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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 000-23091
J.D. EDWARDS & COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 84-0728700
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
ONE TECHNOLOGY WAY, DENVER, CO 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 334-4000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of June 8, 2000, there were 109,259,927 shares of the Registrant's
Common Stock outstanding.
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J.D. EDWARDS & COMPANY
TABLE OF CONTENTS
PAGE
NO.
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of October 31, 1999 and April
30, 2000................................................... 3
Consolidated Statements of Operations for the Six Months
Ended April 30, 1999
and 2000................................................... 4
Consolidated Statements of Cash Flows for the Six Months
Ended April 30, 1999
and 2000................................................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 32
Item 2. Changes in Securities and Use of Proceeds................... 32
Item 3. Defaults upon Senior Securities............................. 32
Item 4. Submission of Matters to a Vote of Security Holders......... 32
Item 5. Other Information........................................... 33
Item 6. Exhibits and Reports on Form 8-K............................ 33
SIGNATURES
J.D. Edwards is a registered trademark of J.D. Edwards & Company. The names of
all other products and services of J.D. Edwards used herein are trademarks or
registered trademarks of J.D. Edwards World Source Company. All other product
and service names used are trademarks or registered trademarks of their
respective owners.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
OCTOBER 31, APRIL 30,
1999 2000
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $113,341 $ 114,675
Short-term investments in marketable securities........... 62,546 55,441
Accounts receivable, net of allowance for doubtful
accounts of $12,000 at October 31, 1999 and April 30,
2000................................................... 236,216 268,748
Other current assets...................................... 34,936 65,758
-------- ----------
Total current assets.............................. 447,039 504,622
Long-term investments in marketable securities.............. 246,564 237,877
Property and equipment, net................................. 86,332 90,911
Non-current portion of deferred income taxes................ 82,572 107,672
Other assets, net........................................... 78,021 83,308
-------- ----------
$940,528 $1,024,390
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 46,004 $ 47,768
Unearned revenue and customer deposits.................... 114,865 163,867
Accrued liabilities....................................... 162,635 148,692
-------- ----------
Total current liabilities......................... 323,504 360,327
Unearned revenue, net of current portion, and other......... 24,304 21,571
-------- ----------
Total liabilities................................. 347,808 381,898
Commitments and contingencies (Note 9)
Common shares subject to repurchase, at redemption amount... -- 115,426
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none outstanding........................... -- --
Common stock, $.001 par value; 300,000,000 shares
authorized; 107,109,494 and 110,666,911 issued and
outstanding as of October 31, 1999 and April 30, 2000,
respectively........................................... 107 111
Additional paid-in capital................................ 456,387 389,813
Deferred compensation..................................... (283) (172)
Retained earnings......................................... 138,100 135,615
Accumulated other comprehensive income (loss): unrealized
gains (losses) on equity securities and foreign
currency translation adjustments....................... (1,591) 1,699
-------- ----------
Total stockholders' equity........................ 592,720 527,066
-------- ----------
$940,528 $1,024,390
======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
Revenue:
License fees..................................... $ 67,204 $ 81,742 $136,803 $165,029
Services......................................... 164,387 149,307 317,725 297,726
-------- -------- -------- --------
Total revenue............................ 231,591 231,049 454,528 462,755
Costs and expenses:
Cost of license fees............................. 7,421 14,122 12,712 27,026
Cost of services................................. 106,605 92,139 206,067 180,710
Sales and marketing.............................. 83,347 91,790 152,760 173,035
General and administrative....................... 25,487 25,218 49,876 48,152
Research and development......................... 28,996 28,728 51,711 58,092
Amortization of acquired software and other
acquired intangibles.......................... 350 6,392 350 12,270
Acquired in-process research and development..... 2,141 -- 2,141 --
-------- -------- -------- --------
Total costs and expenses................. 254,347 258,389 475,617 499,285
Operating loss..................................... (22,756) (27,340) (21,089) (36,530)
Other income:
Interest income.................................. 5,612 3,612 10,956 7,575
Gain on sale of equity investments and sale of
product line.................................. -- 17,878 -- 23,564
Foreign currency gains and other, net............ 637 2,147 400 1,447
-------- -------- -------- --------
Loss before income taxes......................... (16,507) (3,703) (9,733) (3,944)
Benefit from income taxes........................ (6,107) (1,370) (3,601) (1,459)
-------- -------- -------- --------
Net loss........................................... $(10,400) $ (2,333) $ (6,132) $ (2,485)
======== ======== ======== ========
Net loss per common share:
Basic............................................ $ (0.10) $ (0.02) $ (0.06) $ (0.02)
======== ======== ======== ========
Diluted.......................................... $ (0.10) $ (0.02) $ (0.06) $ (0.02)
======== ======== ======== ========
Shares used in computing per share amounts:
Basic............................................ 105,333 109,763 104,222 108,706
Diluted.......................................... 105,333 109,763 104,222 108,706
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)
SIX MONTHS ENDED
APRIL 30,
--------------------
1999 2000
--------- --------
Operating activities:
Net loss.................................................... $ (6,132) $ (2,485)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation.............................................. 11,754 14,884
Amortization of intangible assets and securities premiums
or discounts........................................... 4,958 14,684
Gain on sale of product line.............................. -- (5,686)
Gain on sale of securities................................ -- (17,878)
Benefit from deferred income taxes........................ (6,347) (5,089)
Write-off of in-process research and development assets
acquired............................................... 2,141 --
Other..................................................... 3,316 1,639
Changes in operating assets and liabilities:
Accounts receivable, net.................................. 5,219 (33,892)
Other assets.............................................. (11,252) (29,630)
Accounts payable.......................................... (8,790) 2,032
Unearned revenue and customer deposits.................... 19,490 45,958
Accrued liabilities....................................... (16,435) (12,106)
--------- --------
Net cash used by operating activities............. (2,078) (27,569)
Investing activities:
Purchase of marketable securities......................... (141,291) (44,814)
Proceeds from maturities of marketable securities......... 87,503 75,364
Purchase of available for sale securities................. -- (14,500)
Proceeds from sales of available for sale securities...... -- 25,220
Purchase of property and equipment and other, net......... (27,682) (19,379)
Payment for purchase of acquired company, net of cash
acquired............................................... (4,263) (10,151)
Capitalized development costs............................. (79) (8,594)
--------- --------
Net cash provided (used) for investing
activities...................................... (85,812) 3,146
Financing activities:
Proceeds from issuance of common stock.................... 20,059 28,845
--------- --------
Net cash provided by financing activities......... 20,059 28,845
Effect of exchange rate changes on cash..................... (890) (3,088)
--------- --------
Net increase (decrease) in cash and cash equivalents........ (68,721) 1,334
Cash and cash equivalents at beginning of period............ 183,115 113,341
--------- --------
Cash and cash equivalents at end of period.................. $ 114,394 $114,675
========= ========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Income taxes paid......................................... $ 10,667 $ 2,360
Retirement Savings Plan contribution funded with common
stock.................................................. 4,694 2,782
Common stock issued for acquired company.................. 3,166 --
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. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles 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 generally accepted
accounting principles. The results for the six-month period ended April 30, 2000
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, 1999.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
(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 (loss) by the weighted
average number of shares outstanding during the period. Diluted EPS includes the
dilutive effect of common stock equivalents and is computed using the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares consist of stock options and certain equity
instruments. For periods in which the Company reports net income, the weighted
average shares outstanding is adjusted to include all common shares issuable
under stock options using the treasury stock method and the dilutive impact of
put obligations that are below the current market price using the reverse
treasury stock method. Diluted loss per share for the fiscal 1999 and fiscal
2000 periods exclude common stock equivalents because the effect of their
inclusion would be anti-dilutive, or would decrease the reported loss per share.
Using the treasury stock method, the weighted average common stock equivalents
for second quarter and the six-month period ended 1999 were 5.3 million shares
and 6.9 million shares, respectively, and 6.4 million shares and 6.5 million
shares for the second quarter and the six-month period ended April 30, 2000,
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.
The computation of basic and diluted EPS was as follows (in thousands,
except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------ -----------------
1999 2000 1999 2000
-------- ------- ------- -------
Numerator:
Net loss.................................... $(10,400) $(2,333) $(6,132) $(2,485)
======== ======= ======= =======
Denominator:
Basic loss per share -- weighted average
shares outstanding....................... 105,333 109,763 104,222 108,706
Dilutive effect of common stock
equivalents.............................. -- -- -- --
-------- ------- ------- -------
Diluted net loss per share -- adjusted
weighted average shares outstanding,
assuming conversion of common stock
equivalents.............................. 105,333 109,763 104,222 108,706
======== ======= ======= =======
Basic net loss per share...................... $ (0.10) $ (0.02) $ (0.06) $ (0.02)
Diluted net loss per share.................... $ (0.10) $ (0.02) $ (0.06) $ (0.02)
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) CERTAIN BALANCE SHEET COMPONENTS
Other Current Assets. Other current assets increased from October 31, 1999
as a result of prepayments made and contractual obligations to prepay royalties
associated with certain strategic agreements. The components of other current
assets were as follows (in thousands):
OCTOBER 31, APRIL 30,
1999 2000
----------- ---------
Prepaid expenses................................ $13,305 $34,734
Other current assets............................ 21,631 31,024
------- -------
$34,936 $65,758
======= =======
Common Shares Subject to Repurchase. In August 1999, the Company's board of
directors authorized the repurchase up to eight million shares of the Company's
common stock. This stock repurchase plan was designed to partially offset the
effects of share issuances under the Company's stock option plans and Employee
Stock Purchase Plans (ESPP). The number of shares to be purchased and the timing
of purchases is based on several factors, including the level of stock issuances
under the stock plans, the price of J.D. Edwards' stock, general market
conditions, and other factors. The stock repurchases may be effected at
management's discretion through forward, put and call transactions, or open
market purchases. During the period from December 1999 to March 2000 the Company
entered into equity instrument contracts for the purchase of 5.2 million common
shares in accordance with this share repurchase plan.
On March 16, 2000, the Emerging Issues Task Force (EITF) reached a
consensus on the application of EITF Issue No. 96-13, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" with Issue No. 00-7, "Equity Derivative Transactions that Require Net
Cash Settlement if Certain Events Outside the Control of the Issuer Occur" (EITF
00-7). EITF 00-7 requires that equity derivatives that contain any provision
that could require net cash settlement (except upon the complete liquidation of
the Company) must be marked to fair value through earnings. EITF 00-7 is
effective for all contracts entered into after March 16, 2000, allowing until
December 31, 2000 to amend contracts existing before that date.
The Company entered into two equity repurchase contracts on March 20, 2000
that included a net cash settlement provision and were subject to
asset/liability accounting with any resulting unrealized gains or losses being
recognized through earnings, pursuant to EITF 00-7. These two contracts were
subsequently amended to remove any possible forced net cash settlement
provision. However, the Company realized a $536,000 gain during the period from
when the contracts were entered into until they were amended. The gain is
included in other income on the accompanying statement of operations for the
second quarter of fiscal 2000. On May 18, 2000, these contracts were settled
prior to their maturity dates due in part to current uncertainty about the
ultimate resolution of broad implementation issues surrounding the application
of EITF 00-7. Settlement of the contracts resulted in the repurchase of 363,000
shares for a total of $14.6 million in cash. On June 2, 2000, the Company was
also required to settle contracts for the purchase of 1.9 million shares for
$69.5 million as a result of the decline in the price of its common stock to a
value below the value stipulated in the contracts. The repurchased shares will
be used to fund future stock issuances, including an upcoming ESPP purchase on
June 30, 2000. At June 8, 2000, the Company had forward purchase contracts
remaining for 2.9 million shares of its common stock requiring a full physical
settlement with an aggregate redemption cost of $102.5 million.
At April 30, 2000, the Company held forward contracts requiring the
purchase of 3.2 million shares of its common stock at an average cost of $32.08
per share. Additionally, the Company had outstanding put obligations and call
options for 2.0 million shares of its common stock at average exercise prices of
$37.23 and $51.07 per share, respectively. Forward purchase contracts require a
full physical settlement and the aggregate redemption cost of $115.4 million is
included in the accompanying balance sheet in temporary equity with a
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
corresponding decrease in additional paid-in capital. The outstanding put
obligations permit net share settlement at the Company's option and, therefore,
do not result in a liability on the balance sheet. The equity instruments are
exercisable by the Company only at their dates of expiration, which range from
September 2000 to December 2001. However, the counter-party has the right to
require an early settlement based on the market price of J.D. Edwards' common
stock as stipulated in the contracts. Under the put obligations, J.D. Edwards is
required to collateralize a portion of the value of its outstanding obligation
in the event that the market value of the Company's common stock falls below the
price stipulated in the contract. On April 30, 2000, a decline in the Company's
common stock price had triggered the requirement to collateralize approximately
$39.6 million by May 1, 2000. As of June 8, 2000, the collateralized amount was
released because the market value of J.D. Edwards' common stock rose above the
stipulated contract price.
(4) INVESTMENTS IN MARKETABLE SECURITIES
The Company held investments in marketable securities at April 30, 2000
that were 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, these investments were carried at fair
value as determined by their quoted market prices and included in short-term
investments in marketable securities to reflect management's intention to sell
the shares within the next 12 months. Unrealized gains or losses were included,
net of tax, as a component of accumulated other comprehensive income.
Ariba, Inc. In March 2000, the Company made a $10.0 million minority equity
investment in Tradex, Inc. (Tradex) and, upon the Ariba, Inc. (Ariba)
acquisition of Tradex, the Company's investment converted into 511,000 common
shares of Ariba. During April 2000, the Company sold 375,000 shares of Ariba
common stock resulting in a realized gain of $17.9 million, which is shown on
the accompanying statement of operations as a component of other income for the
quarter ended April 30, 2000. The fair value of the remaining investment at
April 30, 2000 was $10.1 million, and had resulted in a gross unrealized gain of
$7.4 million.
Extensity, Inc. In December 1999, the Company made a minority equity
investment in convertible preferred shares of Extensity, Inc. (Extensity), an
e-business time and expense solutions company. In January 2000, Extensity
completed an initial public offering (IPO) of its common stock, at which time
the preferred stock of Extensity held by the Company converted automatically
into common stock. It is included in short-term marketable securities to reflect
management's intention to sell the shares within the next 12 months, subsequent
to expiration of a six-month lock-up agreement. The fair value of the investment
at April 30, 2000 was $6.1 million, and had resulted in a gross unrealized gain
of $1.6 million.
As of April 30, 2000, all other investments in marketable securities,
consisting of U.S., state, and municipal bonds, as well as domestic corporate
bonds, with maturities of up to 30 months, were classified as held-to-maturity
and were carried at amortized cost. In May and June 2000, the Company liquidated
a portion of its portfolio of marketable securities prior to their maturity
dates in order to settle certain equity contracts (see Notes 3 and 11). As a
result, the Company's entire held to maturity portfolio was reclassified to
available for sale. Beginning in the third quarter of fiscal 2000, the Company
will reflect all investments in marketable securities at fair value, and
unrealized gains or losses will be included, net of tax, as a component of
accumulated other comprehensive income.
(5) ACQUISITION
On March 6, 2000, the Company completed an acquisition of its longstanding
business partner serving Australia and New Zealand, J.D. Edwards New Zealand,
Ltd. With this acquisition, J.D. Edwards strengthens its sales and service
operations and expands its reach into the Asia Pacific region. The integration
of the two companies will enable J.D. Edwards to further leverage joint business
and sales channel strengths in
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Australia and New Zealand to better serve its customers, while positioning the
Company for greater market focus in the region.
The Company paid cash for the remaining outstanding common shares of the
acquired company, making it a wholly-owned subsidiary. The acquisition was
accounted for as a purchase during the second quarter of fiscal 2000.
Accordingly, the total purchase price of $13.0 million was allocated to the
acquired assets and assumed liabilities at their fair values as of the closing
date of the transaction, and the Company's consolidated statements of operations
do not include any revenues or expenses related to the acquisition prior to the
closing date. Such acquired assets include net tangible assets of $1.7 million
and intangible assets related to the in-place workforce, customer base, and
goodwill of approximately $3.8 million, $3.7 million and $3.8 million,
respectively. The intangible assets are being amortized on a straight-line basis
over their estimated useful lives of four years. The effect of adjusting the
cost basis of the Company's previous 10% investment to reflect equity method
accounting is insignificant.
(6) COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires disclosure in the
financial statements of the total changes in equity resulting from revenue,
expenses, and gains and losses, including those which do not affect retained
earnings. The Company's comprehensive income or loss is comprised of its net
income or loss, unrealized gains or losses on equity securities available for
sale, and foreign currency translation adjustments. For the second quarter and
six-month period ended April 30, 1999, the Company had a comprehensive loss of
$9.7 million and $6.1 million, respectively. For the second quarter ended April
30, 2000, the Company's comprehensive loss was $14.8 million, and comprehensive
income was $805,000 for the six-month period ended April 30, 2000.
(7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses hedging instruments to mitigate foreign currency exchange
risk of assets and liabilities denominated in foreign currency. The hedging
instruments used are forward foreign exchange contracts with maturities of
generally three months or less in term. All contracts are entered into with
major financial institutions. Gains and losses on these contracts were included
with foreign currency gains and losses on the transactions being hedged and were
recognized as non-operating income or expense in the period in which the gain or
loss on the underlying transaction is recognized. All gains and losses related
to foreign exchange contracts were included in cash flows from operating
activities in the consolidated statements of cash flows.
At April 30, 2000, the Company had approximately $32.2 million of gross
U.S. dollar equivalent forward foreign exchange contracts outstanding as hedges
of monetary assets and liabilities denominated in foreign currency. Included in
other income were net foreign exchange transaction losses of $373,000 and
$375,000 for the second quarter and six-month period of fiscal 1999,
respectively, and gains of $1.3 million and $800,000 for the second quarter and
six-month period of fiscal 2000, respectively. The primary reason for the gains
in the first six months of fiscal 2000 is related to the overall weakening of
the Euro against the U.S. dollar.
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," was issued in June 1998 and will require companies to value
derivative financial instruments, including those used for hedging foreign
currency exposures, at current market value with the impact of any change in
market value being charged against earnings in each period. SFAS No. 133 will be
effective for the Company in the first quarter of fiscal 2001. The Company
currently anticipates that the adoption of SFAS No. 133 will not have a material
impact on its consolidated financial statements.
9
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," for its fiscal year ended October 31, 1999.
SFAS No. 131 established standards for reporting certain information about
operating segments in annual and interim financial statements. Operating
segments were defined as components of an enterprise for which discrete
financial information is available and is reviewed regularly by the chief
operating decision maker, or decision making group, to evaluate performance and
make operating decisions. The Company identified its chief operating decision
makers as three key executives -- the Chief Executive Officer, Chief Operating
Officer, and Chief Financial Officer. This chief operating decision-making group
reviews the revenue and overall results of operations by geographic regions. The
accounting policies of the operating segments presented below are the same as
those described in the summary of significant accounting policies included in
the Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1999. Total revenue from each country outside of the United States was less than
10 percent of the Company's consolidated revenue. The groupings presented below
represent an aggregation of financial information for countries meeting certain
criteria, including economic characteristics, similar customers, and the same
products, services, and distribution methods.
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
REVENUES FROM UNAFFILIATED CUSTOMERS:
United States...................................... $145,498 $141,676 $282,551 $290,410
Europe, Middle East, and Africa.................... 55,189 52,090 108,976 96,199
Canada, Asia, and Latin America.................... 30,904 37,283 63,001 76,146
-------- -------- -------- --------
Consolidated....................................... $231,591 $231,049 $454,528 $462,755
======== ======== ======== ========
INCOME (LOSS) FROM OPERATIONS:
United States...................................... $(25,552) $(25,322) $(32,744) $(42,724)
Europe, Middle East, and Africa.................... 6,331 5,722 14,831 9,731
Canada, Asia, and Latin America.................... (3,535) (1,348) (3,176) 8,733
Amortization of acquired intangibles............... -- (6,392) -- (12,270)
-------- -------- -------- --------
Consolidated....................................... $(22,756) $(27,340) $(21,089) $(36,530)
======== ======== ======== ========
(9) COMMITMENTS AND CONTINGENCIES
Leases. The Company leases its corporate headquarters office buildings that
were constructed on land owned by the Company. The lessor, a wholly-owned
subsidiary of a bank, and a syndication of banks collectively financed $121.2
million in purchase and construction costs through a combination of debt and
equity. The Company guarantees the residual value of each building up to
approximately 85% of its original cost. The Company's lease obligations are
based on a return on the lessor's costs. Management has elected to reduce the
interest rate used to calculate lease expense by collateralizing up to 97% of
the financing arrangements with investments consistent with the Company's
investment policy. The Company may withdraw the funds used as collateral at its
sole discretion provided it is not in default under the lease agreement.
Investments designated as collateral, including a required coverage margin, are
held in separate investment accounts. At April 30, 2000, investments totaling
$123.3 million were designated as collateral for these leases. 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 April 30, 2000, the Company was in
compliance with its covenants.
Litigation. On September 2, 1999, a complaint was filed in the United
States District Court for the District of Colorado against the Company and
certain of its officers and directors. The complaint purports to
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J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be brought on behalf of purchasers of the Company's common stock during the
period between January 22, 1998 and December 3, 1998. The complaint alleges that
the Company and certain of its officers and directors violated the Securities
Exchange Act of 1934 through a series of false and misleading statements. The
plaintiff seeks to recover unspecified compensatory damages on behalf of all
purchasers of J.D. Edwards' common stock during the class period. Two additional
suits were filed on behalf of additional plaintiffs alleging the same violations
and seeking the same recovery as the first suit. The three complaints were
subsequently consolidated into one action and a consolidated amended complaint
was filed on March 21, 2000. On May 9, 2000, the Company and the individual
defendants filed a motion to dismiss the amended complaint. The court has not
yet scheduled a hearing on the motion to dismiss.
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 are expected to have a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," in December 1999.
SAB No. 101 provides further interpretive guidance for public companies and will
be effective for the Company's first quarter of fiscal 2001. Management
anticipates that the adoption of SAB No. 101 not have a material impact on its
current licensing or revenue recognition practices.
(11) SUBSEQUENT EVENTS
Company Restructuring. On May 22, 2000 the Company announced a strategic
restructuring directed toward strengthening its competitive and financial
position. The Company expects to recognize charges related to the restructuring
and other related expenses of approximately $40.0 million during the second half
of fiscal 2000. These restructuring and related charges will be comprised
primarily of severance costs related to the elimination of approximately 800
employee positions, outplacement services, lease termination payments, office
consolidations, and asset write-offs.
Equity Instrument Settlements. In May and June 2000, the Company settled
certain contracts prior to their maturity dates, resulting in the repurchase of
2.3 million shares of J.D. Edwards' common stock for $84.1 million. The early
settlement was primarily the result of the decline in the price of its common
stock to a value below that stipulated in the contracts.
Line of Credit. In June 2000, the Company obtained a formal commitment from
a bank for an additional $100.0 million unsecured, revolving line of credit. The
primary purpose of this credit facility is for general corporate use and will
provide the Company with increased financial flexibility by adding an
alternative funding source for potential strategic investments.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that have been made
pursuant to the provision of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates, and projections about J.D. Edwards' industry, management's beliefs,
and certain assumptions made by J.D. Edwards' management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words, and similar expressions are intended to identify such
forward-looking statements. The statements are not guarantees of future
performance and are subject to certain risks, uncertainties, and assumptions
that are difficult to predict; therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth in the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1999 under "Factors Affecting
the Company's Business, Operating Results, and Financial Condition' on pages 15
through 24. Unless required by law, the Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events, or otherwise. However, readers should carefully
review the risk factors set forth in other reports 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. During the quarter ended April 30, 2000, the Company's results of
operations reflected an operating loss of $27.3 million compared to an operating
loss of $22.8 million for the second quarter of fiscal 1999. The net loss for
the second quarter of fiscal 2000 was $2.3 million, or $0.02 per share, in
comparison to a net loss of $10.4 million, or $0.10 per share, for the second
quarter last year. Included in the net loss for the second quarter of fiscal
2000 was amortization of acquired intangibles totaling $6.4 million, offset by a
$17.9 million gain from the sale of a portion of certain marketable securities.
Total quarterly operating expenses excluding acquisition-related charges
remained flat compared to the second quarter of fiscal 1999, while total costs
and expenses including acquisition-related charges increased by 2%. For the
first six months of fiscal 2000, the Company's operating loss was $36.5 million
compared to an operating loss of $21.1 million for the same period last year.
The net loss for the first six months of fiscal 2000 was $2.5 million, or $0.02
per share, compared to $6.1 million, or $0.06 per share, for the same period
last year. For the first six months of fiscal 2000, operating expenses excluding
acquisition-related charges increased 3% to $487.0 million from $473.1 million
in the comparable period of fiscal 1999, and total costs and expenses including
acquisition-related charges increased 5% to $499.3 million from $475.6 million
compared to the same period last year. The increased operating loss for the
second quarter and six-month period ended April 30, 2000 was primarily due to an
increase in amortization of acquired software and other acquired intangibles as
well as an increase in sales and marketing expense compared to the same periods
last year.
The Company has incurred operating losses for five of the past six
quarters. The losses were due primarily to an expansion in the Company's
infrastructure and overall operating expenses, while growth in license fees
slowed and services revenue declined over several sequential quarters primarily
due to issues related to Year 2000 and a shift in market growth from traditional
back office enterprise applications to more fully integrated front office and
supply chain solutions. As a result, the Company announced a strategic
restructuring plan directed toward strengthening its competitive and financial
positions on May 22, 2000. As a part of the restructuring plan, the Company
expects to realize savings from, among other things, eliminating approximately
800 employee positions worldwide, reducing office space and related overhead
expenses, and employing different training alternatives for customers. For
further details on the restructuring actions, see "Restructuring Plan" below.
During the second quarter of fiscal 2000, the Company completed an
acquisition of its longstanding business partner serving Australia and New
Zealand, J.D. Edwards New Zealand, Ltd. With this acquisition, the Company
strengthened its sales and service operations and expanded its reach into the
Asia Pacific region. During the second and third quarters of fiscal 1999, the
Company completed acquisitions of two privately held companies -- The Premisys
Corporation in February 1999 and Numetrix, Ltd. (Numetrix) in June 1999.
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These investments further extended the Company's customer relationship
management and supply chain solutions and its ability to compete for business
beyond the traditional back office applications of the enterprise application
market. These acquisitions were all accounted for using the purchase method,
and, accordingly, the total purchase price of each company was allocated to the
acquired assets and liabilities at their fair values as of the closing dates of
the acquisitions. Operating expenses were impacted following each transaction
closing date primarily as a result of amortization of intangible assets
purchased, as well as normal operating expenses associated with the additional
personnel and facilities acquired. The Company's consolidated statements of
operations do not include any revenue or expenses related to the acquisitions
prior to their closing dates.
One of the Company's goals is to form strategic relationships through
reseller or other types of product rights agreements with organizations whose
products enhance the J.D. Edwards solutions. This allows the Company to manage
internal development costs, while at the same time more quickly offering its
customers the spectrum of products and services needed. Over the past four
fiscal quarters, the Company has signed agreements with companies including
Ariba, Inc. (Ariba), Siebel Systems, Inc. (Siebel), and Extensity, Inc.
(Extensity). Additionally, the Company is currently working on strategic
agreements for enterprise application integration solutions. Management believes
its partnerships and strategic investments will enable the Company to deliver a
fully-integrated end-to-end supply chain solution. The terms of each third-party
agreement vary; however, as the Company recognizes license revenue under
reseller provisions in certain of these agreements, a related royalty is charged
to cost of license fees. Other agreements result in amounts capitalized as
software costs and amortized on a straight-line basis over the estimated lives
of the assets. For the second quarter and six-month period ended fiscal 2000,
less than 15% of total license fee revenue was generated from sublicensing the
products included in these reseller arrangements. There can be no assurance that
future license revenue from these reseller arrangements will meet or exceed this
amount.
The Company continues to adjust from the impact of Year 2000. The Company
did not experience significant business interruptions or incur material adverse
effects from the Year 2000 computer systems issue, and all crucial internal
information technology systems made a trouble-free transition into the Year
2000. However, due to the type of software the Company licenses to its
customers, the Year 2000 issue did significantly effect its operating results in
fiscal 1999 and the first six months of fiscal 2000. Total revenue growth was
affected primarily due to companies purchasing enterprise software systems prior
to 1999 in anticipation of potential systems problems. During fiscal 1999, the
Company experienced sequential declines in quarterly license fee revenue in the
first and second quarters with sequential growth in the third and fourth
quarters. Services revenue was negatively impacted, declining 9% in the second
quarter and 6% in the six-month period ended April 30, 2000 compared to the same
periods last year. Additionally, services revenue growth in fiscal 1999 slowed
to 15% from 37% in fiscal 1998. Management believes that the concerns associated
with the Year 2000 impact on operating results are now past and that the Company
will again demonstrate license fee growth followed by services revenue growth in
the second half of fiscal 2000. However, there can be no assurance that the
Company will experience revenue growth or a return to profitability.
The Company has experienced and expects that it will continue to experience
a high degree of seasonality in the future; although, management believes that
quarterly operating results in fiscal 1999 and 2000 were less consistent with
historical seasonality trends primarily due to the impact of Year 2000 concerns
that affected customers' buying patterns as previously discussed. The Company
typically recognizes a disproportionately greater amount of revenue for any
fiscal year in the fourth quarter and an even greater proportion of net income
in the fourth quarter. In the fourth quarters of fiscal 1998 and 1999, the
Company recognized 33% and 27% of total revenue and 37% and 32% of license fee
revenue, respectively. As a result of this and relatively fixed operating
expenses, operating margins tend to be significantly higher in the fourth fiscal
quarter than other quarters. The Company believes this seasonality is primarily
the result of the efforts of the direct sales force to meet or exceed fiscal
year-end quotas and the tendency of certain customers to finalize license
contracts at or near fiscal year end. Because revenue, operating margins, and
net income are greater in the fourth quarter, any shortfall in revenue,
particularly license fee revenue in the fourth quarter, would have a
disproportionately large adverse effect on operating results for the fiscal
year. Additionally, revenue and net income in the first quarter are historically
lower than in the preceding fourth quarter. For example, total
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revenue, license fee revenue, service revenue, and net income or loss in the
first quarter of fiscal 2000 decreased 10%, 18%, 5%, and 217%, respectively,
from the fourth quarter of fiscal 1999.
Due to the volatile economic conditions in international markets
particularly in Asia where recovery from the 1999 economic crisis is still in
process, the Company continues to closely monitor any investments in
international areas to ensure that such opportunities are deemed appropriate and
are consistent with the Company's overall future growth strategies. The Company
has incurred operating losses in Asia and Germany. As a result, Asia and Germany
were, and will continue to be, significantly affected by the Company's strategic
restructuring in May 2000, with approximately one-third of the workforce in Asia
eliminated, approximately one-fourth of the workforce in Germany eliminated, the
planned sale of businesses in China and Malaysia, and the closure and
significant downsizing of offices in Japan. Consistent with its historical
results, the Company expects that during the remainder of fiscal 2000 it will
continue to recognize a relatively small percentage of its revenue from Asia and
Germany as well as the other specific geographic areas that are currently being
impacted by adverse economic conditions. With the worldwide performance of the
Company continuing to be negatively impacted by certain economic conditions,
risks associated with these international investments may not be mitigated by
the broad geographic diversity of the Company's operations. As a result, the
Company's investments in certain international areas have had and may continue
to have a material negative impact on its future financial condition and results
of operations.
Restructuring Plan. On May 22, 2000 the Company announced a strategic
restructuring plan directed toward strengthening its competitive and financial
positions. As a part of the restructuring plan, the Company expects to realize
savings from, among other things, elimination of approximately 800 employee
positions worldwide, reduction of office space and related overhead expenses,
and modification in its approach for providing training alternatives for
customers.
The major events that precipitated the restructuring plan and related
activities were as follows:
- The Company experienced declining gross margins and revenue per employee
over the past several fiscal quarters as the Company's headcount grew at
a faster rate than related overall revenue. As discussed in prior
periods, the Company has also been incurring operating losses in Asia and
Germany. The elimination of the approximately 800 employee positions
worldwide primarily impacted operations in the Asia Pacific region, the
United States, and Germany. The reduction is planned to result in savings
consisting of salaries, benefits expense, computer equipment, and other
related expenses. However, the Company plans to continue limited hiring
for certain key positions.
- The Company has occupied several leased buildings in Denver, Colorado.
Under the restructuring plan, Denver personnel will be consolidated onto
the main campus, which has sufficient available space to accommodate all
Denver employees. The Company will also sublease off-campus space where
possible. Ongoing savings are expected from the downsizing in rent and
related operating expense.
- Certain other regional offices are also being closed or consolidated.
Under the restructuring plan, direct operations in Malaysia and China are
anticipated to be sold effective during the third quarter of fiscal 2000,
and the Japan and Germany operations will be significantly reduced
effective July 31, 2000. Future savings are anticipated to result from
reduced rent and operating expenses.
- The Company has incurred significant expense due to underutilized
training facilities. Under the restructuring plan, the underutilized
training facilities are anticipated to be closed or reconfigured. In
addition, the Company plans to utilize more computer-based training to
replace a portion of classroom training. It is anticipated that the
closures and reconfigurations will be accomplished by September 1, 2000.
Ongoing savings will result from the decrease in office and equipment
lease expense and the increase in sublease income.
The Company expects to recognize restructuring charges and other expenses
related to the restructuring plan of approximately $40.0 million during the
second half of fiscal 2000. These restructuring and related charges will be
comprised primarily of severance costs of terminated employees, outplacement
services, lease termination payments, office consolidations, and asset
write-offs.
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As discussed above, the Company is actively addressing its future operating
plans through a strategic restructuring and is taking the necessary steps to
remain competitive in the future. Management believes that the restructuring
will allow the Company to continue building its leadership position in the
collaborative commerce market. However, the uncertainty in the traditional
enterprise application market, challenges of entering new markets, diversity in
global economic conditions, and strong competitive forces could reduce the
growth in the Company's revenue. 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, if any, that will be
achieved or that the Company's financial condition, results of operations, and
market price of the Company's common stock will not continue to be adversely
affected by unfavorable factors.
Statements of Operations. The following table sets forth, for the periods
indicated, certain items from the Company's consolidated statements of
operations as a percentage of total revenue (except for gross margin data):
THREE MONTHS SIX MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
------------- -------------
1999 2000 1999 2000
----- ----- ----- -----
Revenue:
License fees......................................... 29.0% 35.4% 30.1% 35.7%
Services............................................. 71.0 64.6 69.9 64.3
----- ----- ----- -----
Total revenue................................ 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of license fees................................. 3.2 6.1 2.8 5.8
Cost of services..................................... 46.0 39.9 45.3 39.0
Sales and marketing.................................. 36.1 39.7 33.6 37.4
General and administrative........................... 11.0 10.9 11.0 10.4
Research and development............................. 12.5 12.5 11.4 12.6
Amortization of acquired software and other acquired
intangibles....................................... 0.1 2.7 0.1 2.7
Acquired in-process research and development......... 0.9 -- 0.4 --
----- ----- ----- -----
Total costs and expenses..................... 109.8 111.8 104.6 107.9
Operating loss......................................... (9.8) (11.8) (4.6) (7.9)
Other income, net...................................... 2.7 10.2 2.4 7.1
----- ----- ----- -----
Loss before income taxes............................... (7.1) (1.6) (2.2) (0.8)
Benefit from income taxes............................ (2.6) (0.6) (0.8) (0.3)
----- ----- ----- -----
Net loss............................................... (4.5)% (1.0)% (1.4)% (0.5)%
===== ===== ===== =====
Gross margin on license fee revenue.................... 89.0% 82.7% 90.7% 83.6%
Gross margin on services revenue....................... 35.1% 38.3% 35.1% 39.3%
Total Revenue. Total revenue of $231.0 million remained essentially flat
for the quarter ended April 30, 2000 compared to $231.6 million for the quarter
ended April 30, 1999. The revenue mix between license fees and services was 35%
and 65%, respectively, for the second quarter of fiscal 2000 compared to 29% and
71%, respectively, for the same quarter last year. For the first six months of
fiscal 2000, total revenue grew by 2% to $462.8 million from $454.5 million for
the same period in fiscal 1999. The revenue mix between license fees and
services was 36% and 64%, respectively, for the first six months of fiscal 2000
compared to 30% and 70%, respectively, for the first six months of fiscal 1999.
For the quarter and six-month period ended April 30, 2000 compared to the same
periods in fiscal 1999, license fees increased 22% and 21%, respectively, offset
by a 9% and 6% respective decrease in services revenue due to slowing software
licensing activity during fiscal 1999. The significant change in revenue mix was
primarily due to the impact on services revenue caused by the earlier slowing in
license transactions during fiscal 1999, coupled with the growth in license fee
revenue in the
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second quarter and six-month period ended April 30, 2000 driven in part by the
Company's ability to offer a broad supply chain solution, including products
such as those from Numetrix, Ariba, and Siebel.
The geographic areas defined as the United States, EMEA, and the rest of
the world accounted for 61%, 23%, and 16% of total revenue, respectively, for
the quarter ended April 30, 2000. Comparatively, for the second quarter of
fiscal 1999, the United States, EMEA, and the rest of the world accounted for
63%, 24%, and 13% of total revenue, respectively. The geographic breakdown of
total revenue for the six-month periods was 63%, 21%, and 16% for the United
States, EMEA, and the rest of the world, respectively, in fiscal 2000 and 62%,
24%, and 14% for the United States, EMEA, and the rest of the world,
respectively, in fiscal 1999. Geographically, the overall revenue growth in the
second quarter and first six months of fiscal 2000 compared to the same periods
last year was led by sales performance in certain countries included in rest of
the world.
License Fees. License fee revenue grew by 22% to $81.7 million for the
quarter ended April 30, 2000 from $67.2 million for the quarter ended April 30,
1999. License fee revenue increased by 21% to $165.0 million for the six-month
period ended April 30, 2000 from $136.8 million for the six-month period ended
April 30, 1999. The license fee growth was primarily the result of license
revenue from products through reseller arrangements. Additionally, a significant
amount of business was generated from the Company's installed base of customers.
The percentage of revenue from new customers increased to 49% in the second
quarter of fiscal year 2000 compared to 46% in the second quarter of fiscal 1999
while decreasing to 41% for the six-month period ended April 30, 2000 compared
to 52% for the six-month period ended April 30, 1999. The overall average
transaction size increased compared to the same periods in fiscal 1999. While
there were fewer total license transactions during the second quarter and
six-month period ended April 30, 2000, there were a greater number of license
transactions over $500,000 compared to 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 the Company's ability to both retain its installed
base and add new customers. There can be no assurance that the Company's license
fee growth, results of operations, and financial condition will not be adversely
affected in future periods as a result of the Company's restructuring plan
announced in May 2000, downturns in global economic conditions, intensified
competitive pressures or that the Company's operational investments for the
long-term will be successful.
The Company expanded the number of its customers by 11% compared to the end
of the second quarter last year to over 5,700 at April 30, 2000. Customers have
increasingly accepted the OneWorld applications available for the Windows NT and
UNIX platforms in addition to the AS/400 platform. In the second quarter of
fiscal 2000, 49% of license activity was from customers using the Windows NT or
UNIX platforms compared to 33% in the second quarter of the previous year. For
the six-month period ended April 30, 2000, 41% of license activity was from
customers using the Windows NT or UNIX platforms compared to 30% for the
six-month period ended April 30, 1999. The Company expects that an increasing
portion of the Company's future license fee revenue will be generated from
customers using Windows NT or UNIX platforms compared to the previous year.
Services. Services revenue declined by 9% to $149.3 million for the quarter
ended April 30, 2000 from $164.4 million for the quarter ended April 30, 1999.
For the first six months of fiscal 2000, service revenue declined 6% to $297.7
million from $317.7 million. The Company experienced a decrease in both
consulting and training services revenue in the second quarter and six-month
period ended April 30, 2000 primarily as a result of the decreased licensing
activity during fiscal 1999. Support revenue increased primarily as a result of
the Company's growing installed base of customers compared to the same periods
last year.
As a percentage of total revenue, services revenue decreased in the second
quarter and six-month period ended April 30, 2000 compared to the same periods
in the prior year; however, services revenue as a percentage of total revenue
remained higher than license fee revenue. This decline in the services mix was
due to growth in license fee revenue coupled with decreased demand for
consulting and training services during the second quarter and six-month period
ended April 30, 2000. In any quarter, total services revenue is dependent upon
license transactions closed during the current and preceding quarters, the
growth in the Company's installed base of customers, the amount and size of
consulting engagements, the number of Company and business partner consultants
available to staff engagements, the number of customers referred to alliance
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partners for consulting and training services, the number of customers who have
contracted for support and the amount of the related fees, billing rates for
consulting services and training courses, and the number of customers attending
training courses.
Historically, the Company has been the primary service provider for its
customers, either directly or through subcontracted services from its business
partners. The subcontracted consulting and training services revenue from
business partners decreased 40% for the second quarter and 33% for the six-month
period ended April 30, 2000 over the same periods in fiscal 1999. Direct
services remained flat in the second quarter and increased 3% for the six-month
period ended April 30, 2000 over the same periods in fiscal 1999. The services
revenue generated through subcontracted work accounted for 37% of the total
consulting and training services revenue for the second quarter and 39% for the
six-month period ended April 30, 2000, compared to 49% for both the same periods
last year. The overall decrease in demand for services prompted the shift away
from subcontracted work and a greater percentage of the services engagements
were staffed by internal consultants rather than business partners during the
second quarter and six-month period ended April 30, 2000 compared to previous
periods.
The Company is continuing to pursue a strategy of utilizing third-party
alliance partners to contract directly with the Company's customers under a
referral arrangement for OneWorld implementations and related services. The
Company established additional alliances during fiscal 1999 to achieve this
objective, and several existing alliance partners began providing significantly
more resources to implement OneWorld. However, migration to this services model
was slower than originally anticipated. To the extent the Company is successful
in establishing this strategy, together with the level of license fee revenue,
consulting revenue as a percentage of total revenue is likely to gradually
decrease as compared to the historical revenue mix. However, there can be no
assurance that the Company will be successful in implementing its strategy.
Revenue Recognition. The Company licenses software under non-cancelable
license agreements and provides related services, including consulting,
training, and support. In October 1997, the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position (SOP) 97-2, "Software
Revenue Recognition," which provides guidance on recognizing revenue on software
transactions and supersedes SOP 91-1. Further guidance was published during 1998
in SOP 98-4, "Software Revenue Recognition," and SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, with Respect to Certain Transactions." SOP
98-9 provides additional guidance regarding software revenue recognition and was
adopted by the Company at the beginning of the first quarter of fiscal 2000. The
adoption of this standard did not have a material impact on its financial
condition or results of operations. The AICPA issued technical questions and
answers on financial accounting and reporting issues related to SOP 97-2 during
1999 and 2000, and may issue further additional interpretation related to SOP
97-2 in the future. Additionally, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," in December 1999 that provides further interpretive guidance for
public companies. SAB No. 101 will be effective for the Company's first quarter
of fiscal 2001. The Company currently anticipates that the adoption of SAB No.
101 will not have a material impact on its consolidated financial statements.
There can be no assurance that additional guidance pertaining to revenue
recognition will not result in unexpected modifications to the Company's current
revenue recognition practices and will not materially adversely impact the
Company's future license fee revenue, results of operations, and financial
condition.
Consulting, implementation, and training services are not essential to the
functionality of the Company's software products, are separately priced, and are
available from a number of suppliers. Revenue from these services is recorded
separately from the license fee. The Company recognizes license fee revenue when
a non-cancelable, contingency-free license agreement has been signed, the
product has been delivered, fees from the arrangement are fixed or determinable,
and collection is probable. Revenue on all software license transactions in
which there are undelivered elements other than post-contract customer support
is deferred and recognized once such elements are delivered. Typically, the
Company's software licenses do not include significant post-delivery obligations
to be fulfilled by the Company, and payments are due within a 12-month period
from the date of delivery. Where software license contracts call for payment
terms in excess of 12 months from the date of delivery, revenue is recognized as
payments become due and all other conditions for revenue recognition
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have been satisfied. Revenue from consulting, implementation, and training
services is recognized as services are performed. Revenue from agreements for
supporting and providing periodic upgrades to the licensed software is recorded
as unearned revenue and is recognized ratably over the support service period.
Such unearned revenue includes a portion of the related arrangement fee equal to
the fair value of any bundled support services. The Company does not require
collateral for its receivables, and reserves are maintained for potential
losses.
Cost of License Fees. Cost of license fees includes business partner
commissions, royalties, amortization of internally developed capitalized
software (including payments to third parties related to internal projects),
documentation, and software delivery expenses. The total dollar amount for the
cost of license fees increased 90% to $14.1 million for the quarter ended April
30, 2000 from $7.4 million for the same period last year. The total dollar
amount for the cost of license fees increased 113% to $27.0 million for the
six-month period ended April 30, 2000 from $12.7 million for the same period
last year. The increase for the quarter and six-month period ended April 30,
2000 was primarily due to reseller royalties on software associated with various
transactions with either Siebel, Ariba, or Extensity. These royalties may
increase in future quarters as a result of transactions involving the
sublicensing of products from these third parties.
Capitalized OneWorld costs were fully amortized during the first quarter of
fiscal 2000. Amortization of the capitalized OneWorld costs was $1.0 million for
the first six months of fiscal 2000 and $1.3 million and $2.6 million,
respectively, for the second quarter and six-month period ended April 30, 1999.
The Company capitalized additional software development costs in the second
quarter of fiscal 2000 related to major enhancements, new functionality, and
localization work in the amount of $3.5 million for internal costs and $5.1
million for external costs. Amortization of the majority of these capitalized
costs is expected to begin in the fourth quarter of fiscal 2000. Additional
development projects are expected to be capitalized in future periods given
certain product development plans of the Company.
If the Company is successful with certain expanded sales channel
initiatives and business alliances, business partner costs in future periods may
increase compared to previous periods and gross margins could be reduced.
Accordingly, the total dollar amount for the cost of license fees is likely to
increase in future periods as compared to the previous fiscal year.
Gross margin on license fee revenue varies from quarter to quarter
depending upon the revenue volume in relation to certain fixed costs such as the
amortization of software development costs and the portion of the Company's
software products that are subject to royalty payments. The gross margins in the
second quarter and first six months of fiscal 2000 were significantly impacted
primarily by the increase in royalty expense. The gross margin on license fee
revenue decreased to 83% and 84% for the second quarter and six-month period
ended April 30, 2000 from 89% and 91% for the same periods last year as a result
of this increase. Due to the third-party royalty arrangements with Siebel,
Ariba, and others, the expected increase in capitalized software amortization,
as well as possible increases in certain other costs, it is expected that the
gross margin on license fee revenue will continue to decline from previous
years.
Cost of Services. Cost of services includes the personnel and related
overhead costs for services, including support, training, consulting, and
implementation, as well as fees paid to third parties for subcontracted
services. Cost of services decreased 14% to $92.1 million for the quarter ended
April 30, 2000 from $106.7 million for the quarter ended April 30, 1999. Cost of
services decreased 12% to $180.7 million for the six-month period ended April
30, 2000 from $206.1 million for the six-month period ended April 30, 1999. The
decrease was primarily due to a smaller portion of services revenue being
generated through subcontracted work, a change in the mix of services revenue,
and decreased demand for the traditional classroom style training to a more
effective and efficient method of internet based training with reduced costs.
The gross margin on services revenue increased to 38% and 39% for the second
quarter and six-month period ended April 30, 2000 from 35% for both periods in
fiscal 1999. Management anticipates that the gross margin on services revenue
for the remainder of fiscal 2000 may increase by the end of the fiscal year as a
smaller portion of services revenue is generated through subcontracted work,
which will decrease the related costs. The extent to which the Company is
successful in implementing its strategy of utilizing third parties to contract
directly with the Company's customers for OneWorld implementations and related
services will affect
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gross margin on services revenue in future periods. However, there can be no
assurance that the Company will be successful in implementing its strategy.
Sales and Marketing. Sales and marketing expense consists of personnel,
commissions, and related overhead costs for the sales and marketing activities
of the Company, together with advertising and promotion costs. Sales and
marketing expense increased 10% to $91.8 million for the quarter ended April 30,
2000 from $83.3 million for the quarter ended April 30, 1999, representing 40%
and 36% of total revenue, respectively. Sales and marketing expense increased
13% to $173.0 million for the six-month period ended April 30, 2000 from $152.8
million for the same period in fiscal 1999, representing 37% and 34% of total
revenue, respectively. The increase in expense was primarily the result of the
higher commissions associated with the growth in software license fee revenue as
well as sales incentives during the first six months of fiscal 2000 compared to
the same period last year. Internal costs for consulting personnel deployed in
order to aid in sales efforts increased compared to the prior year. In addition,
the average cost per employee increased in fiscal 2000 due to the competitive
market for personnel.
General and Administrative. General and administrative expense includes
personnel and related overhead costs for the support and administrative
functions of the Company. General and administrative expense decreased 1% to
$25.2 million for the quarter ended April 30, 2000 from $25.5 million for the
quarter ended April 30, 1999, representing 11% of total revenue for both
periods. General and administrative expense decreased 4% to $48.2 million for
the six-month period ended April 30, 2000 from $49.9 million for the six-month
period ended April 30, 1999, representing 10% and 11% of total revenue,
respectively. The total dollar amount of expense was slightly lower in the
periods ended April 30, 2000 compared to the same periods last year primarily
due to cost containment measures, which were reflected in the decrease in
certain overhead costs, travel and entertainment, and contract professional
services. General and administrative expenses as a percentage of total revenue
remained flat primarily due to increased efficiencies within support functions
to manage the overall growth in the Company's operations.
Research and Development. Research and development expense includes
personnel and related overhead costs for product development, enhancements,
upgrades, quality assurance, documentation, translation, and testing. Research
and development expense of $28.7 million for the quarter ended April 30, 2000
decreased by 1% compared to $29.0 million for the quarter ended April 30, 1999,
representing 12% and 13% of total revenue, respectively. Research and
development expense of $58.1 million for the six-month period ended April 30,
2000 increased by 12% from $51.7 million for the six-month period ended April
30, 1999, representing 13% and 11% of total revenue, respectively. The quarterly
decrease was primarily a result of the costs that met software capitalization
requirements offset by an increase in headcount and higher salaries due to the
competitive market. The increase in the first six months of fiscal 2000 as
compared to the first six months of fiscal 1999 was due to an increase in
headcount and higher salaries due to the competitive market, together with
increases in related facilities and computer systems costs necessary to meet
product development objectives, offset by the capitalization of software
development costs.
Development resources devoted to major enhancements and new products
associated with the Company's OneWorld application suites and integration of
those applications with third-party and acquired products resulted in the
capitalization of $3.5 million of software development costs in the second
quarter associated with internal costs and $5.1 million of software development
related payments to third parties. The Company anticipates that costs of certain
other development projects will also be capitalized in the future and that
research and development expenses will increase in subsequent periods due to
personnel additions and salary adjustments resulting from the competitive market
for personnel. The Company is continuing its ongoing internal product
enhancements in e-business and other areas, as well as its integration of
modules, such as sales force automation, advanced planning and scheduling, and
e-procurement. Certain of these projects utilize third-party development
alliances, such as Siebel, Ariba, and Extensity.
Amortization of acquired software and other intangibles. Amortization of
acquired intangibles resulting from the acquisition of the Company's
longstanding business partner serving Australia and New Zealand began in the
second quarter of fiscal 2000. Amortization related to the fiscal 1999
acquisitions of Numetrix and The Premisys Corporation continued for the quarter
ended April 30, 2000. Amortization amounts related
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to the software, in-place workforce, customer base, and goodwill were $2.9
million, $807,000, $1.4 million, and $1.2 million, respectively.
The Numetrix purchase agreement included provisions under which the Company
is able to make claims upon funds held in escrow related to certain liabilities,
anticipated liabilities, and other representations. In June 2000, the Company
notified the escrow agent of such a claim. The amount that may be received from
the claim, if any, cannot be reasonably estimated.
In Process Research and Development. IPR&D expenses were in connection with
the acquisitions of Numetrix in June 1999 and The Premisys Corporation in
February 1999. IPR&D consists of those products that are not yet proven to be
technically feasible but have been developed to a point where there is value
associated with them in relation to potential future revenue. Because
technological feasibility was not yet proven and no alternative future uses are
believed to exist for the in-process technologies, the assigned values were
expensed immediately upon the closing dates of the acquisitions. Aggregate IPR&D
expenses recorded in the second and third quarters of fiscal 1999 were $2.1
million and $24.0 million, respectively. No such charges have been incurred in
fiscal 2000 related to any of the acquisitions.
The most significant in-process technology was being designed by Numetrix
prior to the acquisition to offer an operational-level, planning and scheduling
optimization solution targeted at discrete manufacturing industries. As of the
valuation date, the beta release was scheduled for September 1999, and the
development was estimated to be almost 90% complete. Subsequent to the
acquisition, the beta release was postponed until December 1999. Due to concerns
surrounding the release of the product around Year 2000, the project schedule
was modified for a later release, with additional functionality added to the
product specifications. This project continues to progress with a targeted beta
release date of July 2000 and general release scheduled in October 2000. A new
demand-planning module was being designed by Numetrix to enhance enterprise-
wide collaborative forecasting and to address forecast reconciliation. As of the
acquisition date, this module was less than 10% complete, and the project is
currently under review pending further evaluation and project prioritization by
management. Another in-process technology of Numetrix, a collaborative enabler,
is designed to efficiently interface the messaging architecture among
applications to allow real-time, alert-driven collaboration. As of the
acquisition date, the technology was estimated to be 13% complete. Development
of the collaborative enabler technology continues to progress and is expected to
be released in the third quarter of fiscal 2001. As of the date of acquisition
of The Premisys Corporation, major enhancements of the CustomWorks product were
underway. Additionally, The Premisys Corporation and J.D. Edwards began
developing an interface between CustomWorks and OneWorld under a Product
Alliances Partner Agreement entered into by the two companies in August 1997.
Technology acquired in the Company's purchase of The Premisys Corporation is
continuing to be fully integrated with OneWorld. The targeted general release
date is November 2000. If the Company is unable to complete the in-process
development projects within the expected schedule, future revenue and earnings
could be materially adversely impacted as management believes supply chain
solutions and customer relationship management such as those offered by Numetrix
and The Premisys Corporation are integral to its ability to remain competitive
in the extended enterprise application market.
Other Income (Expense). Other income (expense) includes interest income
earned on cash, cash equivalents and investments, interest expense, foreign
currency gains and losses, and other non-operating income and expenses. During
the first six months of fiscal 2000, other income included a one time $17.9
million gain on the sale of an investment in marketable securities and a $5.7
million gain from the sale of product line to BuildNet. Interest income
decreased to $3.6 million and $7.6 million for the second quarter and six-month
period ended April 30, 2000 from $5.6 million and $11.0 million for the same
periods in fiscal 1999, primarily due to lower cash and investment balances
throughout the first six months of fiscal 2000. Net foreign exchange transaction
losses included in other income and expense totaled $373,000 and $375,000 for
the second quarter and six-month period of fiscal 1999, respectively, and a gain
of $1.3 million and $800,000 for the second quarter and six-month period of
fiscal 2000, respectively. The primary reason for the gains in the first six
months of fiscal 2000 is related to the overall weakening of the Euro against
the U.S. dollar.
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The Company uses 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 in term. 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 the Company from the risk of
foreign currency losses due to the number of currencies in which the Company
conducts business, the volatility of currency rates, and the constantly changing
currency exposures. Foreign currency gains and losses will continue to result
from fluctuations in the value of the currencies in which the Company conducts
its operations as compared to the U.S. dollar, and future operating results will
be affected to some extent by gains and losses from foreign currency exposure.
In March 2000, the Company made a $10.0 million strategic minority equity
investment in Tradex and, upon Ariba's acquisition of Tradex, the Company's
investment converted into 511,000 common shares of Ariba. During April 2000, the
Company sold 375,000 shares of Ariba stock resulting in a realized gain of $17.9
million. The fair value of the remaining investment at April 30, 2000 was $10.1
million, and had resulted in a gross unrealized gain of $7.4 million. In
December 1999, the Company also invested in Extensity, a time and expense
solutions start up company that completed an initial public offering ("IPO") of
its common stock in January 2000. This investment was carried at its fair value
of $6.1 million as determined by the quoted market price as of April 30, 2000.
It is included in short-term marketable securities to reflect management's
intention to sell the shares within the next 12 months, subsequent to expiration
of a six-month lock-up agreement. Gross unrealized gains of $1.6 million were
included as a component of accumulated other comprehensive income. The Company
may also invest in other companies in the future. Investments in technology
companies, and the internet sector and companies with recent IPOs in particular,
are highly volatile. Future results of operations could be adversely affected
should the values of these investments decline below the amounts invested by the
Company. There is no assurance that the unrealized gains related to the
Extensity and Ariba investments will be realized or that other investments and
possible future investments that the Company may make will be profitable.
Other Data Regarding Results of Operations. The impact of
acquisition-related charges and certain non-recurring gains on the net loss and
net loss per share in fiscal 1999 and 2000 are presented below. This
supplemental information does not reflect the Company's results of operations in
accordance with generally accepted accounting principles (GAAP), and it is not
intended to be superior to or more meaningful than other information presented
herein that was prepared in accordance with GAAP.
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------ -----------------
1999 2000 1999 2000
-------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss:
Net loss as reported........................ $(10,400) $(2,333) $(6,132) $(2,485)
Acquisition-related charges, net of tax..... 1,569 4,027 1,569 7,730
-------- ------- ------- -------
Net income (loss) excluding
acquisition-related charges.............. (8,831) 1,694 (4,563) 5,245
Other items, net of tax....................... -- 11,263 -- 14,845
-------- ------- ------- -------
Net loss excluding acquisition-related charges
and other items............................. $ (8,831) $(9,569) $(4,563) $(9,600)
======== ======= ======= =======
Diluted EPS, as reported...................... $ (0.10) $ (0.02) $ (0.06) $ (0.02)
Diluted EPS excluding acquisition-related
charges..................................... $ (0.08) $ 0.02 $ (0.04) $ 0.05
Diluted EPS excluding acquisition-related
charges and other items..................... $ (0.08) $ (0.09) $ (0.04) $ (0.09)
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Acquisition-related charges consisted of $6.4 million gross amortization of
acquired intangibles less $2.4 million in related benefit from income tax for
the three months ended April 30, 2000. For the first six months of fiscal 2000,
amortization of acquired intangibles was $12.3 million less a related benefit
from income tax of $4.5 million. For both of the same periods in fiscal 1999,
amortization of acquired intangibles was $350,000, in-process research and
development was $2.1 million, and the benefit from income tax was $922,000
resulting in the acquisition-related charges, net of tax, shown above.
Other items consisted of a $17.9 million gross gain resulting from the sale
of equity investments less $6.6 million in income taxes for the second quarter
of fiscal 2000. For the six-month period ended April 30, 2000, other items
consisted of a $5.7 million net gain of the sale of product line to BuildNet,
and the $11.3 million net gain resulting from the sale of equity investments.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2000, the Company's principal sources of liquidity
consisted of $114.7 million of cash and cash equivalents, $293.3 million of
short-term and long-term investments in marketable securities, and a $10.0
million unsecured, revolving line of credit. Included in short-term investments
in marketable securities were the Company's equity investments in shares of the
common stock of Ariba and Extensity. The investments are classified as available
for sale and, accordingly, they were carried at their fair market value as
determined by the quoted market price as of April 30, 2000. They were included
in short-term marketable securities to reflect management's intention to sell
the shares within the next 12 months. Gross unrealized gains of $7.4 million and
$1.6 million were included as a component of accumulated other comprehensive
income for Ariba and Extensity, respectively. No amounts were outstanding under
the line of credit during the six-month periods ended April 30, 2000 or 1999.
The Company had working capital of $144.3 million at April 30, 2000 and a
current ratio of 1.4 to 1.0. Included in determining such amounts were
short-term unearned revenue and customer deposits of $163.9 million. The
majority of short-term unearned revenue represents annual support payments
billed to customers, which are recognized ratably as revenue over the support
service period. Without the short-term unearned revenue and customer deposits,
working capital would have been $308.2 million and its current ratio would have
been 2.6 to 1.0.
In June 2000, the Company obtained a formal commitment from a bank for an
additional $100.0 million unsecured, revolving line of credit. The primary
purpose of this credit facility is for general corporate use and will provide
the Company with increased financial flexibility by adding an alternative
funding source for potential strategic investments.
The Company calculates 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 105 days at April 30, 2000 compared to 99 days at April 30, 1999.
The Company's DSO can fluctuate depending upon a number of factors, including
the concentration of transactions that occur toward the end of each quarter and
the variability of quarterly operating results.
The Company used $27.6 million in cash for operating activities during the
six-month period ended April 30, 2000 compared to $2.1 million during the
six-month period ended April 30, 1999. In both periods, the use of cash was
primarily due to the Company's operating losses and prepaid royalties made on
certain reseller agreements reflected in other current assets.
The Company generated $3.1 million in cash from investing activities for
the six-month period ended April 30, 2000 compared to using $85.8 million for
the six-month period ended April 30, 1999. The increase from the prior year was
primarily the result of less investments in marketable securities together with
the proceeds from the sale of 375,000 shares of Ariba common stock. This was
somewhat offset by the capitalization of development costs during the six-month
period ended April 30, 2000 in the amount of $8.6 million.
Financing activities provided $28.9 million in cash from exercises of
common stock options and the Employee Stock Purchase Plan (ESPP) for the
six-month period ended April 30, 2000 compared to
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$21.1 million in the comparable period in 1999. The Company issued a total of
3.6 million shares of common stock during the first six months of fiscal 2000.
The Company did not have other significant financing activities for the first
six months of fiscal 2000 or during the same period last year.
The Company has also used a portion of its cash and investments balances to
acquire other companies. Most recently, a net cash payment of $10.2 million was
made in the acquisition of the Company's business partner serving Australia and
New Zealand in March 2000. The Company acquired The Premisys Corporation in
February 1999 for a net cash payment of $4.3 million and shares of J.D. Edwards'
common stock valued at $3.2 million. Net cash payments totaled $93.2 million for
the Numetrix acquisition during the third quarter of fiscal 1999. The Numetrix
purchase agreement included provisions under which the Company is able to make
claims upon funds held in escrow related to certain liabilities, anticipated
liabilities, and other representations for a one year period. In June 2000, the
Company notified the escrow agent of such claims. The amount that may be
received from the claim, if any, cannot be reasonably estimated.
During the period from December 1999 to March 2000, the Company entered
into equity instrument contracts in accordance with a share repurchase plan
authorized by the Company's Board of Directors to repurchase up to eight million
shares of the Company's common stock. At April 30, 2000, the Company held
forward contracts requiring the purchase of 3.2 million shares of its common
stock at an average cost of $32.08 per share. Additionally, the Company had
outstanding put obligations and call options for 2.0 million shares of its
common stock at average exercise prices of $37.23 and $51.07 per share,
respectively. Forward purchase contracts require a full physical settlement and
the aggregate redemption cost of $115.4 million is included in the accompanying
balance sheet in temporary equity with a corresponding decrease in additional
paid-in capital. The outstanding put obligations permit net share settlement at
the Company's option and, therefore, do not result in a liability on the balance
sheet. The equity instruments are exercisable by the Company only at their dates
of expiration, which range from September 2000 to December 2001. However, the
counter-party has the right to require an early settlement based on the market
price of J.D. Edwards' common stock as stipulated in the contracts. Under the
put obligations, J.D. Edwards is required to collateralize a portion of the
value of its outstanding obligation in the event that the market value of the
Company's common stock falls below the price stipulated in the contract. On
April 30, 2000, a decline in the Company's common stock price had triggered the
requirement to collateralize approximately $39.6 million by May 1, 2000. As of
June 8, 2000, the collateralized amount was released because the market value of
J.D. Edwards' common stock rose above the stipulated contract price.
On May 18, 2000 and June 2, 2000 the Company was required to settle
contracts for the purchase of 363,000 shares and 1.9 million shares,
respectively, for a total of $84.1 million in cash primarily as a result of the
decline in the price of the Company's common stock to a value below that
stipulated in the contracts. The repurchased shares will be used to fund future
issuances of stock under the stock option plan and ESPP, including an upcoming
ESPP purchase on June 30, 2000. At June 8, 2000, the Company had forward
purchase contracts remaining for 2.9 million shares of its common stock
requiring a full physical settlement with an aggregate redemption cost of $102.5
million.
The equity instruments did not have an effect on EPS for the second quarter
or six-month period ended April 30, 2000 as their inclusion would be
anti-dilutive; however, should the dilutive effect of the common stock
equivalents be presented and the market price of the Company's common stock
price falls below the exercise price of the put obligations, such contracts will
increase the number of diluted shares outstanding.
The Company leases its corporate headquarters office buildings that were
constructed on land owned by the Company. The lessor, a wholly-owned subsidiary
of a bank, and a syndication of banks have collectively financed up to $121.2
million in purchase and construction costs through a combination of debt and
equity. The Company guarantees the residual value of each building up to
approximately 85% of its original cost. The Company's lease obligations are
based on a return on the lessor's costs. Management has elected to reduce the
interest rate used to calculate lease expense by collateralizing up to 97% of
the financing arrangements with investments consistent with the Company's
investment policy. The Company may withdraw the funds used as collateral at its
sole discretion, provided it is not in default under the lease agreement.
Investments designated
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as collateral, including a required coverage margin, are held in separate
investment accounts. At April 30, 2000, investments totaling $123.3 million were
designated as collateral for these leases.
Management believes its cash and cash equivalents balance, short-term and
long-term investments, funds generated from operations, and amounts available
under existing credit facilities will be sufficient to meet its cash needs for
at least the next 12 months. The Company may use a portion of its short-term and
long-term investments to make strategic investments in other companies, acquire
businesses, products, or technologies that are complementary to those of the
Company or to settle equity contracts to acquire common stock in the future.
There can be no assurance, however, that the Company will not require additional
funds to support its working capital requirements or for other purposes, in
which case the Company may seek to raise such additional funds through public or
private equity financing or from other sources. There can be no assurance that
such additional financing will be available or that, if available, such
financing will be obtained on terms favorable to the Company and would not
result in additional dilution to the Company's stockholders.
EURO
In January 1999, a new currency called the ECU or the "euro" was introduced
in certain Economic and Monetary Union ("EMU") countries. During 2002, all
participating EMU countries are expected to be operating with the euro as their
single currency. During the next two years, business in participating EMU member
states will be conducted in both the existing national currency and the euro. As
a result, companies operating in or conducting business in these EMU member
states will need to ensure that their financial and other software systems are
capable of processing transactions and properly handling these currencies,
including the euro. Although the Company currently offers software products that
are designed to be euro currency enabled and management believes it will be able
to accommodate any required euro currency changes, there can be no assurance
that the software will contain all the necessary changes or meet all of the euro
currency requirements. If the Company's software does not meet all the euro
currency requirements of its business, its operating results and financial
condition would be materially adversely affected. Nonetheless, the Company has
not had and does not expect a material impact on its results of operations from
foreign currency gains or losses as a result of its transition to the euro as
the functional currency for its subsidiaries based in EMU countries.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company will be required to apply recently issued accounting standards
in its future consolidated financial statements. Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
for Hedging Activities," will require companies to value derivative financial
instruments, including those used for hedging foreign currency exposures, at
current market value with the impact of any change in market value being charged
against earnings in each period. SFAS No. 133 will be effective for the
Company's first quarter of fiscal 2001. The Company currently anticipates that
the adoption of SFAS No. 133 will not have a material impact on its consolidated
financial statements.
Additionally, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," in December 1999. SAB No. 101 provides further interpretive
guidance for public companies and will be effective for the Company's first
quarter of fiscal 2001. Management anticipates that the adoption of SAB No. 101
will not have a material impact on the Company's financial condition or results
of operations and that it will not have a significant impact on its current
licensing or revenue recognition practices.
On March 16, 2000, the Emerging Issues Task Force (EITF) reached a
consensus on the application of EITF Issue No. 96-13, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" with Issue No. 00-7, "Equity Derivative Transactions that Require Net
Cash Settlement if Certain Events Outside the Control of the Issuer Occur" (EITF
00-7). EITF 00-7 requires that equity derivatives that contain any provision
that could require net cash settlement (except upon the complete liquidation of
the Company) must be marked to fair value through earnings. EITF 00-7 is
effective for all contracts entered into after March 16, 2000, allowing until
December 31, 2000 to amend contracts existing before that date.
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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, the following risk factors 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.
Our Quarterly Financial Results Are Subject to Significant Fluctuations
that Could Adversely Impact the Price of Our Stock. Our revenues and operating
results are difficult to predict and have varied widely in the past. We expect
they will continue to vary significantly from quarter to quarter due to a number
of factors, including the following:
- demand for our software products and services
- the size and timing of our license transactions
- the level of product and price competition that we encounter
- the length of our sales cycle
- the timing of our new product introductions and enhancements and those of
our competitors
- market acceptance of our products
- changes in our pricing policies and those of our competitors
- announcements of new hardware platforms that may delay customer's
purchases
- variations in the length of our product implementation process
- the mix of products and services revenue
- the mix of distribution channels through which we license our software
- the mix of international and domestic revenue
- changes in our sales incentives
- changes in the renewal rate of our support agreements
- the life cycles of our products
- software defects and other product quality problems
- the expansion of our international operations
- the general economic and political conditions
- the budgeting cycles of our customers
Our software products typically are shipped when we receive orders.
Consequently, license backlog in any quarter generally represents only a small
portion of that quarter's revenue. As a result, license fee revenue is difficult
to forecast due to its dependence on orders received and shipped in that
quarter. We also recognize a substantial amount of our revenue in the last month
of each quarter and increasingly in the last week of the quarter. Because many
of our operating expenses are relatively fixed, a shortfall in anticipated
revenue or delay in recognizing revenue could cause our operating results to
vary significantly from quarter to quarter and could result in future operating
losses. The timing of large individual transactions is also difficult for us to
predict. In some cases, transactions have occurred in quarters subsequent to
those anticipated by us. To the extent that one or more such transactions are
lost or occur later than we expected, operating results could be materially
impacted. If our revenues fall below our expectations in any particular quarter,
our business, operating results, and financial condition could be materially
adversely affected.
We continue to experience significant seasonality with respect to software
license revenues. We recognize a disproportionately greater amount of revenue
for any fiscal year in our fourth quarter and an even greater proportion of net
income in the fourth quarter. As a result of this and our relatively fixed
operating expenses, our operating margins tend to be significantly higher in the
fourth fiscal quarter than other quarters. We believe this seasonality is
primarily the result of the efforts of our direct sales force to meet or exceed
fiscal year-end quotas and the tendency of certain of our customers to finalize
license contracts at or near our fiscal
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year end. Because revenue, operating margins, and net income are greater in the
fourth quarter, any shortfall in revenue, particularly license fee revenue in
the fourth quarter, would have a disproportionately large adverse effect on our
operating results for the fiscal year. Additionally, our revenue and net income
in the second quarter is historically lower than in the preceding fourth
quarter. Our first fiscal quarter revenue also slows during the holiday season
in November and December.
As a result of the unpredictability of our revenue cycle and uncertainty in
the enterprise software market attributed to many factors, including global
economic conditions and strong competitive forces, we continue to have reduced
visibility of future revenue and operating results. Due to the foregoing
factors, we believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance. It is likely that in some
future quarter, our operating results may again be below expectations of public
market analysts or investors. In this event, the price of our common stock may
fall, and an investment in J.D. Edwards' common stock may be materially
impacted.
Our Recent Expansion into New Business Areas and Partnerships Is Uncertain
and may not Be Successful. We have recently expanded our technology into a
number of new business areas to foster our long-term growth, including the areas
of electronic commerce, on-line business services, and Internet computing. In
addition, we entered into and invested in a number of strategic partnership
relationships in these same areas, including those with Siebel, Ariba,
Extensity, and others. These areas are relatively new to both our product
development and sales and marketing personnel. There can be no assurance that we
will compete effectively or generate significant revenues in these new areas or
that we will be able to provide a product offering that will satisfy new
customer demands in these areas. The success of Internet computing and, in
particular, our current Internet product offering is difficult to predict
because Internet computing represents technology that is new to the entire
computer industry. Additionally, if we are unable to effectively provide a
product offering or sell the products we have developed through or with our
partners, we could lose a significant amount of the investment we have made in
such strategic partnerships. If our expansion into these new business areas or
our relationships with our partners is not successful, our business, revenues,
and stock price would be materially impacted.
The Enterprise Software Industry is Highly Competitive, and We may Be
Unable to Successfully Compete. We compete in the enterprise software solutions
market. This market is highly competitive, subject to rapid technological
change, and significantly affected by new products. Our products are designed
and marketed for the AS/400 and the NT and UNIX platforms. We compete for
customers with a large number of independent software vendors including:
- companies offering other products that run on Windows NT- or UNIX-based
systems, such as SAP Aktiengesellschaft, Oracle Corporation, and
PeopleSoft, Inc.
- companies offering other products on the AS/400 platform, such as Mapics,
Inc., and Infinium Software, Inc.
- companies offering either standard or fully customized products that run
on mainframe computer systems, which we do not offer, such as SAP
In addition, we compete with suppliers of custom developed business
applications software, such as systems consulting groups of major accounting
firms and IT departments of potential customers. We can offer no assurances that
we will be able to successfully compete with new or existing competitors or that
such competition will not materially adversely affect our business, operating
results, or financial condition.
Some of our competitors, SAP and Oracle in particular, have significantly
greater financial, technical, marketing, and other resources than we do. In
addition, they have wider name recognition and a larger installed customer base.
In contrast, we entered the NT and UNIX markets only three years ago. SAP,
Oracle, and PeopleSoft have significantly more experience and name recognition
with NT and UNIX implementations and platforms and have more reference accounts
than we have in these markets. They also have substantially more customers than
we have in the NT and UNIX markets. Additionally, several of our competitors
have well-established relationships with our current or potential customers.
These established relationships might prevent us from competing effectively in
divisions or subsidiaries of such customers. Many
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of our competitors also have announced their intention to offer vertical
applications to mid-sized organizations, which is the market that comprises a
substantial portion of our revenue. There can be no assurances that we can
successfully compete against any of these other software providers. Further,
several of our competitors regularly and significantly discount prices on their
products. If our competitors continue to discount or increase the frequency of
their discounts, we may be required to increasingly discount our products. This
could have a material adverse effect on our operating margins.
We continue to rely on a number of firms that provide systems consulting,
systems integration, services implementation, and customer support services and
that recommend our products during the evaluation stage by potential customers.
A number of our competitors have better established relationships with such
firms, and as a result, these firms may be more likely to recommend our
competitors' products over our products. It is also possible that these third
parties will market software products that compete with our products in the
future. If we are unable to maintain or increase our relationships with the
third parties that recommend, implement, or support our software, our revenue
may be materially impacted.
We believe the principal competitive factors affecting the market for our
software products are as follows:
- responsiveness to customers' needs
- product flexibility and ability to handle business changes
- product functionality
- speed of implementation
- ease of use
- product performance and features
- product quality and reliability
- vendor and product reputation
- quality of customer support
- overall cost
We believe that we compete favorably with respect to the above factors. In
order to be successful in the future, we must continue to respond promptly and
effectively to the challenges of technological change in our market and to our
competitors' innovations. We cannot guarantee that our products will continue to
compete favorably or that we will be successful in facing the increasing
competition from new products and enhancements introduced by our existing
competitors or new companies entering the market.
Our Continued Growth Depends on Our Ability to Develop and Maintain Our
Third-Party Relationships. We rely heavily on third-party service providers to
implement the OneWorld version of our application suites. Additionally, we have
adopted a strategy in which an increasing number of OneWorld implementations
will be performed by third parties that contract directly with our customers.
Executing this strategy requires our current third-party implementation
providers to allocate additional resources to our OneWorld customers. In
addition, we must continue to enter into additional third-party relationships.
Due to the limited resources and capacities of many third-party implementation
providers, there can be no assurance that we will establish or maintain
relationships with third parties having sufficient resources to provide the
necessary services to support the demand of our OneWorld customers. If we cannot
obtain sufficient resources, we will be required to perform the implementation
services ourselves. There is no assurance that we will have sufficient resources
available for such purposes. If we are unable to establish and maintain
effective long-term relationships with such third party implementation providers
or if such providers do not meet our customers needs, our business, operating
results, and financial condition could be materially adversely affected.
To enhance our sales, marketing, and customer service efforts, we have
established relationships with a number of third parties, including consulting
and system integration firms, hardware suppliers, and database, operating
system, and other independent software vendors. Many of these third parties also
have relationships with one or more of our competitors and may, in some
instances, select or recommend the software offerings of our competitors rather
than our software. In addition, certain of these third parties compete with us
directly in
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developing and marketing enterprise software applications. Competition between
these third parties and us could result in the deterioration or termination of
our relationship. This could have a material adverse effect on our business and
sales.
Our International Operations and Sales Subject Us to Various Risks
Associated with Growth Outside the United States. We market and license our
products in the United States and internationally. Our international revenue
continues to represent a significant portion of our total revenue. We currently
maintain 46 international sales offices located throughout Canada, Europe, Asia,
Latin America, and Africa. We intend to continue to expand our international
operations and enter additional markets outside of the U.S. This expansion will
require significant management attention and financial resources. Traditionally,
our international operations are characterized by higher operating expenses and
lower operating margins. As a result, if our international revenue increases as
a percentage of total revenue, our operating margins may be adversely affected.
Additionally, costs associated with international expansion include the
establishment of additional offices, hiring of additional personnel,
localization, and marketing of our products for international customers, and the
development of relationships with international service providers. If revenue
generated is not adequate to offset the expense of expanding foreign operations,
our business could be materially adversely affected. Our international
operations are also subject to other inherent risks, including:
- imposition of governmental controls
- export license requirements
- restrictions on the export of certain technology
- cultural and language difficulties
- the impact of a recessionary environment in economies outside the United
States
- reduced protection for intellectual property rights in some countries
- the potential exchange and repatriation of foreign earnings
- political instability
- trade restrictions and tariff changes
- localization and translation of products
- difficulties in staffing and managing international operations
- difficulties in collecting accounts receivable and longer collection
periods
- the impact of local economic conditions and practices
Our success in expanding our international operations depends, in part, on
our ability to anticipate and effectively manage these and other risks. We
cannot guarantee that these or other factors will not materially adversely
affect our business, operating results, or financial condition.
Due to the volatile economic conditions in international markets
particularly in Asia where recovery from the 1999 economic crisis is still in
process, the Company continues to closely monitor any investments in
international areas to ensure that such opportunities are deemed appropriate and
are consistent with the Company's overall future growth strategies. The Company
has incurred operating losses in Asia and Germany. As a result, Asia and Germany
were, and will continue to be, significantly affected by the Company's strategic
restructuring in May 2000, with approximately one-third of the workforce in Asia
eliminated, approximately one-fourth of the workforce in Germany eliminated, the
planned sale of businesses in China and Malaysia, and the closure and downsizing
of offices in Japan. Consistent with its historical results, the Company expects
that during the remainder of fiscal 2000 it will continue to recognize a
relatively small percentage of its revenue from Asia and Germany as well as the
other specific geographic areas that are currently being impacted by adverse
economic conditions. With the worldwide performance of the Company continuing to
be negatively impacted by certain economic conditions, risks associated with
these international investments may not be mitigated by the broad geographic
diversity of the Company's operations. As a result, the Company's investments in
certain international areas have had and may continue to have a material
negative impact on its future financial condition and results of operations.
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A significant portion of our revenue is received in currencies other than
United States dollars, and as a result we are subject to risks associated with
foreign exchange rate fluctuations. We use a foreign exchange hedging program to
limit our exposure risk. Included in other income were net foreign exchange
transaction of $373,000 and $375,000 for the second quarter and six-month period
of fiscal 1999, respectively, and gains of $1.3 million and $800,000 for the
second quarter and six-month period of fiscal 2000, respectively.
Due to the substantial volatility of foreign exchange rates, there can be
no assurance that our hedging activities will effectively limit our exposure or
that such fluctuations will not have a material adverse effect on our business,
operating results, or financial condition.
Downturns in General Economic and Market Conditions Could Materially Impact
Our Business. Various segments of the software industry have experienced
significant economic downturns characterized by decreased product demand, price
erosion, work slowdown, and layoffs. In addition, there is increasing
uncertainty in the enterprise software market attributed to many factors
including global economic conditions and strong competitive forces. Our future
license fee revenue and results of operations may experience substantial
fluctuations from period to period as a consequence of these factors, and such
conditions may affect the timing of orders from major customers and other
factors affecting capital spending. Although we have a diverse client base, we
have targeted a number of vertical markets. As a result, any economic downturns
in general or in our targeted vertical markets would have a material adverse
effect on our business, operating results, or financial condition.
The Company's Stock Price is Volatile and there is a Risk of
Litigation. The trading price of J.D. Edwards & Company common stock has, in the
past, and may, in the future, be subject to wide fluctuations in response to
factors including, but not limited to, the following:
- revenue or results of operations in any quarter failing to meet the
expectations, published or otherwise, of the investment community
- announcements of technological innovations by the Company or its
competitors
- new products or the acquisition of significant customers by the Company
or its competitors
- developments with respect to patents, copyrights or other proprietary
rights of the Company or its competitors
- changes in recommendations or financial estimates by securities analysts
- the announcement of acquisitions or other significant transactions by the
Company or its competitors
- changes in management
- conditions and trends in the software industry generally, and
- general market conditions and other factors.
Fluctuation in the price of the Company's common stock may expose the
Company to the risk of securities class action lawsuits. As a result of the
declines in the price of its common stock during fiscal 1999, one such lawsuit
was filed against J.D. Edwards & Company. Although the Company believes this
lawsuit is without merit, defending against it could result in substantial costs
and divert management's attention and resources. In addition, any settlement or
adverse determination of this lawsuit could subject the Company to significant
liability. The Company cannot be assured that there will not be additional
lawsuits in the future.
Workforce Restructuring. The Company recently undertook a restructuring
involving, among other things, the reduction of its workforce by approximately
800 employees worldwide. These reductions could result in a temporary lack of
focus and reduced productivity by the Company's remaining employees, including
those directly responsible for revenue generation, which in turn may affect
Company revenues in a future quarter. In addition, prospects or customers may
decide to delay or not to purchase the Company's products due to the perceived
uncertainty caused by the Company's restructuring. There can be no assurances
that the Company will not reduce or otherwise adjust its 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 the Company's business
partners, customers, or
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even its competitors. Although all employees are required to sign a
confidentiality agreement with the Company at the time of hire, there can be no
assurances that the confidential nature of certain proprietary Company
information will be maintained in the course of such future employment. Further,
the Company believes that its future success will depend in large part upon its
ability to attract, train, and retain highly skilled managerial, sales and
marketing personnel. There can be no assurances that the Company will not have
difficulty attracting skilled employees as a result of a perceived risk of
future workforce reductions. Additionally, employment candidates may demand
greater incentives in connection with employment by the Company. The Company may
grant large numbers of options or other stock-based awards to attract and retain
personnel, which could be highly dilutive to Company stockholders. Further, the
failure to attract, train, retain, and effectively manage employees could
increase the Company's costs, hurt the Company's development and sales efforts
and cause a degradation in the quality of the Company's customer service.
Other Risks. For a more complete description of other risk factors that
affect the Company, see "Factors Affecting the Company's Business, Operating
Results and Financial Condition" in the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of its operations, the Company is exposed to certain
market risks, primarily changes in foreign currency exchange rates and interest
rates. Uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax, other regulatory, or credit risks, are not included in
the following assessment of the Company's market risks.
Foreign Currency Exchange Rates. Operations outside of the U.S. expose the
Company to foreign currency exchange rate changes and could impact translations
of foreign denominated assets and liabilities into U.S. dollars and future
earnings and cash flows from transactions denominated in different currencies.
During the second quarter and first six months of fiscal 2000, 39%, and 37%,
respectively, of the Company's total revenue was generated from its
international operations, and 29% of the Company's consolidated net assets
related to its foreign operations as of April 30, 2000. The Company's exposure
to currency exchange rate changes is diversified due to the number of different
countries in which it conducts business. The Company operates outside the U.S.
primarily through wholly owned subsidiaries in Europe, Africa, Asia, Canada, and
Latin America. These foreign subsidiaries use the local currency or, more
recently, the euro as their functional currency as revenue is generated and
expenses are incurred in such currencies.
The Company enters into forward foreign exchange contracts to hedge the
effects of exchange rate changes on cash exposures from receivables and payables
denominated in foreign currencies. Such hedging activities cannot completely
protect the Company from the risk of foreign currency losses due to the number
of currencies in which the Company conducts business, the volatility of currency
rates, and the constantly changing currency exposures. Foreign currency gains
and losses will continue to result from fluctuations in the value of the
currencies in which the Company conducts its operations as compared to the U.S.
dollar, and future operating results will be affected to some extent by gains
and losses from foreign currency exposure.
The Company prepared sensitivity analyses of its exposures from foreign net
asset and forward foreign exchange contracts as of April 30, 2000, and its
exposure from anticipated foreign revenue during the remainder of fiscal 2000 to
assess the impact of hypothetical changes in foreign currency rates. The
Company's analysis assumed a 10% adverse change in foreign currency rates in
relation to the U.S. dollar. At April 30, 2000, there was not a material charge
in the sources or the estimated effects of foreign currency rate exposures from
the Company's quantitative and qualitative disclosures presented in Form 10-K
for the year ended October 31, 1999. Based upon the results of these analyses, a
10% adverse change in foreign exchange rates from the April 30, 2000 rates would
not result in a material impact to the Company's results of operations, cash
flows, or financial condition for a future quarter and the full fiscal year
ending October 31, 2000.
Interest Rates. Investments, including cash equivalents, consist of U.S.,
state, and municipal bonds, as well as domestic corporate bonds, with maturities
of up to 30 months. All investments are classified as held-to-maturity as
defined in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities,"
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and, accordingly, are carried at amortized cost. In May and June 2000, the
Company liquidated a portion of its portfolio of marketable securities prior to
their maturity dates in order to settle certain equity contracts. As a result,
the Company's entire held to maturity portfolio was reclassified to available
for sale. Beginning in the third quarter of fiscal 2000, the company will
reflect all investments in marketable securities at fair value, and unrealized
gains or losses will be included, net of tax, as a component of accumulated
other comprehensive income. Additionally, the Company has lease obligations
calculated as a return on the lessor's costs of funding based on LIBOR and
adjusted from time to time to reflect any changes in the Company's leverage
ratio. Changes in interest rates could impact the Company's anticipated interest
income and lease obligations or could impact the fair market value of its
investments.
The Company prepared sensitivity analyses of its interest rate exposures
and its exposure from anticipated investment and borrowing levels for fiscal
2000 to assess the impact of hypothetical changes in interest rates. At April
30, 2000, there was not a material charge in the sources or the estimated
effects of interest rate exposures from the Company's quantitative and
qualitative disclosures presented in Form 10-K for the year ended October 31,
1999. Additionally, based upon the results of these analyses, a 10% adverse
change in interest rates from the April 30, 2000 rates would not have a material
adverse effect on the fair value of investments and would not materially impact
the Company's results of operations, cash flows, or financial condition for the
fiscal year ending October 31, 2000.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 2, 1999, a complaint was filed in the United States District
Court for the District of Colorado against the Company and certain of its
officers and directors. The complaint purports to be brought on behalf of
purchasers of the Company's common stock during the period between January 22,
1998 and December 3, 1998. The complaint alleges that the Company and certain of
its officers and directors violated the Securities Exchange Act of 1934 through
a series of false and misleading statements. The plaintiff seeks to recover
unspecified compensatory damages on behalf of all purchasers of J.D. Edwards'
common stock during the class period. Two additional suits were filed on behalf
of additional plaintiffs alleging the same violations and seeking the same
recovery as the first suit. The three complaints were subsequently consolidated
into one action and a consolidated amended complaint was filed on March 21,
2000. On May 9, 2000 the Company and the individual defendants filed a motion to
dismiss the amended complaint. The court has not yet scheduled a hearing on the
motion to dismiss.
The Company believes these complaints are without merit and will vigorously
defend itself and its officers and directors against such complaints.
Nevertheless, the Company is currently unable to determine (i) the ultimate
outcome of the lawsuits, (ii) whether resolution of these matters will have a
material adverse impact on the Company's financial position or results of
operations, or (iii) a reasonable estimate of the amount of loss, if any, which
may result from resolution of these matters.
The Company is involved in certain other disputes and legal actions arising
in the ordinary course of its business. In management's opinion, none of such
other disputes and legal actions is expected to have a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was
held on March 29, 2000. At the Annual Meeting, stockholders voted on the
following two matters: (1) the election of Class III directors for a term of
three years, expiring in 2003; and (2) the ratification of the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants. The
stockholders elected management's nominees as Class III directors in an
uncontested election and ratified the appointment of the independent accountants
by the following votes:
(1) Election of Class III directors for a term expiring in 2003:
Votes For Votes Withheld
Michael J. Maples 92,438,266 264,784
C. Edward McVaney 92,472,676 230,374
Trygve E. Myhren 92,442,948 260,102
The Company's Board of Directors is currently comprised of eight members
who are divided into three classes with overlapping three-year terms. The term
for Class I directors (Gerald Harrison and Delwin D. Hock) will expire at the
annual meeting of stockholders to be held in 2001, and the term for Class II
directors (Richard E. Allen, Harry T. Lewis, Jr. and Robert C. Newman) will
expire at the annual meeting of stockholders to be held in 2002. Douglas
Massingill, the third Class I director, resigned from his position on
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the board of directors of the Company in April 2000. The vacancy created by Mr.
Massingill's resignation has not been filled.
(2) Ratification of the appointment of PricewaterhouseCoopers LLP as
independent accounts:
Votes For Votes Against Abstentions
92,456,530 168,952 77,568
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On April 14, 2000, the Company filed a Current Report on Form 8-K
reporting that Douglas Massingill resigned as President, Chief
Executive Officer and Director of J.D. Edwards & Company. The Company's
board of directors reappointed founder C. Edward McVaney to President
and Chief Executive Officer. Mr. McVaney will also remain as Chairman
of the Board of Directors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
J.D. EDWARDS & COMPANY
By: /s/ RICHARD E. ALLEN
----------------------------------
Name: Richard E. Allen
Title: Chief Financial Officer,
Senior Vice President, Finance
and
Administration and Director
(principal financial officer)
Dated: June 12, 2000
By: /s/ PAMELA L. SAXTON
----------------------------------
Name: Pamela L. Saxton
Title: Vice President of Finance,
Controller and Chief Accounting
Officer
(principal accounting officer)
Dated: June 12, 2000
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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27.1 -- Financial Data Schedule