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 JULY 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 000-23091
J.D. EDWARDS & COMPANY
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 84-0728700
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
ONE TECHNOLOGY WAY, DENVER, CO 80237
(Address of principal executive offices) (Zip Code)
</Table>
Registrant's telephone number, including area code: (303) 334-4000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of September 7, 2001, there were 114,190,859 shares of the Registrant's
Common Stock outstanding.
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J.D. EDWARDS & COMPANY
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
NO.
----
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Consolidated Balance Sheets as of October 31, 2000 and July
31, 2001.................................................... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended July 31, 2000 and 2001......................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended July 31, 2000 and 2001................................ 5
Notes to Consolidated Financial Statements.................. 6
Item 2... Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 33
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 35
Item 2. Changes in Securities and Use of Proceeds................... 35
Item 3. Defaults upon Senior Securities............................. 35
Item 4. Submission of Matters to a Vote of Security Holders......... 35
Item 5. Other Information........................................... 35
Item 6. Exhibits and Reports on Form 8-K............................ 35
SIGNATURES............................................................... 36
</Table>
The page numbers in the Table of Contents reflect actual page numbers, not
EDGAR page tag numbers.
J.D. Edwards is a registered trademark of J.D. Edwards & Company. The names
of all other products and services of J.D. Edwards used herein are trademarks or
registered trademarks of J.D. Edwards World Source Company. All other product
and service names used are trademarks or registered trademarks of their
respective owners.
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3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
OCTOBER 31, JULY 31,
2000 2001
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $180,674 $156,814
Short-term marketable securities and other investments.... 49,434 11,779
Accounts receivable, net of allowance for doubtful
accounts of $14,000 and $17,000 at October 31, 2000 and
July 31, 2001, respectively............................ 247,919 230,944
Other current assets...................................... 59,205 36,436
-------- --------
Total current assets.............................. 537,232 435,973
Long-term investments in marketable securities.............. 107,458 65,114
Property and equipment, net................................. 83,677 74,319
Non-current portion of deferred income taxes................ 122,537 --
Software costs, net......................................... 61,352 70,377
Other assets, net........................................... 38,785 28,741
-------- --------
$951,041 $674,524
======== ========
LIABILITIES, COMMON SHARES SUBJECT TO REPURCHASE,
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 59,591 $ 42,859
Unearned revenue and customer deposits.................... 135,445 174,125
Accrued liabilities....................................... 184,542 140,465
-------- --------
Total current liabilities......................... 379,578 357,449
Unearned revenue, net of current portion, and other......... 11,352 7,886
-------- --------
Total liabilities................................. 390,930 365,335
Commitments and contingencies (Note 11)
Common shares subject to repurchase, at redemption amount... 89,113 25,899
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; 114,181,575 issued
and 112,894,312 outstanding as of July 31, 2001........ 112 114
Additional paid-in capital................................ 416,716 416,620
Treasury stock, at cost; 1,947,905 shares and 1,287,263
shares as of October 31, 2000 and July 31, 2001,
respectively........................................... (71,087) (45,342)
Deferred compensation..................................... (88) (39)
Retained earnings (deficit)............................... 122,678 (75,069)
Accumulated other comprehensive income (loss): unrealized
gains (losses) on equity securities and foreign
currency translation adjustments, net.................. 2,667 (12,994)
-------- --------
Total stockholders' equity........................ 470,998 283,290
-------- --------
$951,041 $674,524
======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
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J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------------------- --------------------
2000 2001 2000 2001
-------- --------- -------- ---------
Revenue:
License fees................................... $116,675 $ 50,005 $281,704 $ 194,996
Services....................................... 144,441 154,200 442,167 443,556
-------- --------- -------- ---------
Total revenue.......................... 261,116 204,205 723,871 638,552
Costs and expenses:
Cost of license fees (including write-offs of
third party product arrangements of $12,857
for the three months ended and $20,661 for
the nine months ended July 31, 2001)........ 15,457 21,491 42,483 54,284
Cost of services............................... 96,319 79,412 277,029 246,218
Sales and marketing............................ 94,222 78,437 267,257 224,664
General and administrative..................... 25,319 21,229 73,471 68,702
Research and development....................... 28,787 23,916 86,879 74,243
Amortization of acquired software and other
acquired intangibles........................ 6,470 6,614 18,740 18,969
Restructuring and other related charges........ 30,113 21,737 30,113 24,226
-------- --------- -------- ---------
Total costs and expenses............... 296,687 252,836 795,972 711,306
Operating loss................................... (35,571) (48,631) (72,101) (72,754)
Other income (expense):
Interest and dividend income................... 3,745 2,996 11,320 11,147
Gains (losses) on equity investments and
product line................................ 1,018 (4,112) 24,582 (6,563)
Interest expense, foreign currency gains
(losses), and other, net.................... (1,177) (754) 270 (1,783)
-------- --------- -------- ---------
Loss before income taxes......................... (31,985) (50,501) (35,929) (69,953)
(Benefit from) provision for income taxes,
including valuation allowance............... (9,382) 135,400 (10,841) 127,794
-------- --------- -------- ---------
Net loss......................................... $(22,603) $(185,901) $(25,088) $(197,747)
======== ========= ======== =========
Net loss per common share:
Basic.......................................... $ (0.21) $ (1.65) $ (0.23) $ (1.77)
======== ========= ======== =========
Diluted........................................ $ (0.21) $ (1.65) $ (0.23) $ (1.77)
======== ========= ======== =========
Shares used in computing per share amounts:
Basic.......................................... 110,024 112,353 109,145 111,712
Diluted........................................ 110,024 112,353 109,145 111,712
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
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J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
JULY 31,
--------------------
2000 2001
-------- ---------
Operating activities:
Net loss.................................................... $(25,088) $(197,747)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation.............................................. 22,369 23,945
Amortization of intangible assets and securities premiums
or discounts........................................... 21,726 26,769
(Gain) loss related to sale of a product line (Note 5).... (5,686) 1,299
(Gain) loss on investments on equity investments.......... (18,896) 4,688
Write-off of software development costs and prepaid
reseller royalties..................................... -- 19,067
(Benefit from) provision for deferred income taxes,
including valuation allowance.......................... (17,000) 122,547
Other..................................................... 5,889 2,306
Changes in operating assets and liabilities:
Accounts receivable, net.................................. (23,312) 16,675
Other assets.............................................. (40,688) 5,095
Accounts payable.......................................... (4,535) (16,480)
Unearned revenue and customer deposits.................... 27,749 37,279
Accrued liabilities....................................... 26,128 (38,466)
-------- ---------
Net cash (used in) provided by operating
activities...................................... (31,344) 6,977
Investing activities:
Purchase of marketable securities and other investments... (73,104) (17,361)
Proceeds from sales or maturities of investments in
marketable securities.................................. 205,627 78,749
Purchase of property and equipment and other, net......... (27,753) (18,237)
Payment for purchase of acquired company, net of cash
acquired............................................... (10,151) --
Capitalized software costs................................ (17,144) (31,952)
-------- ---------
Net cash provided by investing activities......... 77,475 11,199
Financing activities:
Proceeds from issuance of common stock.................... 39,980 25,882
Settlement of common stock repurchase contracts........... (84,104) (67,296)
Restricted cash and cash equivalents...................... -- (25,476)
Release of restriction on cash and cash equivalents....... -- 25,476
-------- ---------
Net cash used in financing activities............. (41,124) (41,414)
Effect of exchange rate changes on cash..................... (3,075) (622)
-------- ---------
Net decrease in cash and cash equivalents................... (1,068) (23,860)
Cash and cash equivalents at beginning of period............ 113,341 180,674
-------- ---------
Cash and cash equivalents at end of period.................. $112,273 $ 156,814
======== =========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Income taxes paid......................................... $ 3,671 $ 8,079
Retirement savings plan contribution funded with common
stock.................................................. 2,782 3,697
</Table>
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 nine-month periods ended July 31, 2001 are not
necessarily indicative of the results expected for the full fiscal year. These
consolidated financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 2000.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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 nine-month periods
ended July 31, 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 nine-month period
ended July 31, 2000 were 3.0 million shares and 5.4 million shares,
respectively, and 1.5 million shares and 2.2 million shares for the three and
nine-month period ended July 31, 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 presented.
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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):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------------------- --------------------
2000 2001 2000 2001
-------- --------- -------- ---------
Numerator:
Net loss............................... $(22,603) $(185,901) $(25,088) $(197,747)
======== ========= ======== =========
Denominator:
Basic loss per
share -- weighted-average shares
outstanding......................... 110,024 112,353 109,145 111,712
======== ========= ======== =========
Diluted net loss per share -- adjusted
weighted-average shares outstanding,
assuming conversion of common stock
equivalents (if dilutive)........... 110,024 112,353 109,145 111,712
======== ========= ======== =========
Basic net loss per share................. $ (0.21) $ (1.65) $ (0.23) $ (1.77)
======== ========= ======== =========
Diluted net loss per share............... $ (0.21) $ (1.65) $ (0.23) $ (1.77)
======== ========= ======== =========
</Table>
(3) CERTAIN BALANCE SHEET COMPONENTS
Common Shares Subject to Repurchase. The Company has a stock repurchase
plan which was designed to partially offset the effects of share issuances under
the stock option plans and Employee Stock Purchase 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 approximately 5.2 million common shares in accordance with the share
repurchase plan, and the Company settled contracts for the purchase of
approximately 2.5 million shares for a total of $90.5 million in cash. During
the first nine months of fiscal 2001, the Company executed a full physical
settlement of contracts to purchase approximately 2.2 million of its shares for
$77.5 million, of which $51.9 million was settled in cash. Upon settlement, the
repurchased shares were sold to a counter-party with whom the Company
simultaneously entered into forward contracts to repurchase the shares with
dates of expiration ranging from December 2001 to June 2002. Additionally,
during fiscal 2001, the Company settled one forward contract, originally
scheduled to expire in December 2001, representing 502,500 shares for $15.4
million, or $30.65 per share.
At July 31, 2001, the Company held forward contracts requiring the future
purchase of approximately 2.2 million shares of common stock at an average
redemption price of $11.88 per share. These forward purchase contracts require
full physical settlement and the aggregate redemption cost of $25.9 million is
included in the accompanying balance sheet in temporary equity with a
corresponding decrease in additional paid-in capital. As of July 31, 2001,
approximately 1.2 million of the repurchased shares have been reissued to fund
the Company's ESPP and the discretionary 401(k) Plan contribution, and
approximately 1.3 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. The counter-party has the
right to require early settlement of the forward contracts if the market price
of the Company's common stock declines to $7.50 per share.
7
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 are
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 reduces net income (or increases a
net loss) allocable to common stockholders and related per share amounts for
each period until settlement occurs. For the third quarter and first nine months
of fiscal 2001, the accreted amount of interest did not materially impact the
net loss allocable to common stockholders or the related per share amounts.
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). Under 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 and any gains or losses are recognized through earnings. 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 were grandfathered until June 30, 2001, with cumulative catch-up
adjustment to be recorded at that time if still outstanding. All outstanding
contracts at July 31, 2001 are in accordance with the requirements of EITF 00-19
for equity instrument accounting.
Other Balance Sheet Components. The components of certain balance sheet
line items with significant fluctuation from October 31, 2001 are as follows (in
thousands):
<Table>
<Caption>
OCTOBER 31, JULY 31,
2000 2001
----------- --------
Unearned revenue and customer deposits...................... $135,445 $174,125
Accrued liabilities......................................... 184,512 140,465
</Table>
Unearned revenue and customer deposits consist primarily of annual
maintenance renewals that are recorded as unearned revenue when billed and
amortized over the contract period. Accrued liabilities consist primarily of
accrued compensation, accrued income taxes, restructuring accruals, and other
accrued costs.
(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 July 31, 2001, all investments in marketable
securities were carried at fair value as determined by their quoted market
prices and included as appropriate in either short- or long-term investments 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 July 31, 2001 of $73.2 million and a gross
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unrealized gain of $1.6 million. 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 the third quarter and first nine months of fiscal 2000,
the Company sold a portion of its investment in one of the technology companies
resulting in realized gains of $1.0 million and $18.9 million, respectively,
which are presented in the accompanying consolidated statement of operations in
other income or expense. During the third quarter and first nine months of
fiscal 2001, the Company recorded losses of $4.1 million and $4.7 million,
respectively, on certain equity investments for the portion of the decline in
market value that was deemed to be other than temporary. The losses are
presented in the accompanying consolidated statement of operations in other
income or expense. At July 31, 2001, the remaining aggregate fair value of the
equity securities in certain publicly traded or privately held technology
companies was $3.7 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. 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. The secured promissory note obligation was not collected when due;
therefore, 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. As of
July 31, 2001, the fair value of the collateral was included in software costs,
net, in the accompanying consolidated balance sheets. The loss is reflected in
the accompanying consolidated statement of operations in other income or expense
for the nine months ended July 31, 2001.
(6) INCOME TAXES
During the third quarter of fiscal 2001, the Company provided a non-cash
valuation allowance to fully offset the net deferred tax asset at July 31, 2001.
Management considered a number of factors, including the Company's cumulative
operating losses in fiscal 1999, 2000, and the first three quarters of fiscal
2001. Based upon the weight of positive and negative evidence regarding the
recoverability of deferred tax assets, the Company concluded that a valuation
allowance was required to fully offset the net deferred tax assets, as it is
more likely than not that the deferred tax assets will not be realized. Included
in the deferred tax asset balance at July 31, 2001, are approximately $128.0
million in tax-effected net operating losses (NOLs). Approximately $84.4 million
of the deferred tax asset related to NOLs generated from the benefit from
employee stock plans. 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 Company has a U.S. NOL of approximately $333.4
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 $90.7 million will expire in
2021. The Company has available approximately $15.4 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 $600,000
will expire in 2006. Additionally, an R&D credit carryforward of approximately
$11.1 million is available, of which $3.5 million will expire in 2019, $4.6
million will expire in 2020, and $3.0 million will expire in 2021. The Company's
effective income tax rate was a negative 182.69% for the nine-month period ended
July 31, 2001 and 30.17% for the nine-month period ended July 31, 2000. This
change is primarily due to providing a valuation allowance against the deferred
tax asset in the third quarter of fiscal 2001.
9
10
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) RESTRUCTURINGS AND OTHER CHARGES
Fiscal 2001 Restructuring
Overview. During the second and third quarters of fiscal 2001, the
Company's Board of Directors approved a two-phased strategic global
restructuring plan (referred to as the fiscal 2001 restructuring plan)
precipitated by the Company's operating losses, lower employee productivity
levels, and the general economic downturn. Actions included 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 the closure or
consolidation of some operating facilities. The fiscal 2001 restructuring plan
consists of two phases (Phase I and Phase II), initiated during the second and
third quarters of fiscal 2001. The Company expects that the remaining actions,
such as office closures or consolidations and lease terminations, will be
completed within a one-year time frame.
Employee severance and termination costs. The Company paid termination
salaries, benefits, outplacement, and other related costs to employees
terminated in the second and third quarters of fiscal 2001. 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. The Company decreased its workforce by a
total of 34 employee positions during Phase I and 364 employee positions during
Phase II 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 and all employee
terminations as part of Phase II occurred during the third quarter of fiscal
2001. A limited number of terminated employees continued to provide transitional
services to the Company (generally 30 to 60 days from the termination date) as
part of the fiscal 2001 restructuring plan. Salary and benefits earned during
the transition period were not included in the restructuring charge and
severance packages were provided to the 398 terminated employees.
The following table summarizes the number of employee positions eliminated
in accordance with the fiscal 2001 restructuring plan by geographic region and
function:
<Table>
<Caption>
GEOGRAPHIC REGION:
United States(1)....................... 265
Asia Pacific........................... 39
EMEA Asia Pacific...................... 56
Canada and Latin America(1)............ 38
---
Total.................................. 398
---
</Table>
<Table>
<Caption>
FUNCTION:
Sales and marketing(2)................. 150
Consulting and information
technology(2)........................ 110
Research and development............... 24
Education services(2).................. 16
Finance, human resources, legal, and
other general and administrative..... 49
Customer support and product
delivery............................. 49
---
Total.................................. 398
===
</Table>
- ---------------
(1) Phase I eliminated 18 employee positions in the United States and 16
employee positions in Canada and Latin America.
(2) Phase I eliminated 25 employee positions in sales and marketing, 8 in
consulting and information technology, and 1 in education services.
Operating lease buyouts. In accordance with the fiscal 2001 restructuring
plan, operating lease buyouts and related costs are the actual or estimated
costs associated with the early termination of leases for personal computer
equipment and equipment in training facilities or technology labs that were no
longer necessary for operations due to the reduced workforce and the closure or
consolidation of those training facilities or technology labs.
10
11
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Office closures. In addition to the decrease in employee positions, Phase
II of the fiscal 2001 restructuring plan provided for reduction in specific
office space, underutilized training facilities, 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 fiscal 2001 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.
All office consolidations and closures are expected to be completed no later
than April 2002.
Asset disposal losses and other costs. During the third quarter of fiscal
2001, 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 as part of Phase II of the fiscal
2001 restructuring plan. These assets were taken out of service and disposed of
during the quarter ended July 31, 2001.
Fiscal 2001 restructuring costs. The following table summarizes the
components of the Phase I and Phase II restructuring charge, the payments made
during the periods presented, and the remaining accrual as of July 31, 2001, by
geographic region:
SUMMARY OF FISCAL 2001 RESTRUCTURING CHARGE AND PAYMENTS (IN THOUSANDS):
<Table>
<Caption>
EMPLOYEE TOTAL
SEVERANCE & OPERATING RESTRUCTURING ASSET DISPOSAL RESTRUCTURING
TERMINATION OFFICE LEASE COSTS LOSSES AND AND RELATED
COSTS CLOSURES BUYOUTS SUBTOTAL OTHER COSTS CHARGES
----------- -------- --------- ------------- -------------- -------------
PHASE I:
United States.................... $ 1,412 $ -- $ 28 $ 1,440 $ -- $ 1,440
Canada and Latin America......... 694 -- 22 716 -- 716
------- ------- ------ ------- ------- -------
Consolidated Phase I charge,
quarter-ended April 30, 2001... 2,106 -- 50 2,156 -- 2,156
Second quarter cash payments..... (574) -- -- (574) -- (574)
------- ------- ------ ------- ------- -------
Accrual balance, April 30,
2001........................ 1,532 -- 50 1,582 -- 1,582
Third quarter cash payments...... (1,031) -- -- (1,031) -- (1,031)
Third quarter adjustment......... (280) -- -- (280) -- (280)
------- ------- ------ ------- ------- -------
Accrual balance, July 31,
2001........................ $ 221 $ -- $ 50 $ 271 $ -- $ 271
======= ======= ====== ======= ======= =======
PHASE II:
United States.................... $ 4,031 $ 8,755 $1,396 $14,182 $ 1,959 $16,141
EMEA............................. 1,848 997 71 2,916 49 2,965
Canada, Asia Pacific, and Latin
America........................ 1,416 1,144 20 2,580 331 2,911
------- ------- ------ ------- ------- -------
Consolidated Phase II charge,
quarter-ended July 31, 2001.... 7,295 10,896 1,487 19,678 2,339 22,017
Third quarter cash payments...... (6,349) (552) (296) (7,197) -- (7,197)
Third quarter asset disposals.... -- -- -- -- (2,339) (2,339)
------- ------- ------ ------- ------- -------
Accrual balance, July 31,
2001........................ $ 946 $10,344 $1,191 $12,481 $ -- $12,481
======= ======= ====== ======= ======= =======
PHASE I AND PHASE II COMBINED:
Accrual balance, July 31, 2001... $ 1,167 $10,344 $1,241 $12,752 $ -- $12,752
======= ======= ====== ======= ======= =======
</Table>
11
12
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Phase I adjustments. The Company recorded adjustments to reduce the Phase
I restructuring provision by $280,000 in the third quarter of fiscal 2001. The
majority of the adjustment relates to reduced obligations surrounding employee
severance and termination costs.
Phase I exit from certain reseller agreements. The Company reviewed its
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 in the
accompanying consolidated statement of operations.
Phase II exit from certain third party arrangements. As a result of the
Company's continued review of its business alliances management decided to exit
certain third party arrangements during the third quarter of fiscal 2001. The
Company wrote off $5.0 million in prepaid reseller royalties as a result of a
decision not to market a third-party application service provider e-procurement
solution. Additionally, the Company wrote off $7.8 million of capitalized third
party products resulting from a change in strategy related to a portion of the
XPI product. These charges are included in cost of license fees in the
accompanying consolidated statement of operations.
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. Management effected the
restructuring plan during the third quarter of fiscal 2000 by eliminating 775
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 Company has completed all actions related to this restructuring as of
April 30, 2001. An outstanding accrual of $3.6 million remained at July 31, 2001
primarily consisting of lease obligations for office and training facilities
closed and consolidated which will be paid over the remaining lease terms and
unsettled employee termination costs.
SUMMARY OF FISCAL 2000 RESTRUCTURING ACCRUAL ACTIVITY (IN THOUSANDS):
<Table>
<Caption>
EMPLOYEE TOTAL
SEVERANCE & OPERATING RESTRUCTURING ASSET DISPOSAL RESTRUCTURING
TERMINATION OFFICE LEASE COSTS LOSSES AND AND RELATED
ACCRUAL CLOSURES BUYOUTS SUBTOTAL OTHER COSTS CHARGES
----------- -------- --------- ------------- -------------- -------------
Consolidated charge, July 31,
2001........................... $ 16,683 $12,667 $ 647 $ 29,997 $ 116 $ 30,113
Fiscal 2000 cash payments........ (15,487) (4,154) (223) (19,864) (557) (20,421)
Fiscal 2000 adjustments.......... (342) (2,696) -- (3,038) 941 (2,097)
-------- ------- ----- -------- ------- --------
Accrual balance, October 31,
2000........................ 854 5,817 424 7,095 500 7,595
Fiscal 2001 cash payments........ (485) (2,145) (237) (2,867) (382) (3,249)
Fiscal 2001 asset disposals...... -- -- -- -- (1,078) (1,078)
Fiscal 2001 adjustments.......... (134) (335) (187) (656) 960 304
-------- ------- ----- -------- ------- --------
Accrual balance, July 31,
2001........................ $ 235 $ 3,337 $ -- $ 3,572 $ -- $ 3,572
======== ======= ===== ======== ======= ========
</Table>
Reductions in accrual amounts will continue to occur until all remaining
obligations have been settled by 2007. The Company recorded adjustments to
decrease the restructuring accrual by $656,000 during fiscal
12
13
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001. The adjustments are primarily a result of the final amount of operating
lease buyouts being effectively reduced from the original estimate and
successful elimination of further rental obligations on office closures earlier
in the fiscal year. Additionally, the provision was reduced resulting from
favorable negotiations and reduced obligations surrounding employee termination
costs. Any cost true-ups subsequent to April 30, 2001 related to the fiscal 2000
restructuring will be recorded through normal operations with no impact to the
restructuring charge.
(8) 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):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------------------- --------------------
2000 2001 2000 2001
-------- --------- -------- ---------
Net loss......................................... $(22,603) $(185,901) $(25,088) $(197,747)
Change in unrealized gains (losses) on equity
securities, net of tax......................... 3,485 (5,080) 9,134 (14,589)
Change in foreign currency translation losses.... 29 (1,111) (2,330) (1,072)
-------- --------- -------- ---------
Total comprehensive income (loss),
net.................................. $(19,089) $(192,092) $(18,284) $(213,408)
======== ========= ======== =========
</Table>
(9) 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 No. 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 of 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 from the mark to market
adjustments 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 July 31, 2001, the Company had approximately $80.4 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 was a net foreign exchange transaction loss of $524,000 for the
third quarter of fiscal 2000, a net gain of $238,000 for the first nine months
of fiscal 2000, respectively, and net losses of $429,000 and $780,000 for the
third quarter and first nine months of fiscal 2001, respectively.
(10) SEGMENT INFORMATION
Operating segments are defined as components of an enterprise for which
discrete financial information is available and is reviewed regularly by the
chief operating decision-maker, or decision-making group, to
13
14
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 for all periods presented. The groupings presented below
represent an aggregation of financial information for countries meeting certain
criteria, including economic characteristics, similar customers, and the same
products, services, and distribution methods.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 30,
------------------- -------------------
2000 2001 2000 2001
-------- -------- -------- --------
REVENUES FROM UNAFFILIATED CUSTOMERS:
United States.................................... $173,459 $121,318 $463,869 $403,099
Europe, Middle East, and Africa.................. 47,756 44,423 143,955 127,459
Canada, Asia, and Latin America.................. 39,901 38,464 116,047 107,994
-------- -------- -------- --------
Consolidated..................................... $261,116 $204,205 $723,871 $638,552
======== ======== ======== ========
INCOME (LOSS) FROM OPERATIONS:
United States.................................... $ (8,801) $(24,772) $(51,525) $(50,065)
Europe, Middle East, and Africa.................. 10,675 9,200 20,406 26,312
Canada, Asia, and Latin America.................. (862) 8,054 7,871 14,760
Amortization of acquired intangibles............. (6,470) (6,614) (18,740) (18,969)
Write-off of certain third party arrangements.... -- (12,762) -- (20,566)
Restructuring and other related charges.......... (30,113) (21,737) (30,113) (24,226)
-------- -------- -------- --------
Consolidated..................................... $(35,571) $(48,631) $(72,101) $(72,754)
======== ======== ======== ========
</Table>
(11) 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 nine months of
fiscal 2001. At July 31, 2001, investments totaling $67.2 million were
designated as collateral for these leases compared to $123.3 million of total
investments designated as collateral at October 31, 2000. The lease agreement
requires that the Company remain in compliance with certain affirmative and
negative covenants and representations and warranties, including certain defined
financial covenants. At July 31, 2001, the Company was in compliance with these
covenants and representations and warranties. The Company is currently assessing
its compliance with certain financial covenants for the fourth quarter of fiscal
2001 and for the full fiscal year 2001. The Company is currently discussing this
matter with the syndication of banks. Should management determine that a
covenant violation is probable for
14
15
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the fourth quarter of fiscal 2001 or for the full fiscal year 2001, management
will pursue securing waivers, amending existing contracts, or consider other
financing alternatives. The Company is currently unable to determine the outcome
of any remedy or refinancing measures.
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 extended the deadline for fact discovery to
January 15, 2002 and the filing of dispositive motions to February 28, 2002. 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.
(12) LINE OF CREDIT
In July 2001, the Company renewed its $100 million revolving line of credit
with a syndication of banks that expires in July 2002. The line of credit is
secured by the Company's eligible accounts receivable (as defined). The primary
purpose of this line of credit is for general corporate use and provides the
Company with increased financial flexibility. Advances under the line of credit
require the Company's compliance with certain affirmative and negative covenants
and representations and warranties. At July 31, 2001, the Company was in
compliance with these covenants and representations and warranties and there
were no borrowings outstanding.
(13) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which supersedes Accounting Principles Board
(APB) Opinion No. 16, "Business Combinations." SFAS No. 141 requires that
purchase method of accounting be used for business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interests method. In addition, SFAS
No. 141 establishes specific criteria for the recognition of intangible assets
separately from goodwill and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. The provisions of this
statement apply to all business combinations initiated after June 30, 2001 and
applies to all business combinations accounted for using the purchase method for
which the date of acquisition is July 1, 2001, or later. The adoption of SFAS
No. 141 will not change the method of accounting used by the Company in previous
business combinations.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which is effective for fiscal years beginning after December
15, 2001. Certain provisions shall also be applied to acquisitions initiated
subsequent to June 30, 2001. SFAS No. 142 supersedes APB Opinion No. 17
15
16
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Intangible Assets," and requires, among other things, the discontinuance of
amortization related to goodwill and indefinite lived intangible assets. These
assets will then be subject to an impairment test at least annually. In
addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles, and
reclassification of certain intangibles out of previously reported goodwill.
The Company will adopt SFAS No. 142 no later than November 1, 2002. When
the Company adopts SFAS No. 142, this will result in the Company no longer
amortizing existing goodwill. In addition, the Company will be required to
measure goodwill for impairment as part of the transition provisions. Any
impairment resulting from these transition tests will be recorded and recognized
as the cumulative effect of a change in accounting principle. The Company will
not be able to determine if impairment exists until completion of such
impairment tests.
Additionally, in June 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," which is effective for fiscal years beginning
after June 15, 2002. SFAS No. 143 requires, among other things, that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are then capitalized as part of the
carrying amount of the long-lived asset. The Company will adopt SFAS No. 143 no
later than November 1, 2002. Management anticipates that the adoption of SFAS
No. 143 will not have a material impact on its consolidated financial
statements.
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.
(14) SUBSEQUENT EVENTS
During August 2001, the Company announced the execution of a definitive
agreement to acquire YOUcentric, Inc. (YOUcentric) of Charlotte, North Carolina.
YOUcentric is a privately -- held provider of Java-based customer relationship
management (CRM) software, including applications for sales force automation,
campaign management, contact center management, and partner relationship
management. Under the terms of the agreement, the Company plans to acquire 100%
of the outstanding capital stock of YOUcentric, valued at approximately $86.0
million. The proportions of Company common stock and cash to be paid as
consideration will be determined at the time of closing. The acquisition is
subject to the new acquisition accounting rules set forth in SFAS No. 141 and
SFAS No. 142, discussed above.
16
17
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 that includes
restructuring activities, which do not benefit future operations and resulted 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 the second and third quarters of 2001 by nearly
400 employees.
Our plans to improve profitability:
- continue to expand our focus on supply chain opportunities by 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 our effort in consulting, education, and
customer service operations;
- improve service revenue through maintenance price increases and expanded
service options for customers;
17
18
- capture a larger percentage of direct consulting services, and
- put in place a more effective marketing programs.
In addition, from a product standpoint we are taking steps to remain
competitive in the future by continuing to build a leadership position in the
collaborative commerce (c-commerce) market. We are focused on identifying
specific industries and geographies where we can best compete and are assessing
our current product and services fit for these markets. During August 2001, we
announced the execution of a definitive agreement to acquire YOUcentric, Inc.,
(YOUcentric). YOUcentric is a privately held provider of Java-based customer
relationship management (CRM) software, including applications for sales force
automation, campaign management, contact center management, and partner
relationship management. By adding YOUcentric's capabilities, we believe we will
be in a position to deliver a single source comprehensive set of integrated
collaborative applications that enable companies to electronically manage their
business relationships from supply chain planning to customer services. 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 and a more
efficient and effective organization, and will help us to align our resources on
profitable targeted industries and geographies. We are focused on continuing to
improve revenue growth, organizational effectiveness, and profitability.
Our financial results for the third quarter and first nine months of fiscal
2001 reflected increased operating losses of $48.6 million and $72.8 million,
respectively, compared to $35.6 million and $72.1 million, respectively, for the
same periods last year, This is primarily a result of a significant decline in
license fee revenue during the third quarter of fiscal 2001 as compared to last
year. Additionally, the operating loss for the third quarter and first nine
months of fiscal 2001 included restructuring and related charges of $21.7
million and $24.2 million, respectively, and amortization of acquired
intangibles of $6.6 million and $19.0 million, respectively. Operating expenses
before amortization of acquired intangibles and restructuring charges declined
to $224.5 million from $260.1 million for the third quarter of fiscal 2001
compared to the same period last year declined, respectively, and for the first
nine months of fiscal 2001, declined to $668.1 million from $747.1 million
compared to the same period last year, respectively. These declines were
primarily due to our focus on organizational effectiveness which included a 16%
company-wide decrease in headcount over the past year resulting in increased
operating efficiencies and decreased expenses for the fiscal 2001 periods
presented. The net loss for the third quarter and first nine months of fiscal
2001 was $185.9 million, or $1.65 per share, and $197.7 million, or $1.77 per
share, respectively, compared to a net loss of $22.6 million, or $0.21 per share
and $25.1 million, or $0.23 per share, for the same periods last year,
respectively. This change is primarily due to a valuation allowance that was
provided against our deferred tax asset in the third quarter of fiscal 2001. We
have provided a valuation allowance to fully offset the net deferred tax asset
at July 31, 2001. This non-cash valuation allowance was recorded due to the
uncertainties surrounding the realization of the deferred tax asset resulting
from our net losses in fiscal 1999, 2000, and the first three quarters of fiscal
2001.
Based on current projections for fiscal 2001, we expect total revenue to
decline significantly compared to fiscal 2000 results. While we have and are
continuing to make organizational changes to position us to meet our long-term
goals, we expect that these changes discussed above will have a negative effect
on our short-term financial performance. 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.
18
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:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
----------------------- -----------------------
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.............. 44.7% 24.5% (57.1)% 38.9% 30.5% (30.8)%
Services.................. 55.3 75.5 6.8 61.1 69.5 0.3
----- ----- ----- -----
Total revenue..... 100.0 100.0 (21.8) 100.0 100.0 (11.8)
Costs and expenses:
Cost of license fees
(including write-offs
of certain third party
arrangements).......... 5.9 10.6 (39.0) 5.8 8.5 (27.8)
Cost of services.......... 36.9 38.9 (17.6) 38.3 38.6 (11.1)
Sales and marketing....... 36.1 38.4 (16.8) 36.9 35.2 (15.9)
General and
administrative......... 9.7 10.4 (16.2) 10.1 10.8 (6.5)
Research and
development............ 11.0 11.7 (16.9) 12.0 11.5 (14.5)
Amortization of acquired
software and other
acquired intangibles... 1.4 3.2 2.2 2.6 3.0 1.2
Restructuring and other
related charges........ 11.5 10.6 27.8 4.2 3.8 19.5
----- ----- ----- -----
Total costs and
expenses........ 113.6 123.8 (14.8) 110.0 111.4 (10.6)
Operating loss.............. (13.6) (23.8) -- (10.0) (11.4) --
Other income, net........... 1.4 (0.9) -- 5.0 0.4 --
----- ----- ----- -----
Loss before income taxes.... (12.2) (24.7) -- (5.0) (11.0) --
(Benefit from) provision for
income taxes.............. (3.5) 66.3 -- (1.5) 20.0 --
----- ----- ----- -----
Net loss.................... (8.7)% (91.0)% -- (3.5)% (31.0)% --
===== ===== ===== =====
Gross margin on license fee
revenue (including
write-offs of certain
third party
arrangements)............. 86.8% 57.0% -- 84.9% 72.2% --
Gross margin on license fee
revenue (excluding
write-offs of certain
third party
arrangements)............. 86.8% 82.5% -- 84.9% 82.7% --
Gross margin on service
revenue................... 33.3% 48.5% -- 37.3% 44.5% --
</Table>
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)
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No. 101, "Revenue Recognition in Financial Statements," in December 1999. SAB
No. 101, as amended, provides further interpretive guidance for public companies
on the recognition, presentation, and disclosure of revenue in financial
statements. In June 2000, the SEC issued SAB No. 101B, delaying the
implementation of SAB No. 101 until our fourth quarter of fiscal 2001. We have
evaluated the impact of SAB No. 101 and believe that it will not have a material
impact on our consolidated financial position, results of operations, or current
licensing or revenue recognition practices.
Consulting and education services are not essential to the functionality of
our software products, are separately priced, and are available from a number of
suppliers. Revenue from these services is recorded separately from the license
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 an
allowance is 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 gross
as the principal 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, under certain business partner
agreements, we recognize net revenue from a referral fee received from the
business partner and incur no related cost of services.
Our total revenue decreased to $204.2 million and $638.6 million for the
third quarter and first nine months of fiscal 2001, respectively, compared to
$261.1 million and $723.9 million for the same periods last year, respectively.
For the third quarter of fiscal 2001, the revenue mix between license fees and
services was 24.5% and 75.5%, respectively, compared to 44.7% and 55.3%,
respectively, for the third quarter of fiscal 2000. For the first nine months of
fiscal 2001, the revenue mix between license fees and services was 30.5% and
69.5%, respectively, compared to 38.9% and 61.1%, respectively, for the same
period last year. We believe the decrease in total revenue was primarily a
result of a continued general slowdown of the U.S. economy as well as decline in
productivity within the sales organization caused by organizational and
leadership changes.
A 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 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 third quarter and first
nine 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 3% for the third quarter and first nine months of fiscal 2000, based
on a comparison of foreign exchange rates in effect at the beginning 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
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weakening relative to foreign currencies. Unfavorable changes in foreign
exchange rates may have a material adverse impact on our total revenue and
results of operations.
For the third 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 59%, 22%, and 19% of total revenue, respectively. For the first
nine months of fiscal 2001, the U.S., EMEA, and the rest of the world accounted
for 63%, 20%, and 17% of total revenue, respectively. The geographic breakdown
of total revenue for the third quarter of fiscal 2000 was 65%, 18%, and 17% for
the U.S., EMEA, and the rest of the world, respectively, and 64%, 20%, and 16%
for the U.S., EMEA, and the rest of the world, respectively, for the first nine
months of fiscal 2000.
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. 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.
While other factors discussed above are impacting our current year results, we
expect to continue experiencing seasonality to some extent in future periods. We
believe that these seasonal factors are common in the software industry.
License fees. License fee revenue declined 57.1% to $50.0 million for the
third quarter of fiscal 2001 compared to $116.7 million for the third fiscal
quarter of 2000, and declined 30.8% to $195.0 million for the first nine months
of fiscal 2001 compared to $281.7 for the same period last year. This decrease
is primarily a result of a continued downturn in general economic and market
conditions causing decreased product demand coupled with decreased productivity
resulting from organizational and leadership changes within the sales
organization during the third quarter and first nine months of fiscal 2001.
Additionally, revenue resulting from reseller arrangements for the third quarter
and first nine months of fiscal 2001 has declined compared to the same periods
last year. Transactions exceeding $1.0 million for the third quarter and first
nine months of fiscal 2001 decreased compared to the same periods last year and
the overall number of transactions declined considerably. During the third
quarter of fiscal 2001, license transactions exceeding $1.0 million decreased to
9 transactions, representing $15.5 million or 31% of license fee revenue,
compared to 22 transactions, representing $58.1 million or 50% of license fee
revenue, last year. During the first nine months of fiscal 2001, license
transactions exceeding $1.0 million decreased to 47 transactions, representing
$86.7 million or 44% of license fee revenue, from 48 transactions, representing
$125.6 million or 45%, for the same period last year. The total number of
transactions for the third quarter of fiscal 2001 decreased 28% to 299 compared
to 417 last year and declined 22% to 896 for the first nine months of fiscal
2001 compared to 1,146 for the same period last year. We increased our total
number of customers by 7% compared to the end of the third quarter last year to
over 6,290 at July 31, 2001. The percentage of license revenue from new
customers was 65% and 60% for the third quarter and first nine months of fiscal
2001, compared to 55% and 47% 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 continued downturns in
global economic conditions or intensified competitive pressures.
Services. Services revenue consists of fees generated by our personnel
providing direct consulting, education, and software maintenance services to
customers, 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 third quarter of fiscal 2001
increased 6.8% to $154.2 million from $144.4 million for the third quarter of
fiscal 2000, as a result of improved internal consultant utilization and
realization as well as increased software maintenance revenue, offset in part,
by a decline in education revenue. Services revenue for the first nine months of
fiscal 2001 remained flat at $443.6 million compared to $442.2 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 third quarter and first nine months of fiscal 2001 is attributed
to the consolidation or
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elimination of education classes due to less demand and transition from
application to technical training, lower utilization during the holiday season
and increased employee education time related to the OneWorld Xe release early
in fiscal 2001. 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
from our business partners. In the remainder of fiscal 2001, we intend to
improve utilization of our existing consulting and education staff and
reallocate existing employees to direct revenue-generating consulting positions
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 third quarter and first nine months of
fiscal 2001 compared to the same periods last year, which offsets the declines
in education revenue and year-to-date professional services 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 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 increasing 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 that we will achieve maintenance
revenue growth resulting 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 $224.5 million for the third quarter of fiscal 2001
from $260.1 for the third quarter of fiscal 2000 and to $668.1 million for the
first nine months of fiscal 2001 from $747.1 million for the first nine 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 the fiscal 2001 revitalization plan which includes the
fiscal 2001 restructuring plan. There has been a 16% reduction in company-wide
headcount as a result of the fiscal 2000 restructuring and the fiscal 2001
restructuring plans. These reductions have caused company-wide salary expense
for the third quarter and first nine months of fiscal 2001 to decline 17% and
11%, compared to the same periods last year, respectively. Additionally, as part
of the review of our business approach, the employee bonus plan was 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 third quarter and
first nine months of fiscal 2001 of $5.9 million or 80% and $13.4 million or 71%
compared to the same periods last year, respectively. Also of significance,
travel and entertainment expenses declined across our organization for the third
quarter and first nine months of fiscal 2001 by 35% and 31% compared to the same
periods last year, respectively, due to our overall focus on cost savings.
Cost of license fees. Cost of license fees includes business partner
commissions, royalties, amortization of internally developed capitalized
software (including contractual payments to third parties related to internal
projects and contractual payments to third parties for source code and license
fees), documentation, and software delivery expenses. The total dollar amount
for the cost of license fees increased to $21.5 million and $54.3 million for
third quarter and first nine months of fiscal 2001, respectively, from $15.5
million and
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$42.5 million for the same periods last year, respectively. The increases are
primarily due to the exit from certain third party agreements and related
write-offs of $12.8 million and $20.6 million during the third quarter and first
nine months of fiscal 2001, respectively. During the third quarter of fiscal
2001, we wrote off $5.0 million in prepaid reseller royalties as a result of a
decision not to market a third-party application service provider e-procurement
solution and, we wrote off $7.8 million of capitalized third party products
resulting from a change in strategy related to a portion of our XPI product.
These write-offs were 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.
We record amortization expense on our capitalized software on a
straight-line basis (generally three years) to cost of license fees beginning
once the product is generally available. During the first nine 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 third quarter and first
nine months of fiscal 2001, capitalized software amortization was $3.6 million
and $7.9 million, respectively. For the third quarter and first nine months of
fiscal 2001, we capitalized software development costs in the amount of $7.4
million and $22.5 million for internal costs and $2.3 million and $6.5 million
for payments for third-party costs and outsourced development, respectively.
During the third quarter and first nine months of fiscal 2000 we capitalized
internal costs in the amount of $3.0 million and $6.5 million, respectively, and
third-party costs and outsourced development in the amount of $5.6 million and
$10.7 million, respectively. The third-party costs and outsourced development
are related to our agreements with several providers of business-to-business
integration and process integration providers. These agreements represent an
investment in these companies' industry expertise or products, which are
embedded or currently being embedded into our World and OneWorld software for
new functionality. 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. During the third quarter and
first nine months of fiscal 2001, gross margin on license fee revenue decreased
to 57.0% and 72.2%, respectively, from 86.8% and 84.9%, for the same periods
last year, respectively. These declines were primarily as a result of the
write-off of $12.8 million in the third quarter of fiscal 2001 and $7.8 million
in the second quarter of fiscal 2001 associated with the exit of certain third
party arrangements discussed above, and declines in license fee revenue for the
periods presented. Excluding these write-offs, the gross margin for the third
quarter and first nine months of fiscal 2001 was 82.5% and 82.7%, respectively,
compared to 86.8% and 84.9% for the same periods last year.
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 third quarter and first
nine months of fiscal 2001 decreased to $79.4 million and $246.2 million,
respectively, from $96.3 million and $277.0 million for the same periods last
year, respectively. The decrease for the periods was due to in part a decline in
business partner subcontracted professional services revenue and a result of 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, Phase II of the
fiscal 2001 restructuring, and consolidation of training classes. Additionally,
a 7% 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 third quarter and first nine
months of fiscal 2001 improved to 48.5% and 44.5%, respectively, compared to
33.3% and 37.3% for the same periods last year, respectively. The increase is
due to higher internal consultant utilization, increased maintenance revenue,
and higher margins on education services. 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
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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 third quarter and first nine months of fiscal 2001 decreased to $78.4
million and $224.7 million, respectively, from $94.2 million and $267.3 million
for the same periods last year, respectively. The decline is mainly due to an 8%
decline in headcount since July 31, 2000, resulting primarily from the fiscal
2000 and fiscal 2001 restructurings that decreased salary, bonus, travel and
entertainment expenses, together with closed or consolidated offices.
Additionally, other office and office occupancy costs have also declined due to
the reduced headcount and cost savings efforts 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 third quarter and first
nine months of fiscal 2001 decreased to $21.2 million and $68.7 million,
respectively, from $25.3 million and $73.4 million for the same periods last
year, respectively. The total dollar amount of expense declined mainly due to a
11% decline in headcount since July 31, 2000, resulting primarily from the
fiscal 2000 and fiscal 2001 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 associated with our
revitalization plan efforts, 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 third quarter and
first nine months of fiscal 2001 decreased to $23.9 million and $74.2 million,
respectively, compared to $28.8 million and $86.9 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 third
quarter and first nine months of fiscal 2001. Including current period
capitalized internal costs for development, R&D expenditures were $31.3 million
and $96.7 million for the third quarter and first nine 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
$31.8 million and $93.4 million for the third quarter and first nine months of
fiscal 2000, respectively, representing 12% and 13% of total revenue for the
same periods, respectively.
During the quarter and first nine months ended July 31, 2001, we continued
to devote development resources to major enhancements and new products
associated with our OneWorld application suites, as well as the integration of
our internally developed applications with third party applications. 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 third quarter and first nine months of fiscal
2001, we capitalized $7.4 million and $22.5 million, respectively, associated
with internal costs and $2.3 million and $6.5 million of third-party costs and
outsourced development for the same periods, respectively. During the third
quarter and first nine months of fiscal 2000, we capitalized $3.0 million and
$6.5 million, respectively, associated with internal costs, and $5.6 million and
$10.7 million, respectively, of third-party costs and outsourced development.
During the third quarter of fiscal 2001 we wrote-off $7.8 million of capitalized
third party products resulting from a change in strategy related to a portion of
our XPI product.
We anticipate that certain 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
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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 advanced planning and scheduling, and
e-procurement. In addition, with the announcement of the acquisition of
YOUcentric in August 2001, we will be working on integrating these Java-based
CRM software applications into our existing software. 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 third quarter of
fiscal 2001 was $3.3 million, $828,000, $1.4 million, and $1.1 million,
respectively, and for the first nine months of fiscal 2001 was $9.0 million,
$2.5 million, $4.2 million, and $3.3 million, respectively. Total amortization
related to software, in-place workforce, customer base, and goodwill resulting
from our business acquisitions for the third quarter of fiscal 2000 was $2.9
million, $867,000, $1.5 million, and $1.2 million, respectively, and for the
first nine months of fiscal 2000 was $8.9 million, $2.3 million, $4.1 million,
and $3.4 million, respectively. During the third quarter of fiscal 2001,
acquired software related to our Premisys acquisition was fully amortized.
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 third
party arrangements. During the second and third quarters of fiscal 2001, our
Board of Directors approved a two-phased strategic global restructuring plan
(referred to as the fiscal 2001 restructuring plan) precipitated by our
operating losses, lower employee productivity levels, and the general economic
downturn. Actions included 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
fiscal 2001 restructuring plan consists of two phases (Phase I and Phase II),
initiated during the second and third quarters of fiscal 2001. We expect that
the remaining actions, such as office closures or consolidations and lease
terminations, will be completed within a one-year time frame.
We incurred charges during the first nine months of fiscal 2001 for
termination salaries, benefits, outplacement, and other related costs in the
amount of $1.8 million for the employees terminated in the second quarter of
fiscal 2001 as part of Phase I, and $7.3 million to the employees terminated in
the third quarter by fiscal 2001 as part of Phase II. 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. We decreased our workforce by a total of 34 employee
positions during Phase I and 364 employee positions during Phase II 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 and all employee terminations as part of Phase II
occurred during the third quarter of fiscal 2001. A limited number of terminated
employees continued to provide transitional services to us (generally 30 to 60
days from the termination date) as part of the fiscal 2001 restructuring plan.
Salary and benefits earned during the transition period were not included in the
restructuring charge and severance packages were provided to the 398 terminated
employees.
Operating lease buyouts and related costs in the amount of $1.5 million in
Phase I and II are the actual or estimated costs associated with the early
termination of leases for personal computer equipment and equipment in training
facilities or technology labs that were no longer necessary for operations due
to the reduced workforce and the closure or consolidation of those training
facilities or technology labs in accordance with the fiscal 2001 restructuring
plan.
In addition to the decrease in employee positions, Phase II of the fiscal
2001 restructuring plan provided for reduction in specific office space,
underutilized training facilities, and related overhead expenses. Office and
training facility closure and consolidation costs in the amount of $10.9 million
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 fiscal 2001 restructuring plan.
We closed or consolidated several offices worldwide, including offices in
Denver, Colorado and regional offices in the U.S.,
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Europe, and the Asia Pacific region. All office consolidations and closures are
expected to be completed no later than April 2002.
During the third quarter of fiscal 2001, we wrote off $2.3 million of
certain assets, consisting primarily of leasehold improvements, computer
equipment, and furniture and fixtures that were deemed unnecessary due to the
reduction in workforce as part of Phase II of the fiscal 2001 restructuring
plan. These assets were taken out of service and disposed of during the quarter
ended July 31, 2001.
We recorded adjustments to reduce the Phase I restructuring provision by
$280,000 in the third quarter of fiscal 2001. The majority of the adjustment
relates to reduced obligations surrounding employee severance and termination
costs.
We reviewed our business alliances during the second quarter of fiscal
2001. As a result of this review, we 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 on the accompanying consolidated statement of operations. As a result of
our continued review of our business approach and business alliances during the
third quarter of fiscal 2001,we decided to exit certain other third party
arrangements. We wrote off $5.0 million in prepaid reseller royalties as a
result of a decision not to market a third-party application service provider
e-procurement solution, and $7.8 million of capitalized third party products
resulting from a change in strategy related to a portion of our XPI product.
These charges are included in cost of license fees on the accompanying
consolidated statement of operations.
Based on current calculations, the organizational changes effected during
the second and third quarter of fiscal 2001 are expected to result in annual
savings across all functional areas of over $60.0 million, and we believe that
these actions will position us for more profitable and sustainable growth. There
can be no assurance of our future level of operating expenses or 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 consisted
of severance-related costs for the involuntarily terminated employees, operating
lease termination payments, and office closure costs.
We completed all actions related to this restructuring as of April 30,
2001. The outstanding accrual of $3.6 million remaining at July 31, 2001
primarily consisted of lease obligations for office and training facilities
closed or consolidated and will be paid over the remaining lease terms and
unsettled employee termination costs. Reductions in accrual amounts will
continue to occur until all remaining obligations have been settled by 2007. We
recorded adjustments to decrease the restructuring accrual by $656,000 during
fiscal 2001. The adjustments are primarily a result of the final amount of
operating lease buyouts being effectively reduced from the original estimate and
successful elimination of further rental obligations on office closures earlier
in the fiscal year. Additionally, the provision was reduced resulting from
favorable negotiations and reduced obligations surrounding employee termination
costs. Any cost true-ups subsequent to April 30, 2001 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 third quarter and first nine
months of fiscal 2001 resulted primarily from one-time charges. During the third
quarter and first nine months
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of fiscal 2001, a $4.1 million loss and $4.7 million loss, respectively, were
recognized for the decline in value of marketable equity securities that were
deemed to be other than temporary. Comparatively, during the third quarter and
first nine months of fiscal 2000, other income included a $1.0 million gain and
$18.9 million gain on the sale of marketable equity investments. 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. Additionally, 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. Included in other income was a net foreign exchange transaction losses
of $429,000 and $780,000 for the third quarter and first nine months of fiscal
2001, respectively, and a net exchange loss of $524,000 for the third quarter of
fiscal 2000, a net gain of $238,000 for the first nine months of fiscal 2000.
The losses related primarily to the overall strengthening of the U.S. dollar
against European currencies.
We use hedging instruments to help offset the effects of exchange rate
changes on cash exposures from assets and liabilities denominated in foreign
currency. The hedging instruments used are forward foreign exchange contracts
with maturities of generally three months or less. All contracts are entered
into with major financial institutions. Gains and losses on these contracts are
included with foreign currency gains and losses on the transactions being hedged
and are recognized as non-operating income or expense in the period in which the
gain or loss on the underlying transaction is recognized. All gains and losses
related to foreign exchange contracts are included in cash flows from operating
activities in the consolidated statements of cash flows.
Hedging activities cannot completely protect us from the risk of foreign
currency losses due to the number of currencies in which we conduct business,
the volatility of currency rates, and the constantly changing currency
exposures. We will continue to experience foreign currency gains and losses as a
result of fluctuations in certain currencies where we conduct operations, as
compared to the U.S. dollar. In addition, our future operating results will
continue to be affected by these foreign currency gains and losses.
Provision for (benefit from) income taxes. Our effective income tax rate
was a negative 182.69% for the nine-month period ended July 31, 2001 and 30.17%
for the nine-month period ended July 31, 2000. This change is primarily due to
providing a valuation allowance against the deferred tax asset in the third
quarter of fiscal 2001.
During the third quarter of fiscal 2001, we provided a non-cash valuation
allowance to fully offset the net deferred tax asset at July 31, 2001. We
considered a number of factors, including our cumulative operating losses in
fiscal 1999, 2000, and the first three quarters of fiscal 2001. Based upon the
weight of positive and negative evidence regarding the recoverability of
deferred tax assets, we concluded that a valuation allowance was required to
fully offset the net deferred tax assets, as it is more likely than not that the
deferred tax assets will not be realized. Included in the deferred tax asset
balance at July 31, 2001, are approximately $128.0 million in tax-effected net
operating losses (NOLs). Approximately $84.4 million of the deferred tax asset
related to NOLs generated from the benefit from employee stock plans.
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. We have a U.S. NOL of approximately $333.4 million that will begin
to expire in 2018. We have available approximately $15.4 million in
foreign-tax-credit carryforwards which will begin to expire in 2003.
Additionally, an R&D credit carryforward of approximately $11.1 million is
available which will begin to expire in 2019.
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LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2001, our principal sources of liquidity consisted of $156.8
million of cash and cash equivalents, $76.9 million of short- and long-term
investments, and a $100.0 million secured, revolving line of credit that can be
utilized for working capital requirements and other general corporate purposes.
As of July 31, 2001, we had working capital of $78.5 million, and no amounts
were outstanding under our bank line of credit. Short-term deferred revenue and
customer deposits totaling $174.1 million are included in determining this
amount. The short-term deferred revenue primarily represents annual maintenance
payments billed to customers and recognized ratably as revenue over the support
service period. Without the short-term deferred revenue and customer deposits,
working capital would have been $252.6 million; including long-term investments,
and excluding short-term deferred revenue and customer deposits, would result in
working capital of $317.8 million. Comparatively, as of July 31, 2000, we had
working capital of 113.2 million, and no amounts were outstanding under our bank
line of credit. Short-term deferred revenue and customer deposits totaling
$149.6 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 $262.8 million; including long-term investments, and excluding short-term
deferred revenue and customer deposits, would result in working capital of
$424.8 million.
We calculate accounts receivable days sales outstanding (DSO) on a "gross"
basis by dividing the accounts receivable balance at the end of the quarter by
revenue recognized for the quarter multiplied by 90 days. The impact of deferred
revenue is not included in the computation. Calculated as such, DSO increased to
102 days as of July 31, 2001 from 89 days as of July 31, 2000. The increase in
DSO is primarily due the decline in revenue for the third quarter of fiscal 2001
without a corresponding decrease in receivables. 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 $7.0 million in cash from operating activities during the
nine-months ended July 31, 2001 compared to a use of $31.3 million during the
same period last year. The increase in cash generated from operations was
primarily due to fewer contractual prepayments in the first nine months of
fiscal year 2001 compared to the same period last year and increased collections
of domestic accounts receivables. Additionally, the decrease in other assets for
the first nine months of fiscal 2001 is primarily a result of non-cash write-
offs associated with the exit of certain third party arrangements and a note
receivable related to the sale of a product line.
Accrued liabilities decreased from October 31, 2000 by $44.1 million
primarily as a result of increased commissions and incentive accruals resulting
from increases in revenue at the end of fiscal 2000. We funded the Employee
Retirement Savings Plan as of December 31, 2000 resulting in a large accrual as
of October 31, 2000. The accrual balance at October 31, 2000 also included
accrued royalties and amounts payable for purchased software, as well as
restructuring accruals that have subsequently been paid. Additionally, the
fiscal 2001 decrease is due to a bonus plan accrual reversal that occurred
during the second quarter of fiscal 2001 as a result of a change in estimated
bonus expenses caused by changes made to the bonus plan. The increase in
unearned revenue and customer deposits from October 31, 2000 by $38.7 million is
primarily due to annual maintenance renewals that are recorded as unearned
revenue when billed and amortized over the contract period.
We used $30.2 million in cash from investing and financing activities
during the nine-months ended July 31, 2001 compared to generating $36.4 million
during the same period last year. The decrease from July 31, 2000 was primarily
attributable to decreased proceeds from the sales or maturities of our
investments in marketable securities, additional investments in capitalized
software development costs and a decline in the proceeds resulting from
issuances of our common stock under stock options and employee stock plans.
These uses were offset, in part, by decreased cash payments for the repurchase
of common stock under our forward equity contracts during fiscal 2001. 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.
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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
approximately 5.2 million common shares in accordance with the share repurchase
plan, and we settled contracts for the purchase of approximately 2.5 million
shares for a total of $90.5 million in cash. During the first nine months of
fiscal 2001, we executed a full physical settlement of contracts to purchase
approximately 2.2 million of our shares for $77.5 million, of which $51.9
million was settled in cash. Upon settlement, the repurchased shares were sold
to a counter-party with whom we simultaneously entered into forward contracts to
repurchase the shares with dates of expiration ranging from December 2001 to
June 2002. Additionally, during fiscal 2001, we settled one forward contract,
originally scheduled to expire in December 2001, representing 502,500 shares for
$15.4 million, or $30.65 per share.
At July 31, 2001, we held forward contracts requiring the future purchase
of approximately 2.2 million shares of common stock at an average redemption
price of $11.88 per share. These forward purchase contracts require full
physical settlement and the aggregate redemption cost of $25.9 million is
included in the accompanying balance sheet in temporary equity with a
corresponding decrease in additional paid-in capital. As of July 31, 2001,
approximately 1.2 million of the repurchased shares have been reissued to fund
our ESPP and the discretionary 401(k) Plan contribution, and approximately 1.3
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. The counter-party has the right
to require early settlement of the forward contracts if the market price of our
common stock declines to $7.50 per share.
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 are
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 reduces net income (or increases a
net loss) allocable to common stockholders and related per share amounts for
each period until settlement occurs. For the third quarter and first nine months
of fiscal 2001, the accreted amount of interest did not materially impact the
net loss allocable to common stockholders or the related per share amounts.
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 third quarter and first nine months of fiscal 2001. At July 31, 2001,
investments totaling $67.2 million were designated as collateral for these
leases, compared to investments totaling $123.3 million designated as collateral
at October 31, 2000. The lease agreement requires that we remain in compliance
with certain affirmative and negative covenants and representations and
warranties, including certain defined financial covenants. There can be no
assurance that a continued economic downturn coupled with decline in our
revenues would not affect our ability to secure additional financing or raise
additional funds to support working capital requirements, maintain existing
financing
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arrangements, or for other purposes. Our ability to maintain compliance with
certain affirmative and negative covenants contained in existing agreements,
including certain defined financial covenants, could also be affected.
At July 31, 2001, we were in compliance with our covenants and
representations and warranties, including certain defined financial covenants.
We are currently assessing our compliance with certain financial covenants for
the fourth quarter of fiscal 2001 and for the full fiscal year 2001. We are
currently discussing this matter with the syndication of banks. Should we
determine that a covenant violation is probable for the fourth quarter of fiscal
2001 or for the full fiscal year 2001, we will pursue securing waivers, amending
existing contracts, or consider other financing alternatives. There can be no
assurance that we will be able to successfully secure waivers, amend existing
contracts, or obtain alternate financing and we are currently unable to
determine the outcome of any remedy or refinancing measures.
We believe the cash and cash equivalents balance, short- and long-term
investments, and funds generated from operations 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
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which supersedes Accounting Principles Board
(APB) Opinion No. 16, "Business Combinations." SFAS No. 141 requires that
purchase method of accounting be used for business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interests method. In addition, SFAS
No. 141 establishes specific criteria for the recognition of intangible assets
separately from goodwill and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. The provisions of this
statement apply to all business combinations initiated after June 30, 2001 and
applies to all business combinations accounted for using the purchase method for
which the date of acquisition is July 1, 2001, or later. The adoption of SFAS
No. 141 will not change the method of accounting we used in previous business
combinations.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which is effective for fiscal years beginning after December
15, 2001. Certain provisions shall also be applied to acquisitions initiated
subsequent to June 30, 2001. SFAS No. 142 supersedes APB Opinion No. 17
"Intangible Assets," and requires, among other things, the discontinuance of
amortization related to goodwill and indefinite lived intangible assets. These
assets will then be subject to an impairment test at least annually. In
addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles, and
reclassification of certain intangibles out of previously reported goodwill.
We will adopt SFAS No. 142 no later than November 1, 2002. When we adopt
SFAS No. 142, this will result in us no longer amortizing our existing goodwill.
In addition, we will be required to measure goodwill for impairment as part of
the transition provisions. Any impairment resulting from these transition tests
will be recorded and recognized as the cumulative effect of a change in
accounting principle. We will not be able to determine if impairment exists
until completion of such impairment tests.
Additionally, in June 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," which is effective for fiscal years beginning
after June 15, 2002. SFAS No. 143 requires, among other things, that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are then capitalized as part of the
carrying amount of the long-lived asset. We will adopt SFAS No. 143 no
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later than November 1, 2002. We anticipate that the adoption of SFAS No. 143
will not have a material impact on our consolidated financial statements.
We adopted SFAS No. 133, "Accounting for Derivative Instruments and for
Hedging Activities," during first quarter of fiscal 2001. SFAS No. 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 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 continued downturn in general economic and
market conditions, which may be worsened by recent terrorist attacks in the
United States. 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 forecasts 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 and other factors affecting capital spending may
affect the timing of orders from major customers. Although we have a diverse
client base, we have targeted a number of vertical markets, such as the
manufacturing and distribution industries, which have been significantly
impacted by the recent economic downturn. A continued economic downturn coupled
with decline in our revenues could affect our ability to secure additional
financing or raise additional funds to support working capital requirements,
maintain existing financing arrangements, or for other purposes. Our ability to
maintain compliance with certain affirmative and negative covenants contained in
existing agreements, including certain defined financial covenants, could also
be adversely affected. As a result, any economic downturns in general or in our
targeted vertical markets, such as the manufacturing and distribution
industries, would have a material adverse effect on our business, operating
results, cash flows, or financial condition.
At July 31, 2001, we were in compliance with our covenants and
representations and warranties, including certain defined financial covenants.
We are currently assessing our compliance with certain financial covenants for
the fourth quarter of fiscal 2001 and for the full fiscal year 2001. We are
currently discussing this matter with the syndication of banks. Should we
determine that a covenant violation is probable for the fourth quarter of fiscal
2001 or for the full fiscal year 2001, we will pursue securing waivers, amending
existing contracts, or
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consider other financing alternatives. There can be no assurance that we will be
able to successfully secure waivers, amend existing contracts, or obtain
alternate financing and we are currently unable to determine the outcome of any
remedy or refinancing measures.
We effected a restructuring in the second and third quarters of fiscal
2001. This restructuring involved, among other things, the reduction of our
workforce in April and May 2001 by 398 employee positions worldwide. Such a
reduction has in the past and could in the future result in a temporary lack of
focus and reduced productivity by our remaining employees, including those
directly responsible for revenue generation, which in turn would affect our
revenue in that 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. We 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.
During August 2001, we announced the execution of a definitive agreement to
acquire YOUcentric, Inc. (YOUcentric). The success of this and future
acquisitions depends primarily on our ability to:
- Integrate the acquired business with our existing products and services;
- Retain, motivate, and integrate acquired personnel, and
- Integrate multiple information systems, operations, and facilities.
In addition, we may make future acquisitions or enter into other agreements
but there can be no assurance that such will be successful. We may acquire
additional businesses, products, and technologies, or enter into joint venture
arrangements, that could complement or expand our business. Our negotiations of
potential acquisitions or joint ventures, and our integration of acquired
businesses, products, or technologies, could divert our time and resources from
management of our core business. Future acquisitions could cause us to issue
dilutive equity securities, incur debt or contingent liabilities, or write off
in-process research and development and other acquisition-related expenses that
could seriously harm our financial condition and operating results. Further, we
may not be able to successfully integrate any acquired business, product, or
technology with our existing operations or train, retain, and motivate personnel
from the acquired business. If we are unable to fully integrate an acquired
business, product, or technology, or train, retain, and motivate personnel from
the acquired business, we may not receive the intended benefits of that
acquisition. Our failure to successfully integrate operations and products as a
result of our acquisitions could seriously harm our business, operating results,
cash flows, and financial condition.
For a more complete discussion of risk factors that affect our business,
see "Factors Affecting the Company's Business, Operating Results and Financial
Condition" in our Annual Report on Form 10-K for the fiscal year ended October
31, 2000. These risk factors include the following:
- The potential for significant fluctuations in our quarterly financial
results;
- The potential of a decline in our common stock beyond certain levels as
stipulated in the equity forward contracts may require an acceleration of
cash requirements;
- Our ability to compete in the enterprise software industry;
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- 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 new management team and organizational changes;
- 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 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,
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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 third quarter and first nine
months of fiscal 2001, 41% and 37% of our total revenue was generated from
international operations, respectively, and the net liabilities of our foreign
operations totaled 1% of consolidated net assets as of July 31, 2001. We do not
enter into foreign exchange contracts to hedge the exposure of currency
revaluation in operating results. Foreign exchange rates could adversely affect
our total revenue and results of operations throughout fiscal 2001 if the U.S.
dollar strengthens relative to 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 July 31, 2001, and our exposure
from anticipated foreign revenue during the remainder of fiscal 2001 to assess
the impact of hypothetical changes in foreign currency rates. Our analysis
assumed a 10% adverse change in foreign currency rates in relation to the U.S.
dollar. At July 31, 2001, there was not a material change 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 July 31, 2001 rates would not result
in a material impact to our forecasted results of operations, cash flows, or
financial condition for a future quarter and the fiscal year ending October 31,
2001.
Interest Rates. Our portfolio of investments is subject to interest rate
fluctuations. Investments, including cash equivalents, consist of U.S.
government, state, municipal, and corporate debt securities with maturities of
up to 30 months, as well as money market mutual funds and corporate equity
securities. As a result, our entire held-to-maturity portfolio was reclassified
to available for sale. We classify all investments in marketable securities as
available for sale and these investments were carried at fair value as
determined by their quoted market prices. Unrealized gains or losses were
included, net of tax, as a component of accumulated other comprehensive income.
Additionally, we have lease obligations calculated as a return on the lessor's
costs of funding based on the London Interbank Offered Rate and adjusted from
time to time to reflect any changes in our leverage ratio. Changes in interest
rates could impact our anticipated interest income and lease obligations or
could impact the fair market value of our investments.
We prepared sensitivity analyses of our interest rate exposures and our
exposure from anticipated investment and borrowing levels for fiscal 2001 to
assess the impact of hypothetical changes in interest rates. At July 31, 2001,
there was not a material change in the sources or the estimated effects of
interest rate exposures from our quantitative and qualitative disclosures
presented in Form 10-K for the year ended October 31, 2000. Additionally, based
upon the results of these analyses, a 10% adverse change in interest rates from
the July 31, 2001 rates would not have a material adverse effect on the fair
value of investments and would not materially impact our forecasted results of
operations, cash flows, or financial condition for the fiscal year ending
October 31, 2001.
34
35
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
extended the deadline for fact discovery to January 15, 2002 and the filing of
dispositive motions to February 28, 2002. 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
Not applicable
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
35
36
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: September 14, 2001
By: /s/ PAMELA L. SAXTON
----------------------------------
Name: Pamela L. Saxton
Title: Vice President of Finance,
Controller and Chief Accounting
Officer
(principal accounting officer)
Dated: September 14, 2001
36