (13,098) (13,700)
State............................................ (36) (1,552) (1,109)
Foreign.......................................... (1,573) (3,885) 759
-------- -------- --------
(1,933) (18,535) (14,050)
-------- -------- --------
Total provision for (benefit from) income taxes....... $ 43,735 $ (8,941) $ (5,210)
======== ======== ========
</TABLE>
The provisions for or benefit 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,
----------------------------
1998 1999 2000
------- -------- -------
<S> <C> <C> <C>
Statutory rate.......................................... $41,371 $(16,858) $(7,221)
Foreign income taxed at higher rates.................... 7,119 6,752 7,268
Non-deductible expenses/non-taxable income.............. (1,067) (3,015) (1,244)
State income taxes, net of U.S. Federal benefit......... 2,847 (830) (470)
Income tax credits...................................... (5,590) (4,983) (4,594)
Other................................................... (945) 1,113 1,051
Acquisition-related permanent differences............... -- 8,880 --
------- -------- -------
Provision for (benefit from) income taxes............... $43,735 $ (8,941) $(5,210)
======= ======== =======
</TABLE>
The effective rate for fiscal year 2000, excluding the effects of
restructuring and other related charges, was 37%, and the effective tax rate for
fiscal year 1999, excluding the impact of acquisitions, was 37%. During fiscal
2000, the restructuring and other related charges decreased the rate primarily
due to the differences in tax rates in various countries where the restructuring
costs were incurred. During fiscal 1999, the tax effect of acquisition-related
permanent differences reduced the overall income tax benefit.
The Company received a benefit from the tax deductions for compensation in
excess of compensation expense recognized for financial reporting purposes. Such
credit arises from an increase in the market price of the stock under employee
option agreements between the measurement date (as defined in APB No. 25,
"Accounting for Stock Issued to Employees") and the date at which the
compensation deduction for income tax purposes is
F-18
<PAGE> 78
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determinable. Additional paid-in capital was increased by this tax benefit of
$58.3 million, $10.1 million, and $22.5 million for fiscal years 1998, 1999, and
2000, respectively, and is included in the accompanying consolidated statement
of changes in stockholders' equity.
Deferred tax assets and liabilities included in the balance sheet are
comprised of the following components (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Deferred tax assets:
Revenue deferred for book purposes........................ $ 7,747 $ 2,879
Foreign tax credit carryforwards.......................... 14,893 14,624
Allowance for doubtful accounts........................... 1,586 3,226
Vacation and other accruals............................... 8,441 13,600
Fixed assets.............................................. 2,290 961
Research and development credit carryforward.............. 2,735 7,120
Net operating loss carryforwards.......................... 62,251 104,387
Other..................................................... 9,475 9,207
-------- --------
Total deferred tax assets......................... 109,418 156,004
Deferred tax liabilities:
Capitalized software development costs.................... -- (9,673)
Revenue deferred for tax.................................. (10,774) (8,362)
Other..................................................... (2,109) (6,682)
-------- --------
Total deferred tax liabilities.................... (12,883) (24,717)
Less valuation allowance.................................... (9,651) (9,651)
-------- --------
Net deferred tax asset...................................... $ 86,884 $121,636
======== ========
Deferred taxes in other current assets...................... $ 4,312 $ (901)
Non current portion of deferred taxes....................... 82,572 122,537
-------- --------
Net deferred tax asset...................................... $ 86,884 $121,636
======== ========
</TABLE>
The Company has available approximately $14.6 million of foreign tax credit
carryforwards, of which $4.8 million will expire in 2003, $8.4 million will
expire in 2004, and $1.4 million will expire in 2005. The Company has a U.S. net
operating loss carryforward (NOL) of approximately $270.5 million, of which
$121.2 million will expire in 2018, $52.5 million will expire in 2019, and $96.8
million will expire in 2020. Additionally, a research and development credit
carryforward of approximately $7.1 million is available, of which $3.5 million
will expire in 2019 and $3.6 million will expire in 2020.
The Company has gross deferred tax assets of $156.0 million at October 31,
2000, against which the Company has recorded a valuation allowance of $9.7
million related to certain foreign tax credits. This valuation allowance was
recorded because the Company could not utilize such credits in the current year
and there is sufficient uncertainty as to whether the credits will be utilized
prior to expiration. Also included in the deferred tax asset balance at October
31, 2000 are approximately $104.4 million in tax-affected NOLs. Realization of
the deferred tax assets associated with the NOLs is dependent on the Company
generating sufficient taxable income to utilize the NOLs prior to their
expiration. Management believes that based on the available evidence, both
positive and negative, it is more likely than not that currently recorded
deferred tax assets will be fully realized based on analysis of historical
results, projections of future operating results, and an assessment of the
market conditions that have and are expected to affect the Company in the
future.
F-19
<PAGE> 79
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At October 31, 1999, and October 31, 2000, unremitted earnings of foreign
subsidiaries totaled $15.2 million and $2.0 million, respectively, and were
deemed to be permanently invested. The unrecognized deferred tax liability for
such earnings is immaterial.
(7) STRATEGIC RESTRUCTURING
Overview. During fiscal 2000, the Company's Board of Directors approved a
global restructuring plan to reduce the Company's operating expenses and
strengthen both its competitive and financial positions. Overall expense
reductions were necessary both to lower the Company's existing cost structure
and to reallocate resources to pursue its future operating strategies. The
restructuring plan was precipitated by declining gross margins and other
performance measures such as revenue per employee over the past several fiscal
quarters, as the Company's headcount and operating expenses grew at a faster
rate than revenue. As discussed in prior periods, the Company also had incurred
operating losses in certain geographic areas. Management effected the
restructuring plan during the third quarter of fiscal 2000 by eliminating
certain employee positions, reducing office space and related overhead expenses,
and modifying the Company's approach for providing certain services for
customers. Restructuring and related charges primarily consisted of severance
related costs for the involuntarily terminated employees, operating lease
termination payments, and office closure costs. The majority of the
restructuring activity occurred during the second half of fiscal 2000 and
management expects that remaining actions, such as office closures or
consolidations and lease terminations, will be completed within a one-year time
frame.
Employee severance and termination costs. The Company paid termination
salaries, benefits, stock compensation, outplacement, and other related costs to
the employees involuntarily terminated worldwide. The total workforce reduction
was effected through a combination of involuntary terminations and reorganizing
operations to permanently eliminate open positions resulting from normal
employee attrition. Only costs for involuntarily terminated employees are
included in the restructuring charge.
Specifically targeted were areas with opportunities for more efficient
processes that would reduce staffing, where operations were generating losses,
or where redundancy existed. The Company decreased its workforce by a total of
775 employees across most geographic areas and functions of its business,
including administrative, professional, and management positions. All employee
terminations occurred during the third quarter of fiscal 2000, although a
limited number of involuntarily terminated employees continued to provide
transitional services to the Company (generally 30- to 60 days from the
termination date). Salary and benefits earned during the transition period were
not included in the restructuring charge and severance packages were only
provided to the 688 involuntarily terminated employees. The employee severance
and termination costs included $1.3 million in non-cash charges.
F-20
<PAGE> 80
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the number of employee positions eliminated
in accordance with the restructuring plan by geographic region and function:
<TABLE>
<S> <C>
GEOGRAPHIC REGION:
United States............................................... 472
Asia Pacific................................................ 143
EMEA........................................................ 96
Canada and Latin America.................................... 64
---
Total............................................. 775
===
FUNCTION:
Sales and marketing......................................... 265
Consulting and technical support............................ 208
Research and development.................................... 100
Training services........................................... 80
Finance, human resources, legal, and other general and
administrative............................................ 63
Information technology...................................... 33
Customer support and product delivery....................... 26
---
Total............................................. 775
===
</TABLE>
Office closures. In addition to the decrease in employee positions, the
restructuring plan provided for reduction in office space and related overhead
expenses. Office and training facility closure and consolidation costs are the
estimated costs to close specifically identified facilities, costs associated
with obtaining subleases, lease termination costs, and other related costs, all
of which are in accordance with the restructuring plan. The Company closed or
consolidated several offices worldwide, including offices in Denver, Colorado
and regional offices in the U.S.; Europe, and the Asia Pacific region. During
the third quarter of fiscal 2000, the majority of Denver-based personnel were
consolidated into the main corporate headquarters campus, with the remaining
moves expected to be completed by February 2001. Other significant reductions,
such as those that occurred in Japan and certain European countries, were
substantially completed during fiscal 2000.
The Company also closed or downsized several underutilized training
facilities in order to modify its education approach. Certain regional
facilities, including Denver, Colorado; Chicago, Illinois; Dallas, Texas;
Secaucus, New Jersey; Rutherford, New Jersey; and Toronto, Canada, were closed,
downsized, or significantly reduced. These closures and reductions were
completed in December 2000.
Operating lease buyouts. Operating lease buyouts and related costs are the
actual or estimated costs associated with the early termination of leases for
computer equipment, phones, and automobiles that were no longer necessary for
operations due to the reduced workforce and facilities.
Asset disposal losses and other costs. During fiscal 2000, the Company
wrote off certain assets, consisting primarily of leasehold improvements,
computer equipment, and furniture and fixtures that were deemed unnecessary due
to the reduction in workforce. These assets were taken out of service and
disposed of during fiscal 2000. During the last half of fiscal 2000, the Company
incurred other expenses of $557,000 related to additional asset write-offs,
consolidation of office space, and relocation of employees.
Adjustments. The Company recorded adjustments to reduce the restructuring
provision by $2.5 million in the fourth quarter of fiscal 2000. A portion of the
adjustment relates to favorable negotiations with a vendor through which the
Company successfully reduced a contractual termination fee by $1.5 million. The
Company also successfully negotiated higher sublease income associated with
leased office space and subleased some vacated premises more quickly than
anticipated for a total of $1.2 million. Additionally, employee severance and
termination costs were reduced by $342,000 as some of these related costs were
lower than anticipated. This was
F-21
<PAGE> 81
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
offset in part by an increase of $500,000 for other additional incremental
severance and termination costs not anticipated in the original restructuring
plan.
Total costs. The following table summarizes the components of the
restructuring charge, the payments and non-cash charges, and the remaining
accrual as of October 31, 2000, by geographic region (in thousands):
<TABLE>
<CAPTION>
ASSET
DISPOSAL TOTAL
EMPLOYEE RESTRUCTURING LOSSES AND RESTRUCTURING
SUMMARY OF RESTRUCTURING SEVERANCE & OFFICE OPERATING LEASE COSTS OTHER AND RELATED
CHARGE AND PAYMENTS: TERMINATION COSTS CLOSURES BUY-OUTS SUBTOTAL COSTS CHARGES
------------------------ ----------------- -------- --------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
United States.......... $ 8,447 $10,815 $ 597 $ 19,859 $ 81 $ 19,940
EMEA................... 4,155 458 -- 4,613 35 4,648
Canada, Asia Pacific,
and Latin America.... 4,081 1,394 50 5,525 -- 5,525
-------- ------- ----- -------- ----- --------
Consolidated charge,
July 31, 2000........ 16,683 12,667 647 29,997 116 30,113
Third quarter cash
payments and non-cash
charges.............. (12,176) (1,860) (223) (14,259) (116) (14,375)
-------- ------- ----- -------- ----- --------
Accrual balance, July
31, 2000............. 4,507 10,807 424 15,738 -- 15,738
Fourth quarter cash
payments............. (3,311) (2,294) -- (5,605) (441) (6,046)
Fourth quarter
restructuring charge
adjustment........... (342) (2,696) -- (3,038) 941 (2,097)
-------- ------- ----- -------- ----- --------
Accrual balance, October
31, 2000............. $ 854 $ 5,817 $ 424 $ 7,095 $ 500 $ 7,595
======== ======= ===== ======== ===== ========
</TABLE>
(8) ACQUISITIONS
To date, all of the Company's business acquisitions have been 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 product suite was
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.
F-22
<PAGE> 82
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma results of operations have been prepared as though the companies
had combined at the beginning of fiscal 1998 and fiscal 1999, the two most
recently completed fiscal years at the time of acquisition. These unaudited pro
forma results of operations have been prepared for comparative purposes only and
include certain adjustments, including the write-off of IPR&D, 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.
The Numetrix purchase agreement included provisions under which the Company
is able to make claims upon funds held in escrow related to certain liabilities,
anticipated liabilities, and other representations and warranties made in the
purchase agreement. In June 2000, the Company notified the escrow agent of such
a claim. The amount that may be received from the claim cannot currently be
reasonably estimated.
The most significant in-process technology acquired was being designed by
Numetrix prior to the fiscal 1999 acquisition to provide an operational-level
planning and scheduling optimization solution targeted at discrete manufacturing
industries. Additionally, prior to the fiscal 1999 acquisition, a new
demand-planning module was in the process of design by Numetrix to enhance
enterprise-wide collaborative forecasting and address forecast reconciliation.
Both technologies were released in October 2000. Another in-process technology
of Numetrix, a collaborative enabler, is designed to efficiently interface the
messaging architecture among applications to allow real-time, alert-driven
collaboration. This technology is now part of J.D. Edwards advanced planning
integration project.
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 also
was 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 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,
F-23
<PAGE> 83
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
working capital, fixed assets, trademark, and customer base. A royalty rate for
the proprietary Distributed Object Messaging Architecture 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 targeted 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 fiscal 1999 and gradually increase
through the fiscal year ending February 28, 2009.
The Premisys Corporation. On February 26, 1999, the Company completed its
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 software. 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 on the occurrence of certain
future events is being recorded as compensation expense through the second
quarter of fiscal 2001. Pro forma results of operations as though the companies
had combined at the beginning of fiscal 1998 and fiscal 1999, the two most
recently completed fiscal years at the time of acquisition, would not be
materially different from reported results and therefore have been omitted.
As of the date of acquisition of The Premisys Corporation, major
enhancements of the CustomWorks product were underway. Additionally, The
Premisys Corporation and J.D. Edwards began developing an interface between
CustomWorks and OneWorld under a Product Alliances Partner Agreement entered
into by the two companies in August 1997. Technology acquired in the Company's
purchase of The Premisys Corporation is now functionally integrated with
OneWorld, and the integrated version was released in August 2000.
F-24
<PAGE> 84
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
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 fiscal 1999 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 expense assumptions showed
significant increases, gradually falling 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 fiscal 2000 and fiscal 2001, but then gradually decline as the developed
and in-process products mature.
Australia/New Zealand business partner. On March 6, 2000, the Company
completed an acquisition of its long-standing business partner serving Australia
and New Zealand, J.D. Edwards New Zealand, Ltd. (JDE-NZ). In connection
therewith, the Company acquired the remaining 90% of JDE-NZ not previously
owned. Prior to the acquisition, the Company owned 10% of JDE-NZ. With this
acquisition, J.D. Edwards strengthened its sales and service operations and
expanded its reach into the Asia Pacific region. The integration of the two
companies is enabling J.D. Edwards to further leverage joint business and sales
channel strengths in Australia and New Zealand to better serve its customers,
while positioning the Company for greater market focus in the region.
The Company paid cash for the common shares of JDE-NZ not already owned by
the Company, making JDE-NZ a wholly owned subsidiary. The acquisition was
accounted for as a purchase during the second quarter of fiscal 2000.
Accordingly, the total purchase price of $13.0 million was allocated to the
acquired assets and assumed liabilities at their fair values as of the closing
date of the transaction. Pro forma results of operations as though the companies
had combined at the beginning of the two most recently completed fiscal years
would not be materially different from reported results and therefore have been
omitted.
Acquired assets include net tangible assets of $1.7 million and intangible
assets related to the in-place workforce, customer base, and goodwill of
approximately $3.8 million, $3.7 million and $3.8 million, respectively. The
valuations of intangible assets were based upon 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. A replacement cost approach
was determined to best quantify the in-place workforce. An income-based approach
was applied to value the economic benefits of the existing customer base using
projections of net cash flows and an appropriate discount rate was applied as a
factor of the associated risk. The intangible assets are being amortized on a
straight-line basis over their estimated useful lives of four years. The effect
of adjusting the cost basis of the Company's previous 10% investment to reflect
equity method accounting is insignificant.
(9) SALE OF PRODUCT LINE
In January 2000, the Company sold its home building software product line
through an asset sale to a privately held provider of e-business, technology,
and project management systems. The buyer acquired all of the rights to the J.D.
Edwards homebuilder software, including its source code, contracts, contractual
rights, license agreements, maintenance agreements, and customer lists. The
Company received $6.5 million in a combination of cash and a secured promissory
note due in January 2001. The promissory note is convertible to the buyer's
F-25
<PAGE> 85
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock at the Company's option upon the closing of an initial public
offering of the buyer's common stock. The Company allocated the total proceeds
to the components of the agreement and recognized a gain of approximately $5.7
million during fiscal 2000, included as other income in the accompanying
consolidated statements of operations.
(10) SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company defines operating segments 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 the U.S. was less than 10% 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,
--------------------------------
1998 1999 2000
-------- -------- ----------
<S> <C> <C> <C>
REVENUE FROM UNAFFILIATED CUSTOMERS:
United States....................................... $591,887 $578,804 $ 652,279
Europe, Middle East, and Africa..................... 206,922 224,601 196,841
Canada, Asia Pacific, and Latin America............. 135,173 140,826 151,945
-------- -------- ----------
Consolidated........................................ $933,982 $944,231 $1,001,065
======== ======== ==========
INCOME (LOSS) FROM OPERATIONS:
United States....................................... $ 86,380 $(24,808) $ (47,851)
Europe, Middle East, and Africa..................... 14,584 (10,027) 35,451
Canada, Asia Pacific, and Latin America............. 5,674 3,243 5,949
IPR&D and amortization of acquired intangibles...... -- (35,629) (25,044)
Restructuring and other related charges............. -- -- (28,016)
-------- -------- ----------
Consolidated........................................ $106,638 $(67,221) $ (59,511)
======== ======== ==========
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space and equipment under various operating
leases. Rent expense for office space and equipment during fiscal 1998, fiscal
1999, and fiscal 2000 was $42.8 million, $59.6 million, and $74.8 million,
respectively. The minimum future lease commitments under non-cancelable leases
as of October 31, 2000, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- --------
<S> <C>
2001..................................................... $ 50,166
2002..................................................... 36,340
2003..................................................... 27,272
2004..................................................... 21,941
2005..................................................... 12,501
Thereafter............................................... 27,091
--------
$175,311
========
</TABLE>
F-26
<PAGE> 86
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases its corporate headquarters office buildings that were
constructed on Company-owned land. The lessor, a wholly owned subsidiary of a
bank, and a syndication of banks collectively financed $121.2 million in
purchase and construction costs through a combination of debt and equity. The
Company guarantees the residual value of each building up to approximately 85%
of its original cost. The Company's lease obligations are based on a return on
the lessor's costs. Management has elected to reduce the interest rate used to
calculate lease expense by collateralizing up to 97% of the financing
arrangements with investments consistent with the Company's investment policy.
The Company may withdraw the funds used as collateral at its sole discretion
provided it is not in default under the lease agreement. Investments designated
as collateral, including a required coverage margin, are held in separate
investment accounts. At October 31, 1999 and 2000, investments totaling $121.4
million and $123.3 million were designated as collateral for these leases,
respectively. The lease agreement requires that the Company remain in compliance
with certain affirmative and negative covenants, representations, and
warranties, including certain defined financial covenants. At October 31, 2000,
the Company was in compliance with its covenants.
Legal Matters
On September 2, 1999, a complaint was filed in the U.S. District Court for
the District of Colorado against the Company and certain of its officers and
directors. The complaint purports to be brought on behalf of purchasers of the
Company's common stock during the period between January 22, 1998 and December
3, 1998. The complaint alleges that the Company and certain of its officers and
directors violated the Securities Exchange Act of 1934 through a series of false
and misleading statements. The plaintiff seeks to recover unspecified
compensatory damages on behalf of all purchasers of J.D. Edwards' common stock
during the class period. Two additional suits were filed on behalf of additional
plaintiffs alleging the same violations and seeking the same recovery as the
first suit. The three complaints were subsequently consolidated into one action
and a consolidated amended complaint was filed on March 21, 2000. On May 9,
2000, the Company and the individual defendants filed a motion to dismiss the
amended complaint. The court has scheduled a hearing on the motion to dismiss
for January 12, 2001.
The Company believes these complaints are without merit and will vigorously
defend itself and its officers and directors against such complaints.
Nevertheless, the Company is currently unable to determine: (i) the ultimate
outcome of the lawsuits; (ii) whether resolution of these matters will have a
material adverse impact on the Company's financial position or results of
operations; or (iii) a reasonable estimate of the amount of loss, if any, which
may result from resolution of these matters.
The Company is involved in certain other disputes and legal actions arising
in the ordinary course of its business. In management's opinion, none of such
other disputes and legal actions is expected to have a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
F-27
<PAGE> 87
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's quarterly financial information for fiscal 1999 and fiscal
2000 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, 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
YEAR ENDED OCTOBER 31, 2000:
Total revenue.............................. $231,706 $231,049 $261,116 $277,194
Less: costs and expenses................. 240,896 258,389 296,687 264,604
-------- -------- -------- --------
Operating income (loss).................... (9,190) (27,340) (35,571) 12,590
-------- -------- -------- --------
Income (loss) before income taxes.......... (241) (3,703) (31,985) 15,297
Net income (loss).......................... $ (152) $ (2,333) $(22,603) $ 9,666
======== ======== ======== ========
Net income (loss) per common share:
Basic.................................... $ 0.00 $ (0.02) $ (0.21) $ 0.09
Diluted.................................. $ 0.00 $ (0.02) $ (0.21) $ 0.08
</TABLE>
F-28
<PAGE> 88
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, 1998..................... $ 9,800 $ 7,211 $ (4,527) $ 416 $12,900
October 31, 1999..................... 12,900 6,615 (7,301) (214) 12,000
October 31, 2000..................... 12,000 15,552 (12,538) (1,014) 14,000
</TABLE>
S-1
<PAGE> 89
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
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.
10.3 -- 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 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.
10.12* -- Employment Agreement, dated May 15, 2000, between Douglas
S. Massingill and J.D. Edwards & Company.
10.13* -- Technology License Agreement Dated April 1, 1999 Between
J.D. Edwards and & Company and Seagull Software Systems,
Inc. (and addendum Dated September 26, 2000)
10.14* -- Agreement as to Terms and Conditions of Termination of
Employment, dated July 31, 2000 between J.D. Edwards &
Company and Michael A. Schmitt.
10.15* -- Employment Agreement, dated August 1, 2000 but effective
as of May 1, 2000, between David E. Girard and J.D.
Edwards & Company.
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.16* -- Employment Agreement, dated August 1, 2000 but effective
as of May 1, 2000, between Richard E. Allen and J.D.
Edwards & Company.
10.17* -- Form of Management Change in Control Plan, participated
by J.D. Edwards & Company's executive officers.
21.1* -- Subsidiaries of Registrant.
23.1* -- Consent of PricewaterhouseCoopers LLP.
</TABLE>
---------------
* Filed herewith
