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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2001
[ ] 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)
DELAWARE 84-0728700
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
ONE TECHNOLOGY WAY, DENVER, CO 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 334-4000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of March 13, 2001, there were 112,121,145 shares of the Registrant's
Common Stock outstanding.
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J.D. EDWARDS & COMPANY
TABLE OF CONTENTS
PAGE
NO.
----
PART I FINANCIAL INFORMATION
Item 1... Consolidated Balance Sheets as of October 31, 2000 and
January 31, 2001
(unaudited)............................................... 3
Consolidated Statements of Operations for the Three Months
Ended
January 31, 2000 and 2001 (unaudited)....................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended
January 31, 2000 and 2001(unaudited)........................ 5
Notes to Consolidated Financial Statements (unaudited)...... 6
Item 2... Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 27
Item 2. Changes in Securities and Use of Proceeds................... 27
Item 3. Defaults upon Senior Securities............................. 27
Item 4. Submission of Matters to a Vote of Security Holders......... 27
Item 5. Other Information........................................... 28
Item 6. Exhibits and Reports on Form 8-K............................ 28
SIGNATURES
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
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
OCTOBER 31, JANUARY 31,
2000 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $180,674 $161,053
Short-term marketable securities and other investments.... 49,434 31,750
Accounts receivable, net of allowance for doubtful
accounts of $14,000 and $17,000 at October 31, 2000 and
January 31, 2001, respectively......................... 247,919 294,734
Other current assets...................................... 59,205 62,355
-------- --------
Total current assets.............................. 537,232 549,892
Long-term investments in marketable securities.............. 107,458 101,788
Property and equipment, net................................. 83,677 85,166
Non-current portion of deferred income taxes................ 122,537 134,567
Software costs, net......................................... 61,352 68,339
Other assets, net........................................... 38,785 36,126
-------- --------
$951,041 $975,878
======== ========
LIABILITIES, COMMON SHARES SUBJECT TO REPURCHASE, AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 59,591 $ 42,190
Unearned revenue and customer deposits.................... 135,445 200,051
Accrued liabilities....................................... 184,542 149,478
-------- --------
Total current liabilities......................... 379,578 391,719
Unearned revenue, net of current portion, and other......... 11,352 11,186
-------- --------
Total liabilities................................. 390,930 402,905
Commitments and contingencies (Note 10)
Common shares subject to repurchase, at redemption amount... 89,113 75,755
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none outstanding........................... -- --
Common stock, $.001 par value; 300,000,000 shares
authorized; 112,034,460 issued and 110,086,555
outstanding as of October 31, 2000; 113,010,477 issued
and 111,804,763 outstanding as of January 31, 2001..... 112 113
Additional paid-in capital................................ 416,716 430,195
Treasury stock, at cost; 1,947,905 shares and 1,205,714
shares as of October 31, 2000 and January 31, 2001,
respectively.............................................. (71,087) (48,015)
Deferred compensation....................................... (88) (43)
Retained earnings........................................... 122,678 118,299
Accumulated other comprehensive income (loss): unrealized
gains (losses) on equity securities and foreign currency
translation adjustments, net.............................. 2,667 (3,331)
-------- --------
Total stockholders' equity........................ 470,998 497,218
-------- --------
$951,041 $975,878
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
JANUARY 31,
-------------------
2000 2001
-------- --------
Revenue:
License fees.............................................. $ 83,287 $ 82,669
Services.................................................. 148,419 135,016
-------- --------
Total revenue..................................... 231,706 217,685
Costs and expenses:
Cost of license fees...................................... 12,904 15,662
Cost of services.......................................... 88,571 82,593
Sales and marketing....................................... 81,245 72,809
General and administrative................................ 22,934 23,700
Research and development.................................. 29,364 25,942
Amortization of acquired software and other acquired
intangibles............................................ 5,878 6,211
Restructuring and other related charges................... -- 1,043
-------- --------
Total costs and expenses.......................... 240,896 227,960
Operating loss.............................................. (9,190) (10,275)
Other income (expense):
Interest and dividend income.............................. 3,963 4,495
Gain on sale of product line.............................. 5,686 --
Foreign currency gains (losses) and other, net............ (700) (1,170)
-------- --------
Loss before income taxes.................................... (241) (6,950)
Benefit from income taxes................................. (89) (2,571)
-------- --------
Net loss.................................................... $ (152) $ (4,379)
======== ========
Net loss per common share:
Basic..................................................... $ (0.00) $ (0.04)
======== ========
Diluted................................................... $ (0.00) $ (0.04)
======== ========
Shares used in computing per share amounts:
Basic..................................................... 107,649 110,758
Diluted................................................... 107,649 110,758
The accompanying notes are an integral part of these consolidated financial
statements.
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J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
JANUARY 31,
-------------------
2000 2001
-------- --------
Operating activities:
Net loss.................................................... $ (152) $ (4,379)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 7,675 8,080
Amortization of intangible assets and securities premiums
or discounts........................................... 7,620 6,553
Gain on sale of product line.............................. (5,686) --
Benefit from deferred income taxes........................ (4,064) (5,353)
Other..................................................... 1,963 (2,210)
Changes in operating assets and liabilities:
Accounts receivable, net.................................. (45,838) (41,272)
Other assets.............................................. (28,041) (292)
Accounts payable.......................................... 4,484 (17,847)
Unearned revenue and customer deposits.................... 50,029 63,298
Accrued liabilities....................................... (14,744) (29,074)
-------- --------
Net cash used in operating activities............. (26,754) (22,496)
Investing activities:
Purchase of marketable securities and other investments... (19,696) (17,253)
Proceeds from sales or maturities of investments in
marketable securities.................................. 49,514 28,452
Purchase of property and equipment and other, net......... (11,612) (9,892)
Capitalized software costs................................ -- (15,619)
-------- --------
Net cash provided by (used in) investing
activities....................................... 18,206 (14,312)
Financing activities:
Proceeds from issuance of common stock.................... 13,675 13,936
-------- --------
Net cash provided by financing activities......... 13,675 13,936
Effect of exchange rate changes on cash..................... (1,548) 3,251
-------- --------
Net increase (decrease) in cash and cash equivalents........ 3,579 (19,621)
Cash and cash equivalents at beginning of period............ 113,341 180,674
-------- --------
Cash and cash equivalents at end of period.................. $116,920 $161,053
======== ========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Income taxes paid......................................... $ 2,230 $ 1,251
Retirement savings plan contribution funded with common
stock.................................................. -- 3,697
The accompanying notes are an integral part of these consolidated financial
statements.
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Interim Financial Statements. The accompanying financial statements of
J.D. Edwards & Company (the Company) have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. The unaudited consolidated
financial statements included herein have been prepared on the same basis as the
annual consolidated financial statements and reflect all adjustments, which
include only normal recurring adjustments necessary for a fair presentation in
accordance with accounting principles generally accepted in the United States.
Certain amounts in the prior periods consolidated financial statements have been
reclassified to conform to the current period presentation. The results for the
three-month period ended January 31, 2001 are not necessarily indicative of the
results expected for the full fiscal year. These consolidated financial
statements should be read in conjunction with the audited financial statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 2000.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) EARNINGS PER COMMON SHARE
Basic earnings per share (EPS) excludes the dilutive effect of common stock
equivalents and is computed by dividing net income 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. Diluted loss per share for the first quarters of fiscal 2000 and
2001 exclude common stock equivalents because the effect of their inclusion
would be anti-dilutive, or would decrease the reported loss per share. The
weighted average outstanding shares for the periods presented are reflected net
of treasury shares, if any. Using the treasury stock method, the weighted
average common stock equivalents for first quarters of fiscal 2000 and 2001 were
6.7 million shares and 4.1 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 presented.
The computation of basic and diluted EPS was as follows (in thousands,
except per share amounts):
THREE MONTHS ENDED
JANUARY 31,
-------------------
2000 2001
-------- --------
Numerator:
Net loss.................................................. $ (152) $ (4,379)
======== ========
Denominator:
Basic loss per share -- weighted average shares
outstanding............................................ 107,649 110,758
Dilutive effect of common stock equivalents............... -- --
-------- --------
Diluted net loss per share -- adjusted weighted average
shares outstanding, assuming conversion of common stock
equivalents............................................ 107,649 110,758
======== ========
Basic net loss per share.................................... $ (0.00) $ (0.04)
======== ========
Diluted net loss per share.................................. $ (0.00) $ (0.04)
======== ========
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) CERTAIN BALANCE SHEET COMPONENTS
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). In August 1999,
the Company's Board of Directors authorized the repurchase of up to 8.0 million
shares of J.D. Edwards' common stock under this plan. 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 forward contracts for the purchase of 5.2 million
common shares in accordance with the share repurchase plan, and the Company
settled contracts for the purchase of 2.5 million shares for a total of $90.5
million in cash. As of January 31, 2001, approximately 1.3 million of the
repurchased shares have been reissued to fund the June 2000 and December 2000
ESPP purchases and the Company's discretionary 401(k) Plan contribution. At
January 31, 2001, approximately 1.2 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 on the first-in, first-out method.
At January 31, 2001, the Company held forward contracts requiring the
future purchase of 2.2 million shares of common stock at an average redemption
price of $34.77 per share. These forward purchase contracts require full
physical settlement and the aggregate redemption cost of $75.8 million is
included in the accompanying balance sheet in temporary equity with a
corresponding decrease in additional paid-in capital. During the first quarter
of fiscal 2001 the Company extended final settlement of a contract for 502,500
shares by entering into another forward contract with a different counter-party
upon the expiration of the original contract. The new contract requires the
purchase at a future date of the 502,500 shares of the Company's common stock at
a redemption price of $30.16 per share (which was the same price as the
pre-existing contract), and expires in December 2001. Under the contract, the
Company has the option to elect either a full physical or a net share
settlement, and the aggregate redemption value of $15.2 million is included in
the accompanying balance sheet in stockholders' equity at January 31, 2001. All
outstanding equity instruments are exercisable through their dates of
expiration, which ranged from March 2001 to December 2001, as of January 31,
2001.
In March 2001, the Company executed a full physical settlement of contracts
to purchase 700,000 of its shares for $21.7 million, of which $14.8 million was
settled in cash. The settlement of the contracts included the sale of the shares
to a different counter-party with whom the Company simultaneously entered into a
forward contract to repurchase the shares in March 2002, at a current redemption
price of $9.94 per share and a current aggregate redemption cost of $6.9
million. In accordance with the Emerging Issues Task Force (EITF) Issue No.
98-12, "The Application of EITF Issue No. 96-13 'Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock,' to Forward Equity Sales Transactions," the forward purchase commitment
for the purchase of the shares will be included in temporary equity with a
corresponding decrease in additional paid-in capital, and will be accreted to
the redemption value over the twelve-month life of the forward contract. The
accretion amount will reduce net income (or increase a net loss) allocable to
common shareholders and related per share amounts for each period until
settlement occurs.
The counter-party has the right to require the Company to provide
collateral on certain of the outstanding contracts based on the market price of
the Company's common stock as stipulated in the contracts (these contracts were
entered into prior to the issuance of EITF 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), as
discussed below). For certain forward contracts, representing 1.5 million
shares, a decline in the Company's common stock price to below $13.00 per share
for three consecutive days may require the Company to provide such collateral to
the counter-party. The counter-party also has the right to require early
settlement based on the market price of the Company's common stock as stipulated
in the contracts. A common stock price ranging from
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$7.50 to $13.00 per share may require the Company to settle these contracts. As
of the filing date of this Form 10-Q, none of the contracts have been settled
prior to their maturity dates as a result of these contract provisions.
In March 2000, 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 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.
(4) INVESTMENTS IN MARKETABLE SECURITIES
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
generally 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. The Company's investment portfolio was
classified as available-for-sale as defined in Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, at January 31, 2001, all investments in marketable
securities 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 January 31,
2000, all investments were classified as held-to-maturity and accordingly were
carried at amortized cost.
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 January 31, 2001, of $122.8 million and a gross unrealized gain of
$709,000. The Company did not realize a material amount of gains or losses on
the sales of securities during the first quarter of fiscal 2001. The Company's
investments in the equity securities of certain publicly traded or privately
held technology companies are classified as available-for-sale and are included
at fair value in short-term marketable securities and other investments on the
accompanying balance sheets. At January 31, 2001, the aggregate fair value of
these investments was $10.7 million, and the gross unrealized gain was $1.5
million. A portion of one of the investments is subject to a lock-up provision,
which expires in January 2002.
(5) 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
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
periods, the Company also 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 by April 2001.
Adjustments. The Company recorded adjustments to reduce the restructuring
provision by $74,000 in the first quarter of fiscal 2001. A portion of the
adjustment relates to favorable negotiations with a lessor through which the
Company successfully eliminated further rental obligation of $148,000. This was
offset by an increase in employee termination costs of $124,000. Additionally,
the Company recorded a restructuring related charge of $972,000, primarily for
an office closure resulting in additional asset write-offs, during the first
quarter of fiscal 2001 as part of the approved restructuring plan.
Total costs. The following table summarizes the components of the
restructuring and other related charges, the payments and non-cash charges, and
the remaining accrual as of January 31, 2001, by geographic region (in
thousands):
SUMMARY OF RESTRUCTURING CHARGE AND PAYMENTS:
EMPLOYEE TOTAL
SEVERANCE & OPERATING RESTRUCTURING ASSET DISPOSAL RESTRUCTURING
TERMINATION OFFICE LEASE BUY- COSTS LOSSES AND AND RELATED
COSTS CLOSURES OUTS SUBTOTAL OTHER COSTS CHARGES
----------- -------- ---------- ------------- -------------- -------------
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
adjustment............... (342) (2,696) -- (3,038) 941 (2,097)
-------- ------- ----- -------- ------ --------
Accrual balance, October
31, 2000................. $ 854 $ 5,817 $ 424 $ 7,095 $ 500 $ 7,595
First quarter cash
payments................. (310) (772) -- (1,082) (45) (1,127)
First quarter asset
disposals................ -- -- -- -- (972) (972)
First quarter adjustment... 124 (148) (50) (74) 1,117 1,043
-------- ------- ----- -------- ------ --------
Accrual balance, January
31, 2001................. $ 668 $ 4,897 $ 374 $ 5,939 $ 600 $ 6,539
======== ======= ===== ======== ====== ========
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) COMPREHENSIVE INCOME
Comprehensive income or loss includes unrealized gains or losses on equity
securities and foreign currency translation gains or losses that have been
reflected as a component of stockholders' equity and have not impacted net
income. The following table summarizes the components of comprehensive income or
loss as of the balance sheet dates indicated (in thousands):
JANUARY 31, JANUARY 31,
2000 2001
----------- -----------
Net loss.................................................... $ (152) $ (4,379)
Change in unrealized gains (losses) on equity securities,
net of tax................................................ 15,304 (8,004)
Change in foreign currency translation losses............... 500 1,973
------- --------
Comprehensive income (loss), net............................ $15,652 $(10,410)
======= ========
(7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and for Hedging Activities," in the first quarter of fiscal 2001. SFAS 133, as
amended, requires the Company to recognize all derivatives on the balance sheet
at fair value. The gains or losses resulting from changes in the fair value of
derivative instruments will either be recognized in current earnings or in other
comprehensive income, depending on the use of the derivative and whether the
hedging instrument is effective or ineffective when hedging changes in fair
value. The adoption of SFAS No. 133, as amended, by the Company during the first
quarter of fiscal 2001 did not have a material impact on its consolidated
financial position, results or operations, or cash flows.
The Company uses hedging instruments to mitigate foreign currency exchange
risk of assets and liabilities denominated in foreign currency. The hedging
instruments used are forward foreign exchange contracts with maturities of
generally three months or less in term. All contracts are entered into with
major financial institutions. Gains and losses on these contracts were included
with foreign currency gains and losses on the transactions being hedged and were
recognized as non-operating income or expense in the period in which the gain or
loss on the underlying transaction is recognized. All gains and losses related
to foreign exchange contracts were included in cash flows from operating
activities in the consolidated statements of cash flows.
At January 31, 2001, the Company had approximately $73.3 million of gross
U.S. dollar equivalent forward foreign exchange contracts outstanding as hedges
of monetary assets and liabilities denominated in foreign currency. Included in
other income were net foreign exchange transaction losses of $500,000 and $1.1
million for the first quarter of fiscal 2000 and the first quarter of fiscal
2001, respectively.
(8) 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. During the first quarter of fiscal 2001, the
promissory note payment date was extended to April 2001. The promissory note is
convertible to the buyer's 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 the first quarter of fiscal 2000, included as
other income in the accompanying consolidated statements of operations.
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) SEGMENT INFORMATION
Operating segments were defined as components of an enterprise for which
discrete financial information is available and is reviewed regularly by the
chief operating decision-maker, or decision-making group, to evaluate
performance and make operating decisions. The Company identified its chief
operating decision makers as three key executives -- the Chief Executive
Officer, Chief Operating Officer, and Chief Financial Officer. This chief
operating decision-making group reviews the revenue and overall results of
operations by geographic regions. The accounting policies of the operating
segments presented below are the same as those described in the summary of
significant accounting policies included in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 2000. Total revenue from each country
outside of the United States was less than 10 percent of the Company's
consolidated revenue. The groupings presented below represent an aggregation of
financial information for countries meeting certain criteria, including economic
characteristics, similar customers, and the same products, services, and
distribution methods.
THREE MONTHS ENDED
JANUARY 31,
-------------------
2000 2001
-------- --------
REVENUES FROM UNAFFILIATED CUSTOMERS:
United States............................................... $148,734 $138,925
Europe, Middle East, and Africa............................. 44,109 38,053
Canada, Asia-Pacific, and Latin America..................... 38,863 40,707
-------- --------
Consolidated................................................ $231,706 $217,685
======== ========
INCOME (LOSS) FROM OPERATIONS:
United States............................................... $(17,402) $(20,042)
Europe, Middle East, and Africa............................. 4,009 6,168
Canada, Asia-Pacific, and Latin America..................... 10,081 10,853
Acquired IPR&D and amortization of acquired intangibles..... (5,878) (6,211)
Restructuring and related charges........................... -- (1,043)
-------- --------
Consolidated................................................ $ (9,190) $(10,275)
======== ========
(10) COMMITMENTS AND CONTINGENCIES
Leases. 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 a portion 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. During the first quarter of fiscal 2001, the total
investments designated as collateral were reduced. The reduction in total
investments designated as collateral did not result in an increased lease
obligation due to overall interest rate declines during the first quarter of
fiscal 2001. At January 31, 2001, investments totaling $67.2 million were
designated as collateral for these leases compared to $123.3 million of total
investments designated as collateral at October 31, 2000. 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 January 31, 2001, the Company was in compliance with its
covenants.
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation. On September 2, 1999, a complaint was filed in the U.S.
District Court (the 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. At a hearing held on February 9, 2001 the Court denied a motion
to dismiss previously filed by the Company and the individual defendants.
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.
(11) RECENT ACCOUNTING PRONOUNCEMENTS
The SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements," in December 1999. SAB No. 101, as amended,
provides further interpretive guidance for public companies on the recognition,
presentation, and disclosure of revenue in financial statements. On June 26,
2000, the SEC issued SAB No. 101B, delaying the implementation of SAB No. 101
until the Company's fourth quarter of fiscal 2001. Management anticipates that
the adoption of SAB No. 101 will not have a material impact on its current
licensing or revenue recognition practices.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that have been made
pursuant to the provision of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates, and projections about J.D. Edwards' industry, management's beliefs,
and certain assumptions made by J.D. Edwards' management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words, and similar expressions are intended to identify such
forward-looking statements. The statements are not guarantees of future
performance and are subject to certain risks, uncertainties, and assumptions
that are difficult to predict; therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth in the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 2000 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 or documents the Company
files from time to time with the Securities and Exchange Commission,
particularly the Quarterly Reports on Form 10-Q and any Current Report on Form
8-K.
RESULTS OF OPERATIONS
Overview. 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 nearly 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 was $217.7 million for the first quarter of fiscal 2001
compared to $231.7 million for the first quarter of fiscal 2000. While license
fee revenue was relatively flat year over year, total services revenue for the
first quarter of fiscal 2001 decreased compared to the first quarter of fiscal
2000, as a result of lower direct and subcontract consulting and education
services activity. Our financial results also reflected an increased operating
loss of $10.3 million for the first quarter of fiscal 2001 compared to $9.2
million for the first quarter of fiscal 2000. The operating loss for the first
quarter of fiscal 2001 included amortization of acquired software and other
intangibles of $6.2 million and restructuring and related charges of $1.0
million. Comparatively, the operating loss in the first quarter of fiscal 2000
included expenses for the amortization of acquired software and other
intangibles totaling $5.9 million. The net loss for the first quarter of fiscal
2001 was $4.4 million, or $0.04 per share, compared to a net loss of $152,000,
or $0.00 per share for the first quarter of fiscal 2000. Reducing the reported
net loss for the first quarter of fiscal 2000 was a $5.7 million gain related to
the sale of a product line. Excluding all acquisition-related charges,
restructuring charges, and the product line sale, we reached net income in first
quarter of fiscal 2001 of $191,000, or $0.00 per share, compared to a net loss
of $31,000, or $0.00 per share for the first quarter of fiscal 2000. See "Other
Data Regarding Results of Operations" for a reconciliation of the comparable
results for the first quarter of fiscal 2001 and first quarter of fiscal 2000.
We historically have experienced and expect to continue to experience a
high degree of seasonality in our business operations. First fiscal quarter
revenue and results from operations historically have been lower than those in
the immediately preceding fourth quarter. Because our operating expenses are
somewhat 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 the end of our fiscal year. Our first
quarter revenue historically has slowed during the holiday season in November
and December, and our total revenue, license fee revenue, services revenue, and
net income for our first fiscal quarter historically have been lower than in the
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immediately preceding fourth quarter. We believe that these seasonal factors are
common in the software industry.
We are taking actions to improve revenue growth, organizational
effectiveness, and profitability. To improve revenue growth, we will continue to
expand our focus on supply chain opportunities and take steps to improve our
sales force effectiveness both for software licensing and services, leverage
opportunities to increase our current customers' usage of our expanded solutions
by focusing effort in our consulting, education, and customer service
operations, improve customer service revenues through price increases and
expanded service options for customers, capture a larger percentage of direct
consulting services, and put in place a more effective marketing program. To
improve organizational effectiveness, we are separating the consulting business
from the sales organization and consolidating sales areas in the field,
appointing new sales and marketing leadership, increasing the management span of
control by improving staffing ratios and reducing layers of management, and
improving our internal procurement activities through strategic sourcing. From a
product standpoint, we are also taking steps to remain competitive in the future
and to continue building a leadership position in the collaborative commerce
(c-commerce) market. We believe that our products and vision for c-commerce are
solid. We believe that these actions will position us for more profitable growth
as a result of increased focus on both the sales and services parts of our
business, improved customer focus, reduced cost of sales, and a more efficient
and effective organization.
Based on current projections for fiscal 2001, we expect license fee revenue
and total revenue to be relatively consistent with fiscal 2000. Despite flat
revenues, given the actions previously described, we expect an improvement in
operating margins for fiscal 2001, excluding all acquisition-related charges,
restructuring charges, and sales of investments. While the changes we are making
are positioning us to meet our long-term goals, we expect that these changes
will have a negative effect on our short-term financial performance.
Accordingly, our financial performance in the second quarter of fiscal 2001
could be adversely impacted as a result of these changes. Additionally, the
maturity of the traditional enterprise resource planning market, challenges of
emerging new markets, the slowdown in global economic conditions, strong
competitive forces and potential negative effects from organizational and
management changes could reduce revenue and reduce or eliminate 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 that will be achieved, if 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.
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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) and percentage of dollar change for revenue and
expenses:
THREE MONTHS ENDED
JANUARY 31,
-----------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
REVENUE REVENUE PERCENTAGE OF DOLLAR
2000 2001 CHANGE 2001/2000
---------- ---------- --------------------
Revenue:
License fees................................ 35.9% 38.0% (0.7)%
Services.................................... 64.1 62.0 (9.0)
----- -----
Total revenue....................... 100.0 100.0 (6.1)
Costs and expenses:
Cost of license fees........................ 5.6 7.2 21.4
Cost of services............................ 38.2 37.9 (6.7)
Sales and marketing......................... 35.0 33.5 (10.4)
General and administrative.................. 9.9 10.9 3.3
Research and development.................... 12.7 11.9 (11.7)
Amortization of acquired software and other
acquired intangibles..................... 2.5 2.8 5.7
Restructuring and other related charges..... -- 0.5 100.0
----- -----
Total costs and expenses............ 103.9 104.7 (5.4)
Operating loss................................ (3.9) (4.7) --
Other income, net............................. 3.8 1.5 --
----- -----
Loss before income taxes...................... (0.1) (3.2) --
Benefit from income taxes................... (0.0) (1.2) --
----- -----
Net loss...................................... (0.1)% (2.0)% --
===== =====
Gross margin on license fee revenue........... 84.5% 81.1% --
Gross margin on service revenue............... 40.3% 38.8% --
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 by us, and payments are
due within a 12-month period from the date of delivery. Where software license
contracts call for payment terms of 12 months or more from the date of delivery,
revenue is recognized as
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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 and unspecified upgrades. 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 an 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. We recognize services revenue and
the related cost of services revenue through these subcontract agreements. In
addition, we have consulting alliance partnerships with a variety of service
organizations, including 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 in some cases we recognize revenue from a referral fee received
from the business partner and incur no related cost of services.
Our total revenue decreased to $217.7 million for the first quarter of
fiscal 2001 compared to $231.7 million for the first quarter of fiscal 2000. The
revenue mix between license fees and services was 38.0% and 62.0%, respectively,
for the first quarter of fiscal 2001, compared to 35.9% and 64.1%, respectively,
for the first quarter of fiscal 2000. The change in revenue mix was a result of
the drop in services revenue, compared to the first quarter of fiscal 2000, due
to less direct and subcontracted implementation revenue and fewer customer
education courses, as well as less billable hours due to fewer revenue
generating consulting employees.
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 the volatility 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 U.S. dollar positively affected our
total revenue by less than 1% based on a comparison of foreign exchange rates in
effect at the beginning of our fiscal year to actual rates for the first quarter
of fiscal 2001. Foreign exchange rates will continue to affect our total revenue
and results of operations depending on the U.S. dollar strengthening or
weakening relative to foreign currencies. We cannot guarantee that unfavorable
changes in foreign exchange rates will not have a material adverse impact on our
total revenue and results of operations.
Geographically, the overall revenue contribution for the quarter ended
January 31, 2001 compared to the quarter ended January 31, 2000 was led by 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 64%, 17%, and 19% of
total revenue, respectively, for the first quarter of fiscal 2001. For the first
quarter of fiscal 2000, the U.S., EMEA, and the rest of the world accounted for
64%, 19%, and 17% of total revenue, respectively.
License fees. License fee revenue remained relatively flat at $82.7 million
for the first quarter of fiscal 2001 compared to $83.3 million for the first
fiscal quarter of 2000, primarily a result of a decline in average sales price
that was offset by a slight growth in the number of transactions during the
first quarter of fiscal 2001. During the first quarter of fiscal 2001, we
recorded 21 transactions exceeding $1.0 million, representing $38.7 million or
47% of license fee revenue, compared to 17 transactions exceeding $1.0 million,
for the first quarter of fiscal 2000 representing $44.5 million or 53% of
license fee revenue. We increased our number of customers by 10% compared to the
end of the first quarter last year to over 6,150 at January 31, 2001. The
percentage of license revenue from new customers was 55% for the first fiscal
quarter of fiscal 2001 as compared to 33% for the first fiscal quarter of fiscal
2000. The mix of revenue from new and existing customers varies from quarter to
quarter, 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 revenue, 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.
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Our revenue mix has continued to shift toward our OneWorld(R)applications
available for the Windows NT and UNIX platforms. During the first quarter of
fiscal 2001, 63% of license activity was from customers using the Windows NT or
UNIX platforms compared to 34% for the first quarter of fiscal 2000. While we
expect that an increasing portion of our future license fee revenue will be
generated from customers using Windows NT or UNIX platforms, there can be no
assurance that we will continue to generate increasing amounts of revenue from
these platforms.
Services. Services revenue consists of fees generated by our personnel
providing direct services to customers, including consulting, support, and
education, fees generated through third parties for subcontracted services, and
referral fees from service providers who contract directly with customers.
Services revenue declined 9% to $135.0 million for the first quarter of fiscal
2001 from $148.4 million for the first quarter of fiscal 2000, a result of
declines in consulting and education revenue. This decrease was primarily a
result of a decrease in the number of direct consulting employees and in
employee utilization during the holiday season and increased employee education
time related to the OneWorld Xe release. Additionally, the revenue we recognized
from certain referral arrangements decreased in the first quarter of fiscal 2001
as compared to the first quarter of fiscal 2000. We believe services revenue
will continue to vary from quarter to quarter depending on the mix between
consulting, education, and maintenance revenue, as well as the mix of direct,
subcontract, and referral arrangements. In the remainder of fiscal 2001, we
intend to improve utilization of our existing consulting staff and increase the
number of the 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.
Maintenance revenue increased in the first quarter of fiscal 2001 compared
to the same period last year, which partially offset the decline in consulting
and education services, due to our growing installed base of customers and
consistent maintenance renewal rates. Throughout the remainder of fiscal 2001,
maintenance revenue is expected to continue to rise due to license fee growth in
fiscal 2000 and an increase in pricing for certain levels of maintenance
effective in the first quarter of fiscal 2001. Additionally, we are offering new
premium levels of support to our new and existing customers that are priced
higher than standard customer support. 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.
In any period, total services revenue is dependent on license transactions
closed during the current and preceding periods, 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.
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 to $15.7 million for first quarter of fiscal 2001 from $12.9 million
for the first quarter of fiscal 2000 primarily due to reseller royalties on
third-party software transactions, and royalties for certain embedded products.
Since 1998, we have 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. 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.
During the first quarter of fiscal 2000, we recorded amortization expense
of $1.0 million related to costs capitalized on our initial release of OneWorld
that is now fully amortized as of January 31, 2001. We capitalized software
development costs in the amount of $10.6 million in first quarter of fiscal
2001. The majority of the
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capitalization was internal costs related to major product enhancements and
payments for outsourced development. Additionally, we capitalized costs that are
related to our agreements with several providers of business-to-business
integration and process integration providers. These agreements represent an
investment in these companies' products, embedded or currently being embedded
into our OneWorld software and provide new functionality. 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. We expect that additional
costs for these and other development projects will be capitalized in future
periods given our current product development plans.
Gross margin on license fee revenue varies from quarter to quarter
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 subject to royalty payments. The first quarter of fiscal 2001
gross margin on license fee revenue decreased to 81.1% from 84.5% for the first
quarter of fiscal 2000, primarily as a result of reseller royalties. Based on
expected revenue volume, 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 periods.
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 to $82.6 million for the
quarter ended January 31, 2001 from $88.6 million for the quarter ended January
31, 2000. The decrease was primarily due to a decline in subcontracted
consulting and education revenue provided by business partners. The gross margin
on services revenue decreased to 38.8% for the quarter ended January 31, 2001,
compared to 40.3% for the quarter ended January 31, 2000 primarily due to lower
consultant utilization. Maintenance revenue, which has a higher margin than
consulting and education, increased as a percentage of total services revenue,
partially offsetting the decrease. Gross margins on services revenue for the
remainder of fiscal 2001 will 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
decreased to $72.8 million for the first quarter of fiscal 2001 from $81.2
million for the first quarter of fiscal 2000. The decrease is primarily a result
of a decline in commissions compared to the same period last year. Additionally,
salary expense decreased due to a lower average number of employees compared to
the same period last year as a result of our strategic restructuring in the
third quarter of fiscal 2000. The overall decrease was offset in part by an
increase in advertising as we are focusing on improving our market presence
through increased marketing initiatives.
General and administrative. General and administrative expense includes
primarily personnel and related overhead costs for support and administrative
functions. General and administrative expense increased to $23.7 million for the
first quarter of fiscal 2001 from $22.9 million for the first quarter in fiscal
2000. The total dollar amount of expense was slightly higher for the quarter
ended January 31, 2001 compared to the same period last year primarily due to an
increase in outside professional services.
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 translation, net of any
capitalized costs. R&D expense decreased to $25.9 million for the first quarter
of fiscal 2001 compared to $29.4 million for the first quarter of fiscal 2000.
The decrease in dollar amount was primarily due to internal software development
costs capitalized during the first quarter of fiscal 2001. Including current
period capitalized internal development expenditures, R&D expenditures were
$33.8 million for the first quarter of fiscal 2001 representing 15.5% of total
revenue, compared to R&D expenditures representing 12.7% of total revenue for
the first quarter of fiscal 2000.
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During the quarter ended January 31, 2001, we continued to devote
development resources primarily to major enhancements and new products
associated with our OneWorld application suites, as well as the integration of
our internally developed applications with acquired applications and those of
third parties. In addition to our internal R&D activities, we are outsourcing
the development of software for a specialized industry, and we recently 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 the first quarter of
fiscal 2001, we capitalized $7.9 million associated with internal costs and
subcontract development work and $2.6 million of third-party contractual
obligations and outsourced development. We did not capitalize any development
costs during the first quarter of fiscal 2000.
We anticipate that costs of some of these development projects will
continue to be capitalized in the future but total development expense will
increase in subsequent periods due to the addition of personnel and increasing
salaries resulting from competitive market pressures. We are continuing our
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.
Amortization of acquired software and other intangibles. Total amortization
for the quarter ended January 31, 2001 resulting from our three business
acquisitions was $2.9 million, $839,000, $1.4 million, and $1.1 million, related
to software, in-place workforce, customer base, and goodwill, respectively. For
the quarter ended January 31, 2000, total amortization was $2.9 million,
$650,000, $1.3 million, and $1.0 million, related to software, in-place
workforce, customer base, and goodwill, respectively.
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 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. We expect
that the organizational changes resulting from the restructuring plan effected
during third quarter of fiscal 2000 will 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 recorded adjustments to reduce the restructuring provision by $74,000 in
the first quarter of fiscal 2001. A portion of the adjustment relates to
favorable negotiations with a lessor through which we successfully eliminated
further rental obligation of $148,000. This was offset by an increase in
employee termination costs of $124,000. Additionally, we recorded a
restructuring related charge of $972,000, primarily for an office closure
resulting in additional asset write-offs, during the first quarter of fiscal
2001 as part of the approved restructuring plan.
As discussed previously, management is currently assessing and realigning
all of our operating activities. As a result, we expect that these activities
may result in another restructuring plan during fiscal 2001, although such a
decision has not yet been made, and any charge cannot yet been quantified. We
believe that these activities 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
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income and expenses. The primary reason for the decrease in other income and
expense for the first quarter of fiscal 2001 was the non-recurring gain of $5.7
million on the sale of a product line that occurred during the first quarter of
fiscal 2000. Included in other income and expense were net foreign exchange
transaction losses of $1.1 million for the first quarter of fiscal 2001 and
$500,000 in first quarter of fiscal 2000. 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. We will continue to experience foreign currency gains and losses as a
result of fluctuations in certain currencies where we conduct operations, as
compared to the U.S. dollar. In addition, our future operating results will
continue to be affected by these foreign currency gains and losses.
Other data regarding results of operations. The impact of
acquisition-related charges, restructuring and related charges, and a
significant one-time gain on our net loss and net loss per share for the first
quarters of fiscal 2000 and 2001 are presented below (in thousands, except per
share data). This supplemental information does not reflect our results of
operations in accordance with accounting principles generally accepted (GAAP) in
the United States, and it is not intended to be superior to or more meaningful
than other information presented herein that was prepared in accordance with
GAAP.
THREE MONTHS ENDED
JANUARY 31,
-------------------
2000 2001
-------- --------
Net loss, as reported....................................... $ (152) $ (4,379)
Adjustments to net loss, net of tax:
Acquisition-related charges............................ 3,703 3,913
Restructuring and related charges...................... -- 657
Gain on sale of product line........................... (3,582) --
-------- --------
Adjusted net income (loss).................................. $ (31) $ 191
======== ========
Diluted EPS, as reported.................................... $ 0.00 $ (0.04)
Adjustments to net loss, net of tax:
Acquisition-related charges............................ 0.03 0.03
Restructuring and related charges...................... -- 0.01
Gain on sale of product line........................... (0.03) --
-------- --------
Adjusted diluted EPS........................................ $ 0.00 $ 0.00
======== ========
Shares used in computing adjusted EPS....................... 107,649 114,845
Acquisition-related charges consisted of $5.9 million in amortization of
acquired intangibles less $2.2 million in related benefit from income tax for
the first quarter of fiscal 2000. The first quarter of fiscal 2001 resulted in
acquisition related charges of $6.2 million less $2.3 million in related benefit
from income tax. During the first quarter of fiscal 2000, we realized a $3.9
million net of tax gain from the sale of a product line. During the first
quarter of fiscal 2001, after adjustments, the restructuring charge consisted of
a $1.0 million charge less the related benefit from income tax of $386,000.
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.
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Benefit from income taxes. Our effective income tax rate was 37% for the
first quarter of fiscal 2001 and for the first quarter of fiscal 2000. We have
available approximately $14.8 million in foreign-tax-credit carryforwards, of
which $4.8 million will expire in 2003, $8.4 million will expire in 2004, $1.4
million will expire in 2005, and $200,000 will expire in 2006. We have a U.S.
net operating loss carryforward (NOL) of approximately $280.6 million, of which
$121.2 million will expire in 2018, $52.5 million will expire in 2019, $96.8
million will expire in 2020, and $10.1 million will expire in 2021.
Additionally, an R&D credit carryforward of approximately $9.1 million is
available, of which $3.5 million will expire in 2019, $4.6 million will expire
in 2020, and $1.0 million will expire in 2021.
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 FASB
Interpretation (FIN) No. 44 "Accounting for Certain Transactions Involving Stock
Compensation," an interpretation of APB No. 25), 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 $5.7 million and $5.2
million for the first quarter of fiscal years 2000 and 2001, respectively.
We have net deferred tax assets of $136.5 million at January 31, 2001,
which includes a valuation allowance of $9.7 million related to foreign tax
credits. This valuation allowance was recorded because there is sufficient
uncertainty as to whether the credits will be utilized prior to expiration. Also
included in the deferred tax asset balance at January 31, 2001, are
approximately $109.2 million in tax-effected NOLs. Approximately $83.7 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 $322.2 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 last
year's 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.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2001, our principal sources of liquidity consisted of
$161.1 million of cash and cash equivalents, $133.5 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 January 31, 2001, we had working capital of $158.2
million, and no amounts were outstanding under our bank line of credit.
Short-term deferred revenue and customer deposits totaling $200.1 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 $358.2
million; including long-term investments, and excluding short-term deferred
revenue and customer deposits, would result in working capital of $460.0
million.
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 January 31, 2001, of $122.8 million and a gross unrealized gain of
$709,000. We did not realize a material amount of gains or losses on the sales
of securities during the first quarter of fiscal 2001. At January 31, 2001, our
investments in the equity securities of certain publicly traded or privately
held technology companies had an aggregate fair value of $10.7 million, and a
gross unrealized gain of $1.5 million. 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
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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.
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 increased to
122 days as of January 31, 2001 compared to 108 days at January 31, 2000,
primarily as a result of calendar year maintenance billings. In addition, we
extended the due date for the calendar year maintenance billings by one month in
order to allow customers more time to decide on new service options. 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.
We used $22.5 million in cash for operating activities during the quarter
ended January 31, 2001 compared to a use of $26.8 million during the quarter
ended January 31, 2000. Cash used for operating activities was primarily for
payments of fiscal 2000 bonuses and commissions, payments for contractual
obligations to third parties for products and source code rights, and the
increased net loss for first quarter of fiscal 2001.
We used $376,000 in cash from investing and financing activities during the
quarter ended January 31, 2001 compared to generating $31.9 million during the
quarter ended January 31, 2000. The decrease from January 31, 2000 was primarily
the result of decreased proceeds from the sales or maturities of our investments
in marketable securities and our investment in capitalized software development.
During each of these periods, 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 periods, we purchased property and
equipment that was necessary to support operations. In future periods, we expect
to invest a portion of our cash and investments to repurchase shares of our
common stock.
We have a stock repurchase plan which was designed to partially offset the
effects of share issuances under the stock option plans and ESPP. In August
1999, our Board of Directors authorized the repurchase of up to 8.0 million
shares of our common stock under this plan. 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 our
stock, general market conditions, and other factors. The stock repurchases may
be effected at our discretion through forward purchases, put and call
transactions, or open market purchases. During fiscal 2000, we entered into
forward contracts for the purchase of 5.2 million common shares in accordance
with the share repurchase plan, and we settled contracts for the purchase of 2.5
million shares for a total of $90.5 million in cash. As of January 31, 2001,
approximately 1.3 million of the repurchased shares have been reissued to fund
the June 2000 and December 2000 ESPP purchases and our discretionary 401(k) Plan
contribution. At January 31, 2001, approximately 1.2 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 on the first-in,
first-out method.
At January 31, 2001, we held forward contracts requiring the future
purchase of 2.2 million shares of common stock at an average redemption price of
$34.77 per share. These forward purchase contracts require full physical
settlement and the aggregate redemption cost of $75.8 million is included in the
accompanying balance sheet in temporary equity with a corresponding decrease in
additional paid-in capital. During the first quarter of fiscal 2001 we extended
final settlement of a contract for 502,500 shares by entering into another
forward contract with a different third party upon the expiration of the
original contract. The new contract requires the purchase at a future date of
the 502,500 shares of our common stock at a redemption price of $30.16 per share
(which was the same price as the pre-existing contract) and expires in December
2001. Under the contract, we have the option to elect either a full physical or
a net share settlement, and the aggregate redemption value of $15.2 million is
included in the accompanying balance sheet in stockholders' equity at January
31, 2001. All outstanding instruments are exercisable through their dates of
expiration, which ranged from March 2001 to December 2001, as of January 31,
2001.
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In March 2001, we executed a full physical settlement of contracts to
purchase 700,000 of its shares for $21.7 million, of which $14.8 million was
settled in cash. The settlement of the contracts included the sale of the shares
to a different counter-party with whom we simultaneously entered into a forward
contract to repurchase the shares in March 2002, at a current redemption price
of $9.94 per share and a current aggregate redemption cost of $6.9 million. In
accordance with the Emerging Issues Task Force (EITF) Issue No. 98-12, "The
Application of EITF Issue No. 96-13 'Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,' to
Forward Equity Sales Transactions," the forward purchase commitment for the
purchase of the shares will be included in temporary equity with a corresponding
decrease in additional paid-in capital, and will be accreted to the redemption
value over the twelve-month life of the forward contract. The accretion amount
will reduce net income (or increase a net loss) allocable to common shareholders
and related per share amounts for each period until settlement occurs.
The counter-party has the right to require that we provide collateral on
certain of the outstanding contracts based on the market price of our common
stock as stipulated in the contracts (these contracts were entered into prior to
the issuance of EITF 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)). For certain forward
contracts, representing 1.5 million shares, a decline in our common stock price
to below $13.00 per share for three consecutive days may require us to provide
such collateral. The counter-party also has the right to require early
settlement based on the market price of our common stock as stipulated in the
contracts. A common stock price ranging from $7.50 to $13.00 per share may
require us to settle these contracts. As of the filing date of this Form 10-Q,
none of the contracts have been settled prior to their maturity dates as a
result of these contract provisions.
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 a portion of the financing arrangements with investments
consistent with our investment policy. We may withdraw the funds used as
collateral at our sole discretion provided we are not in default under the lease
agreement. Investments designated as collateral, including a required coverage
margin, are held in separate investment accounts. During the first quarter of
fiscal 2001, we reduced the total amount of investments designated as
collateral. The reduction in total investments designated as collateral did not
result in an increased lease obligation due to overall interest rate declines
during the first quarter of fiscal 2001. At January 31, 2001, investments
totaling $67.2 million were designated as collateral for these leases, compared
to investments totaling $123.3 million designated as collateral at October 31,
2000. 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 January 31, 2001, 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
We adopted SFAS No. 133, "Accounting for Derivative Instruments and for
Hedging Activities," in first quarter of fiscal 2001. SFAS 133, as amended,
requires that we recognize all derivatives on the balance sheet at fair value.
The gains or losses resulting from changes in the fair value of derivative
instruments will either be
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recognized in current earnings or in other comprehensive income, depending on
the use of the derivative and whether the hedging instrument is effective or
ineffective when hedging changes in fair value. Our adoption of SFAS No. 133, as
amended, during the first quarter of fiscal 2001 did not have a material impact
on our consolidated financial position, results or operations, or cash flows.
Additionally, we do not currently anticipate that the adoption of SFAS No. 133,
as amended, will have a future material impact on our consolidated financial
position, results of operations, or cash flows.
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. On June 26, 2000, the SEC issued SAB No.
101B, delaying the implementation of SAB No. 101 until the Company's fourth
quarter of fiscal 2001. Management anticipates that the adoption of SAB No. 101
will not have a material impact on its current licensing or revenue recognition
practices.
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS, AND FINANCIAL
CONDITION
In addition to other information contained in this Quarterly Report on Form
10-Q, there are numerous factors that should be carefully considered in
evaluating the Company and its business because such factors currently have a
significant impact or may have a significant impact in the future on the
Company's business, operating results, or financial conditions.
We operate in a rapidly changing industry that involves numerous risks,
some of which are beyond our control. Additional risks and uncertainties that we
do not presently know or that we currently deem immaterial may also impair our
business. You should carefully consider the risk factors listed below before
making an investment decision.
There is a potential for a downturn in general economic and market
conditions. Various segments of the software industry have experienced
significant economic downturns characterized by decreased product demand, price
erosion, work slowdown, and layoffs. Recently concerns have increased throughout
the technology industry regarding a continuing economic slowdown and negative
growth predictions for the remainder of the calendar year 2001. Moreover, 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.
For a more complete discussion of risk factors that affect our business,
see "Factors Affecting the Company's Business, Operating Results and Financial
Condition" in our Annual Report on Form 10-K for the fiscal year ended October
31, 2000. These risk factors include the following:
- The potential for significant fluctuations in our quarterly financial
results;
- The potential of a decline in our common stock beyond certain levels as
stipulated in the equity forward contracts may require an acceleration of
cash requirements;
- Our ability to compete in the enterprise software industry;
- Our recent expansion into new business areas and partnerships and our
ability to compete effectively and generate revenues in these areas;
- The potential for a less than anticipated increase in use of the Internet
for commerce and communication;
- The potential for future regulation of the Internet and a resulting
decreased demand for our products and services and increased costs of
doing business;
- Our reliance on third-party technology and the resulting potential for
cost increases or development delays;
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- Our ability to develop and maintain relationships with third-party
service providers who implement OneWorld;
- Rapid technological change and the potential for defects associated with
new versions of products;
- Our often lengthy and unpredictable sales cycles;
- An implementation process that may be time-consuming; our reliance on
service revenue;
- Competitive pressure to enter into fixed price service contracts;
- Our ability to manage growth; exposure from our international operations
to risks associated with growth outside the United States;
- Our ability to integrate operations or realize the intended benefits of
our recent acquisitions;
- Our dependence on certain key personnel and our continued ability to hire
other qualified personnel;
- Potential business distractions resulting from our recent restructuring;
- Limited protection of our proprietary technology and intellectual
property;
- Volatility of our stock price and a risk of continuing litigation;
- Disruptions affecting the security features in certain of our Internet
browser-enabled products;
- The introduction of and operation in the euro currency may adversely
impact our business;
- The potential influence of control by existing stockholders on matters
requiring stockholder approval, and
- The impact of Delaware law and anti-takeover provisions in our charter
documents with respect to potential acquisitions of the company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of our 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, 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 first quarter of fiscal 2001, 36% 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 January 31, 2001. We do
not enter into foreign exchange contracts to hedge the exposure of currency
revaluation in operating results. Foreign exchange rates could adversely affect
our total revenue and results of operations throughout fiscal 2001 if the U.S.
dollar strengthens relative to foreign currencies.
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
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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 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 January 31, 2001, and our exposure
from anticipated foreign revenue during the remainder of 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. At January 31, 2001, there was not a material charge in the sources or
the estimated effects of foreign currency rate exposures from the Company's
quantitative and qualitative disclosures presented in Form 10-K for the year
ended October 31, 2000. Based upon the results of these analyses, a 10% adverse
change in foreign exchange rates from the January 31, 2001 rates would not
result in a material impact to our forecasted results of operations, cash flows,
or financial condition for a future quarter and the fiscal year ending October
31, 2001.
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. As a result, our entire held-to-maturity portfolio was reclassified
to available for sale. 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 2001 to
assess the impact of hypothetical changes in interest rates. At January 31,
2001, there was not a material change in the sources or the estimated effects of
interest rate exposures from our quantitative and qualitative disclosures
presented in Form 10-K for the year ended October 31, 2000. Additionally, based
upon the results of these analyses, a 10% adverse change in interest rates from
the January 31, 2001 rates would not have a material adverse effect on the fair
value of investments and would not materially impact our forecasted results of
operations, cash flows, or financial condition for the fiscal year ending
October 31, 2001.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 2, 1999, a complaint was filed in the U.S. District Court (the
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. At a hearing held on February 9, 2001 the Court denied a motion to dismiss
previously filed by the Company and the individual defendants.
The Company believes these complaints are without merit and will vigorously
defend itself and its officers and directors against such complaints.
Nevertheless, the Company is currently unable to determine: (i) the ultimate
outcome of the lawsuits; (ii) whether resolution of these matters will have a
material adverse impact on the Company's financial position or results of
operations; or (iii) a reasonable estimate of the amount of loss, if any, which
may result from resolution of these matters.
The Company is involved in certain other disputes and legal actions arising
in the ordinary course of its business. In management's opinion, none of such
other disputes and legal actions is expected to have a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the Annual Meeting) was held
on March 6, 2001. At the Annual Meeting, stockholders voted on the following two
matters: (1) the election of Class I directors for a term of three years,
expiring in 2004; and (2) the ratification of the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants. The
stockholders elected management's nominees as Class I directors in an
uncontested election and ratified the appointment of the independent accountants
by the following votes:
(1) Election of Class I directors for a term expiring in 2004:
VOTES FOR VOTES WITHHELD
----------- --------------
Gerald Harrison........................... 102,754,964 388,424
Delwin D. Hock............................ 102,759,698 383,690
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The Company's Board of Directors is currently comprised of eight members
who are divided into three classes with overlapping three-year terms. The term
for Class II directors (Richard E. Allen, Harry T. Lewis, Jr., and Robert C.
Newman) will expire at the annual meeting of stockholders to be held in 2002,
and the term for Class III directors (Michael J. Maples, C. Edward McVaney, and
Trygve E. Myhren) will expire at the annual meeting of stockholders to be held
in 2003.
(2) Ratification of the appointment of PricewaterhouseCoopers LLP as
independent accounts:
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
102,901,746 160,313 81,329
ITEM 5. OTHER INFORMATION
Effective February 5, 2001, the Company's new Chief Operating Officer is
Hank Bonde. Dave Girard resigned his position of Chief Operating Officer during
the first quarter of fiscal 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Not applicable
28
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
J.D. EDWARDS & COMPANY
By: /s/ RICHARD E. ALLEN
----------------------------------
Name: Richard E. Allen
Title: Chief Financial Officer,
Executive Vice President,
Finance and
Administration and Director
(principal financial officer)
Dated: March 15, 2001
By: /s/ PAMELA L. SAXTON
----------------------------------
Name: Pamela L. Saxton
Title: Vice President of Finance,
Controller and Chief Accounting
Officer
(principal accounting officer)
Dated: March 15, 2001
29