1
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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 APRIL 30, 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 of (I.R.S. Employer Identification Number)
incorporation or organization)
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 June 11, 2001, there were 114,026,227 shares of the Registrant's
Common Stock outstanding.
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2
J.D. EDWARDS & COMPANY
TABLE OF CONTENTS
PAGE
NO.
----
PART I FINANCIAL INFORMATION (UNAUDITED)
Item Consolidated Balance Sheets as of October 31, 2000 and April
1. 30, 2001.................................................... 3
Consolidated Statements of Operations for the Three and Six
Months Ended April 30, 2000 and 2001........................ 4
Consolidated Statements of Cash Flows for the Six Months
Ended April 30, 2000 and 2001............................... 5
Notes to Consolidated Financial Statements.................. 6
Item Management's Discussion and Analysis of Financial Condition
2. and Results of Operations................................... 17
Item Quantitative and Qualitative Disclosure About Market Risk... 31
3.
PART II OTHER INFORMATION
Item Legal Proceedings........................................... 33
1.
Item Changes in Securities and Use of Proceeds................... 33
2.
Item Defaults upon Senior Securities............................. 33
3.
Item Submission of Matters to a Vote of Security Holders......... 33
4.
Item Other Information........................................... 34
5.
Item Exhibits and Reports on Form 8-K............................ 34
6.
SIGNATURES............................................................. 35
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.
2
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
OCTOBER 31, APRIL 30,
2000 2001
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $180,674 $165,396
Restricted cash, cash equivalents, and short-term
marketable securities (Note 4).......................... -- 27,649
Short-term marketable securities and other investments.... 49,434 14,119
Accounts receivable, net of allowance for doubtful
accounts of $14,000 and $18,000 at October 31, 2000 and
April 30, 2001, respectively............................ 247,919 253,618
Other current assets...................................... 59,205 47,985
-------- --------
Total current assets............................... 537,232 508,767
Long-term investments in marketable securities.............. 107,458 58,002
Restricted long-term investments in marketable securities
(Note 4).................................................. -- 20,304
Property and equipment, net................................. 83,677 82,000
Non-current portion of deferred income taxes................ 122,537 140,547
Software costs, net......................................... 61,352 70,636
Other assets, net........................................... 38,785 31,584
-------- --------
$951,041 $911,840
======== ========
LIABILITIES, COMMON SHARES SUBJECT TO REPURCHASE, AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 59,591 $ 43,949
Unearned revenue and customer deposits.................... 135,445 190,262
Accrued liabilities....................................... 184,542 132,910
-------- --------
Total current liabilities.......................... 379,578 367,121
Unearned revenue, net of current portion, and other......... 11,352 9,226
-------- --------
Total liabilities.................................. 390,930 376,347
Commitments and contingencies (Note 10)
Common shares subject to repurchase, at redemption amount... 89,113 61,992
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; 113,546,547 issued
and 111,838,333 outstanding as of April 30, 2001........ 112 114
Additional paid-in capital................................ 416,716 432,824
Treasury stock, at cost; 1,947,905 shares and 1,708,214
shares as of October 31, 2000 and April 30, 2001,
respectively.............................................. (71,087) (63,422)
Deferred compensation....................................... (88) (44)
Retained earnings........................................... 122,678 110,832
Accumulated other comprehensive income (loss): unrealized
gains (losses) on equity securities and foreign currency
translation adjustments, net.............................. 2,667 (6,803)
-------- --------
Total stockholders' equity......................... 470,998 473,501
-------- --------
$951,041 $911,840
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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4
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------- -------------------
2000 2001 2000 2001
-------- -------- -------- --------
Revenue:
License fees................................... $ 81,742 $ 62,322 $165,029 $144,991
Services....................................... 149,307 154,340 297,726 289,356
-------- -------- -------- --------
Total revenue.......................... 231,049 216,662 462,755 434,347
Costs and expenses:
Cost of license fees (including write-offs of
prepaid reseller royalties of $7,804 in
fiscal 2001)................................ 14,122 17,131 27,026 32,793
Cost of services............................... 92,139 84,213 180,710 166,806
Sales and marketing............................ 91,790 73,418 173,035 146,227
General and administrative..................... 25,218 23,773 48,152 47,473
Research and development....................... 28,728 24,385 58,092 50,327
Amortization of acquired software and other
acquired intangibles........................ 6,392 6,144 12,270 12,355
Restructuring and other related charges........ -- 1,446 -- 2,489
-------- -------- -------- --------
Total costs and expenses............... 258,389 230,510 499,285 458,470
Operating loss................................... (27,340) (13,848) (36,530) (24,123)
Other income (expense):
Interest and dividend income................... 3,612 3,656 7,575 8,151
Gains (losses) on equity investments and
product line sale........................... 17,878 (1,875) 23,564 (1,875)
Interest expense, foreign currency gains
(losses), and other, net.................... 2,147 (435) 1,447 (1,605)
-------- -------- -------- --------
Loss before income taxes......................... (3,703) (12,502) (3,944) (19,452)
Benefit from income taxes...................... (1,370) (5,035) (1,459) (7,606)
-------- -------- -------- --------
Net loss......................................... $ (2,333) $ (7,467) $ (2,485) $(11,846)
======== ======== ======== ========
Net loss per common share:
Basic.......................................... $ (0.02) $ (0.07) $ (0.02) $ (0.11)
======== ======== ======== ========
Diluted........................................ $ (0.02) $ (0.07) $ (0.02) $ (0.11)
======== ======== ======== ========
Shares used in computing per share amounts:
Basic.......................................... 109,763 112,027 108,706 111,392
Diluted........................................ 109,763 112,027 108,706 111,392
The accompanying notes are an integral part of these consolidated financial
statements.
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5
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED APRIL 30,
---------------------------
2000 2001
----------- ------------
Operating activities:
Net loss.................................................... $ (2,485) $ (11,846)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation.............................................. 14,884 16,007
Amortization of intangible assets and securities premiums
or discounts........................................... 14,684 16,096
(Gain) loss related to sale of a product line (Note 5).... (5,686) 1,299
(Gain) loss on investments on equity investments.......... (17,878) 576
Benefit from deferred income taxes........................ (5,089) (17,406)
Other..................................................... 1,639 13
Changes in operating assets and liabilities:
Accounts receivable, net.................................. (33,892) (5,174)
Other assets.............................................. (29,630) 16,827
Accounts payable.......................................... 2,032 (15,598)
Unearned revenue and customer deposits.................... 45,958 54,222
Accrued liabilities....................................... (12,106) (38,754)
-------- ---------
Net cash (used in) provided by operating
activities...................................... (27,569) 16,262
Investing activities:
Purchase of marketable securities and other investments... (59,314) (17,361)
Proceeds from sales or maturities of investments in
marketable securities.................................. 100,584 64,371
Purchase of property and equipment and other, net......... (19,379) (15,661)
Payment for purchase of acquired company, net of cash
acquired............................................... (10,151) --
Capitalized software costs................................ (8,594) (24,670)
-------- ---------
Net cash provided by investing activities......... 3,146 6,679
Financing activities:
Proceeds from issuance of common stock.................... 28,845 16,487
Settlement of common stock repurchase contracts........... -- (30,164)
Restricted cash and cash equivalents...................... -- (25,476)
-------- ---------
Net cash provided by (used in) financing
activities...................................... 28,845 (39,153)
Effect of exchange rate changes on cash..................... (3,088) 934
-------- ---------
Net increase (decrease) in cash and cash equivalents........ 1,334 (15,278)
Cash and cash equivalents at beginning of period............ 113,341 180,674
-------- ---------
Cash and cash equivalents at end of period.................. $114,675 $ 165,396
======== =========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Income taxes paid......................................... $ 2,360 $ 3,349
Retirement savings plan contribution funded with common
stock.................................................. 2,782 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 of America 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 of
America. Certain amounts in the prior periods consolidated financial statements
have been reclassified to conform to the current period presentation. The
results for the three and six-month periods ended April 30, 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 of America
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 three and six-month periods ended
April 30, 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 the three and six-month period
ended April 30, 2000 were 6.4 and 6.5 million shares, respectively, and 850,200
shares and 2.5 million shares for the three and six-month period ended April 30,
2001, respectively. All shares owned by the J.D. Edwards & Company Retirement
Savings Plan were included in the weighted average common shares outstanding for
all periods.
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The computation of basic and diluted EPS was as follows (in thousands,
except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------- ------------------
2000 2001 2000 2001
-------- -------- ------- --------
Numerator:
Net loss..................................... $(2,333) $(7,467) $(2,485) $(11,846)
======= ======= ======= ========
Denominator:
Basic loss per share -- weighted average
shares outstanding........................ 109,763 112,027 108,706 111,392
Dilutive effect of common stock
equivalents............................... -- -- -- --
------- ------- ------- --------
Diluted net loss per share -- adjusted
weighted average shares outstanding,
assuming conversion of common stock
equivalents............................... 109,763 112,027 108,706 111,392
======= ======= ======= ========
Basic net loss per share....................... $ (0.02) $ (0.07) $ (0.02) $ (0.11)
======= ======= ======= ========
Diluted net loss per share..................... $ (0.02) $ (0.07) $ (0.02) $ (0.11)
======= ======= ======= ========
(3) 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 Plan (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. 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. Upon settlement, the
repurchased shares were sold to a different counter-party with whom the Company
simultaneously entered into a forward contract to repurchase the shares in March
2002. At April 30, 2001, the redemption price was $9.94 per share and the
aggregate redemption cost was $6.9 million. In June 2001, the Company executed a
full physical settlement of contracts to purchase 811,000 of its shares for
$26.2 million, of which $16.3 million was settled in cash. Upon settlement, the
repurchased shares were sold to the counter-party with whom the Company
simultaneously entered into a forward contract to repurchase the shares in June
2002, at a current redemption price of $12.30 per share, and a current aggregate
redemption cost of $10.0 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 under the contracts
entered into during fiscal 2001 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 stockholders and related per share amounts for each period until
settlement occurs. For the second quarter and first six months of fiscal 2001,
the accreted amount of interest was negligible and did not materially impact the
net loss allocable to common stockholders or the related per share amounts.
7
8
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The counter-party has the right to require early settlement of the forward
contracts based on the market price of the Company's common stock as stipulated
in the contracts. A common stock price ranging from $7.50 to $10.00 per share
may require the Company to settle these contracts before they mature. In April
2001, the Company was required to settle one forward contract originally
scheduled to expire in December 2001, representing 502,500 shares for $15.4
million, or $30.65 per share.
The counter-party also has the right to require the Company to provide
collateral on certain outstanding forward 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 outstanding forward contracts as of April 30, 2001,
a decline in the Company's common stock price below $13.00 per share for three
consecutive days required the Company to provide such collateral to the
counter-party. As of April 30, 2001, $48.0 million in cash, cash equivalents,
and short- and long-term investments were designated as collateral and are
presented as restricted on the accompanying consolidated balance sheet.
At April 30, 2001, the Company held forward contracts requiring the future
purchase of 2.2 million shares of common stock at an average redemption price of
$29.56 per share. These forward purchase contracts require full physical
settlement and the aggregate redemption cost of $62.0 million is included in the
accompanying balance sheet in temporary equity with a corresponding decrease in
additional paid-in capital. As of April 30, 2001, all outstanding equity
instruments were exercisable through their dates of expiration, which ranged
from June 2001 to March 2002. As of April 30, 2001, approximately 1.3 million of
the repurchased shares have been reissued to fund the Company's ESPP and the
discretionary 401(k) Plan contribution. At April 30, 2001, approximately 1.7
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.
In March 2000, the 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 that 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 for equity instrument accounting and accordingly
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, and long-term investments. All highly
liquid investments with an original maturity of three months or less when
purchased are considered to be cash equivalents. All cash equivalents are
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 April 30, 2001, all investments in marketable
securities were carried at fair
8
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value as determined by their quoted market prices and included as appropriate in
either short- or long-term investments on the accompanying consolidated balance
sheet. All unrealized gains and all losses believed to be temporary were
included, net of tax, in stockholders' equity as a component of accumulated
other comprehensive income.
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 April 30, 2001, of $87.4 million and a gross unrealized gain of
$956,000. As of April 30, 2001, $2.2 million in short-term marketable securities
and other investments and $20.3 million in long-term investments in marketable
securities were restricted for collateral pursuant to the Company's forward
contract agreements, discussed above in Note 3. 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
consolidated balance sheets. During April 2000, the company sold a portion of
its investment in one of the technology companies resulting in a realized gain
of $17.9 million, which is presented on the accompanying consolidated statement
of operations in other income or expense. During the second quarter of fiscal
2001, the Company recorded a loss of $576,000 on an equity investment in a
technology company for the portion of the decline in market value that was
determined to be other than temporary. This loss is presented on the
accompanying consolidated statement of operations in other income or expense. At
April 30, 2001, the remaining aggregate fair value of the equity securities was
$7.2 million, and the gross unrealized loss recorded as a component of
shareholders' equity was $2.9 million. A portion of one of the equity securities
is subject to a lock-up provision, which expires in January 2002.
(5) 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 promissory note
secured by the software code and the customer base. During the second quarter of
fiscal 2001, the secured promissory note obligation was not collected when due.
The Company allocated the total proceeds to the components of the agreement and
recognized a one-time gain of approximately $5.7 million as other income during
the first quarter of fiscal 2000. During the second quarter of fiscal 2001, the
Company recorded a reserve against the note receivable of $4.6 million in order
to reduce the note to its net realizable value, based on the fair value of the
collateral. The loss is reflected in the accompanying consolidated statement of
operations in other income or expense.
(6) RESTRUCTURINGS AND EXIT FROM CERTAIN RESELLER AGREEMENTS
Fiscal 2001 Restructuring
Overview. During the second quarter of fiscal 2001, the Company's Board of
Directors approved a strategic global restructuring plan precipitated by the
Company's continued operating losses, lower employee productivity levels, and
the general economic downturn. Actions include the elimination of certain
employee positions in order to reduce the total workforce and the computer
equipment either owned or leased for employee use, and to condense or close some
operating facilities. The restructuring plan consists of two phases,
contemplated and taking place during the second and third quarters of fiscal
2001.
Employee severance and termination costs. The Company paid termination
salaries, benefits, outplacement, and other related costs to the employees
involuntarily terminated in the second quarter of fiscal 2001 as part of the
first phase of the restructuring plan (Phase I). The total workforce reduction
was effected through involuntary terminations. Specifically targeted were areas
with opportunities for increasing the management span of control by improving
staffing ratios, reducing layers of management, and eliminating non-essential
functions.
9
10
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company decreased its workforce by a total of 34 employee positions across
the United States, Latin America, and Canada across administrative,
professional, and management positions and various functions of the Company's
business. All employee terminations as part of Phase I occurred during the
second quarter of fiscal 2001, although a limited number of involuntarily
terminated employees continued to provide transitional services to the Company
(generally 30 to 60 days from the termination date). Salary and benefits earned
during the transition period were not included in the restructuring charge and
severance packages were only provided to the 34 involuntarily terminated
employees.
The following table summarizes the number of employee positions eliminated
in accordance with Phase I of the strategic restructuring plan by geographic
region and function:
GEOGRAPHIC REGION:
United States............................................... 18
Canada...................................................... 13
Latin America............................................... 3
---
Total............................................. 34
===
FUNCTION:
Sales and marketing......................................... 25
Consulting and technical support............................ 8
Education services.......................................... 1
---
Total............................................. 34
===
Operating lease buyouts. Operating lease buyouts and related costs are the
actual or estimated costs associated with the early termination of leases for
personal computer equipment that were no longer necessary for operations due to
the reduced workforce associated with Phase I.
Total restructuring costs. The following table summarizes the components
of the Phase I restructuring charge, the payments, and the remaining accrual as
of April 30, 2001, by geographic region (in thousands):
Summary of phase I -- fiscal 2001 restructuring charge and payments:
EMPLOYEE
SEVERANCE & OPERATING TOTAL
TERMINATION LEASE RESTRUCTURING
COSTS BUYOUTS COSTS
----------- --------- -------------
United States..................................... $1,412 $28 $1,440
Canada and Latin America.......................... 694 22 716
------ --- ------
Consolidated charge, April 30, 2001............... 2,106 50 2,156
Second quarter cash payments...................... (574) -- (574)
------ --- ------
Accrual balance, April 30, 2001................. $1,532 $50 $1,582
====== === ======
Exit from certain reseller agreements. The Company has reviewed its
business approach and business alliances during the second quarter of fiscal
2001. As a result of this review, the Company decided to exit certain reseller
arrangements for which prepaid royalty balances existed. The Company wrote off
$7.8 million in prepaid royalties associated with these reseller agreements
during the second quarter of fiscal 2001 and the charge is included in cost of
license fees on the accompanying consolidated statement of operations.
Restructuring Phase II. During May 2001, the Company announced the
elimination of approximately 370 employee positions as part of Phase II of the
strategic restructuring plan directed toward improving organizational
10
11
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
effectiveness and profitability. During the third quarter of fiscal 2001, the
Company continues to assess and realign operations and will incur restructuring
and other related charges that will be comprised primarily of the severance
costs related to the elimination of worldwide employee positions, outplacement
services, lease termination payments, reduction in office space and related
overhead expenses, and asset write-offs. Total restructuring and other related
charges related to Phase II cannot be quantified at this time.
Fiscal 2000 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 several fiscal quarters,
as the Company's headcount and operating expenses grew at a faster rate than
revenue. As discussed in prior periods, the Company also had incurred operating
losses in certain geographic areas. Management effected the restructuring plan
during the third quarter of fiscal 2000 by eliminating certain employee
positions, reducing office space and related overhead expenses, and modifying
the Company's approach for providing certain services for customers.
Restructuring and related charges primarily consisted of severance related costs
for the involuntarily terminated employees, operating lease termination
payments, and office closure costs. The majority of the restructuring activity
occurred during the second half of fiscal 2000 and remaining actions, such as
office closures or consolidations and lease terminations, were completed within
a one year time frame with continued obligations for the remaining lease terms.
Employee severance and termination costs. The Company paid termination
salaries, benefits, stock compensation, outplacement, and other related costs to
the employees involuntarily terminated worldwide. The total workforce reduction
was effected through a combination of involuntary terminations and reorganizing
operations to permanently eliminate open positions resulting from normal
employee attrition. Only costs for involuntarily terminated employees are
included in the restructuring charge.
Specifically targeted were areas with opportunities for more efficient
processes that would reduce staffing, where operations were generating losses,
or where redundancy existed. The Company decreased its workforce by a total of
775 employees across most geographic areas and functions of its business,
including administrative, professional, and management positions. All employee
terminations occurred during the third quarter of fiscal 2000, although a
limited number of involuntarily terminated employees continued to provide
transitional services to the Company (generally 30 to 60 days from the
termination date). Salary and benefits earned during the transition period were
not included in the restructuring charge and severance packages were only
provided to the 688 involuntarily terminated employees. The employee severance
and termination costs included an initial $1.3 million in non-cash charges.
11
12
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the number of employee positions eliminated
in accordance with the restructuring plan by geographic region and function:
GEOGRAPHIC REGION:
United States............................................... 472
Asia Pacific................................................ 143
EMEA Asia Pacific........................................... 96
Canada and Latin America.................................... 64
---
Total............................................. 775
===
FUNCTION:
Sales and marketing......................................... 265
Consulting and technical support............................ 208
Research and development.................................... 100
Education services.......................................... 80
Finance, human resources, legal, and other general and
administrative............................................ 63
Information technology...................................... 33
Customer support and product delivery....................... 26
---
Total............................................. 775
===
Office Closures. In addition to the decrease in employee positions, the
restructuring plan provided for reduction in office space and related overhead
expenses. Office and training facility closure and consolidation costs are the
estimated costs to close specifically identified facilities, costs associated
with obtaining subleases, lease termination costs, and other related costs, all
of which are in accordance with the restructuring plan. The Company closed or
consolidated several offices worldwide, including offices in Denver, Colorado
and regional offices in the U.S., Europe, and the Asia Pacific region. During
the third quarter of fiscal 2000, the majority of Denver-based personnel were
consolidated into the main corporate headquarters campus, with the remaining
moves completed within a one-year time frame. Other significant reductions, such
as those that occurred in Japan and certain European countries, were
substantially completed during fiscal 2000.
The Company also closed or downsized several underutilized training
facilities in order to modify its education approach. Certain regional
facilities, including Denver, Colorado; Chicago, Illinois; Dallas, Texas;
Secaucus, New Jersey; Rutherford, New Jersey; and Toronto, Canada, were closed,
downsized, or significantly reduced. These closures and reductions were
completed in December 2000.
Operating lease buyouts. Operating lease buyouts and related costs are the
actual or estimated costs associated with the early termination of leases for
computer equipment, phones, and automobiles that were no longer necessary for
operations due to the reduced workforce and facilities.
Asset disposal losses and other costs. During fiscal 2000, the Company
wrote off certain assets, consisting primarily of leasehold improvements,
computer equipment, and furniture and fixtures that were deemed unnecessary due
to the reduction in workforce. These assets were taken out of service and
disposed of predominately during fiscal 2000.
Adjustments. The Company recorded adjustments to reduce the restructuring
provision by $710,000 in the second quarter of fiscal 2001. The majority of the
adjustment relates to favorable negotiations and reduced obligations surrounding
employee termination costs. Additionally, the final amount of operating lease
buyouts was effectively reduced from the original estimate by $115,000 and the
Company successfully eliminated further rental obligations by $187,000. These
reductions were offset by other restructuring related charges of $106,000
12
13
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
primarily for additional asset write-offs during the second quarter of fiscal
2001 as part of the approved restructuring plan.
The Company has completed all actions related to this restructuring as of
April 30, 2001. An outstanding accrual of $4.2 million remained primarily
consisting of lease obligations for office and training facilities closed and
consolidated which will be paid over the remaining lease terms, unsettled
employee termination costs, and remaining operating lease buyout obligations.
Reductions in accrual amounts will continue to occur until all remaining
obligations have been settled in 2007. Any further cost true-ups related to the
fiscal 2000 restructuring will be recorded through normal operations with no
impact to the restructuring charge.
Total costs. The following table summarizes the components of the
restructuring charge, the payments and non-cash charges, and the remaining
accrual as of April 30, 2001, by geographic region (in thousands):
Summary of fiscal 2000 restructuring charge and payments:
EMPLOYEE ASSET TOTAL
SEVERANCE & OPERATING RESTRUCTURING DISPOSAL RESTRUCTURING
TERMINATION OFFICE LEASE COSTS LOSSES AND AND RELATED
COSTS CLOSURES BUYOUTS 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
Second quarter cash payments... (120) (896) (204) (1,220) (327) (1,547)
Second quarter asset
disposals.................... -- -- -- -- (106) (106)
Second quarter adjustment...... (251) (187) (115) (553) (157) (710)
-------- ------- ----- -------- ------ --------
Accrual balance, April 30,
2001...................... $ 297 $ 3,814 $ 55 $ 4,166 $ 10 $ 4,176
======== ======= ===== ======== ====== ========
13
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) 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 loss.
The following table summarizes the components of comprehensive income or loss as
of the balance sheet dates indicated (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------- ------------------
2000 2001 2000 2001
-------- -------- ------- --------
Net loss..................................... $ (2,333) $ (7,467) $(2,485) $(11,846)
Change in unrealized gains (losses) on equity
securities, net of tax..................... (9,654) (1,538) 5,650 (9,542)
Change in foreign currency translation
losses..................................... (2,860) (1,934) (2,360) 72
-------- -------- ------- --------
Total comprehensive income (loss),
net.............................. $(14,847) $(10,939) $ 805 $(21,316)
======== ======== ======= ========
(8) 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, 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 April 30, 2001, the Company had approximately $71.6 million of gross
U.S. dollar equivalent forward foreign exchange contracts outstanding as hedges
of monetary assets and liabilities denominated in foreign currency. Included in
other income were net foreign exchange transaction losses of $1.3 million and
$800,000 for the second quarter and first six months of fiscal 2000,
respectively, gains of $788,000 for the second quarter of fiscal 2001, and
losses of $350,600 for first six months of fiscal 2001.
(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
14
15
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial information for countries meeting certain criteria, including economic
characteristics, similar customers, and the same products, services, and
distribution methods.
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------- -------------------
2000 2001 2000 2001
-------- -------- -------- --------
REVENUES FROM UNAFFILIATED CUSTOMERS:
United States.............................. $141,676 $142,856 $290,410 $281,781
Europe, Middle East, and Africa............ 52,090 44,983 96,199 83,036
Canada, Asia, and Latin America............ 37,283 28,823 76,146 69,530
-------- -------- -------- --------
Consolidated............................. $231,049 $216,662 $462,755 $434,347
======== ======== ======== ========
INCOME (LOSS) FROM OPERATIONS:
United States.............................. $(25,322) $ (5,251) $(42,724) $(25,293)
Europe, Middle East, and Africa............ 5,722 10,944 9,731 17,112
Canada, Asia, and Latin America............ (1,348) (4,147) 8,733 6,706
Amortization of acquired intangibles....... (6,392) (6,144) (12,270) (12,355)
Write-off of certain reseller royalties.... -- (7,804) -- (7,804)
Restructuring and other related charges.... -- (1,446) -- (2,489)
-------- -------- -------- --------
Consolidated............................. $(27,340) $(13,848) $(36,530) $(24,123)
======== ======== ======== ========
(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. In 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 half of fiscal
2001. At April 30, 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 April 30, 2001, the Company was in compliance with its covenants.
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. Two subsequent suits were later
consolidated and an Amended Consolidated Complaint (the "Complaint") was filed
on March 21, 2000. 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. 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 Court has set a discovery deadline for September 15,
2001. No trial date has been set.
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16
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
During fiscal 2001 we effected a revitalization plan with components that
are exit activities, which do not benefit future operations, and result in
restructuring charges in the second and third quarters of fiscal 2001. The plan
also focuses on improving our organizational effectiveness and profitability
detailed as follows:
Our organizational effectiveness changes:
- realigned and consolidated the field consulting and sales organizations;
- appointed new sales and marketing leadership;
- increased the management span of control by improved staffing ratios and
reduced layers of management;
- improved our internal procurement activities through strategic sourcing,
and
- reduced our workforce in May 2001 by approximately 370 employees.
Our plans to improve profitability:
- continue to expand our focus on supply chain opportunities and taking
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 revenue 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.
In addition, from a product standpoint we are taking steps to remain
competitive in the future and to continue building a leadership position in the
collaborative commerce (c-commerce) market, and are focused on
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identifying specific industries and geographies where we can best compete and
assessing our current product and services fit for these various markets. We
believe that our products and vision for c-commerce are solid. We believe that
these actions will position us for more profitable and sustainable growth as a
result of increased focus on both the sales and services parts of our business,
improved customer focus, reduced cost of sales, a more efficient and effective
organization, and help us to align our resources on profitable core industries
and geographies. Throughout the remainder of fiscal 2001, we are focused on
continuing to improve revenue growth, organizational effectiveness, and
profitability.
Our total revenue for the second quarter and first six months of fiscal
2001 was $216.7 million and $434.3 million, respectively, compared to $231.0
million and $462.8 million, for same periods last year, respectively. Services
revenue increased for the second quarter of fiscal 2001 to $154.3 million from
$149.3 million during the same period last year but decreased to $289.4 million
for the first six months of fiscal 2001 from $297.7 million for the same period
last year. License fee revenue for the second quarter and first six months of
fiscal 2001 decreased to $62.3 million and $145.0 million, respectively,
compared to $81.7 million and $165.0 million for the same periods last year,
respectively. We believe this decrease was primarily due to adjustments within
the sales organization resulting from headcount reductions, organizational
changes, and leadership changes that caused reduced productivity from our
remaining employees.
Our financial results for the second quarter and first six months of fiscal
2001 reflected reduced operating losses of $13.8 million and $24.1 million,
respectively, compared to $27.3 million and $36.5 million for the same periods
last year, respectively. This is primarily a result of our cost savings efforts
and an 11% company-wide decrease in headcount since April 30, 2000, resulting in
increased operating efficiencies and decreased expenses for the fiscal 2001
periods presented. The operating loss for the second quarter and first six
months of fiscal 2001 included restructuring and related charges of $1.4 million
and $2.5 million, respectively. The net loss for the second quarter and first
six months of fiscal 2001 was $7.5 million, or $0.07 per share, and $11.9
million, or $0.11 per share, respectively, compared to a net loss of $2.3
million, or $0.02 per share and $2.4 million, or $0.02 per share, for the same
periods last year, respectively.
We historically have experienced and expect to continue to experience a
high degree of seasonality in our business operations which 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,
impacting the first six-months of a fiscal year, 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 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 these seasonal factors are common in the software
industry.
Based on current projections for fiscal 2001, we expect total revenue to
decline slightly compared to fiscal 2000 results. While we are making
organizational changes to position us to meet our long-term goals, we expect
that these changes will have a negative effect on our short-term financial
performance. We will record a restructuring charge in the third quarter of
fiscal 2001 and the financial performance of our operating areas 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 growth that will be achieved, if any, or of a return to net
profitability or that our financial condition, results of operations, cash
flows, and market price of our common stock will not continue to be adversely
affected by the aforementioned factors.
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19
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 SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------------- -----------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF DOLLAR OF TOTAL OF TOTAL OF DOLLAR
REVENUE REVENUE CHANGE REVENUE REVENUE CHANGE
2000 2001 2001/2000 2000 2001 2001/2000
---------- ---------- ---------- ---------- ---------- ----------
Revenue:
License fees............. 35.4% 28.8% (23.8)% 35.7% 33.4% (12.1)%
Services................. 64.6 71.2 3.4 64.3 66.6 (2.8)
----- ----- ----- -----
Total revenue..... 100.0 100.0 (6.2) 100.0 100.0 (6.1)
Costs and expenses:
Cost of license fees
(including write-offs
of certain prepaid
reseller royalties).... 6.1 7.9 21.3 5.8 7.6 21.3
Cost of services......... 39.9 38.9 8.6 39.0 38.4 (7.7)
Sales and marketing...... 39.7 33.9 (20.0) 37.4 33.7 (15.5)
General and
administrative......... 10.9 11.0 5.7 10.4 10.9 (1.4)
Research and
development............ 12.5 11.2 (15.1) 12.6 11.6 (13.4)
Amortization of acquired
software and other
acquired intangibles... 2.7 2.8 (3.9) 2.7 2.8 0.7
Restructuring and other
related charges........ -- 0.7 100.0 -- 0.6 100.0
----- ----- ----- -----
Total costs and
expenses........ 111.8 106.4 (10.8) 107.9 105.6 (8.2)
Operating loss............. (11.8) (6.4) -- (7.9) (5.6) --
Other income, net.......... 10.2 .6 -- 7.1 1.0 --
----- ----- ----- -----
Loss before income taxes... (1.6) (5.8) -- (0.8) (4.6) --
Benefit from income
taxes.................. (0.6) (2.4) -- (0.3) (1.8) --
----- ----- ----- -----
Net loss................... (1.0)% (3.4)% -- (0.5)% (2.8)% --
===== ===== ===== =====
Gross margin on license fee
revenue (including
write-offs of certain
prepaid reseller
royalties)............... 82.7% 72.5% -- 83.6% 77.4% --
Gross margin on license fee
revenue (excluding
write-offs of certain
prepaid reseller
royalties)............... 82.7% 85.0% -- 83.6% 82.8% --
Gross margin on service
revenue.................. 38.3% 45.4% -- 39.3% 42.4% --
Total revenue. We license software under non-cancelable license agreements
and provide related services, including consulting, support, and education. We
recognize 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
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20
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
fees. 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 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 $216.7 million and $434.3 million for the
second quarter and first six months of fiscal 2001, respectively, compared to
$231.0 million and $462.8 million for the same periods last year, respectively.
For the second quarter of fiscal 2001, the revenue mix between license fees and
services was 28.8% and 71.2%, respectively, compared to 35.4% and 64.6%,
respectively, for the second quarter of fiscal 2000. For the first six months of
fiscal 2001, the revenue mix between license fees and services was 33.4% and
66.6%, respectively, compared to 35.7% and 64.3%, respectively, for the same
period last year. The decrease in license fee revenue was primarily a result of
a decline in productivity within the sales organization caused by headcount
reductions, organization changes, and leadership changes, as well as a general
slowdown of the U.S. economy.
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 second
quarter and first six months of fiscal 2001. Comparatively, changes in the value
of major foreign currencies relative to the U.S. dollar negatively affected our
total revenue by less than 2% and 1% for the second quarter and first six months
of fiscal 2000, based on a comparison of foreign exchange rates in affect at the
beginning of fiscal 2000 to actual rates for the second quarter and first six
months of fiscal 2000. 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.
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For the second quarter of fiscal 2001, the geographic areas defined as the
U.S., Europe, the Middle East, and Africa (EMEA), and the rest of the world
accounted for 66%, 21%, and 13% of total revenue, respectively. For the first
six months of fiscal 2001, the U.S., EMEA, and the rest of the world accounted
for 65%, 19%, and 16% of total revenue, respectively. The geographic breakdown
of total revenue for the second quarter of fiscal 2000 was 61%, 23%, and 16% for
the U.S., EMEA, and the rest of the world, respectively, and 63%, 21%, and 16%
for the U.S., EMEA, and the rest of the world, respectively, for the first six
months of fiscal 2000.
License fees. License fee revenue declined 23.8% to $62.3 million for the
second quarter of fiscal 2001 compared to $81.7 million for the second fiscal
quarter of 2000, and declined 12.1% to $145.0 million for the first six months
of fiscal 2001 compared to $165.0 for the same period last year. This decrease
is primarily a result of a decline in productivity resulting from organizational
and leadership changes within the sales organization together with a slowing in
the U.S. economy during the first six months of fiscal 2001. Additionally,
revenue resulting from reseller arrangements for the second quarter and first
six months of fiscal 2001 has declined compared to the same periods last year.
While transactions exceeding $1.0 million for the second quarter and first six
months of fiscal 2001 increased compared to the same periods last year, the
overall number of transactions declined considerably. During the second quarter
of fiscal 2001, license transactions exceeding $1.0 million increased to 17
transactions, representing $32.4 million or 52% of license fee revenue compared
to 9 transactions representing $23.0 million or 29% of license fee revenue last
year. During the first six months of fiscal 2001, license transactions exceeding
$1.0 million increased to 38 transactions, representing $71.1 million or 49% of
license fee revenue, from 26 transactions, representing $67.5 million or 41% for
the same period last year. The total number of transactions for the second
quarter of fiscal 2001 decreased 35% to 275 compared to 422 last year and
declined 18% to 597 for the first six months of fiscal 2001 compared to 729 for
the same period last year. We increased our number of customers by 9% compared
to the end of the second quarter last year to over 6,200 at April 30, 2001. The
percentage of license revenue from new customers was 62% and 58% for the second
quarter and first six months of fiscal 2001, compared to 51% and 42% for the
same periods last year. 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, cash
flows, and financial condition will not be adversely affected in future periods
as a result of downturns in global economic conditions or intensified
competitive pressures.
Services. Services revenue consists of fees generated by our personnel
providing direct services to customers, consulting, education and software
maintenance, fees generated through third parties for such services on a
subcontracted arrangement, and referral fees from service providers who contract
directly with customers. Services revenue for the second quarter of fiscal 2001
increased 3.4% to $154.3 million from $149.3 million for the second quarter of
fiscal 2000, as a result of improved internal consultant utilization and
realization as well as increased software maintenance revenue. Services revenue
for the first six months of fiscal 2001 decreased 2.8% to $289.4 million from
$297.7 million for the same period last year primarily due to lower professional
services revenue from business partners for both sub-contract and referral work
as a result of an effort towards obtaining more direct implementation work and
increasing the utilization targets and staffing of direct personnel. The decline
in education revenue for the first six months of fiscal 2001 is also attributed
to lower utilization during the holiday season early in fiscal 2001 and
increased employee education time related to the OneWorld Xe release. 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 and education
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 second quarter and first six months of
fiscal 2001 compared to the same periods last year, which offset the declines in
professional services and education revenue. The increase in maintenance is
primarily a result of our growing installed base of customers, consistent
maintenance renewal rates, and an increase in pricing for certain levels of
maintenance effected in the first quarter of fiscal 2001. Throughout the
remainder of fiscal 2001, maintenance revenue is expected to continue to rise
due to the license
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fee growth in fiscal 2000, the effort towards achieving steady and balanced
growth within the maintenance organization, and the maintenance pricing
increases. Additionally, we are focusing on improving and maintaining our
installed base of customers and are currently 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, and the level
of competition from alliance partners for consulting and implementation work.
Additionally, services revenue is dependent on the number of our internal
service provider consultants available to staff engagements, the number of
customers referred to alliance partners for education services, the number of
customers who have contracted for support and the amount of the related fees,
billing rates for education courses, and the number of customers purchasing
education services.
Total operating expenses. Our total expenses, excluding amortization of
acquired software and other acquired intangibles and restructuring and other
related charges, declined to $222.9 million for second quarter of fiscal 2001
from $252.0 for the second quarter of fiscal 2000 and to $443.6 million for the
first six months of fiscal 2001 from $487.0 million for the first six months of
fiscal 2000. These significant decreases in operating expenses are due to the
cost savings and organizational changes effected in our fiscal 2000
restructuring plan, and fiscal 2001 revitalization plan which includes the
fiscal 2001 restructuring plan. There has been an 11% reduction in company-wide
headcount as a result of the fiscal 2000 restructuring and Phase I of the fiscal
2001 restructuring. These reductions have caused company-wide salary expense for
the second quarter and first six months of fiscal 2001 to decline 8% compared to
the same periods last year. Additionally, as part of the review of our business
approach, the employee bonus plan has been replaced by a profit sharing plan,
and the excess charge associated with the former employee plan, as compared to
the charge for the profit sharing plan, was reversed in the second quarter of
fiscal 2001. This reversal, coupled with the headcount reduction, resulted in a
decline in bonus expense for the second quarter and first six months of fiscal
2001 of $12.2 million and $7.6 million compared to the same periods last year,
respectively. The effect of the reversal of previous quarter expense in the
second quarter of fiscal 2001 was to decrease our net loss by $2.5 million or
$0.02 per share. Also of significance, travel and entertainment expenses
declined across our organization for the second quarter and first six months of
fiscal 2001 by 40% and 29% compared to the same periods last year, respectively.
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 $17.1 million and $32.8 million for second quarter and first six
months of fiscal 2001, respectively, from $14.1 million and $27.0 million for
the same periods last year, respectively. The increases are primarily due to the
write-off of prepaid royalties associated with the exit of two reseller
agreements in the amount of $7.8 million which was partially offset by lower
revenues and related royalties on other reseller agreements. Since 1998, we have
had 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. In other cases, we capitalize our
payments to third parties as capitalized software and amortize the amount on a
straight-line basis to cost of license fees once the product is generally
available.
Beginning in the second quarter of fiscal 2000 we capitalized internal
costs and subcontract development work in the amount of $3.5 million and
third-party contractual obligations or outsourced development in the amount of
$5.1 million. During the first six months of fiscal 2000, we recorded final
amortization expense of $1.0 million related to costs capitalized on our initial
release of OneWorld. For the second quarter and first six months of fiscal 2001,
we capitalized software development costs in the amount of $7.2 million and
$15.1 million for internal costs and subcontract development and $1.6 million
and $4.2 million for payments for third-party contractual obligations or
outsourced development, respectively. The third-party contractual obligations
are
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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 for new functionality. Amortization of a portion of
these capitalized costs for the second quarter and first six months of fiscal
2001 was $3.3 million and $4.3 million, respectively. It is expected that the
majority of the remaining unamortized capitalized costs will begin amortization
in the third quarter of fiscal 2002 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 second quarter and first six
months of fiscal 2001 gross margin on license fee revenue decreased to 72.5% and
77.4%, respectively, from 82.7% and 83.6%, for the same periods last year,
respectively. These declines were primarily as a result of the write-off of $7.8
million of unused prepaid royalties associated with the exit of two reseller
agreements during the second quarter of fiscal 2001. Excluding these write-offs,
the gross margin for the second quarter and first six months of fiscal 2001 was
85.0% and 82.8%, respectively. 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 for the second quarter and first
six months of fiscal 2001 decreased to $84.2 million and $166.8 million,
respectively, from $92.1 million and $180.7 million for the same periods last
year, respectively. The decrease for the periods was due to a decline in
sub-contracted and professional services revenue and related costs from business
partners that is in line with our efforts to increase the utilization of
internal resources and obtain more direct implementation work. Additionally,
there was a decrease in education revenue and related costs attributable to the
elimination and consolidation of several training facilities as part of the
fiscal 2000 restructuring and consolidation of training classes. Additionally, a
16% decline in headcount resulting from the fiscal 2000 and fiscal 2001
restructurings contributed to decreased bonus, salary, and travel and
entertainment expenses.
The gross margin on services revenue for the second quarter and first six
months of fiscal 2001 increased to 45.4% and 42.4%, respectively, compared to
38.3% and 39.3% for the same periods last year, respectively. The increase is
due to higher consultant utilization and increased maintenance revenue.
Generally, maintenance revenue produces a higher margin than professional
services and education revenue. 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 utilization of our 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 for
the second quarter and first six months of fiscal 2001 decreased to $73.4
million and $146.2 million, respectively, from $91.8 million and $173.0 million
for the same periods last year, respectively. The decline is mainly due to a 14%
decline in headcount since April 30, 2000, resulting primarily from the fiscal
2000 and fiscal 2001 Phase I restructurings that decreased salary, bonus, travel
and entertainment expenses, and closed or consolidated offices. Additionally,
other office and office occupancy costs have also declined due to the reduced
headcount compared to the same periods last year. The overall decrease was
offset in part by an increase in advertising and promotion as we are focusing on
improving and increasing our market presence through increased marketing
initiatives and programs.
General and administrative. General and administrative expense includes
primarily personnel and related overhead costs for support and administrative
functions. General and administrative expense for the second
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quarter and first six months of fiscal 2001 decreased to $23.8 million and $47.5
million, respectively, from $25.2 million and $48.2 million for the same periods
last year, respectively. The total dollar amount of expense declined mainly due
to a 14% decline in headcount since April 30, 2000, resulting primarily from the
fiscal 2000 and fiscal 2001 Phase I restructurings that decreased salary, bonus,
and travel and entertainment expenses. The overall decrease was offset, in part,
by increased costs in outside contract professional services compared to the
same periods last year.
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 internal development costs. R&D expense for the second quarter and
first six months of fiscal 2001 decreased to $24.4 million and $50.3 million,
respectively, compared to $28.8 million and $58.1 million for the same periods
last year, respectively. The decrease in dollar amount was primarily due to the
increased internal software development costs capitalized during the second
quarter and first six months of fiscal 2001. Including current period
capitalized internal costs for development, R&D expenditures were $31.6 million
and $65.4 million for the second quarter and first six months of fiscal 2001,
respectively, representing 15% of total revenue for both periods. Including
current period capitalized internal costs for development, R&D expenditures were
$32.2 million and $61.6 million for the second quarter and first six months of
fiscal 2000, respectively, representing 14% and 13% of total revenue for the
same periods, respectively.
During the quarter and first six months ended April 30, 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 second quarter
and first six months of fiscal 2001, we capitalized $7.2 million and $15.1
million, respectively, associated with internal costs and subcontract
development work and $1.6 million and $4.2 million of third-party contractual
obligations and outsourced development for the same periods, respectively.
During the second quarter and first six months of fiscal 2000, we capitalized
$3.5 million associated with internal costs and subcontract development work and
$5.1 million of third-party contractual obligations and outsourced development.
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 planned development of new technologies,
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 of new technology, 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 related to software, in-place workforce, customer base, and
goodwill resulting from our business acquisitions for the second quarter of
fiscal 2001 was $2.8 million, $832,000, $1.4 million, and $1.1 million,
respectively, and for the first six months of fiscal 2001 was $5.7 million, $1.7
million, $2.8 million, and $2.2 million, respectively. Total amortization
related to software, in-place workforce, customer base, and goodwill resulting
from our business acquisitions for the second quarter of fiscal 2000 was $2.9
million, $807,000, $1.4 million, and $1.2 million, respectively, and for the
first six months of fiscal 2000 was $5.8 million, $1.5 million, $2.7 million,
and $2.2 million, respectively. Amortization of acquired intangibles resulting
from the acquisition of our longstanding business partner serving Australia and
New Zealand began in the second quarter of fiscal 2000.
Fiscal 2001 restructuring and related charges and exit from certain
reseller agreements. During the second quarter of fiscal 2001, our Board of
Directors approved a strategic global restructuring plan as a component of our
revitalization plan. The restructuring plan was precipitated by continued
operating losses, lower employee productivity levels, and the general economic
downturn. Actions include the elimination of certain employee positions in order
to reduce the total workforce and the computer equipment either owned or leased
for employee
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use and to condense or close some operating facilities. The restructuring plan
consists of two phases, contemplated and taking place during the second and
third quarters of fiscal 2001.
We paid termination salaries, benefits, outplacement, and other related
costs in the amount of $2.1 million to the employees involuntarily terminated in
the second quarter of fiscal 2001 as part of the first phase (Phase I) of the
restructuring plan. The total workforce reduction was effected through
involuntary terminations. Specifically targeted were areas with opportunities
for increasing the management control by improving staffing ratios, reducing
layers of management, and eliminating non-essential functions. We decreased our
workforce by a total of 34 employee positions across the United States, Latin
America, and Canada across administrative, professional, and management
positions and various functions of our business. All employee terminations as
part of Phase I occurred during the second quarter of fiscal 2001, although a
limited number of involuntarily terminated employees continued to provide
transitional services to us (generally 30 to 60 days from the termination date).
Salary and benefits earned during the transition period were not included in the
restructuring charge and severance packages were only provided to the 34
involuntarily terminated employees. Operating lease buyouts and related costs in
the amount of $50,000 are the actual or estimated costs associated with the
early termination of leases for personal computer equipment that were no longer
necessary for operations due to the reduced workforce associated with Phase I.
During the second quarter of fiscal 2001, we reviewed our business approach
and business alliances and decided to exit certain reseller arrangements for
which prepaid royalty balances existed. We wrote off $7.8 million in prepaid
royalties associated with these reseller agreements during the second quarter of
fiscal 2001 and the charge is included in cost of license fees.
During May 2001, we announced the elimination of approximately 370 employee
positions as part of Phase II of the strategic restructuring plan directed
toward improving organizational effectiveness and profitability. During the
third quarter of fiscal 2001, we continue to assess and realign operations and
will incur restructuring and other related charges that will be comprised
primarily of the severance costs related to the elimination of worldwide
employee positions, outplacement services, lease termination payments, reduction
in office space and related overhead expenses, and asset write-offs. Total
restructuring and other related charges and annual savings related to the fiscal
2001 restructuring cannot be quantified at this time. We believe these actions
will position us for more profitable and sustainable growth. There can be no
assurance of our future level of operating expenses or of other factors that may
impact future operating results.
Fiscal 2000 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
remaining actions, such as office closures or consolidations and lease
terminations, were completed within one year, with continued obligations for the
remaining lease terms continuing through 2007. Based on current calculations,
the organizational changes effected during third quarter of fiscal 2000 are
expected to result in annual savings across all functional areas of over $70.0
million, and have allowed us to reallocate resources and invest in areas
critical to our future success.
We recorded adjustments to reduce the restructuring provision by $710,000
in the second quarter of fiscal 2001. The majority of the adjustment relates to
favorable negotiations and reduced obligations surrounding employee termination
costs. Additionally, the final amount of operating lease buyouts was effectively
reduced from the original estimate by $115,000 and we successfully eliminated
further rental obligations by $187,000.
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These reductions were offset by other restructuring related charges of $106,000
primarily for additional asset write-offs during the second quarter of fiscal
2001 as part of the approved restructuring plan.
We have completed all actions related to this restructuring as of April 30,
2001. An outstanding accrual of $4.2 million remained primarily consisting of
lease obligations for office and training facilities closed or consolidated
which will be paid over the remaining lease terms, unsettled employee
termination costs, and remaining operating lease buyout obligations. Reductions
in accrual amounts will continue to occur until all remaining obligations have
been settled in 2007. Any further cost true-ups related to the fiscal 2000
restructuring will be recorded through normal operations with no impact to the
restructuring charge.
Other income (expense). Other income and expenses include interest and
dividend income earned on cash, cash equivalents, investments, interest expense,
foreign currency gains and losses, and other non-operating income and expenses.
The decrease in other income and expense for the second quarter and first six
months of fiscal 2001 resulted primarily from one-time charges. Our $5.9 million
note receivable from a privately held company related to the sale of a product
line was not collected when due during the second quarter of fiscal 2001. During
the second quarter of fiscal 2001, we recorded a reserve against the note
receivable of $4.6 million in order to reduce the note to its net realizable
value, based on the fair value of the collateral. During the first quarter of
fiscal 2000, we allocated the total proceeds to the components of the agreement
and recognized a one-time gain of approximately $5.7 million as other income.
Additionally, during the second quarter of fiscal 2001, a $576,000 loss was
recognized for the portion of decline in value of a marketable equity security
that was deemed to be other than temporary. Comparatively, during the second
quarter and first six months of fiscal 2000, other income included a one-time
$17.9 million gain on the sale of a marketable equity investment and the $5.7
million gain from the sale of a product line. Included in other income were net
foreign exchange transaction losses of $1.3 million and $800,000 for the second
quarter and first six months of fiscal 2000, respectively, gains of $788,000 for
the second quarter of fiscal 2001, and losses of $350,600 for the first six
months of fiscal 2001. 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.
Benefit from income taxes. Our effective income tax rate was 39% for the
first half of fiscal 2001 and 37% for the first half of fiscal 2000. This change
is primarily due to the tax effect of projected income and expenses in various
countries that have higher tax rates and changes in investment strategies from
tax advantaged investments to taxable investments. Also, restructuring costs
were incurred in the first half of 2001 that are being incurred in various
countries at different tax rates. Excluding the effect of restructuring charges
the effective income tax rate was 40% for the first half of fiscal 2001 and 37%
for fiscal 2000.
We have available approximately $15.2 million in foreign-tax-credit
carryforwards, of which $4.8 million will expire in 2003, $8.4 million will
expire in 2004, $1.6 million will expire in 2005, and $.4 million will expire in
2006. We have a U.S. net operating loss carryforward (NOL) of approximately
$288.0 million, of which $121.2 million will expire in 2018, $52.5 million will
expire in 2019, and $69.0 million will expire in 2020, and $45.3 million will
expire in 2021. Additionally, an R&D credit carryforward of approximately $10.1
million is available, of which $3.5 million will expire in 2019, $4.6 million
will expire in 2020, and $2.0 million will expire in 2021.
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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 (generally the date of grant), 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
$18.6 million and $6.0 million for the first half of fiscal year 2000 and 2001,
respectively.
We have net deferred tax assets of $146.7 million at April 30, 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 April 30, 2001, are approximately $111.6
million in tax-effected NOLs. Approximately $83.4 million of the deferred tax
asset related to NOLs was generated due to the benefit of dispositions from
employee stock plans, which were recorded directly to stockholders equity in the
accompanying consolidated balance sheets.
Realization of the deferred tax asset associated with the NOLs is dependent
upon generating sufficient taxable income to utilize the NOLs prior to their
expiration. The minimum amount of taxable income required to realize the NOLs is
$327.0 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 April 30, 2001, our principal sources of liquidity consisted of
$190.9 million of cash and cash equivalents, $94.6 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 April 30, 2001, $25.5 million in cash and cash
equivalents, $2.2 million in short-term marketable securities and other
investments, and $20.3 million in long-term investments in marketable securities
were restricted for collateral in accordance with our forward contract
agreements for purchase of our common stock. As of April 30, 2001, we had
working capital of $141.7 million, and no amounts were outstanding under our
bank line of credit. Short-term deferred revenue and customer deposits totaling
$190.3 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 $331.9 million; including long-term investments, and excluding short-term
deferred revenue and customer deposits, would result in working capital of
$410.2 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 April 30, 2001, of $87.4 million and a gross unrealized gain of
$956,000. At April 30, 2001, our investments in the equity securities of certain
publicly traded or privately held technology companies had an aggregate fair
value of $7.2 million, and the gross unrealized loss was $2.9 million. A portion
of one of the investments is subject to a lock-up provision, which expires in
January 2002. We may 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 any 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 remained
unchanged at 106 days as of April 30, 2001 compared to April 30, 2000.
International collections experienced a slowdown for maintenance contracts due
to the price increase that was effected early in fiscal 2001. In addition,
during first quarter of fiscal 2001 we extended the due date for the calendar
year maintenance billings by one month in order
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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 generated $16.2 million in cash from operating activities during the
six-months ended April 30, 2001 compared to a use of $27.6 million during the
same period last year. The increase in cash generated from operations was
primarily due to collections of accounts receivables and fewer contractual
prepayments in the first six months of fiscal year 2001 compared to the same
period last year. Additionally, the decrease in other assets for the first six
months of fiscal 2001 is primarily a result of non-cash write-offs associated
with the exit of two reseller arrangements and a note receivable related to the
sale of a product line.
We used $32.5 million in cash from investing and financing activities
during the six-months ended April 30, 2001 compared to generating $32.0 million
during the same period last year. The decrease from April 30, 2000 was primarily
attributable to the repurchase of common stock during fiscal 2001 of $30.1
million under our forward equity contracts, decreased proceeds from the sales or
maturities of our investments in marketable securities, and our investment in
capitalized software development. Additionally, cash from financing activities
was reduced by $25.5 million in cash and cash equivalents that were designated
as restricted at April 30, 2001 in accordance with an agreement related to our
forward equity contracts. In future periods, we expect to invest a portion of
our cash and investments to repurchase the remaining shares of our common stock
under the forward equity contracts.
We have a stock repurchase plan which was designed to partially offset the
effects of share issuances under the stock option plans and Employee Stock
Purchase Plan (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. In March 2001, we executed a full physical settlement of
contracts to purchase 700,000 of our shares for $21.7 million, of which $14.8
million was settled in cash. Upon settlement, the repurchased shares were sold
to a different counter-party with whom we simultaneously entered into a forward
contract to repurchase the shares in March 2002. At April 30, 2001, the
redemption price was $9.94 per share and the aggregate redemption cost was $6.9
million. In June 2001, we executed a full physical settlement of contracts to
purchase 811,000 of our shares for $26.2 million, of which $16.3 million was
settled in cash. Upon settlement, the repurchased shares were sold to the
counter-party with whom we simultaneously entered into a forward contract to
repurchase the shares in June 2002, at a current redemption price of $12.30 per
share and a current aggregate redemption cost of $10.0 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
under the contracts entered into during fiscal 2001 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 stockholders and related per share amounts for each
period until settlement occurs. For the second quarter and first six months of
fiscal 2001, the accreted amount of interest was negligible and did not
materially impact the net loss allocable to common stockholders or the related
per share amounts.
The counter-party has the right to require early settlement of the forward
contracts based on the market price of our common stock as stipulated in the
contracts. A common stock price ranging from $7.50 to $10.00 per share may
require us to settle these contracts before they mature. In April 2001, we were
required to settle one forward contract originally scheduled to expire in
December 2001, representing 502,500 shares for $15.4 million, or $30.65 per
share.
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The counter-party also has the right to require us to provide collateral on
certain outstanding forward 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), as discussed below. For
certain outstanding forward contracts as of April 30, 2001, a decline in our
common stock price below $13.00 per share for three consecutive days required us
to provide such collateral to the counter-party. As of April 30, 2001, $48.0
million in cash, cash equivalents, and short- and long-term investments were
designated as collateral and are presented as restricted on the accompanying
consolidated balance sheet.
At April 30, 2001, we held forward contracts requiring the future purchase
of 2.2 million shares of common stock at an average redemption price of $29.56
per share. These forward purchase contracts require full physical settlement and
the aggregate redemption cost of $62.0 million is included in the accompanying
balance sheet in temporary equity with a corresponding decrease in additional
paid-in capital. As of April 30, 2001, all outstanding equity instruments were
exercisable through their dates of expiration, which ranged from June 2001 to
March 2002. As of April 30, 2001, approximately 1.3 million of the repurchased
shares have been reissued to fund our ESPP and the discretionary 401(k) Plan
contribution. At April 30, 2001, approximately 1.7 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.
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 second quarter and first six months of fiscal 2001. At April 30,
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 April 30, 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," during 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 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
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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 our fourth quarter of
fiscal 2001. We anticipate that the adoption of SAB No. 101 will not have a
material impact on our 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, cash flows or financial condition.
We effected a restructuring in the second quarter of fiscal 2001 with
additional actions being taken in the third quarter of fiscal 2001. This
restructuring involves, among other things, the reduction of our workforce in
May 2001 by approximately 370 employee positions worldwide. Such a reduction
could result in a temporary lack of focus and reduced productivity by our
remaining employees, including those directly responsible for revenue
generation, which in turn may affect our revenue in a future quarter. In
addition, prospects or customers may decide to delay or not to purchase our
products due to the perceived uncertainty caused by the restructuring. There can
be no assurances that we will not reduce or otherwise adjust our workforce again
in the future or that the related transition issues associated with such a
reduction will not be incurred again in the future. In addition, employees
directly affected by the reduction may seek future employment with our business
partners, customers, or even competitors. Although all employees are required to
sign a confidentiality agreement with us at the time of hire, there can be no
assurances that the confidential nature of certain proprietary information will
be maintained in the course of such future employment. Further, we believe that
our future success will depend in large part upon our ability to attract, train,
and retain highly skilled managerial, sales, and marketing personnel. We may
have difficulty attracting skilled employees as a result of a perceived risk of
future workforce reductions. Additionally, employment candidates may demand
greater incentives in connection with employment with us. The Company may grant
options or other stock-based awards to attract and retain personnel, which could
dilute our stockholders. Further, the failure to attract, train, retain, and
effectively manage employees could increase our costs, hurt our development and
sales efforts, and cause a degradation in the quality of our customer service.
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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;
- 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 fluctuation in revenue contribution from reselling partner
products;
- 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
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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 the second quarter and first six months of fiscal 2001, 34%
and 35% of our total revenue was generated from international operations,
respectively, and the net assets of our foreign operations totaled 2% of
consolidated net assets as of April 30, 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 certain 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 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 April 30, 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 April 30, 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 April 30, 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 April 30, 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 April 30, 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. Two subsequent suits were later consolidated and an
Amended Consolidated Complaint (the "Complaint") was filed on March 21, 2000.
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. 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 Court
has set a discovery deadline for September 15, 2001. No trial date has been set.
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
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.
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(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
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Not applicable
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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: June 13, 2001
By: /s/ PAMELA L. SAXTON
----------------------------------
Name: Pamela L. Saxton
Title: Vice President of Finance,
Controller and Chief
Accounting Officer
(principal accounting
officer)
Dated: June 13, 2001
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