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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-23091
J.D. EDWARDS & COMPANY
(Exact name of Registrant as Specified in its Charter)
<Table>
DELAWARE 84-0728700
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
ONE TECHNOLOGY WAY, DENVER, COLORADO 80237
(Address of principal executive offices) (Zip code)
</Table>
Registrant's telephone number, including area code 303/334-4000
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, par value $0.001 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of January 24, 2002, there were 119,114,682 shares of the Registrant's
common stock outstanding, and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on January 24, 2002) was approximately $1.4
billion. Shares of the Registrant's common stock held by each executive officer
and director and by each entity that owns 5% or more of the Registrant's
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the
2002 Annual Meeting of Stockholders to be held on March 26, 2002, are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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J.D. EDWARDS & COMPANY
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001
TABLE OF CONTENTS
<Table>
<Caption>
PAGE NO.
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PART I
Item 1. Business.................................................... 1
Risk Factors................................................ 11
Item 2. Properties.................................................. 21
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Our Executive Officers...................................... 22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 23
Item 6. Selected Consolidated Financial Data........................ 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 47
Item 8. Consolidated Financial Statements and Supplementary Data.... 48
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 48
PART III
Item 10. Directors and Executive Officers of the Company............. 48
Item 11. Executive Compensation...................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 48
Item 13. Certain Relationships and Related Transactions.............. 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 49
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
</Table>
The page numbers in the Table of Contents reflect actual page numbers, not
EDGAR page tag numbers.
J.D. Edwards is a registered trademark of J.D. Edwards & Company. The names of
all other products and services of J.D. Edwards used herein are trademarks or
registered trademarks of J.D. Edwards World Source Company. All other product
and service names used are trademarks or registered trademarks of their
respective owners.
i
PART I
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. In some
cases, forward-looking statements can be identified by the use of such words as
"anticipates," expects"," intends," "plans," "believes," "seeks," "estimates,"
variations of such words, and similar expressions, particularly statements
referencing the benefits of our acquisition of YOUcentric, Inc., the retention
of YOUcentric personnel, the benefits resulting from our restructurings, and our
annual and quarterly revenue expectations for fiscal 2002. Such forward-looking
statements are based on current expectations, estimates, and projections about
J.D. Edwards' industry, management beliefs, and certain assumptions made by J.D.
Edwards' management. These statements are not guarantees of future performance
and are subject to certain risks, uncertainties, and assumptions that are
difficult to predict; therefore, actual results may differ materially from those
expressed or forecasted in any such forward-looking statements. Such risks and
uncertainties include those set forth herein under "Risk Factors" on pages 11 to
21. Unless required by law, we undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise. However, readers should carefully review the risk factors
set forth in other reports and documents that we file from time to time with the
Securities and Exchange Commission, particularly the Quarterly Reports on Form
10-Q and any Current Reports on Form 8-K.
ITEM 1. BUSINESS
OVERVIEW
J.D. Edwards is a leading provider of agile, collaborative solutions for
the connected economy. For 25 years, we have developed, marketed, and supported
innovative, flexible solutions that help run multinational organizations,
including more than 6,300 companies of all sizes. We deliver integrated,
collaborative software for supply chain management (planning and execution)
procurement, and customer relationship management (CRM), in addition to
workforce management and other functional support. Through recent internal
developments, business acquisitions, and strategic partnerships, we have
expanded our product offerings. Our enterprise software is designed to help
organizations manage and execute internal business functions, such as
manufacturing, finance, distribution/logistics, and other core operational
processes. These systems manage and store large amounts of diverse business
information, providing continuous and simultaneous availability of information
to geographically dispersed employees, customers, and suppliers. Customers can
choose to operate our software on a variety of computing environments and we
support several different databases. To help customers achieve maximum benefit
from our software, we provide implementation, education, and support services
through our own direct services organization and business partners. Our services
organization is focused on being a responsive and proactive extension of our
software offerings.
We distribute, implement, and support our software worldwide through 55
offices and more than 350 third-party business partners. Our principal executive
office is located at One Technology Way, Denver, Colorado 80237. Our telephone
number is 303/334-4000, and our Internet home page is located at
www.jdedwards.com. We were incorporated in Colorado in March 1977 and
reincorporated in Delaware in August 1997. Except as otherwise noted herein, all
references to "J.D. Edwards" means J.D. Edwards & Company and its subsidiaries.
RECENT DEVELOPMENTS
Acquisition of YOUcentric, Inc.
In November 2001, we completed the acquisition of YOUcentric, Inc.
(YOUcentric), a Charlotte, N.C.-based privately held provider of Java-based CRM
software, including Web-based applications for sales force automation, campaign
management, contact center management, and partner relationship management. The
new J.D. Edwards CRM offering, which combines the functionality of YOUcentric's
product with the look and feel of our software, is generally available now. J.D.
Edwards CRM operates on technology platforms that include UNIX, Windows NT(R),
and IBM OS/400, with full wireless functionality across multiple portable
devices. By adding YOUcentric's capabilities, we believe we will be in a better
position to deliver a
1
comprehensive set of integrated collaborative applications that enable companies
to electronically manage their business relationships, from supply chain
planning to customer service.
Under the terms of the transaction, we acquired 100 percent of the capital
stock of YOUcentric, Inc., valued at $86 million, in exchange for $80 million in
J.D. Edwards common stock and $6 million in cash. Our consolidated statement of
operations for the year ended October 31, 2001 does not include any revenue or
expense related to the YOUcentric acquisition. We expect most of YOUcentric's
executive team and employees to remain with J.D. Edwards.
Management Team Changes
In January 2002, our Board of Directors appointed Robert M. Dutkowsky as
President and Chief Executive Officer, replacing C. Edward McVaney, a company
co-founder and long-time leader. Mr. McVaney will retain the position of
Chairman of the Board until our Annual Meeting of Stockholders in March 2002, at
which time Mr. Dutkowsky will assume the additional duty of Chairman of the
Board. Mr. McVaney will continue as a director on the Board of Directors. In
February 2001, Hank Bonde joined J.D. Edwards as Chief Operating Officer and Les
Wyatt joined as Chief Marketing Officer. In May 2001, Richard Mathews was
appointed Senior Vice President, International. In August 2001, J.D. Edwards
appointed Harry Debes to the position of Senior Vice President, Americas.
Additionally, we made recent internal promotions that we believe have
strengthened our management team. For information on the background of the
executive officers, see the information in the section titled "Our Executive
Officers" at the end of Part I of this Annual Report on Form 10-K.
Restructurings
Our restructuring activities in fiscal 2001 included the elimination of
certain employee positions, computer equipment either owned or leased, and the
closure or consolidation of some operating facilities, and we incurred
restructuring charges in connection with these actions. In addition, we focused
on improving our organizational effectiveness and profitability.
The following changes are designed to improve our organizational
effectiveness:
- realigned and consolidated the field consulting and sales organizations
- appointed new sales and marketing leadership
- increased the management span of control by improved staffing ratios and
reduced layers of management
- reduced our workforce in the second and third quarters of 2001 by nearly
400 employees and in the third quarter of 2000 by nearly 800 employees
- improved our internal procurement activities through strategic sourcing
The following changes are designed to improve profitability:
- expanded our focus on existing and new customer opportunities by
improving our sales force effectiveness both for software licensing and
services
- focused our resources on specific industries and geographies where we can
best compete given our current product and services fit for these markets
- re-assigned certain existing employees to direct-revenue consulting
positions and focused on consulting utilization and revenue realization
- increased the number of our direct service engagements
- expanded our integrated solutions through the completion of the
acquisition of YOUcentric
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- improved service revenue through maintenance price increases and expanded
service options for customers
- focused on more effective marketing and pricing programs
J.D. EDWARDS' SOFTWARE FOR THE ENTERPRISE, SUPPLY CHAIN AND CUSTOMER
RELATIONSHIP MANAGEMENT
J.D. Edwards Product Lines
We offer a wide range of software to help our customers meet their
enterprise needs, extending beyond the walls of the enterprise to facilitate
collaboration with trading partners. Customers can choose to operate our
software on a variety of computing environments, including Windows(R), NT,
UNIX(R), and IBM OS/400(R). Our software is also Web-enabled through Java(R) and
HTML. The databases we support include IBM's DB2(R)/UDB for IBM eServer
iSeries(TM), (previously known as the AS/400(R)), DB2(R)/UDB for UNIX(R),
DB2(R)/UDB for Windows, Microsoft's SQL Server, and Oracle. The software
provides the following capabilities to meet the operational needs and challenges
of businesses and includes the following products:
<Table>
- -Supply Chain Management - Customer Relationship Management
- Supply Chain Execution - Workforce Management
- Advanced Planning - Knowledge Management
- - Cross-Industry Applications
</Table>
Supply Chain Execution. Our Supply Chain Execution software supports
multi-mode, multi-facility manufacturing and distribution environments, as well
as global enterprise financial management. Traditional enterprise resource
planning (ERP) functionality is extended to include sophisticated pricing,
warehouse management, and transportation management. Modules include:
<Table>
- - Requirements Planning - Work Order Management
- - Inventory Management - Quality Management
- - Procurement - Warehouse Management
- - Sales Order Management - Transportation Management
- - Advanced Pricing - Manufacturing Management
</Table>
Advanced Planning. As part of J.D. Edwards' supply chain management
systems, the Advanced Planning product offerings are designed to produce
optimized production and distribution plans and schedules in collaboration with
trading partners. Real-time responsiveness to operational changes is
facilitated, enabling businesses to reduce inventory, improve customer service,
and ensure that the right products reach their proper destination at the right
time. In addition, "what-if" analyses can be performed to allow businesses to
see how changes in their processes could affect operations and consequently
revise their plans. Most importantly, Advanced Planning is integrated with our
ERP product offerings, so our customers are able to put their optimized plans
into action. Advanced Planning from J.D. Edwards offers full functionality with
Web-enablement tools, including the following modules:
<Table>
- - Demand Planning - Production and Distribution Planning
- - Demand Consensus - Production Scheduling -- Discreet
- - Order Promising - Production Scheduling -- Process
- - Strategic Network Optimization - Web Planning
</Table>
3
Cross-Industry Applications. Cross-Industry Applications cover the bases
of business processes that almost any enterprise in any industry cannot be
without -- managing finances, assets, and projects. Modules include:
<Table>
- - Financial Management (including activity-based - Enterprise Asset Management
costing)
- - Real Estate Management - Project Management
</Table>
CRM. With the acquisition of YOUcentric, Inc., we now market J.D. Edwards
CRM, a suite of software that integrates with our Supply Chain Management
systems to support all of the business processes and associated systems of a
customer. Web-based CRM capabilities enable businesses to configure product
orders with tailored features, functionality, and branding -- meeting the demand
for what analysts call "one-to-one marketing." Our applications capture customer
profiles and preferences, improve products and promotions, and build trust in
the ability of companies to meet the needs of customers. The software links
companies with their customers and business partners and integrates easily with
other internal enterprise applications. Modules of J.D. Edwards CRM include:
<Table>
- - Sales Force Automation - Customer Self-Service
- - Marketing Automation - Service and Warranty Management
- - Advanced Order Configurator - Contact Center
</Table>
Workforce Management. J.D. Edwards Workforce Management software helps
enterprises record and administer information for their employees. Our product
includes functionality to facilitate the data gathering for and processing of
payroll and regulatory requirements as well as advanced management tools. Our
e-business and workflow technologies allow HR departments to push data
collection and maintenance to the source -- employees and managers -- so staff
can focus on strategic tasks such as workforce planning and employee
development. Modules of J.D. Edwards Workforce Management include:
<Table>
- - Human Resource Management - Employee Self-Service
- - Payroll - Manager Self-Service
- - Time Accounting
</Table>
Knowledge Management. With J.D. Edwards Knowledge Management software,
clients transform their organization's data into information they can use to
build or maintain a competitive advantage. The software provides access to
real-time information -- both internal and external to the enterprise -- that
helps clients monitor performance and make more informed decisions. Additional
functionality includes the ability to capture, create, organize, access,
distribute, and use data by aligning key business processes, technology, and
information management principles, enabling clients to search against multiple
data stores and tag content to create profiles. The Web-enabled modules of our
Knowledge Management software include:
- Business Intelligence
- Content Management
- Web-based Training
Vertical Market Applications
J.D. Edwards has significant vertical market experience and expertise in
developing, marketing, selling, and deploying enterprise software to more than
6,300 customers across a variety of industries. We strategically focus on
specific vertical markets to better address those customers' needs. The vertical
focus offers customers more finely tailored solutions, better implementation,
and broader industry-specific expertise. We believe that by aligning the sales
and consulting organizations along vertical lines, we will be able to broaden
our specific industry offerings and better enable our customers to quickly react
to business changes. Currently, we provide
4
industry-specific solutions for manufacturing, distribution, asset-intensive,
and project-oriented industries, that include the following sectors:
- Consumer. This sector focuses on consumer packaged goods,
pharmaceuticals, and energy and chemicals.
- Industrial. The industrial sector focuses on high technology and
electronics, industrial fabrication and assembly, automotive, and other
manufacturing disciplines.
- Services. The services industry sector focuses on professional services
organizations, construction, real estate, mining, and others related to
project and asset-intensive industries.
We plan to continue our strategy of tailoring application suites and
templates for vertical markets, as well as incorporating best business practices
into our software and services. We also will continue to offer industry-
specific services to these markets.
Technology Choices for Different Market Segments
Customers choose between two suites of J.D. Edwards applications:
OneWorld(R) and WorldSoftware(R). OneWorld is an object-based, event-driven
technology designed to provide the information access and other user benefits of
traditional client/server systems. OneWorld was introduced in late 1996 to
operate on a variety of computing environments and was specifically designed to
enable customers to make business changes quickly and easily without
programming.
WorldSoftware is a host-centric software suite for the IBM iSeries
platform. With user-friendly Java(TM) -- and HTML-based graphical user
interfaces, WorldSoftware allows users to work in a visual environment
traditionally associated with client/server systems without compromising data
integrity, disrupting ongoing operations, or sacrificing existing hardware and
software investments.
We believe our software architecture provides the overall system
performance to efficiently process high volumes of activity online and in
client/server, host-centric, and Web environments. In addition, the OneWorld and
WorldSoftware suites are scalable with different network configurations, server
platforms, and other architectural components.
We develop and enhance our software applications using the OneWorld and
WorldSoftware toolsets. We believe the use of toolsets increases code
consistency and improves quality. Toolsets are bundled with the respective
applications, providing companies with the same productivity, consistency, and
quality benefits realized by our own internal developers. Since modifications
made by customers and J.D. Edwards are completed using the same toolsets,
upgrades to new releases are faster and easier, and preserve customer
modifications.
TECHNOLOGY HIGHLIGHTS
OneWorld System and Change Management
J.D. Edwards' OneWorld advanced technology tools help simplify system
management -- streamlining the system upgrade process and providing performance
measurement, modeling, and visualization tools. These system and change
management tools package the knowledge a customer needs to understand,
implement, test, and change software. Intuitive user interfaces map to a wide
range of system management tools, so the customer can quickly acquire the skills
and information to modify software as their business grows or changes. Features
of the OneWorld Implementation and Change Management include:
- advanced tools for system performance measurement, benchmarking, and
documentation, as well as a scripting tool for regression testing and
application verification
- several types of modelers used to describe a business, its processes, and
the systems that it uses, including process modeling functionality, a
visualizer, and content management tools
5
Collaborative Technology
Starting from the premise that no single organization has a monopoly on
good ideas, we provide software that gives customers the freedom to share
information and processes among disparate business systems. To enable customers
to choose the best ideas or technology regardless of where they originate in the
value chain, we market software with the following features:
- standards-based interoperability to link an organization's operations
with supply chain partners that use different software
- pre-integrated extended business processes
J.D. Edwards begins with a component-based architecture that provides
flexibility and allows customers to quickly change the way they do business
without reprogramming their systems. We integrate core business processes that
enable customers to make the best use of their assets and resources across all
areas of their enterprises. Lastly, we provide links to partners and customers
in order to optimize the business processes that extend beyond the four walls of
an organization.
We believe our architecture leapfrogs two barriers to entry in the digital
business environment -- centralized, proprietary technology infrastructures and
rigid, internally focused business process models.
Standards-Based Interoperability
J.D. Edwards provides a comprehensive set of interoperability options,
including EDI and the middleware foundation, for seamless access and integration
via COM/DCOM, CORBA, Java, and MQSeries(R). With OneWorld Xe we introduced our
XML-based eXtended Process Integration (XPI(TM)) interoperability engine. XPI
provides an extensible, reliable, and scalable architecture within one solution
for:
- application portfolio integration within the enterprise
- data, process, and workflow integration between enterprises
J.D. Edwards XPI enables plug-and-play interoperability of J.D. Edwards and
non-J.D. Edwards enterprise information systems, including packaged, custom,
Internet, database, and legacy applications.
J.D. Edwards XPI provides broad application connection capabilities with an
integration broker and a "hub-and-spoke" interface architecture, with XPI acting
as the hub. At the ends of the spokes are the disparate applications used by a
company -- for example, OneWorld, WorldSoftware, Advanced Planning, CRM, and a
legacy manufacturing suite. Each of the company's applications passes messages
down the spoke to the hub where they are translated into a neutral format. The
hub determines where each message is going -- again, this could be a OneWorld or
other type of application -- translates the message into the appropriate format,
and sends it up the appropriate spoke. The XPI technology offers a number of
different connectors, or application "spokes," on the hub, and adding new spokes
is straightforward. A new application does not need to be "translated" to every
other existing application; rather, it only needs to be translated once to the
neutral, or interoperable, format of the XPI hub.
Pre-Integrated Extended Business Processes
During fiscal 2001, we released the first series of J.D. Edwards
pre-integrated extended business processes for OneWorld and WorldSoftware. Once
XPI connects a customer's disparate applications within the company and
externally with business and trading partners, we recommend the implementation
of these fully executable business processes based on industry-specific
information technology standards that facilitate more effective collaboration
between companies, simplify systems integration, and leverage past ERP/APS
investments.
Our packaged extended business processes support the ANSI/EDIFACT EDI
standard and RosettaNet. Significantly, RosettaNet is the IT standard in the
electronics industry -- a target market and important vertical practice at J.D.
Edwards. For instance, an electronics company can send out a purchase order in
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standard RosettaNet format. A second company that adheres to the RosettaNet
standard can automatically accept the purchase order and translate it into a
sales order using J.D. Edwards or other software.
GLOBAL CUSTOMER SERVICES
We seek to provide our customers with high-quality consulting, support, and
education services in the most efficient and effective manner. As of October 31,
2001, we had 1,821 employees in the global customer services organization
located throughout the world. We also have relationships with a variety of
third-party service providers. In cases where we do not provide the client
services directly, we sometimes subcontract a portion of the work through
third-party implementation support partners, depending on available resources.
Many of these business partners support our international operations or provide
services in countries where J.D. Edwards does not have direct operations. We
also maintain alliances with leading consulting companies that contract directly
with our customers to provide technology and application implementation support,
offering expertise in business process reengineering and knowledge in
diversified industries.
Our service organizations work to ensure customer satisfaction during and
after the software implementation has been completed. We operate from the
premise that the way we do business is the reason people do business with us. We
acknowledge the magnitude of our customers' decisions to invest resources and
trust in our products by standing by them long after the sale -- a partner for
the long-term.
Our services organizations provide education, consulting, and ongoing
support to customers. They ensure that user-friendly self-service tools provide
complete access to information customers need. In order to help our customers
realize the highest return on their investment, the services organizations
provide the following services:
- help implement software efficiently and effectively
- train client employees to use the implemented software
- provide self-service and live support for our customers
- maintain and grow the value of customers' technology assets
SOFTWARE ENGINEERING
J.D. Edwards has invested, and expects to continue to invest, substantial
resources in research and product development. Our development process is
enhanced by frequent solicitation of customer feedback and close contact with
customers through our consulting services organization. Additionally,
cross-functional product teams -- led by our product management department and
consisting of management representatives from our development, global support
services, and marketing teams -- meet regularly to determine product direction.
Research and development expenditures, which include capitalized internal
development costs, third-party source code rights, and outsourced software
development costs, were $109.2 million, $159.9 million, and $130.0 million for
the fiscal years ended October 31, 1999, 2000, and 2001, respectively. As of
October 31, 2001, our software engineering organization included 1,124
employees, the majority of whom were located in Denver, Colorado. We also have
development centers in Toronto, Ontario and Charlotte, North Carolina.
During fiscal 2001, we devoted development resources primarily to major
enhancements and new products associated with OneWorld application suites, as
well as integration of our applications with those of third parties. In addition
to our own research and development activities, we outsourced the development of
software and acquired source code rights for certain enterprise interface
applications and other embedded technology. By forming relationships with other
organizations, we were able to manage internal development resources and offer
our customers a broad spectrum of products and services.
J.D. Edwards software applications are developed and enhanced using
OneWorld, WorldSoftware, or other toolsets. We believe the use of these toolsets
provides advantages including increased productivity and code consistency,
self-documenting code, and improved quality. Our development technologies groups
are responsible for the development of toolsets and underlying technologies of
our software. The OneWorld
7
development technologies team focuses on enhancing the flexibility, scalability,
simplicity, and performance of OneWorld and its Configurable Network Computing
(CNC) technological foundation. The WorldSoftware development technologies team
is primarily focused on maintaining the toolset and underlying technologies for
WorldSoftware. These teams share responsibility for cross-functional
coordination with sales and support. Additionally, they work with hardware and
software suppliers with whom we have relationships to identify, analyze,
prioritize, and schedule new features and functions.
Application development teams use the toolsets created by the development
technologies group to create and enhance application suites. These software
engineers are responsible for developing, enhancing, and maintaining
applications and for integrating our software with that of product alliance
partners. J.D. Edwards has designed toolsets to enable application programming
to be performed by business analysts or nonprogrammers responsible for business
practices. Our application development team works closely with the product
management teams responsible for working with customers, internal sales and
marketing departments, and third-party implementation providers to identify,
analyze, prioritize, and schedule new functionality in the application suites,
as well as establish product requirements and priorities for new vertical
markets.
The Engineering Services and Quality Services groups both work closely with
the development technologies and application development groups, focusing on
quality assurance and measurement, release management, product assembly, and
distribution. Our documentation group is responsible for product documentation,
localization, and the translation of application suites for particular foreign
markets, as well as for the vertical market application suites and templates.
They work closely with domestic and international customers and third-party
implementation providers -- as well as cross-functional internal teams of
development, implementation, support, and education professionals -- to ensure
that appropriate enhancements are incorporated into the documentation and
implementation processes. Some localization and translations are performed by
our business partners instead of our internal documentation group. Our OneWorld
application suite is currently translated into and operates in 19 languages, and
the WorldSoftware application suite currently is translated into and operates in
21 languages.
SALES, MARKETING, AND DISTRIBUTION
J.D. Edwards distributes, implements, and supports its products worldwide
through 55 offices in over 20 countries. We have 67 reseller and distributor
partners with offices throughout the world.
International revenue as a percentage of total revenue ranged from 35% to
39% in each of the past three fiscal years. No international country represented
10% or more of revenue in any of the past three fiscal years. We directly market
our software in more than 20 countries through foreign subsidiaries located
throughout Europe, South Africa, Asia, Australia, New Zealand, North America,
and South America. Our international business partners extend our reach to other
geographic areas in which we have not invested resources to establish a direct
presence. We expect that revenue from international customers will continue to
account for a significant portion of total revenue in the future.
Our marketing strategy is to position J.D. Edwards in identified target
markets as a premier provider of agile, collaborative software for the connected
economy and to increase recognition of our corporate brand. In support of this
strategy, our marketing programs include developing and maintaining industry
analyst and public relations, developing databases of targeted customers,
conducting advertising and direct mail campaigns, and maintaining a World Wide
Web home page. In marketing software to multinational organizations, we
typically engage in a lengthy sales cycle -- generally between six and 18
months -- and expend substantial time, effort, and money educating prospective
customers on the use and benefits of J.D. Edwards' products.
Software Licensing
J.D. Edwards licenses software under perpetual license agreements via
direct sales and business partner channels throughout the world. As of October
31, 2001, we employed 248 account executives. More than 350 business partners
(including sales and consulting partners) are located throughout the world and
provide an indirect distribution channel to target certain markets or geographic
areas. We expect to continue to rely on indirect channels in order to enhance
market penetration and implementation capabilities.
8
Application Service Providers
Since introducing an application hosting strategy in 1998, we have
successfully delivered hosting applications and services to customers of all
sizes in a wide array of vertical industries. Through select third-party
business partners, our application service providers (ASP) service allows
rapid-growth companies to outsource enterprise application software so they can
focus more intently on the core competencies that bring them competitive
advantage. The J.D. Edwards ASP Solutions group quickly makes customers
operational and enables general businesses to become e-businesses. Customers may
license the software for their internal use under rental or perpetual license
arrangements. Generally, companies that use an ASP service seek more predictable
IT costs, and our ASP partners help reduce customers' investment in the hardware
and other costs necessary to run systems internally.
THIRD-PARTY BUSINESS PARTNERS
J.D. Edwards' strategic partnerships include hardware platform
manufacturers, operating systems vendors, software and database developers,
resellers, and system integrators that complement our software and services. In
all, our alliances encompass more than 350 partners, ranging from large global
consulting firms to small organizations, providing service to customers in
remote locations. We have introduced many programs to help the following partner
groups become more successful, automate, and accelerate the overall
implementation process, and open new markets not currently served by us
directly.
- Technology Partners -- We provide customers with system configuration
benchmarking standards and pre-engineered network solutions through
technology partners. Each partner has personnel who can provide customers
with customized sizing and configuration support for large or unusually
complex configurations.
- Consulting Alliance Partners -- We have relationships with some of the
world's foremost consulting companies to provide both technology and
application support. These global partners offer expertise in business
process reengineering and possess a broad range of knowledge in
diversified industries. Our consulting alliance partners have dedicated
service organizations to manage every aspect of a customer's
implementation.
- ASP Partners -- J.D. Edwards' ASP initiative comprises select partners
with unique vertical industry expertise. These ASP partners are
differentiated according to industry or customer size, business process
support, and market reach.
- International Sales and Service Partners -- International sales and
service partners strengthen our worldwide presence with sales and support
services in areas without a direct J.D. Edwards presence. These partners
also maintain a value-added reseller program to complement their direct
offices, enhancing our coverage of the small- to medium-enterprise
market.
- Channel Partners -- J.D. Edwards' solution for smaller U.S. companies,
the Genesis Channel extends our presence in the market of organizations
with $130 million or less in annual revenue. The Genesis partners market
our software, maintenance support, and training services, while providing
direct consulting and implementation services in their respective areas.
- Implementation Support Partners -- We seek to provide customers with
high-quality implementation services in the most efficient and effective
manner. In some cases where we do not provide implementation services
directly, we subcontract a portion of our services through third parties.
We also maintain relationships with a number of third-party
implementation providers that contract directly with customers to
implement software. We select these third-party providers carefully to
ensure they have the ability and knowledge to represent J.D. Edwards and
implement our enterprise business software properly. Our service
providers receive extensive training in the application suites and
implementation process. In addition, we evaluate these service providers
on a regular basis to ensure quality service and customer support. These
relationships enable us to provide implementation services through
third-party personnel with extensive client/server expertise, while
expanding service capacity, focusing on license fee revenue generation,
and concentrating our own service resources most
9
efficiently. We believe that this direct and third-party customer service
strategy allows us to deliver comprehensive and timely services
worldwide.
- Product Alliances Partners -- One of our ongoing goals is to form
relationships with organizations whose products enhance our software.
This allows us to more effectively manage development costs and more
quickly offer customers the broadest spectrum of products and services.
Our product alliance partners ensure compatible technology and provide
credentialed support. We currently have approximately 70 product alliance
partners.
CUSTOMERS
To date, we have licensed application suites to more than 6,300 customers.
Our installed base of customers is widespread geographically and is highly
diversified in terms of size and industry groups represented. Customers use our
software at nearly 10,000 sites in over 100 countries. During each of the last
three fiscal years, no customer accounted for more than 10% of total revenue.
COMPETITION
J.D. Edwards competes in the enterprise software solutions market, with
distinct competencies in supply chain management and CRM solutions. Our products
are designed and marketed for the IBM iSeries and the NT and UNIX platforms,
including use over the Internet. This market is highly competitive, subject to
rapid technological change, and significantly affected by new product
introductions. We compete with a large number of independent software vendors in
this market, as well as with suppliers of custom-developed business application
software. We have expanded our technology into a number of new business areas to
foster long-term growth, including the areas of electronic commerce, online
business services, and Internet computing. In addition, we have entered into and
invested in a number of strategic partnership relationships in these same areas.
These segments present different competitive factors than the traditional
enterprise software market.
Our competitors include:
- enterprise resource application software vendors, such as Oracle
Corporation, SAP AG, PeopleSoft Inc., each of which currently offers
enterprise software solutions that incorporate applications that compete
with our products
- supply chain software vendors, including i2 Technologies Inc. and
Manugistics Group Inc.
- CRM software vendors, including Siebel Systems Inc. and PeopleSoft Inc.
- other business application software vendors that may broaden their
product offerings by internally developing or by acquiring or partnering
with independent developers of advanced planning and scheduling software
- custom-developed business applications software, such as that from
systems consulting groups and IT departments of potential customers
We also must maintain competitive advantage and growth while standing our
ground against competitors who may have greater financial, technical, marketing,
and other resources. For example, Oracle Corporation is a significant competitor
in our market space -- and their well-known relational database management
system underlies a portion of our installed applications. Some competitors have
become more aggressive with their payment terms, discounting practices, and
service arrangements, which makes product differentiation more important.
Additionally, several of our competitors have well-established relationships
with our current or potential customers. These established relationships might
prevent us from competing effectively in divisions or subsidiaries of such
customers. Many of our competitors also offer vertical applications to mid-sized
organizations, which is the market that comprises a substantial portion of our
revenue.
We believe our differentiation is in marketing solutions that enable
collaboration, solve customers' business problems, and facilitate organizational
change, including services that meet market demands and
10
customer expectations. We believe the principal differentiating factors
affecting the competitive market for our software products are as follows:
<Table>
- responsiveness to customer needs - product quality and reliability
- product flexibility and interoperability - vendor and product reputation
- product functionality and collaborative ability - vendor size and financial resources
- speed of implementation - quality of customer support
- ease of use - overall cost
- product performance and features
</Table>
We believe that we compete favorably with respect to the above factors. See
"Risk Factors."
EMPLOYEES
As of October 31, 2001, we employed 4,713 people full time -- 1,124 in
research and development, 1,076 in sales and marketing, 1,267 in client services
and education, 554 in customer support, and 692 in management and
administration. We believe that our continuing success will depend, in part, on
our ability to retain a limited number of key employees and other members of
senior management, as well as our ability to attract and retain highly skilled
technical, marketing, and management personnel who are in great demand. We have
not had a work stoppage, and no employees are represented under collective
bargaining agreements. Management considers employee relations to be good. See
"Risk Factors -- We depend to a significant extent on certain key personnel and
our continued ability to hire qualified personnel."
PROPRIETARY RIGHTS AND LICENSING
Our success depends, in part, on our ability to protect our proprietary
rights. To protect these rights, we rely primarily on a combination of patent,
copyright, trade secret, and trademark laws; confidentiality agreements with
employees and third parties; and protective contractual provisions. See "Risk
Factors -- We have limited protection of our proprietary technology and
intellectual property and face potential infringement claims."
RISK FACTORS
IN ADDITION TO OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM
10-K AND IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING US AND OUR BUSINESS BECAUSE
SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY HAVE A SIGNIFICANT
IMPACT IN THE FUTURE ON OUR BUSINESS, OPERATING RESULTS, OR FINANCIAL
CONDITIONS.
Downturns in general economic and market conditions could materially affect
our business. There is potential for a continued downturn in general economic
and market conditions, which may be worsened by recent terrorist attacks in the
United States. Various segments of the software industry have experienced
significant economic downturns characterized by decreased product demand, price
erosion, work slowdown, and layoffs. Recently, concerns have increased
throughout the technology industry regarding negative growth forecasts for the
early part of calendar year 2002. Moreover, there is increasing uncertainty in
the enterprise software market attributed to many factors, including global
economic conditions and strong competitive forces. Our future license fee
revenue and results of operations may experience substantial fluctuations from
period to period as a consequence of these factors, and such conditions and
other factors affecting capital spending may affect the timing of orders from
major customers. Although we have a diverse client base, we have targeted a
number of vertical markets, such as the manufacturing and distribution
industries, which have been significantly impacted by the recent economic
downturn. A continued economic downturn coupled with decline in our revenues
could affect our ability to secure additional financing or raise additional
funds to support working capital requirements, maintain existing financing
arrangements, or for other purposes. Our ability to maintain compliance with
certain affirmative and negative covenants contained in existing agreements,
including certain defined financial covenants, could also be adversely affected.
As a result, any
11
economic downturns in general or in our targeted vertical markets, particularly
in the manufacturing and distribution industries, would have a material adverse
effect on our business, operating results, cash flows, or financial condition.
Our quarterly financial results are subject to significant fluctuations,
and a failure to meet expectations could adversely affect the price of our
stock. Our revenue and operating results are difficult to predict and have
varied widely from quarter to quarter in the past. We expect they will continue
to vary significantly from quarter to quarter due to a number of factors, many
of which are outside our control. Factors that could affect our quarterly
operating results include the following:
- general economic and political conditions
- market acceptance of and demand for our software products and services
- budgeting and buying cycles of our customers
- size and timing of our license transactions
- length of our sales cycle
- timing of our new product introductions and enhancements and those of our
competitors, along with the level of product and price competition that
we encounter
- changes in our pricing policies and those of our competitors
- mix of domestic and international revenue, along with fluctuations in
foreign currency exchange rates
- changes in our sales incentives
- changes in our strategic relationships
- changes in our business strategy
Our software products typically are shipped when we receive orders.
Consequently, license backlog, if any, in a quarter generally represents only a
small portion of that quarter's revenue. As a result, license fee revenue is
difficult to forecast due to its dependence on orders received and shipped in
that quarter. We also recognize a substantial amount of our revenue in the last
month of each quarter and 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 is
lost or occurs later than we expected, operating results could be materially
affected. If our revenue falls below our expectations in any particular quarter,
our business, operating results, and financial condition could be materially
adversely affected.
We historically have experienced and expect to continue to experience a
high degree of seasonality, with a disproportionately greater amount of revenue,
and an even greater proportion of net results, for any fiscal year typically
being recognized in our fourth fiscal quarter. Because our operating expenses
are relatively fixed in the near term, our operating margins have historically
been significantly higher in our fourth fiscal quarter than in other quarters,
and we expect this to continue in future fiscal years. We believe that such
seasonality is primarily the result of both the efforts of our direct sales
force to meet or exceed fiscal year-end sales quotas and the tendency of certain
customers to finalize licensing contracts at or near our fiscal year end. First
quarter revenue historically has slowed during the months of November and
December, and our total revenue, license fee revenue, service revenue, and net
results in the first fiscal quarter historically have been weaker than those in
the immediately preceding fourth quarter.
As a result of the unpredictability of our revenues and uncertainty in the
enterprise software market attributed to many factors, including global economic
conditions and strong competitive forces, we continue to have limited visibility
of future revenue and operating results. Due to the foregoing factors, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. It
12
is likely that during some future quarters we may not meet the expectations of
public market analysts or investors. In this event, the price of our common
stock may fall, and an investment in our common stock may be materially
affected.
The enterprise software industry is highly competitive, and we may be
unable to successfully compete. We compete for customers with a variety of
software vendors, including Internet application vendors in the enterprise
application software market segment, vendors in the manufacturing software
application market segment, vendors in the resource optimization software
solutions market segment, providers of financial management systems software
products, vendors in the CRM market segment, and numerous small firms that offer
products with new or advanced features. Our competitors include:
- enterprise resource application software vendors, such as Oracle
Corporation, SAP AG, and PeopleSoft Inc., each of which currently offers
sophisticated enterprise software solutions that incorporate applications
that compete with our products
- supply chain software vendors, including i2 Technologies, Inc. and
Manugistics Group, Inc.
- CRM software vendors, including Siebel Systems, Inc. and PeopleSoft,
Inc., that may have significantly greater financial, technical, marketing
and other resources, significantly greater name recognition, and a larger
installed base of customers than we do
- other business application software vendors that may broaden their
product offerings by internally developing, or by acquiring or partnering
with independent developers of advanced planning and scheduling software
- custom-developed business applications software, such as that from
systems consulting groups and IT departments of potential customers
We believe we differentiate ourselves by delivering technology that enables
collaboration and facilitates change, as well as by providing services and
solutions that are compatible with market demands and our customers'
expectations. Some of our competitors may have an advantage over us due to their
significantly greater financial, technical, marketing and other resources, or
larger installed base. In addition, Oracle Corporation is a competitor whose
relational database management system underlies a portion of our installed
applications. Furthermore, potential customers may consider outsourcing options,
including data center outsourcing and service bureaus, as viable alternatives to
licensing our software products. We began an outsourcing partner program -- J.D.
Edwards ASP Solutions Group -- in fiscal 1998, which we believe addresses the
needs of the marketplace. Some competitors have become more aggressive with
their payment terms, discounting practices, and service arrangements, which
makes product differentiation even more important. If our competitors continue
to discount or increase the frequency of their discounts, we may be required to
increase discounts on our products. This could have a material adverse effect on
our operating margins. Additionally, several of our competitors have
well-established relationships with our current or potential customers. These
established relationships might prevent us from competing effectively in
divisions or subsidiaries of such customers. Many of our competitors also have
announced their intention to offer vertical applications to mid-sized
organizations, which is the market that comprises a substantial portion of our
revenue. We can offer no assurances that we can successfully compete against new
or existing competitors or that such competition will not materially adversely
affect our business, operating results, or financial condition.
The markets in which we compete experience rapid technological change, and
we face risks associated with new versions and products and defects that could
materially affect our business and revenue. The software market in which we
compete is characterized by rapid technological change, evolving industry
standards, changes in customer requirements, and frequent new product
introductions and enhancements. For instance, existing products can become
obsolete and unmarketable when products utilizing new technologies are
introduced or new industry standards emerge. As a result, the life cycles of our
software products are difficult to estimate. To be successful, we must be able
to enhance existing products, develop and introduce new products that keep pace
with technological development, satisfy our customers' requirements, and achieve
13
market acceptance. There can be no assurance that we will successfully identify
new product opportunities, develop and bring new products to the market in a
timely and cost-effective manner, or that products, capabilities, or
technologies developed by our competitors will not render our products obsolete.
We have addressed the need to develop new products and enhancements primarily
through internal development efforts, licensing third-party technology, and
acquiring technology. However, if we are unable to develop new software products
or enhancements, or if we cannot acquire the necessary technology, or if such
products do not achieve market acceptance, our business, operating results, or
financial condition may be materially adversely affected.
Historically, we have issued significant new releases of our software
products periodically, with minor interim releases issued more frequently. As a
result of the complexities inherent in our software, major new product
enhancements and new products often require long development and testing periods
before they are released. On occasion, we have experienced delays in the
scheduled release date of new and/or enhanced products, and we cannot provide
any assurance that we will achieve future scheduled release dates. The delay of
product releases or enhancements, or the failure of such products or
enhancements to achieve market acceptance, could materially affect our business
and reputation.
Software products as complex as ours frequently contain undetected errors
or "bugs" when first introduced or as new versions are released. Despite
extensive testing, some bugs are not discovered until the product has been
installed and used by our customers. To date, our business, operating results,
and financial condition have not been materially affected by the release of
products containing errors. There can be no assurance that any future errors
will not result in the delay or loss of revenue, diversion of development
resources, damage to our reputation, increased service or warranty costs, or
impaired market acceptance of these products.
We may not successfully integrate or realize the intended benefits of our
acquisitions. We acquired The Premisys Corporation in February 1999, Numetrix
in June 1999, J.D. Edwards New Zealand, Ltd., in March 2000, and YOUcentric,
Inc., in November 2001. In addition, we have acquired product source code rights
to help broaden and strengthen our product portfolio. The success of our
acquisitions depends primarily on our ability to:
- integrate acquired software with our existing products and services
- retain, motivate, and integrate acquired personnel
- integrate multiple information systems
- train existing J.D. Edwards sales force on new product functionality and
sales techniques
We have integrated the operations and have made progress with market
acceptance of the products from The Premisys Corporation, Numetrix, and J.D.
Edwards New Zealand, Ltd.; however, with certain of our fiscal 1999 and fiscal
2000 acquisitions we experienced a higher than anticipated turnover of
employees. There can be no assurance that we will realize the full benefits that
we anticipated when acquiring YOUcentric, Inc., or in other future acquisitions.
Our failure to successfully gain market acceptance of these products or to gain
market share could seriously harm our business, operating results and financial
condition.
In addition, we may make future acquisitions or enter into other agreements
that may not be successful. We may acquire additional businesses, products, and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. Management's negotiations of potential acquisitions or
joint ventures, and management's integration of acquired businesses, products,
or technologies, could divert their time and resources. Future acquisitions
could cause us to issue dilutive equity securities, incur debt or contingent
liabilities, incur impairments on goodwill, amortize other intangibles, or write
off in-process research and development and other indefinite-lived intangible
assets that could seriously harm our financial condition and operating results.
Further, we may not be able to integrate any acquired business, product, or
technology with our existing operations or train, retain, and motivate personnel
from the acquired business. If we are unable to fully integrate an acquired
business, product, or technology, or train, retain, and motivate personnel from
the acquired business, we may not receive the intended benefits of that
acquisition.
14
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, including the areas of CRM resulting from our
YOUcentric acquisition, collaborative commerce (c-commerce), and Internet
computing. 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 revenue in these new areas or that we will
be able to provide a product offering that will satisfy new customer demands in
these areas. The success of Internet computing and, in particular, our current
Internet product offering is difficult to predict because Internet computing
represents technology that is relatively new to the entire software industry. In
addition, we have invested in a number of partnership relationships in these
areas where we may not realize the value equal to our initial investment. During
fiscal 2001, we reviewed our partnership relationships and we decided to
terminate certain reseller arrangements resulting in the write-off of $12.8
million in prepaid royalties and $7.8 million of capitalized third-party
products resulting from a change in strategy related to a portion of our XPI
product. There can be no guarantee that going forward we will be able to
effectively provide a product offering or sell the products we have developed
through or with our partners. Accordingly, we could lose a significant amount of
the investments we have made in such partnerships. Additionally, if our
expansion into these new business areas or our relationships with our partners
is not successful, our business, revenue, and stock price would be materially
affected.
Our continued growth depends on our ability to develop and maintain our
third-party relationships. To enhance our sales, marketing, and customer
service efforts, we have established relationships with a number of third
parties, including consulting and system integration firms, hardware suppliers,
database, operating system, and other independent software vendors. Many of
these third parties also have relationships with one or more of our competitors
and may, in some instances, select or recommend the software offerings of our
competitors rather than our software. In addition, certain of these third
parties compete with us directly in developing and marketing enterprise software
applications. 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 affected.
We depend on third-party technology that could result in increased costs or
delays in the production and improvement of our software offerings. We license
numerous critical third-party software products that we incorporate into our own
software products. If any of the third-party software vendors were to change
their product offerings or terminate our licenses, we might need to incur
additional development costs to ensure continued performance of our products. In
addition, if the cost of licensing any of these third-party software products
significantly increases, our gross margins could significantly decrease.
In some cases, we rely on existing partnerships with other software vendors
who are also competitors. If these vendors change their business practices in
the future, we may be compelled to find alternative vendors with complementary
software, which may not be available on attractive terms, or may not be as
widely accepted or as effective as the software provided by our existing
vendors.
Our restructuring could result in business distractions. We have undergone
two restructurings in fiscal 2000 and fiscal 2001 involving, among other things,
a substantial reduction in our worldwide workforce. These reductions could
result in prospects or customers deciding to delay or not purchase our products
due to perceived uncertainty caused by the restructurings. There can be no
assurance that we will not reduce or otherwise adjust our workforce again in the
future or that the related transition issues associated with such reductions
will not be incurred again in the future. This uncertainty could result in a
lack of focus and reduced productivity by our remaining employees, including
those directly responsible for revenue generation, which in turn may affect our
revenue in the future. In addition, employees directly affected by the
reductions may seek future employment with our business partners, customers, or
even our competitors. Although all employees are required to sign a
confidentiality agreement with us at the time of hire, there can be no
assurances that the confidential nature of our proprietary information will be
maintained in the course of such future employment.
We depend to a significant extent on certain key personnel and our
continued ability to hire qualified personnel. Our success depends, to a
significant extent, on a limited number of members of our senior management and
other key employees. The loss of one or more of our key employees could result
in a material
15
adverse effect to our business. We have recently made significant changes in our
executive and management teams, and there can be no assurance that these changes
will be successful. Additionally, we do not maintain key-man life insurance on
our chief executive officer or other key personnel.
Further, we believe that our future success will depend in large part on
our ability to attract, train, and retain highly skilled managerial, sales, and
marketing personnel. There can be no assurance that we will not have difficulty
attracting skilled employees as a result of a perceived risk of future workforce
reductions. Additionally, employment candidates may demand greater incentives in
connection with their employment. We may grant options or other stock-based
awards to attract and retain personnel, which could dilute our existing
stockholders. Further, the failure to attract, train, retain, and effectively
manage employees could increase our costs, hurt our development and sales
efforts, or cause a degradation in the quality of our customer service and could
have a material adverse effect on our business, operating results, or financial
condition.
Our sales cycle is often lengthy and unpredictable, which could affect our
sales. Customers make a substantial capital investment when purchasing our
software for division or enterprise-wide essential business purposes. Potential
customers spend significant time and resources to determine which software to
purchase. Selling our products requires an extensive sales effort because the
decision to license software generally involves evaluation by a significant
number of customer personnel in various functional and geographic areas. We also
have limited control over which vendor a customer favors or if the customer
chooses to delay or forego a purchase. Due to all of these factors, our sales
cycle can range from six to 18 months. Since the sales cycle is unpredictable,
it is difficult to forecast the timing or amount of specific sales, and
therefore, the number of sales and amount of revenue generated from such sales
varies from quarter to quarter. During fiscal 2001, the overall number of
transactions exceeding $1.0 million declined to 63 transactions, or 43% of our
license fee revenue, from 73 transactions, or 45% of our license fee revenue in
fiscal 2000. The failure to complete one or more large sales could have a
material adverse effect on our business, operating results, or financial
condition.
If use of the Internet for commerce and communication does not increase as
we anticipate, our business will suffer. We are offering new and enhanced
products and services focused on collaboration with trading partners over the
Internet. Our strategy depends on increased acceptance and use of the Internet
as a medium for commerce and communication. Rapid growth in the use of the
Internet is a recent trend. As a result, acceptance and use may not continue to
develop at historical rates, and a sufficiently broad base of business customers
may not adopt or continue to use the Internet to conduct their operations.
Demand and market acceptance for recently introduced services and products over
the Internet are subject to a high level of uncertainty, and there exist few
proven services and products. Our business could be seriously harmed if:
- the necessary communication and computer network technology underlying
the Internet and other online services does not effectively support any
expansion that may occur
- new standards and protocols are not developed or adopted in a timely
manner
- concerns about security, reliability, cost, ease of use, accessibility,
quality of service, or other factors result in the Internet not becoming
established as a viable commercial marketplace, inhibiting the
development of electronic commerce and reducing the need for and
desirability of our products and services
Our continued success depends on our ability to achieve growth. Our
ability to successfully offer products and services and to implement our
business plan in a rapidly evolving market requires an effective planning and
management process. To continue competing effectively and achieve future growth,
we must continue to evaluate and improve the adequacy of our management
structure and existing procedures, including our financial and internal
controls. If we are not successful, our business, operating results, and
financial condition would be materially adversely affected.
We continue to depend on revenue from customers who use the IBM iSeries
platform for a large portion of our total revenue. We continue to be dependent
on customers using our software products on the IBM iSeries platform. Although
the percentage of our revenue from the iSeries declined as the percentage of
16
our revenue from customers using our products on other platforms increased
during fiscal 2000 and 2001, a significant portion of our installed base of
customers uses our software on the iSeries platform. Through the J.D. Edwards
WorldSoftware Organization, we will continue to offer enhanced software products
for and maintain a focus on the iSeries market, but there is no guarantee that
our customers will license, or purchase support contracts for, these enhanced
software products. If our efforts to maintain a focus on the iSeries market and
our WorldSoftware customers are unsuccessful and if we lose installed-base
customers or iSeries market share, we may suffer material adverse effects to our
revenue and business. In addition, there can be no assurance that new
technologies developed and marketed by our competitors will not erode our
product differentiation or render our iSeries products obsolete, whereby our
revenue and business could be materially adversely affected.
Our implementation process may be lengthy, which could result in customer
dissatisfaction or damage to our reputation. Our software is complex and
affects many different business functions across various functional or
geographic areas of an enterprise. This can result in a complex and lengthy
implementation process. The implementation process requires the involvement of
significant customer resources and can also result in significant risks to the
customer. Delays in implementation by our business partners or by us may result
in customer dissatisfaction or damage to our reputation. This could materially
affect our revenue or business.
We depend to a significant extent on our service revenue. Beginning in
fiscal 1997, we initiated a strategy of referring some customers to business
partners who contract directly with our customers for the implementation of
OneWorld. During fiscal 2000 and the first half of fiscal 2001, we had fewer
revenue-generating consulting employees and began to see a decline in consulting
revenue. In the last half of fiscal 2001, we reassigned existing employees to
direct revenue-generating consulting positions and increased the number of
direct service engagements. As a result, consultant utilization and revenue
realization improved during the last half of fiscal 2001, and consulting revenue
and margins began to improve. For fiscal 2002, we have initiated an incentive
program for our account executives to sell direct service engagements and will
continue to focus on improving consultant utilization and revenue realization.
We also intend to continue pursuing business partner relationships under both
subcontract and referral arrangements, as appropriate, to best meet our
objectives and our customers' needs. There is no assurance that we can attract
the right direct revenue generating consulting employees or have sufficient
resources available to perform the implementation services ourselves. If we are
unable to establish and maintain effective long-term relationships with such
third-party implementation providers or if such providers do not meet our
customers' needs, our business, operating results, and financial condition could
be materially adversely affected. In any quarter, total services revenue is
dependent on license transactions closed during the current and preceding
periods, the growth in our installed base of customers, the amount and size of
consulting engagements, and the level of competition from alliance partners for
consulting and implementation work. There can be no assurance that future
fluctuations in our license revenue will not have an adverse affect on future
services revenue.
Recent terrorist activities and resulting military and other actions could
adversely affect our business. The terrorist attacks on September 11, 2001,
disrupted commerce throughout the world. In response to such attacks, the U.S.
is actively using military force to pursue those behind these attacks and
initiating broader actions against global terrorism. The continued threat of
terrorism throughout the world, the escalation of military action, and
heightened security measures in response to such threats may cause significant
disruption to commerce throughout the world. To the extent that such disruptions
result in reductions in capital expenditures or spending on information
technology, longer sales cycles, deferral or delay of customer orders, or an
inability to effectively market our products, our business and results of
operations could be materially and adversely affected.
Our international operations and sales subject us to various risks
associated with growth outside the U.S. We market and license our products in
the U.S. and internationally. Our international revenue continues to represent a
significant portion of our total revenue. We currently maintain 43 international
sales offices located throughout Canada, Europe, Asia Pacific, Latin America,
and Africa. We may expand our international operations and enter additional
markets outside of the U.S. in the future. Expansion would require significant
management attention and financial resources. Traditionally, our international
operations are characterized by
17
higher operating expenses and lower operating margins. As a result, if our
international revenue increases as a percentage of total revenue, our operating
margins may be adversely affected. Additionally, costs associated with
international expansion include the establishment of additional offices, hiring
of additional personnel, localization, and marketing of our products for
international customers and the development of relationships with international
service providers. If revenue generated is not adequate to offset the expense of
expanding foreign operations, our business could be materially adversely
affected. Our international operations are also subject to other inherent risks,
including:
- imposition of governmental controls
- export license requirements
- restrictions on the export of certain technology
- cultural and language difficulties
- the impact of local economic conditions and practices and the impact of a
recession in economies outside the U.S.
- reduced protection for intellectual property rights in some countries
- the potential exchange and repatriation of foreign earnings
- political instability
- trade restrictions and tariff changes
- localization and translation of products
- difficulties in staffing and managing international operations
- difficulties in collecting accounts receivable and longer collection
periods
Our success in expanding our international operations depends, in part, on
our ability to anticipate and effectively manage these and other risks. We
cannot guarantee that these or other factors will not materially adversely
affect our business, operating results, or financial condition.
Due to the volatile business and economic conditions in international
markets we continue to closely monitor any investments in international areas to
ensure that such opportunities are deemed appropriate and are consistent with
our overall future growth strategies. We have incurred operating losses in some
geographic areas, including Asia, South America, and certain European countries.
Consistent with historical results, we expect that we will continue to recognize
a relatively small percentage of our revenue from Asia, South America, and
certain European countries, and other geographic areas that are currently
affected by adverse conditions. With our worldwide performance continuing to be
negatively affected by certain economic conditions, risks associated with these
international investments may not be mitigated by the broad geographic diversity
of our customers. As a result, our investments in some international areas have
had, and may continue to have, a material negative impact on our future
financial condition and results of operations.
A significant portion of our revenue is received in currencies other than
U.S. dollars and, as a result, we are subject to risks associated with foreign
exchange rate fluctuations. Changes in the value of major foreign currencies
relative to the U.S. dollar and their affect on our consolidated total revenues
were immaterial during fiscal 2000 and fiscal 2001. Foreign exchange rates may
adversely affect our total revenue throughout fiscal 2002 if the U.S. dollar
strengthens relative to foreign currencies. There can be no assurances that we
will be able to successfully address these challenges in the near term.
Included in other income were net foreign exchange transaction losses of
$422,000 in fiscal 2000 and gains of $741,900 in fiscal 2001. 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.
18
We may be unable to compete effectively if we are forced to offer a
significant number of fixed-price service contracts. We offer a combination of
software, implementation, and support services to our customers. We typically
enter into service agreements with our customers, to provide consulting and
implementation services on a time and materials basis. We have, from time to
time, entered into fixed-price service contracts with certain of our customers.
These types of contracts specify that we must obtain certain milestones prior to
payment, regardless of the actual costs incurred by us. We believe that such
fixed-price service contracts may be offered more frequently by our competitors
to differentiate their products and services. As a result, we may be forced to
enter into more of such contracts. We can offer no assurance that we can
successfully complete these contracts on budget or that our inability to do so
would not have a material adverse effect on our business and ability to
effectively compete in the market.
We have limited protection of our proprietary technology and intellectual
property and face potential infringement claims. Our success depends, in part,
on our ability to protect our proprietary rights. To protect our proprietary
rights, we rely primarily on a combination of patent, copyright, trade secret,
and trademark laws; confidentiality agreements with employees and third parties;
and protective contractual provisions such as those contained in our license
agreements with consultants, vendors, partners, and customers. We currently have
eight U.S. patents, one Canadian patent, and one Japanese patent directed to
various aspects of our software application suites. We pursue the registration
of certain of our trademarks and service marks in the U.S. and in certain other
countries. However, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the U.S., and effective
patent, copyright, trademark, and trade-secret protection may not be available
in other jurisdictions. Nevertheless, we believe that the following factors are
more essential to protecting our technology leadership position:
- technological and creative skills of our personnel
- new product developments
- frequent product enhancements
- name recognition
- customer education and support
- reliable product support
We generally enter into confidentiality or license agreements with our
employees, customers, consultants, and vendors. These agreements control access
to and distribution of our software, documentation, and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our products, obtain and use information that we
regard as proprietary, or develop similar technology through reverse engineering
or other means. Preventing or detecting unauthorized use of our products is
difficult. There can be no assurances that the steps we take will prevent
misappropriation of our technology or that our license agreements will be
enforceable. In addition, we may resort to litigation to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of others' proprietary rights, or to defend against claims of
infringement or invalidity in the future. Such litigation could result in
significant costs or the diversion of resources. This could materially adversely
affect our business, operating results, or financial condition.
We generally license our products to end users through standard license
agreements. Each agreement is negotiated individually and may contain
variations. We also license our products to independent third-party distributors
with a right to sub-license. Although we establish the conditions under which
our products are licensed by our distributors to end users, there can be no
assurance that our distributors do not deviate from such conditions.
We may receive notice of claims of infringement of other parties'
proprietary rights in the normal course of business. Although we do not believe
that our products infringe on the proprietary rights of third parties, we cannot
guarantee that such infringement or invalidity claims will not be asserted or
prosecuted against us. Defending such claims, regardless of their validity,
could result in significant costs and diversion of resources. Such assertions or
defense of such claims may materially adversely affect our business, operating
results, or financial condition. In addition, such assertions could result in
injunctions against us. Injunctions that prevent us from distributing our
products would have a material adverse effect on our business, operating
results, and financial condition. If such claims are asserted against us, we may
seek to obtain a license to use such
19
intellectual property rights. There can be no assurance that such a license
would be available on commercially reasonable terms.
We also rely on certain technology that we license from third parties,
including software that is integrated with our internally developed software.
There can be no assurance that these third-party licenses will continue to be
available to us on commercially reasonable terms. The loss of, or inability to
maintain, any of these licenses would result in delays or reductions in product
shipments until we could identify, license, or develop and integrate equivalent
technology. Any such delays or reductions in product shipments would materially
adversely affect our business, operating results, or financial condition.
Although we are generally indemnified by third parties against claims that such
third parties' technology infringes on the proprietary rights of others, such
indemnification is not always available for all types of intellectual property.
Often such third-party indemnifiers are not well capitalized and may not be able
to indemnify us in the event that their technology infringes on the proprietary
rights of others. As a result, we may face substantial exposure in the event
that technology licensed from a third-party infringes on another party's
proprietary rights. We currently do not maintain liability insurance to protect
against this risk. There can be no assurance that such infringement claims will
not be asserted against us or that such claims would not materially affect our
business. Defending such infringement claims, regardless of their validity,
could result in significant cost and diversion of resources.
We face risks associated with the security of our products. We have
included security features in certain of our Internet browser-enabled products
that are intended to protect the privacy and integrity of customer data. Despite
these security features, our products may be vulnerable to break-ins and similar
problems caused by Internet users. Such break-ins and other disruptions could
jeopardize the security of information stored in and transmitted through the
computer systems of our customers. Break-ins include such things as hackers
bypassing firewalls and accessing confidential information. Addressing problems
caused by such break-ins may have a material adverse effect on our business.
Although our license agreements with our customers contain provisions
designed to limit our exposure as a result of the defects listed above, such
provisions may not be effective. Existing or future federal, state, or local
laws or ordinances or unfavorable judicial decisions could affect their
enforceability. To date, we have not experienced any such product liability
claims, but there can be no assurance that this will not occur in the future.
Because our products are used in essential business applications, a successful
product liability claim could have a material adverse effect on our business,
operating results, and financial condition. Additionally, defending such a suit,
regardless of its merits, could entail substantial expense and require the time
and attention of key management.
Our stock price is volatile, and there is a risk of litigation. The
trading price of our common stock has, in the past, and may, in the future, be
subject to wide fluctuations in response to factors including, but not limited
to, the following:
- quarterly revenue or results of operations fail to meet the expectations,
published or otherwise, of the investment community
- announcements of technological innovations made by us or our competitors
- our or our competitors' new products or the acquisition of significant
customers
- developments with respect to our or our competitors' patents, copyrights,
or other proprietary rights
- changes in recommendations or financial estimates by securities analysts
- the announcement of acquisitions or other significant transactions by us
or our competitors
- changes in management
- conditions and trends in the software industry in general
- general market and economic conditions and other factors
- domestic or international terrorism
20
Fluctuation in the price of our common stock may expose us to the risk of
securities class action lawsuits. Defending against such suits could result in
substantial cost and divert management's attention and resources. In addition,
any settlement or adverse determination of such lawsuits could subject us to
significant liability. There can be no assurance that there will not be lawsuits
in the future.
Control by existing shareholders could significantly influence matters
requiring stockholder approval. As of January 24, 2002, J.D. Edwards' executive
officers, directors, and affiliated entities, in the aggregate, beneficially
owned approximately 27.6% of our outstanding common stock. These stockholders,
if acting together, would be able to significantly influence all matters
requiring approval by stockholders, including the election of directors and the
approval of mergers or other business combinations.
Future regulation of the Internet may slow its growth, resulting in
decreased demand for our products and services and increased cost of doing
business. Due to increasing popularity and use of the Internet, it is possible
that state and federal regulators could adopt laws and regulations that impose
additional burdens on companies conducting business online. For example, the
growth and development of the market for Internet-based services may prompt
calls for more stringent consumer protection laws. Moreover, the application of
existing Internet laws in various jurisdictions governing issues such as
property ownership, sales tax, libel, and personal privacy is uncertain and may
take years to resolve. Any new legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could decrease the expansion of the Internet, causing
our costs to increase and our growth to be harmed.
Our stockholder rights plan or anti-takeover provisions and Delaware law
could materially affect our stockholders. Certain provisions of our Certificate
of Incorporation, Bylaws, and Delaware law could make it more difficult for a
third-party to acquire us, even if doing so would benefit our stockholders.
This, as well as the anti-takeover provisions of our Certificate of
Incorporation and Bylaws, could adversely affect the market price of our common
stock and affect the value of our stockholders' investment.
In addition, we recently adopted a stockholder rights plan. Under the plan,
we issued a dividend of one right for each outstanding share of common stock to
stockholders of record as of November 26, 2001. Because the rights may
substantially dilute the stock ownership of a person or group attempting to take
us over without the approval of our Board of Directors, the plan could make it
more difficult for a third-party to acquire us (or a significant percentage of
our outstanding capital stock) without first negotiating with our Board of
Directors regarding such acquisition.
ITEM 2. PROPERTIES
Our corporate headquarters and executive offices are in Denver, Colorado,
where we lease approximately 812,000 square feet of space in multiple
facilities. The leases on these facilities expire at various dates ranging from
2002 through 2004. We also lease approximately 430,000 square feet of space,
primarily for regional sales and support offices, elsewhere in the U.S.
Additionally, we lease approximately 522,000 square feet of office space in
countries outside the U.S., used primarily for sales and support offices.
Expiration dates on sales and support office leases range from 2002 to 2023. See
Note 11 of Notes to Consolidated Financial Statements in Item 14 of this Annual
Report on Form 10-K, beginning on page F-6, for information regarding our
obligations under facilities leases and financing activities.
ITEM 3. LEGAL PROCEEDINGS
On September 2, 1999, a complaint was filed in the U.S. District Court (the
Court) for the District of Colorado against the Company and certain of its
officers and directors. Two subsequent suits were later consolidated and an
Amended Consolidated Complaint (the Complaint) was filed on March 21, 2000. The
Complaint purported 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 alleged 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 was seeking to recover unspecified
compensatory damages on behalf of all purchasers of J.D. Edwards' common stock
during the class period.
21
The Company has reached a settlement in principle of these shareholder
class action lawsuits. The terms of the settlement are still being resolved, but
management believes the final terms will not have a material adverse effect on
the Company's financial position, results of operations, or cash flows. The
negotiated settlement will be funded entirely with proceeds from the Company's
directors and officers' insurance policies. The final settlement agreement is
subject to Court approval and class notice provisions.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
OUR EXECUTIVE OFFICERS
Our executive officers and their ages as of January 16, 2002, were as
follows:
<Table>
<Caption>
NAME AGE POSITION(S)
- ---- --- -----------
Robert M. Dutkowsky......... 47 President and Chief Executive Officer
John H. Bonde............... 56 Executive Vice President and Chief Operating Officer
Richard E. Allen............ 44 Executive Vice President, Finance and Administration,
and Chief Financial Officer
Leslie E. Wyatt............. 51 Senior Vice President and Chief Marketing Officer
Harry Debes................. 50 Senior Vice President, Americas Sales and Consulting
Services
Richard Mathews............. 37 Senior Vice President, International Sales
David A. Siebert............ 43 Group Vice President, WorldSoftware and Channel
Operations
Pamela L. Saxton............ 49 Vice President of Finance, Controller, and Chief
Accounting Officer
Richard G. Snow, Jr. ....... 56 Vice President, General Counsel, and Secretary
</Table>
Robert M. Dutkowsky has been President and Chief Executive Officer of the
Company since January 2002. Mr. Dutkowsky joined J.D. Edwards from Teradyne,
Inc., where he was President of its Assembly Test Division. Previously he had
been Chairman, President, and Chief Executive Officer of GenRad, Inc., which was
acquired by Teradyne in October 2001. Prior to joining GenRad in 2000, Mr.
Dutkowsky was with EMC, where he served as Executive Vice President responsible
for global sales, marketing, alliances, and customer service. He served as
President of Data General in 1999, when it was acquired by EMC. Previously, Mr.
Dutkowsky held management positions at IBM during his 20-year employment with
the company. Mr. Dutkowsky holds a Bachelor of Science degree in Industrial and
Labor Relations from Cornell University, and is a member of the board of
directors of Network Associates.
John H. Bonde has been Executive Vice President and Chief Operating Officer
of the Company since February 2001. Prior to joining J.D. Edwards, Mr. Bonde was
the President and CEO of Tachyon, Inc. Previously he was employed in a variety
of management positions at Los Angeles Cellular Telephone Company, BellSouth
Cellular Company, and IBM. Mr. Bonde holds a B.S. in economics from City
University of New York and an M.B.A. from Columbia University.
Richard E. Allen has served as Executive Vice President, Finance and
Administration, since August 2000. Prior to becoming Executive Vice President,
Mr. Allen served as Vice President, Finance and Administration, from January
1990 through October 1997 and as Senior Vice President, Finance and
Administration, from November 1997 to August 2000. Mr. Allen has served in the
capacities of Chief Financial Officer, Treasurer, and Assistant Secretary since
January 1990. From August 1985 to September 1994, Mr. Allen served as Controller
of the Company and as Secretary from March 1986 to January 1990. Mr. Allen holds
a B.S. in business administration from Colorado State University.
Leslie E. Wyatt has been Senior Vice President and Chief Marketing Officer
since February 2001. Mr. Wyatt most recently served as Senior Vice President,
Worldwide Marketing, of Harbinger Corporation,
22
an e-commerce software provider. Before that he held various positions during
his 17-year employment at Texas Instruments, including Director of Strategic
Marketing for Texas Instruments Software. Mr. Wyatt holds a B.S. in software
design from Arizona State University and an M.S. in computer science from
Arizona State University.
Harry Debes has been Senior Vice President, Americas Sales and Consulting
Services since August 2001. From May 2001 until August 2001, Mr. Debes served as
a consultant to J.D. Edwards. Mr. Debes joined J.D. Edwards from GEAC Enterprise
Solutions Americas, where he served as President of GEAC Americas for two years.
Prior to that, he spent more than eight years as the managing director for the
company's Asia Pacific business. Mr. Debes holds a B.A. in history from the
University of Toronto and an M.B.A. with an accounting major from McMaster
University.
Richard Mathews has been Senior Vice President, International Sales, since
May 2001. From March 2000 to May 2001 he was Vice President and Managing
Director of the Australia/New Zealand region. He also held the positions of
managing director and Vice President of J.D. Edwards Australia and New Zealand
from 1998 to 2000 and general manager of J.D. Edwards New Zealand from 1994 to
2000. Mr. Mathews holds a bachelor of commerce in accounting and a B.S. in
mathematics from the University of Otago in New Zealand.
David A. Siebert has been Group Vice President, WorldSoftware and Channel
Operations, since June 2001. He also served as Group Vice President of Channel
Operations from June 2000 to June 2001. From November 1997 to June 2000, he was
Business Unit Director of the U.S. Central area. From May 1996 to November 1997,
he was Industry Marketing Director and Director of Worldwide Marketing
Consulting. Mr. Siebert holds a B.A. in business administration from Bethel
College and an M.B.A. in operations management from DePaul University.
Pamela L. Saxton has been Vice President of Finance, Controller, and Chief
Accounting Officer since joining the Company in September 1994. Ms. Saxton holds
a B.S. in accounting from the University of Colorado.
Richard G. Snow, Jr., has been Vice President, General Counsel, and
Secretary since joining the Company in January 1990. He holds a B.S. in business
administration from the University of California, Berkeley, and a J.D. from
California Western University Law School.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock is listed on the Nasdaq National Market under the
symbol "JDEC." The following table sets forth the high and low closing sale
prices per share of our common stock for the fiscal periods indicated.
<Table>
<Caption>
HIGH LOW
------ ------
2000
First Quarter............................................. $40.81 $22.81
Second Quarter............................................ 44.98 15.38
Third Quarter............................................. 18.50 10.50
Fourth Quarter............................................ 26.75 13.06
2001
First Quarter............................................. $29.00 $15.00
Second Quarter............................................ 15.13 6.89
Third Quarter............................................. 14.14 7.94
Fourth Quarter............................................ 13.03 6.10
</Table>
As of January 24, 2002, there were 1,124 holders of record of our common
stock. Because many shares of our common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to
23
estimate the total number of stockholders represented by these record holders.
We have never declared or paid any cash dividend on our common stock. Since we
currently intend to retain all future earnings to finance future growth, we do
not anticipate paying any cash dividends in the foreseeable future.
On November 16, 2001, in connection with our acquisition of YOUcentric,
Inc., we acquired 100 percent of the capital stock of YOUcentric, Inc., valued
at $86 million, in exchange for $80 million of our common stock, or
approximately 7.7 million shares, and $6 million in cash. We believe that the
securities issued were exempt from the registration requirements of the
Securities Act by virtue of Section 3(a)(10) thereof. The terms and conditions
of the share exchange were approved by the Secretary of State of North Carolina
after a public hearing on the fairness of such terms and conditions.
(b) We have an active stock repurchase program that was primarily designed
to offset the effects of share issuances under our option plans and our employee
stock purchase plan (see Note 4 of Notes to Consolidated Financial Statements).
One element of the program is effecting such stock repurchases through forward
purchases and put and call transactions. At October 31, 2001, there were no
outstanding forward contracts that required the future purchase of common stock.
During fiscal 2001, we executed settlements of contracts to purchase
approximately 5.0 million shares of our common stock for $94.4 million in cash,
which included contracts for 2.2 million shares, that upon settlement, were sold
to a counter-party with whom we simultaneously entered into forward contracts to
repurchase the shares at a later date. At October 31, 2001, approximately 1.7
million of the repurchased shares have been reissued to fund our ESPP and the
discretionary 401(k) Plan contribution, and approximately 3.6 million remaining
shares were held as treasury stock to fund future stock issuances.
All of these transactions were exempt from registration under Section 4 (2)
of the Securities Act of 1933. Each transaction was privately negotiated, and
each purchaser of options was an accredited investor and qualified institutional
buyer. We did not make a public solicitation in the placement of these
securities.
24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statements of operations data provided for the years ended
October 31, 1999, 2000, and 2001, and the consolidated balance sheet data as of
October 31, 2000 and 2001, are derived from, and are qualified by reference to,
our consolidated financial statements audited by PricewaterhouseCoopers LLP,
independent accountants, which are included elsewhere in this Annual Report on
Form 10-K. The consolidated statements of operations data for the years ended
October 31, 1997 and 1998, and the consolidated balance sheet data as of October
31, 1997, 1998, and 1999, are derived from consolidated financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, which are not
included in this Annual Report on Form 10-K. Historical results are not
necessarily indicative of results for any future period. We have never declared
or paid any cash dividend on our common stock. (See "Consolidated Financial
Statements" under Item 14(a)). The following selected consolidated financial
data should be read in conjunction with "Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations," the consolidated
financial statements and notes thereto, and other financial information included
elsewhere in this Annual Report on Form 10-K.
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS:
Revenue:
License fees............................................. $248,707 $386,081 $ 312,817 $ 419,103 $ 271,869
Services................................................. 399,105 547,901 631,414 581,962 602,111
-------- -------- ---------- ---------- ---------
Total revenue...................................... 647,812 933,982 944,231 1,001,065 873,980
Costs and expenses:
Cost of license fees (including write-offs of certain
third-party arrangements of $20.6 million in fiscal
2001).................................................. 36,444 43,404 29,882 59,963 64,189
Cost of services......................................... 244,640 349,689 408,293 366,081 323,888
Sales and marketing...................................... 176,031 261,400 334,201 367,050 292,758
General and administrative............................... 69,850 83,450 94,241 97,556 91,963
Research and development................................. 60,591 89,401 109,206 116,866 99,943
Amortization and write-offs of acquired software and
other intangibles(1)................................... -- -- 9,488 25,044 27,388
Acquired in-process research and development(1).......... -- -- 26,141 -- --
Restructuring and other related charges(2)............... -- -- -- 28,016 25,621
-------- -------- ---------- ---------- ---------
Total costs and expenses........................... 587,556 827,344 1,011,452 1,060,576 925,750
Operating income (loss).................................... 60,256 106,638 (67,221) (59,511) (51,770)
Other income (expense):
Interest and dividend income............................. 1,686 15,294 19,324 14,980 13,081
Gain on sale of equity investments and product line...... -- -- -- 24,582 (8,516)
Foreign currency losses and other, net................... (2,616) (3,729) (268) (683) (1,115)
-------- -------- ---------- ---------- ---------
Income (loss) before income taxes.......................... 59,326 118,203 (48,165) (20,632) (48,320)
Provision for (benefit from) income taxes(3)............. 22,098 43,735 (8,941) (5,210) 131,433
-------- -------- ---------- ---------- ---------
Net income (loss).......................................... $ 37,228 $ 74,468 $ (39,224) $ (15,422) $(179,753)
======== ======== ========== ========== =========
Net income (loss) per common share (4):
Basic.................................................... $ 0.46 $ 0.76 $ (0.37) $ (0.14) $ (1.61)
======== ======== ========== ========== =========
Diluted.................................................. $ 0.39 $ 0.68 $ (0.37) $ (0.14) $ (1.61)
======== ======== ========== ========== =========
Shares used in computing per share amounts:
Basic.................................................... 80,546 98,264 105,378 109,376 111,778
Diluted.................................................. 96,500 109,993 105,378 109,376 111,778
</Table>
<Table>
<Caption>
OCTOBER 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $224,437 $183,115 $113,341 $180,674 $231,952
Short- and long-term marketable securities and other
investments............................................... 138,560 351,194 309,110 156,892 2,217
Total assets................................................ 643,037 950,473 940,528 951,041 661,132
Common shares subject to repurchase, at redemption
amount(5)................................................. -- -- -- 89,113 --
Stockholders' equity........................................ 396,861 583,996 592,720 470,998 299,059
</Table>
25
- ---------------
(1) During fiscal 1999, 2000, and 2001 business acquisitions resulted in
amortization of acquired intangible assets and the write-off of in-process
research and development. Additionally, during fiscal 2001, we wrote off
$2.5 million for the impairment of acquired workforce related to our
business acquisitions. See Note 8 of Notes to Consolidated Financial
Statements in Item 14.
(2) In fiscal 2000 and 2001, our Board of Directors approved two separate global
restructuring plans resulting in charges to operations. For a discussion on
the restructuring, see Note 7 of Notes to Consolidated Financial Statements
in Item 14.
(3) During fiscal 2001, we provided a non-cash valuation allowance to fully
offset the net deferred tax assets at October 31, 2001. The deferred tax
benefit may still be used to the extent we generate taxable income in future
periods. See Note 6 of Notes to Consolidated Financial Statements in Item
14.
(4) For a discussion of the computation of earnings per common share and
weighted-average common shares outstanding, see Note 1 of Notes to
Consolidated Financial Statements in Item 14.
(5) At October 31, 2000, we held certain forward purchase contracts requiring
full physical settlement, and the aggregate redemption cost of $89.1 million
was included in temporary equity with a corresponding decrease in additional
paid-in capital. At October 31, 2001, there were no forward contracts
outstanding requiring the future purchase of common stock. For a discussion
on the share repurchase program, see Note 4 of Notes to Consolidated
Financial Statements in Item 14.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and notes
thereto included elsewhere in this Annual Report on Form 10-K. This item
contains forward-looking statements that involve risks and uncertainties. Actual
results may differ materially from those indicated in such forward-looking
statements. Factors that may cause such a difference include, but are not
limited to, those discussed in "Item 1: Business -- Risk Factors."
OVERVIEW
J.D. Edwards is a leading provider of agile, collaborative enterprise
software. For more than 20 years, we have developed, marketed, and supported
innovative, flexible solutions that help run multinational organizations,
including more than 6,000 companies of all sizes. We deliver integrated,
collaborative software for supply chain planning, procurement, and customer
relationship management, in addition to supply chain execution (also known as
Enterprise Resource Planning, or ERP), workforce management, and other
functional support. To help customers rapidly achieve benefits from our
software, we provide implementation and education services through our own
direct services organization and business partners. Our services organization is
focused on being a responsive and proactive extension of our software offerings.
We distribute, implement, and support our software worldwide through 55 offices
and more than 350 third-party business partners.
Fiscal 2001 provided us with many challenges and opportunities. We made
changes in our senior and mid-level management teams and realigned our
organizational structure. We have identified specific industries and geographies
where we can best compete and continue to evolve our current product and
services fit for these markets. During fiscal 2001, we effected a revitalization
plan that included restructuring activities that we believe will position us for
sustainable growth and profitability as a result of increased focus on both
sales and services revenue opportunities, improved customer focus, reduced cost
of sales, a more efficient and effective organization, and will help us to align
our resources on profitable targeted industries and geographies. We will
continue to focus on improving revenue growth, organizational effectiveness, and
profitability throughout fiscal 2002.
We historically have experienced and expect to continue to experience a
high degree of seasonality in our business operations, which is primarily the
result of both the efforts of our direct sales force to meet or exceed fiscal
year-end sales quotas and the tendency of certain customers to finalize sales
contracts at or near the end of our fiscal year. Because our operating expenses
are somewhat fixed in the near term, our operating margins have historically
been significantly higher in our fourth fiscal quarter than in other quarters.
While the changes discussed above are affecting our current year results, we
expect to continue to experience seasonality in future periods. See "Risk
Factors -- Our quarterly financial results are subject to significant
fluctuations, and a failure to meet expectations could adversely affect the
price of our stock."
While we have made and continue to make organizational changes to position
ourselves to meet our long-term goals, we expect that the recent downturn in the
global economy and the seasonality in our business operations may have a
negative impact on our short-term financial performance. Based on current
projections for the first quarter of fiscal 2002, we expect total revenue to
decline compared to the first quarter of fiscal 2001. Additionally, the maturity
of the traditional enterprise resource planning market, challenges of entering
new markets, the slowdown in global economic conditions, strong competitive
forces, and potential negative effects from organizational and management
changes could reduce revenue and reduce or eliminate improvements in operating
margins. These uncertainties have made forward-looking projections of future
revenue and operating results particularly challenging. There can be no
assurance of the level of revenue growth that will be achieved, if any, or of a
return to net profitability or that our financial condition, results of
operations, cash flows, and market price of our common stock will not continue
to be adversely affected by the aforementioned factors.
During November 2001, we completed our acquisition of YOUcentric, Inc.
(YOUcentric). YOUcentric is a provider of Java-based customer relationship
management (CRM) software, including applications for sales force automation,
campaign management, contact center management, and partner relationship
27
management. Under the terms of the transaction, we acquired 100 percent of the
capital stock of YOUcentric, Inc., valued at $86 million, in exchange for $80
million in J.D. Edwards common stock and $6 million in cash. Most of
YOUcentric's executive team and employees will remain with J.D. Edwards in
Charlotte, North Carolina. Our consolidated statement of operations for October
31, 2001 does not include any revenue or expense related to the YOUcentric
acquisition.
RESULTS OF OPERATIONS
Our financial results for fiscal 2001 reflected an operating loss of $51.8
million, compared to $59.5 million for fiscal 2000. The improvement is primarily
due to our focus on organizational effectiveness, which included a 7%
Company-wide decrease in headcount over the past year resulting in increased
operating efficiencies and decreased expenses for fiscal 2001. Operating
expenses before amortization of acquired intangibles and restructuring charges
for fiscal 2001 declined to $872.7 million from $1.0 billion for fiscal 2000.
The operating loss for fiscal 2001 included restructuring and related charges of
$25.6 million and amortization and write-offs of acquired intangibles of $27.4
million. Comparatively, the fiscal 2000 operating loss included restructuring
and related charges of $28.0 million and amortization of acquired intangibles of
$25.0 million. The net loss for fiscal 2001 was $179.8 million, or $1.61 per
share, compared to a net loss of $15.4 million, or $0.14 per share for fiscal
2000. The net loss for fiscal 2001 included a non-cash valuation allowance to
fully reserve for our deferred tax assets. This non-cash valuation allowance was
recorded due to the uncertainties surrounding the realization of the deferred
tax assets resulting from our cumulative operational losses in fiscal 1999,
2000, and 2001, among other things. The benefit of the deferred taxes may still
be used to the extent we generate taxable income in future periods.
28
The following table sets forth, for the periods indicated, certain items
from our consolidated statements of operations as a percentage of total revenue
(except for gross margin data):
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
-----------------------
1999 2000 2001
----- ----- -----
Revenue:
License fees.............................................. 33.1% 41.9% 31.1%
Services.................................................. 66.9 58.1 68.9
----- ----- -----
Total revenue..................................... 100.0 100.0 100.0
Costs and expenses:
Cost of license fees (including write-offs of certain
third-party arrangements of $20.6 million in fiscal
2001).................................................. 3.1 5.9 7.3
Cost of services.......................................... 43.2 36.6 37.1
Sales and marketing....................................... 35.4 36.7 33.6
General and administrative................................ 10.0 9.7 10.6
Research and development.................................. 11.6 11.7 11.4
Amortization and write-offs of acquired software and other
intangibles............................................ 1.0 2.5 3.1
Acquired in-process research and development.............. 2.8 -- --
Restructuring and other related charges................... -- 2.8 2.9
----- ----- -----
Total costs and expenses.......................... 107.1 105.9 106.0
Operating loss.............................................. (7.1) (5.9) (6.0)
Other income, net........................................... 2.0 3.9 .4
----- ----- -----
Loss before income taxes.................................... (5.1) (2.0) (5.6)
(Benefit from) provision for income taxes................. (.9) (.5) 15.0
----- ----- -----
Net loss.................................................... (4.2)% (1.5)% (20.6)%
===== ===== =====
Gross margin on license fee revenue (including write-offs of
certain third-party arrangements of $20.6 million in
fiscal 2001).............................................. 90.4% 85.8% 76.4%
Gross margin on license fee revenue (excluding write-offs of
certain third-party arrangements of $20.6 million in
fiscal 2001).............................................. 90.4% 85.8% 84.0%
Gross margin on service revenue............................. 35.3% 37.0% 46.2%
</Table>
Fiscal Years Ended October 31, 2000 and 2001
Total revenue. We license software under non-cancelable license agreements
and provide related services, including consulting, support, and education. We
recognize revenue in accordance with Statement of Position (SOP) 97-2, "Software
Revenue Recognition," as amended and interpreted by SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, with respect to certain transactions,"
as well as Technical Practice Aids (TPA) issued from time to time by the
American Institute of Certified Public Accountants. We adopted Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," during
the fourth quarter of fiscal 2001. SAB No. 101, as amended, provides further
interpretive guidance for public companies on the recognition, presentation, and
disclosure of revenue in financial statements. Our adoption of SAB No. 101, as
amended, during the fourth quarter of fiscal 2001, did not have a material
impact on our licensing or revenue recognition practices. Additionally, we do
not currently anticipate that the adoption of SAB No. 101, as amended, will have
a future material impact on our consolidated financial position, results of
operations, or cash flows.
In general, we recognize license fee revenue when a non-cancelable,
contingency-free license agreement has been signed, the product has been
delivered, fees from the arrangement are fixed or determinable, and
29
collection is probable. Revenue on all software license transactions in which
there are undelivered elements other than post-contract customer support is
deferred and recognized once such elements are delivered. Typically, our
software licenses do not include significant post-delivery obligations to be
fulfilled by us, and payments are due within a 12-month period from the date of
delivery. Where software license contracts call for payment terms of 12 months
or more from the date of delivery, revenue is recognized as payments become due
and all other conditions for revenue recognition have been satisfied. Consulting
and education services are separately priced and generally are available from a
number of suppliers and are not essential to the functionality of our software
products. Revenue from these services is recorded separately from the license
fees as the services are performed. Revenue from agreements for supporting and
providing periodic unspecified upgrades to the licensed software is recorded as
unearned revenue and is recognized ratably over the support service period. Such
unearned revenue includes a portion of the related arrangement fee equal to the
fair value of any bundled support services and unspecified upgrades. We
anticipate that the majority of our arrangement fees will continue to be
recognized as described above. We do not require collateral for receivables;
however, an allowance is maintained for potential losses. In certain instances
where services are deemed essential to the customer's use of the software, the
entire arrangement is accounted for in accordance with SOP 81-1, "Accounting for
Performance of Construction Type and Certain Production Type Contracts."
In fiscal 2001, our total revenue decreased 12.7% to $874.0 million
compared to $1.0 billion for fiscal 2000. The revenue mix between license fees
and services was 31.1% and 68.9%, respectively, for fiscal 2001 compared to
41.9% and 58.1%, respectively, for fiscal 2000. We believe the decrease in total
revenue was primarily a result of a continued general downturn in the U.S.
economy as well as decreased productivity within the sales organization caused
by organizational and leadership changes throughout fiscal 2001.
A portion of our total revenue is derived from international sales and is
therefore subject to the related risks, including general economic conditions in
each country, the strength of international competitors, different tax
structures, difficulty of managing an organization spread over various
countries, changes in regulatory requirements, compliance with a variety of
foreign laws and regulations, longer payment cycles, and the volatility of
exchange rates in certain countries. A portion of our business is conducted in
currencies other than the U.S. dollar. Changes in the value of major foreign
currencies relative to the U.S. dollar and their affect on our total revenues
were immaterial during fiscal 2001 and fiscal 2000. Foreign exchange rates will
continue to affect our total revenue and results of operations depending on the
U.S. dollar strengthening or weakening relative to foreign currencies.
Unfavorable changes in each country's general economic and political environment
or foreign exchange rates may have a material adverse impact on our total
revenue and results of operations.
For fiscal 2001, the geographic areas defined as the U.S., Europe, the
Middle East, and Africa (EMEA), and the rest of the world accounted for 63%,
20%, and 17% of total revenue, respectively. The geographic breakdown of total
revenue for fiscal 2000 was 65%, 20%, and 15% for the U.S., EMEA, and the rest
of the world, respectively.
License fees. License fee revenue declined 35.1% to $271.9 million for
fiscal 2001 compared to $419.1 million for fiscal 2000. During fiscal 2001,
license transactions exceeding $1.0 million decreased to 63 transactions,
representing $118.2 million or 43% of license fee revenue, compared to 73
transactions, representing $190.0 million or 45% of license fee revenue, for
fiscal 2000. The total number of transactions for fiscal 2001 decreased 24% to
1,290 compared to 1,704 for fiscal 2000. We increased our total number of
customers by 5% compared to the end of fiscal 2000 to over 6,300 at October 31,
2001. The percentage of license revenue from new customers was 56% for fiscal
2001 compared to 46% for fiscal 2000. Additionally, revenue resulting from
reseller arrangements for fiscal 2001 declined compared to fiscal 2000, mainly
due to our exit from certain third-party reseller arrangements. The mix of
revenue from new and existing customers varies from quarter to quarter, and our
future growth is dependent on our ability to both retain our installed base of
customers while adding new customers, as well as our ability to offer
competitive products. There can be no assurance that our license fee revenue,
results of operations, cash flows, and financial condition will not be adversely
affected in future periods as a result of continued downturns in global economic
conditions, or intensified competitive pressures, or that we will be able to
successfully integrate or realize the expected benefits of our YOUcentric
acquisition.
30
Services. Services revenue consists of fees generated by our personnel
providing direct consulting, education, and software maintenance services to
customers, fees generated through subcontracted third-party arrangements, and
referral fees from service providers who contract directly with customers.
Services revenue for fiscal 2001 increased 3.5% to $602.1 million from $582.0
million for fiscal 2000. This increase is primarily a result of increased
software maintenance revenue, offset in part by a decline in consulting and
education revenue. The increase in maintenance is primarily a result of an
increase in maintenance pricing effected early in fiscal 2001, our growing
installed base of customers, and consistent maintenance renewal rates. We expect
maintenance revenue to continue to rise during fiscal 2002 as a result of
additional increases in our maintenance pricing, as well as our effort to
continue to increase our install base of customers and maintain consistent
maintenance renewal rates. Additionally, we currently offer new premium levels
of support to our new and existing customers that are priced higher than
standard customer support. There can be no assurance, however, that we will
maintain consistent maintenance renewal rates in the future due to the increase
in prices, that we will achieve maintenance revenue growth resulting from the
premium level of customer support being offered.
The decline in consulting revenue for fiscal 2001 is attributed to low
utilization and revenue realization rates in the first half of fiscal 2001 due
to lower direct service engagements and less direct-revenue-generating
consulting positions. As a result of the revitalization plan discussed
previously, consulting utilization and revenue realization rates improved during
the last half of fiscal 2001 due to our focus on generating more direct service
engagements and reassigning existing employees to direct-revenue consulting
positions. For fiscal 2002, we have initiated an incentive program for our
account executives to sell direct service engagements and will continue to focus
on improved consulting utilization and revenue realization rates. We also intend
to continue pursuing business partner relationships under both subcontract and
referral arrangements.
The decline in education revenue for fiscal 2001 is attributed to the
consolidation or elimination of education classes due to less customer demand
for classroom training and a slowdown in customer travel subsequent to September
11, 2001. We intend to offer more custom on-site customer training as well as
on-line offerings throughout fiscal 2002.
In any period, total services revenue is dependent on license transactions
closed during the current and preceding periods, the growth in our installed
base of customers, the amount and size of consulting engagements, and the level
of competition from alliance partners for consulting and implementation work. We
believe services revenue will continue to vary from quarter to quarter depending
on the mix between consulting, education, and maintenance revenue, the mix of
direct, subcontract, and referral arrangements from our business partners.
Additionally, services revenue is dependent on the availability of our internal
service provider consultants to staff engagements, the number of customers
referred to alliance partners for education services, the number of customers
who have contracted for support and the related support fees, billing rates for
education courses, and the number of customers purchasing education services.
Total costs and expenses. Our total costs and expenses declined 13% to
$925.8 million for fiscal 2001 from $1.1 billion for fiscal 2000. Operating
expenses before amortization of acquired intangibles and restructuring charges
for fiscal 2001 declined to $872.7 million, or 13%, from $1.0 billion for fiscal
2000. Operating expenses for fiscal 2001 included restructuring and related
charges of $25.6 million and amortization and write-offs of acquired intangibles
of $27.4 million. Comparatively, the fiscal 2000 operating expenses included
restructuring and related charges of $28.0 million and amortization of acquired
intangibles of $25.0 million. The decrease in operating expenses is due to the
cost savings and organizational changes effected in our fiscal 2000
restructuring plan and the fiscal 2001 restructuring plan. There was a 7%
reduction in Company-wide headcount as a result of the fiscal 2000 and 2001
restructuring plans. These reductions have caused Company-wide salary expense
for fiscal 2001 to decline by $35.8 million, or 10% compared to fiscal 2000.
Additionally, as part of the review of our business approach, our employee bonus
plan was replaced by a profit sharing plan that resulted in a decrease in bonus
expense for fiscal 2001 of $14.5 million compared to fiscal 2000. Also of
significance, travel and entertainment expenses declined across our organization
for fiscal 2001 by $24.0 million or 35% compared to fiscal 2000, primarily due
to our overall focus on cost savings, reduced number of employees, and hesitancy
to travel subsequent to September 11, 2001.
31
Cost of license fees. Cost of license fees includes business partner
commissions, royalties, amortization of internally developed capitalized
software (including contractual payments to third parties related to internal
projects and contractual payments to third parties for source code and license
fees), documentation, and software delivery expenses. The total dollar amount
for cost of license fees increased 7% to $64.2 million for fiscal 2001 from
$60.0 million for fiscal 2000. The increase is primarily due to the exit from
certain third-party agreements and related write-offs of $20.6 million during
fiscal 2001. We wrote off $12.8 million in prepaid reseller royalties associated
with the exit of certain third-party reseller agreements. We wrote off an
additional $7.8 million of capitalized third-party products resulting from a
change in strategy related to a portion of our XPI product. These write-offs
were partially offset by lower royalties on other reseller agreements due to
lower related revenue during fiscal 2001. Since 1998, we have had reseller and
product-right relationships with organizations whose products enhance our
solutions. This allows us to manage internal development resources, while at the
same time offering our customers a broad spectrum of products and services. The
terms of each third-party agreement vary; however, as we recognize license
revenue under the reseller provisions in these agreements, a related royalty is
charged to cost of license fees.
We record amortization expense on our capitalized software, excluding
software acquired as part of a business acquisition, on a straight-line basis
(generally three years) to cost of license fees beginning once the product is
generally available. During fiscal 2000, we recorded amortization expense of
$1.0 million related to costs capitalized on our initial release of OneWorld.
During fiscal 2001, amortization of capitalized software was $11.4 million
excluding software acquired as part of business acquisitions, which was
primarily related to major enhancements of our OneWorld applications.
Gross margin on license fee revenue varies from quarter to quarter
depending on the revenue volume in relation to certain fixed costs, such as the
amortization of capitalized software development costs and the portion of our
software products subject to royalty payments. During fiscal 2001, gross margin
on license fee revenue decreased to 76.4% from 85.8% for fiscal 2000. The
decline was primarily a result of the write-off of $20.6 million associated with
the exit of certain third-party arrangements discussed above, and declines in
license fee revenue for fiscal 2001. Excluding these write-offs, the gross
margin for fiscal 2001 was 84.0%, compared to 85.8% for fiscal 2000.
Cost of services. Cost of services includes the personnel and related
overhead costs for providing services to customers, including consulting,
implementation, support, and education, as well as fees paid to third parties
for subcontracted services. We seek to provide our customers with high-quality
implementation and education services in the most efficient and effective
manner. Cost of services for fiscal 2001 decreased 11.5% to $323.9 million from
$366.1 million for fiscal 2000. The decrease for the period was due in part to a
decline in business partner subcontracted professional services revenue, where
costs of services are greater than costs of direct services. Additionally, there
was a decrease in education revenue and related costs attributable to the
elimination and consolidation of several training facilities as part of our
fiscal 2001 restructuring and overall consolidation of training classes.
Additionally, an 11% decline in headcount from October 31, 2000, resulting from
the fiscal 2001 restructuring, contributed to declines in bonus, salary, and
travel and entertainment expenses.
The gross margin on services revenue for fiscal 2001 improved to 46.2%
compared to 37.0% for fiscal 2000. The increase is due to increased maintenance
revenue, improved internal consultant utilization from direct service
engagements and higher margins on education services. Generally, maintenance
revenue produces a higher margin than professional services and education
revenue. Gross margins on services revenue for fiscal 2002 will depend on the
mix of total services revenue, the extent to which we are successful in
increasing the utilization of our revenue-generating consulting employees and
the number of direct service engagements, as well as the extent to which we
utilize our service partner relationships under either subcontract or referral
arrangements.
Sales and marketing. Sales and marketing expense consists of personnel,
commissions, and related overhead costs for the sales and marketing activities,
together with advertising and promotion costs. Sales and marketing expense for
fiscal 2001 decreased 20.2% to $292.8 million from $367.1 million for fiscal
2000. The decline was due to a 12% decrease in headcount resulting primarily
from the restructurings that decreased
32
salary, bonus, travel and entertainment, and other office occupancy expenses.
Additionally, commission expense was lower in fiscal 2001 from fiscal 2000 due
to reduced revenue from license fees. These overall decreases were offset in
part by increased advertising and promotion expense as we are focused on
improving and increasing our market presence through increased marketing
initiatives and programs.
General and administrative. General and administrative expense includes
personnel and related overhead costs for support and administrative functions.
General and administrative expense for fiscal 2001 decreased 5.7% to $92.0
million from $97.6 million for fiscal 2000. The total dollar amount of expense
declined due to a 10% decline in headcount since October 31, 2000, resulting
primarily from the restructurings that decreased salary, bonus, and travel and
entertainment expenses. The overall decline from fiscal 2000 was offset, in
part, by increased costs in outside contract professional services associated
with our revitalization plan efforts.
Research and development. Research and development (R&D) expense includes
personnel and related overhead costs for product development, minor
enhancements, upgrades, testing, quality assurance, documentation, and
translation, net of any capitalized internal development costs. R&D expense for
fiscal 2001 decreased 14.5% to $100.0 million compared to $116.9 million for
fiscal 2000 and was 11.4% of total revenue. The decrease was primarily due to
increased capitalization of internal software development costs during fiscal
2001. Additionally, our overall cost savings efforts resulted in decreased
bonus, travel and entertainment, and other office occupancy expense. Including
current period capitalized internal development cost, R&D expenditures were
$130.0 million for fiscal 2001, representing 15% of total revenue. Including
current period capitalized internal development costs, R&D expenditures were
$159.9 million for fiscal 2000, representing 16% of total revenue.
During fiscal 2001, we continued to devote development resources to major
enhancements and new products associated with our OneWorld application suites,
as well as to the integration of our internally developed applications with
third-party applications. In addition to our internal R&D activities, we are
outsourcing the development of software for specialized industries, and we
recently acquired source code rights for certain enterprise interface
applications and other embedded technology. We capitalize internally developed
software costs and software purchased from third parties in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." During
fiscal 2001, we capitalized $29.2 million associated with internal development
costs and $8.2 million of costs related to third-party product rights and
outsourced development. During fiscal 2000, we capitalized $12.0 million
associated with internal development costs and $31.4 million of costs related to
third-party product rights and outsourced development. During fiscal 2001, we
wrote off $7.8 million of capitalized third-party product costs resulting from a
change in strategy related to a portion of our XPI product.
We anticipate that the costs of certain of these development projects will
continue to be capitalized in the future. In addition, we expect total
development expense to increase in subsequent periods due to the planned
development of new technologies, the addition of key development personnel, and
the YOUcentric acquisition. We are continuing our ongoing internal product
enhancements in e-business and other areas of new technology, as well as
integration of such modules as advanced planning and scheduling, and
e-procurement.
Amortization and write-offs of acquired software and other
intangibles. Total amortization for fiscal 2001 related to software, in-place
workforce, customer base, and goodwill resulting from our business acquisitions
was $11.6 million, $3.3 million, $5.6 million, and $4.4 million, respectively.
Total amortization for fiscal 2000 related to software, in-place workforce,
customer base, and goodwill was $11.8 million, $3.2 million, $5.6 million, and
$4.5 million, respectively. Amortization of acquired intangibles resulting from
the acquisition of our longstanding business partner serving Australia and New
Zealand began in the second quarter of fiscal 2000.
During the fourth quarter of fiscal 2001, we performed an impairment
analysis of our acquired intangibles under SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This impairment analysis was performed as a result of the overall decline in our
stock price during fiscal 2001, the year over year decline in revenue from
fiscal 2000, increased operating losses compared
33
to prior fiscal periods, and our fiscal 2001 restructuring. We retained an
independent appraisal firm to perform valuations and review our acquired
software, customer base, and goodwill for impairment. The estimated fair value
of in-place workforce represented a replacement cost estimate, and our
impairment testing was based on employee turnover within each acquired
organization since the respective acquisition dates. Our impairment analysis
resulted in a write-off of $2.5 million of intangible workforce assets during
the fourth quarter of fiscal 2001. Software, customer base, and goodwill were
reviewed by analyzing the forecasted undiscounted cash flows from operations for
the enterprise and the acquired entities on a pro forma stand-alone basis and
were deemed to not be impaired.
Fiscal 2001 restructuring and related charges and exit from certain
third-party arrangements. During the second and third quarters of fiscal 2001,
our Board of Directors approved a two-phased strategic global restructuring plan
(referred to as the fiscal 2001 restructuring plan) precipitated by our
operating losses, lower employee productivity levels, and the general economic
downturn. Actions included the elimination of certain employee positions in
order to reduce the total workforce and the computer equipment either owned or
leased for employee use, and to condense or close some operating facilities. The
fiscal 2001 restructuring plan consists of two phases (Phase I and Phase II),
initiated during the second and third quarters of fiscal 2001, respectively. We
expect that the remaining actions, such as office closures or consolidations and
lease terminations, will be completed by April 2002.
We incurred charges during fiscal 2001 for termination salaries, benefits,
outplacement, and other related costs in the amount of $1.8 million for the
employees terminated in the second quarter of fiscal 2001 as part of Phase I,
and $7.1 million to the employees terminated in the third quarter of fiscal 2001
as part of Phase II. Specifically targeted were areas with opportunities for
increasing the management span of control by improving staffing ratios, reducing
layers of management, and eliminating non-essential functions. We decreased our
workforce by a total of 34 employee positions during Phase I and 364 employee
positions during Phase II across administrative, professional, and management
positions and various functions of our business. All employee terminations as
part of Phase I occurred during the second quarter of fiscal 2001, and all
employee terminations as part of Phase II occurred during the third quarter of
fiscal 2001. A limited number of terminated employees continued to provide
transitional services to us (generally 30 to 60 days from the termination date).
Salary and benefits earned during the transition period were not included in the
restructuring charge.
Combined Phase I and Phase II operating lease buyouts and related costs in
the amount of $1.5 million are the costs associated with the early termination
of leases for personal computer equipment and equipment in training facilities
or technology labs that were no longer necessary for operations due to the
reduced workforce and the closure or consolidation of those training facilities
or technology labs in accordance with the fiscal 2001 restructuring plan.
In addition to the decrease in employee positions, Phase II of the fiscal
2001 restructuring plan provided for reduction in specific office space,
underutilized training facilities, and related overhead expenses. Office and
training facility closure and consolidation costs in the amount of $10.9 million
are the estimated net costs to close specifically identified facilities, costs
associated with obtaining subleases, lease termination costs, and other related
costs, offset by estimated sublease income in accordance with the fiscal 2001
restructuring plan. We closed or consolidated several offices worldwide,
including offices in Denver, Colorado, and regional offices in the U.S., Europe,
and the Asia Pacific region. All office consolidations and closures are expected
to be completed no later than April 2002.
During the third and fourth quarters of fiscal 2001, we wrote off $3.5
million of certain assets, consisting primarily of leasehold improvements,
computer equipment, and furniture and fixtures that were deemed unnecessary due
to the reduction in workforce as part of Phase II of the fiscal 2001
restructuring plan. These assets were taken out of service and disposed of
during the third and fourth quarters of fiscal 2001.
We recorded immaterial adjustments to both the Phase I and Phase II
restructuring charges during fiscal 2001. For a detailed reconciliation refer to
Note 7 in the Notes to the Consolidated Financial Statements in Item 14 of this
Annual Report on Form 10-K, beginning on page F-6.
34
We reviewed our business alliances during fiscal 2001. As a result of this
review, we decided to exit certain reseller arrangements for which prepaid
royalty balances existed. We wrote off $12.8 million in prepaid royalties
associated with these third-party agreements and $7.8 million of capitalized
third-party products resulting from a change in strategy related to a portion of
our XPI product. These charges are included in cost of license fees on the
accompanying consolidated statement of operations.
Based on recent calculations, the organizational changes effected during
fiscal 2001 are expected to result in ongoing annual savings across all
functional areas of approximately $60.0 million, and we believe that these
actions will position us for more profitable and sustainable growth. There can
be no assurance of our future level of operating expenses or other factors that
may affect future operating results.
Fiscal 2000 restructuring and related charges. We completed all actions
related to the fiscal 2000 restructuring as of April 30, 2001. The outstanding
accrual of $2.9 million remaining at October 31, 2001, primarily consisted of
lease obligations for office and training facilities closed or consolidated and
will be paid over the remaining lease terms. Reductions in accrual amounts will
continue to occur until all remaining obligations have been settled by 2007. We
recorded adjustments to decrease the restructuring accrual by $656,000 during
fiscal 2001. The adjustments are primarily a result of the final amount of
operating lease buyouts being effectively reduced from the original estimate and
successful elimination of further rental obligations on office closures earlier
in the fiscal year. Additionally, the charge was also reduced as a result of
favorable negotiations and reduced obligations surrounding employee termination
costs. Cost true-ups subsequent to April 30, 2001, related to the fiscal 2000
restructuring were recorded through normal operations with no impact to the
restructuring charge. For further details on the fiscal 2000 restructuring see
"Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the heading "Fiscal Years Ended October 31, 1999 and 2000,"
in this Annual Report on Form 10-K.
Other income (expense). Other income and expenses include interest and
dividend income earned on cash, cash equivalents, and investments, gains and
losses on equity investments and product lines, interest expense, foreign
currency gains and losses, and other non-operating income and expenses. Interest
and dividend income decreased during fiscal 2001 compared to fiscal 2000
primarily due to lower cash, cash equivalents, and investments balances during
fiscal 2001, as well as lower interest rates. During fiscal 2001, a $7.2 million
loss was recognized for declines in value of marketable equity securities of
certain technology enterprises that were deemed to be other than temporary.
Comparatively, during fiscal 2000, other income included an $18.9 million gain
realized on the sale of marketable equity investments of technology enterprises.
We may invest in other companies in the future. Investments in technology
enterprises, and companies with recent initial public offerings in particular,
are highly volatile. Our future results of operations could be adversely
affected should the values of these investments decline below the amounts
invested by us. Additionally, our $5.9 million note receivable from a privately
held company related to the sale of a product line was not collected when due.
Accordingly, during the second quarter of fiscal 2001, we recorded a reserve
against the note receivable of $4.6 million in order to reduce the note to its
net realizable value, based on the fair value of the collateral. We previously
allocated the total proceeds from this sale to the components of the agreement
and recognized a one-time gain of approximately $5.7 million as other income in
the first quarter of fiscal 2000. Also, included in other income and expense
were net foreign exchange transaction gains of $741,900 for fiscal 2001, and net
foreign exchange transaction losses of $422,000 for fiscal 2000. The gains
related primarily to the overall downturn in the U.S. economy during fiscal 2001
and the weakening of the U.S. dollar against foreign currencies. The losses
during fiscal 2000 related primarily to the overall strengthening of the U.S.
dollar against European currencies.
We use hedging instruments to help offset the effects of exchange rate
changes on cash exposures from assets and liabilities denominated in foreign
currency. Gains and losses on these instruments 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.
Hedging activities cannot completely protect us from the risk of foreign
currency losses due to the number of currencies in which we conduct business,
the volatility of currency rates, and the constantly changing currency
exposures. We will continue to experience foreign currency gains and losses as a
result of
35
fluctuations in certain currencies where we conduct operations, as compared to
the U.S. dollar. In addition, our future operating results will continue to be
affected by these foreign currency gains and losses.
(Benefit from) provision for income taxes. Our effective income tax rate
was a negative 272% for fiscal 2001 compared to 25% for fiscal 2000. This change
is primarily due to providing a non-cash valuation allowance during fiscal 2001
to fully offset deferred tax assets at October 31, 2001. We considered a number
of factors, including our cumulative operating losses in fiscal 1999, 2000, and
2001, including acquisition-related charges and restructuring charges. Based on
the weight of both positive and negative evidence regarding the recoverability
of deferred tax assets, we concluded that a valuation allowance was required to
fully offset the net deferred tax assets. The benefit of the deferred taxes may
still be used to the extent we generate taxable income in future periods.
Included in the deferred tax asset balance at October 31, 2001, are
approximately $121.4 million in tax-effected net operating losses (NOLs), or
$309.1 million on a gross basis. Approximately $84.4 million of the deferred tax
asset related to tax-effected NOLs generated from the benefit from employee
stock plans. Realization of the deferred tax asset associated with the NOLs is
dependent on generating sufficient taxable income to utilize the NOLs prior to
their expiration. Of the $309.1 million of gross NOLs, $121.2 million will
expire in 2018, $52.5 million will expire in 2019, $69.0 million will expire in
2020, and $66.4 million will expire in 2021. During fiscal 2000, the
restructuring and other related charges decreased the rate primarily due to
differences in tax rates in various countries where the restructuring costs were
incurred.
Fiscal Years Ended October 31, 1999 and 2000
Total revenue. In fiscal 2000, our total revenue exceeded $1.0 billion
compared to $944.2 million in total revenue for fiscal 1999, a 6.0% increase and
the highest annual revenue achieved in our history. This was driven by license
fee revenue growth of 34% to $419.1 million in fiscal 2000 from $312.8 million
in fiscal 1999. The revenue mix between license fees and services was 41.9% and
58.1%, respectively, for fiscal 2000 compared to 33.1% and 66.9%, respectively,
for fiscal 1999. The significant change in revenue mix was primarily due to less
demand for software implementations and education following the reduced
licensing activity in fiscal 1999, continuing through the transition to the Year
2000. Additionally, higher license fee growth during fiscal 2000, fewer
revenue-generating consulting employees and our recognition of less direct
consulting revenue and less subcontract consulting revenue generated through
third parties significantly contributed to the change. The growth in license fee
revenue for fiscal 2000 was driven in part by our ability to offer a broad and
integrated supply chain planning solution.
A significant portion of our business was conducted in currencies other
than the U.S. dollar. Changes in the value of major foreign currencies relative
to the value of the U.S. dollar adversely affected our total revenue during
fiscal 2000, primarily as a result of the weakening of the euro exchange rates
against the U.S. dollar. Based on foreign exchange rates in effect at the
beginning of our fiscal year compared to actual rates, total revenue would have
been $21.7 million higher than the reported $1.0 billion, or an 8% increase over
fiscal 1999 compared to the reported 6% increase.
Geographically, the overall revenue growth for fiscal 2000 compared to
fiscal 1999 was led by sales performance in the U.S. The U.S., EMEA, and the
rest of the world accounted for 65%, 20%, and 15% of total revenue,
respectively, for fiscal 2000. For fiscal 1999, the U.S., EMEA, and the rest of
the world accounted for 61%, 24%, and 15% of total revenue, respectively.
License fees. License fee revenue increased 34.0% to $419.1 million for
fiscal 2000 from $312.8 million for fiscal 1999, primarily due to an increase in
the overall average license fee transaction size in fiscal 2000, with over 70
transactions exceeding $1.0 million compared to 35 transactions exceeding $1.0
million in fiscal 1999. Approximately 45% of our total license fee revenue was
generated from the transactions exceeding $1.0 million during fiscal 2000. The
percentage of revenue from new customers was 46% for fiscal 2000 compared to 49%
for fiscal 1999. We increased our number of customers by 9% from fiscal 1999 to
over 6,000 at October 31, 2000. Our revenue mix continued to shift toward our
OneWorld applications available for the Windows NT and UNIX platforms. During
fiscal 2000, 43% of license activity was due to customers using the Windows NT
or UNIX platforms compared to 33% in fiscal 1999.
36
Services. Services revenue declined by 7.8% to $582.0 million for fiscal
2000 from $631.4 million for fiscal 1999. This decrease was primarily a result
of less demand for software implementation and education following the reduced
licensing activity in fiscal 1999, continuing through the first half of fiscal
2000 due to customers' concerns regarding potential Year 2000 systems issues.
Additionally, our recognition of less direct consulting revenue and less
subcontract consulting revenue generated through third parties significantly
contributed to the change. The subcontracted consulting and education revenue
decreased 35% in fiscal 2000 compared to fiscal 1999. Direct services decreased
2% in fiscal 2000 from fiscal 1999. The services revenue generated through
subcontracted work accounted for 39% of the total consulting and education
services revenue for fiscal 2000, compared to 49% for fiscal 1999. Additionally,
compared to fiscal 1999, we had fewer revenue-generating consulting employees,
which contributed to the decrease in direct services revenue. Customer support
revenue increased in fiscal 2000, which somewhat offset the decline in
consulting and education services, due to the growing installed base of
customers and consistent maintenance renewal rates compared to fiscal 1999. As a
percentage of total revenue, services revenue decreased during fiscal 2000
compared to fiscal 1999. This decline in the services mix was due to growth in
license fee revenue coupled with the decreases in consulting services and
decline in education revenue during fiscal 2000.
Cost of license fees. The total dollar amount for the cost of license fees
increased 100.7% to $60.0 million for fiscal 2000 from $29.9 million for fiscal
1999. The increase for fiscal 2000 was primarily due to certain reseller
royalties from software transactions, in addition to royalties for certain
embedded products. Capitalized OneWorld costs were fully amortized early in
fiscal 2000. Amortization of capitalized OneWorld costs was $4.8 million for
fiscal 1999 and $1.0 million for fiscal 2000. We capitalized additional software
development costs in the amount of $43.4 million for fiscal 2000. These costs
related to investments in third-party products that had been or would be
embedded into OneWorld and provide new functionality. Additionally, we
capitalized payments for outsourced development and internal costs for major
product enhancements.
The gross margin for fiscal 2000 was significantly affected primarily by
the increase in certain reseller royalty expense from software transactions. The
fiscal 2000 gross margin on license fee revenue decreased to 86% from 90% for
fiscal 1999 as a result of these reseller royalties.
Cost of services. Cost of services decreased 10.3% to $366.1 million for
fiscal 2000 from $408.3 million for fiscal 1999. The decrease was primarily due
to a smaller portion of services revenue generated through subcontracted work,
which decreased the related third-party subcontract costs. The gross margin on
services revenue increased to 37% for fiscal 2000 compared to 35% for fiscal
1999 primarily due to a change in the mix of total services revenue. Customer
support revenue, which has a higher margin than consulting and education,
increased as a percentage of total services revenue.
Sales and marketing. Sales and marketing expense increased 9.8% to $367.1
million for fiscal 2000 from $334.2 million for fiscal 1999. The increase was
primarily a result of commissions associated with the growth in software license
fee revenue, higher advertising and promotion expenditures, and increased
salaries due to the competitive market for personnel during fiscal 2000.
General and administrative. General and administrative expense increased
3.5% to $97.6 million for fiscal 2000 from $94.2 million for fiscal 1999. The
total dollar amount of expense was slightly higher in fiscal 2000 compared to
fiscal 1999 primarily due to an increase in salaries, contract professional
services, and certain other costs. General and administrative expenses as a
percentage of total revenue remained essentially flat primarily due to increased
efficiencies within support functions to manage the overall growth in our
operations.
Research and development. R&D expense increased 7.0% to $116.9 million for
fiscal 2000 compared to $109.2 million for fiscal 1999. The increase in dollar
amount was primarily due to an increase in headcount and higher salaries due to
the competitive market for personnel, together with increases in related
facilities and computer systems necessary to meet product development
objectives, offset by costs capitalized during fiscal 2000. Including
capitalized development expenditures, research and development expenditures were
$159.9 million for fiscal 2000, or 16% of total revenue.
37
During fiscal 2000, we devoted development resources primarily to major
enhancements and new products associated with our OneWorld application suites,
such as the September 2000 release of OneWorld Xe, as well as the integration of
our internally developed applications with acquired applications and those of
third parties. We also completed certain significant enhancements to our
WorldSoftware functionality, including advanced planning capabilities and
Web-enablement.
In addition to our internal R&D activities, we outsourced the development
of software for a specialized industry, and we acquired source code rights for
certain enterprise interface applications and other embedded technology. During
fiscal 2000, we capitalized $12.0 million associated with internal development
costs and $31.4 million of third-party costs and outsourced development.
Amortization of acquired software and other intangibles. Total
amortization for fiscal 2000 resulting from our three business acquisitions
related to software, in-place workforce, customer base, and goodwill was $11.8
million, $3.2 million, $5.6 million, and $4.5 million, respectively. In fiscal
1999, total amortization was $4.6 million, $1.3 million, $1.9 million, and $1.7
million, related to software, in-place workforce, customer base, and goodwill,
respectively.
In-process research and development. IPR&D expenses were in connection
with the acquisitions of Numetrix in June 1999 and The Premisys Corporation in
February 1999. IPR&D represents the value of acquired products that are not yet
proven to be technologically feasible but have been developed to a point where
there is value associated with them in relation to potential future revenue.
Because technological feasibility was not yet proven and no alternative future
uses were believed to exist for the in-process technologies, the assigned values
were expensed immediately upon the closing dates of the acquisitions. Aggregate
IPR&D expenses recorded during fiscal 1999 were $26.1 million. No such charges
were incurred with respect to the fiscal 2000 acquisition of JDE-NZ.
The most significant in-process technology acquired was in development by
Numetrix prior to the fiscal 1999 acquisition to provide an operational-level
planning and scheduling optimization solution targeted at discrete manufacturing
industries. Additionally, prior to the fiscal 1999 acquisition, a new
demand-planning module was in the process of design by Numetrix to enhance
enterprise-wide collaborative forecasting and address forecast reconciliation.
Both technologies were released in October 2000. Another in-process technology
of Numetrix, a collaborative enabler, is designed to efficiently interface the
messaging architecture among applications to allow real-time, alert-driven
collaboration. This technology is now part of our advanced planning solution.
In-process technology acquired in our purchase of The Premisys Corporation is
now functionally integrated with OneWorld and was released in August 2000.
Restructuring and related charges. During fiscal 2000, the Board of
Directors approved a global restructuring plan to reduce our operating expenses
and strengthen both our competitive and financial positions. Overall expense
reductions were necessary both to lower our existing cost structure and to
reallocate resources to pursue our future operating strategies. The
restructuring plan was precipitated by declining gross margins and other
performance measures such as revenue per employee over several fiscal quarters,
as our headcount and operating expenses grew at a faster rate than revenue. We
also had incurred operating losses in certain geographic areas. We effected the
restructuring plan during the third quarter of fiscal 2000 by eliminating
certain employee positions, reducing office space and related overhead expenses,
and modifying our approach for providing certain services to our customers.
Restructuring and related charges primarily consist of severance-related costs
for the involuntarily terminated employees, operating lease termination
payments, and office closure costs. The majority of the restructuring activity
occurred during the second half of fiscal 2000, and remaining actions, such as
office closures or consolidations and lease terminations, were completed within
a one-year time frame.
Severance-related costs include the termination payments, benefits,
outplacement, and other related costs paid to the employees terminated
worldwide. The total workforce reduction was effected through a combination of
involuntary terminations and reorganizing operations to permanently eliminate
open positions resulting from normal employee attrition.
38
Specifically targeted were areas with opportunities for more efficient
processes that would reduce staffing, where operations were generating losses,
or where redundancy existed. We decreased our workforce by a total of 775
employees across most geographic areas and functions of our business, including
administrative, professional, and management positions. All employee
terminations occurred during the third quarter of fiscal 2000, although a
limited number of involuntarily terminated employees continued to provide
transitional services (generally 30 to 60 days from their termination date).
Salary and benefits earned during the transition period were not included in the
restructuring charge, and severance packages were only provided to the 688
involuntarily terminated employees.
In addition to the decrease in employee positions, the restructuring plan
provided for reduction in office space and related overhead expenses. Office and
training facility closure and consolidation costs are the estimated costs to
close specifically identified facilities, costs associated with obtaining
subleases, lease termination costs, and other related costs, all of which are in
accordance with the restructuring plan. We closed or consolidated several
facilities worldwide, including offices in Denver, Colorado, and regional
offices in the U.S., Europe, and the Asia Pacific region. During the third
quarter of fiscal 2000, the majority of Denver-based personnel were consolidated
into the main corporate headquarters campus, with the remaining moves completed
within a one-year time frame. Other significant reductions, such as those that
occurred in Japan and certain European countries, were substantially completed
during fiscal 2000.
We also closed or downsized several under-utilized training facilities as a
result of our modified training approach. Certain regional facilities, including
Denver, Colorado; Chicago, Illinois; Dallas, Texas; Secaucus, New Jersey;
Rutherford, New Jersey; and Toronto, Canada, were closed, downsized, or
significantly reduced. These closures and reductions were completed by December
2000.
The charge for operating lease buyouts and related costs represents the
actual or estimated costs associated with the early termination of leases for
computer equipment, phones, and automobiles that were no longer necessary for
operations due to our reduced workforce and facilities.
During fiscal 2000, we wrote off certain assets, consisting primarily of
leasehold improvements, computer equipment, and furniture and fixtures that were
deemed unnecessary due to the reduction in workforce. These assets were taken
out of service and disposed of during fiscal 2000.
We recorded adjustments to reduce the restructuring provision by $2.5
million in the fourth quarter of fiscal 2000. A portion of the adjustment
related to favorable negotiations with a vendor through which we successfully
reduced a contractual termination fee by $1.5 million. We also successfully
negotiated higher sublease income associated with leased office space and
subleased some vacated premises more quickly than anticipated for a total of
$1.2 million. Additionally, net employee outplacement, severance, and
termination costs were increased by $200,000 for other additional costs not
anticipated in the original restructuring plan.
Other income (expense). Interest and dividend income decreased to $15.0
million for fiscal 2000 from $19.3 million in fiscal 1999, primarily due to
lower cash and investment balances throughout much of fiscal 2000. Included in
other income and expense were net foreign exchange transaction losses of
$422,000 for fiscal 2000 and a loss of $568,000 for fiscal 1999. The losses
related primarily to the overall strengthening of the U.S. dollar against
European currencies.
We held short- and long-term investments (excluding equity securities of
certain publicly traded or privately held technology enterprises) that had a
fair value at October 31, 2000, of $132.4 million and a gross unrealized loss of
$509,000. During fiscal 2000, we realized losses of $747,000 from the sales of
municipal bonds. These realized losses are shown in the accompanying statement
of operations as a component of other income. In addition, during fiscal 2000,
we made equity investments in certain publicly traded or privately held
technology companies of $16.7 million, and we realized gains of $18.9 million
from the sale of a portion of our investment. These realized gains are shown in
the accompanying statement of operations as a component of other income. At
October 31, 2000, these investments had a fair value of $24.5 million and a
gross unrealized gain of $9.6 million. Additionally, during fiscal 2000, we
allocated the total proceeds from the sale of a product line to the components
of the agreement and recognized a one-time gain of approximately $5.7 million as
other income.
39
(Benefit from) provision for income taxes. Our effective income tax rate
was 25% for fiscal 2000 compared to 19% for fiscal 1999. This change was due
primarily to differences in tax rates in various countries where the
restructuring costs were incurred during fiscal 2000 and certain
acquisition-related charges that reduced the overall income-tax benefit for
fiscal 1999. Excluding the effect of the restructuring charges and
acquisition-related permanent differences, the rate for fiscal 1999 and fiscal
2000 was 37%.
We had available approximately $14.6 million in foreign-tax-credit
carryforwards, of which $4.8 million will expire in 2003, $8.4 million will
expire in 2004, and $1.4 million will expire in 2005. We had a U.S. net
operating loss carryforward (NOL) of approximately $270.5 million, of which
$121.2 million will expire in 2018, $52.5 million will expire in 2019, and $96.8
million will expire in 2020. Additionally, an R&D credit carryforward of
approximately $7.1 million was available, of which $3.5 million will expire in
2019 and $3.6 million will expire in 2020.
We received a benefit from the tax deductions for compensation in excess of
compensation expense recognized for financial reporting purposes. Such credit
arises from an increase in the market price of the stock under employee option
agreements between the measurement date (as defined in Accounting Principles
Board (APB) No. 25, "Accounting for Stock Issued to Employees") and the date at
which the compensation deduction for income tax purposes is determinable.
Additional paid-in capital was increased by this tax benefit of $10.1 million
and $22.6 million for fiscal years 1999 and 2000, respectively, and was included
in the accompanying statement of changes in stockholders' equity.
We had net deferred tax assets of $121.6 million at October 31, 2000, which
included a valuation allowance of $9.7 million related to foreign tax credits.
This valuation allowance was recorded because we could not utilize the foreign
tax credits in fiscal 2000, and there was sufficient uncertainty as to whether
the credits would be utilized prior to expiration. Also included in the deferred
tax asset balance at October 31, 2000, was approximately $104.4 million in
tax-effected NOLs. Approximately $77.4 million of the deferred tax asset related
to NOLs was generated due to the benefit of dispositions from employee stock
plans, which were recorded directly to stockholders equity in the accompanying
consolidated balance sheets. Realization of the deferred tax asset associated
with the NOLs is dependent on generating sufficient taxable income to utilize
the NOLs prior to their expiration. The minimum amount of taxable income
required to realize this asset was $302.5 million.
40
QUARTERLY RESULTS OF OPERATIONS/SUPPLEMENTARY FINANCIAL INFORMATION
The following table sets forth certain unaudited consolidated statements of
income data, both in absolute dollars and as a percentage of total revenue
(except for gross margin data), for each of our last eight quarters. This data
has been derived from unaudited consolidated financial statements that have been
prepared on the same basis as the annual audited consolidated financial
statements and, in our opinion, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such
information. These unaudited quarterly results should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this Annual Report on Form 10-K. The consolidated results of operations for
any quarter are not necessarily indicative of the results for any future period.
<Table>
<Caption>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
2000 2000 2000 2000 2001 2001 2001 2001
----------- --------- -------- ----------- ----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS:
Revenue:
License fees............. $83,287 $81,742 $116,675 $137,399 $82,669 $62,322 $ 50,005 $76,873
Services................. 148,419 149,307 144,441 139,795 135,016 154,340 154,200 158,555
------- ------- -------- -------- ------- ------- --------- -------
Total revenue...... 231,706 231,049 261,116 277,194 217,685 216,662 204,205 235,428
Costs and expenses:
Cost of license fees
(including write-offs
of certain third-party
product arrangements of
$7.8 million and $12.8
million for the three
months ended April 30,
2001, and July 31,
2001, respectively).... 12,904 14,122 15,457 17,480 15,662 17,131 21,491 9,905
Cost of services......... 88,571 92,139 96,319 89,052 82,593 84,213 79,412 77,670
Sales and marketing...... 81,245 91,790 94,222 99,793 72,809 73,418 78,437 68,094
General and
administrative......... 22,934 25,218 25,319 24,085 23,700 23,773 21,229 23,261
Research and
development............ 29,364 28,728 28,787 29,987 25,942 24,385 23,916 25,700
Amortization and
write-offs of acquired
software and other
intangibles............ 5,878 6,392 6,470 6,304 6,211 6,144 6,614 8,419
Restructuring and other
related charges........ -- -- 30,113 (2,097) 1,043 1,446 21,737 1,395
------- ------- -------- -------- ------- ------- --------- -------
Total costs and
expenses......... 240,896 258,389 296,687 264,604 227,960 230,510 252,836 214,444
Operating income (loss).... (9,190) (27,340) (35,571) 12,590 (10,275) (13,848) (48,631) 20,984
Other income, net.......... 8,949 23,637 3,586 2,707 3,325 1,346 (1,870) 649
------- ------- -------- -------- ------- ------- --------- -------
Income (loss) before income
taxes.................... (241) (3,703) (31,985) 15,297 (6,950) (12,502) (50,501) 21,633
Income tax provision
(benefit)................ (89) (1,370) (9,382) 5,631 (2,571) (5,035) 135,400 3,639
------- ------- -------- -------- ------- ------- --------- -------
Net income (loss).......... $ (152) $(2,333) $(22,603) $ 9,666 $(4,379) $(7,467) $(185,901) $17,994
======= ======= ======== ======== ======= ======= ========= =======
Net income (loss) per
common share:
Basic.................... $ 0.00 $ (0.02) $ (0.21) $ 0.09 $ (0.04) $ (0.07) $ (1.65) $ 0.16
======= ======= ======== ======== ======= ======= ========= =======
Diluted.................. $ 0.00 $ (0.02) $ (0.21) $ 0.08 $ (0.04) $ (0.07) $ (1.65) $ 0.16
======= ======= ======== ======== ======= ======= ========= =======
Shares used in computing
per share amounts:
Basic.................... 107,649 109,763 110,024 110,066 110,758 112,027 112,353 111,976
Diluted.................. 107,649 109,763 110,024 114,657 110,758 112,027 112,353 112,523
</Table>
41
<Table>
<Caption>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
2000 2000 2000 2000 2001 2001 2001 2001
----------- --------- -------- ----------- ----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
License fees............. 35.9% 35.4% 44.7% 49.6% 38.0% 28.8% 24.5% 32.7%
Services................. 64.1 64.6 55.3 50.4 62.0 71.2 75.5 67.3
------- ------- -------- -------- ------- ------- --------- -------
Total revenue...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of license fees
(including write-offs
of certain third-party
product arrangements of
$7.8 million and $12.8
million for the three
months ended April 30,
2001, and July 31,
2001, respectively).... 5.6 6.1 5.9 6.3 7.2 7.9 10.6 4.2
Cost of services......... 38.2 39.9 36.9 32.1 37.9 38.9 38.9 33.0
Sales and marketing...... 35.0 39.7 36.1 36.0 33.4 33.9 38.4 28.9
General and
administrative......... 9.9 10.9 9.7 8.7 10.9 11.0 10.4 9.9
Research and
development............ 12.7 12.5 11.0 10.8 11.9 11.2 11.7 10.9
Amortization and
write-offs of acquired
software and other
intangibles............ 2.5 2.7 2.5 2.3 2.9 2.8 3.2 3.6
Restructuring and other
related charges........ -- -- 11.5 (0.7) 0.5 0.7 10.6 0.6
------- ------- -------- -------- ------- ------- --------- -------
Total costs and
expenses......... 103.9 111.8 113.6 95.5 104.7 106.4 123.8 91.1
Operating income (loss).... (3.9) (11.8) (13.6) 4.5 (4.7) (6.4) (23.8) 8.9
Other income (expense),
net...................... 3.8 10.2 1.4 1.0 1.5 0.6 (0.9) 0.3
------- ------- -------- -------- ------- ------- --------- -------
Income (loss) before income
taxes.................... (0.1) (1.6) (12.2) 5.5 (3.2) (5.8) (24.7) 9.2
Income tax provision
(benefit)................ (0.0) (0.6) (3.5) 2.0 (1.2) (2.4) 66.3 1.5
------- ------- -------- -------- ------- ------- --------- -------
Net income (loss).......... (0.1)% (1.0)% (8.7)% 3.5% (2.0)% (3.4)% (91.0)% 7.7%
======= ======= ======== ======== ======= ======= ========= =======
Gross margin on license fee
revenue (including
write-offs of certain
third-party product
arrangements of $7.8
million and $12.8 million
for the three months
ended April 30, 2001, and
July 31, 2001,
respectively)............ 84.5% 82.7% 86.8% 87.3% 81.1% 72.5% 57.0% 87.1%
Gross margin on license fee
revenue (excluding
write-offs of certain
third-party product
arrangements of $7.8
million and $12.8 million
for the three months
ended April 30, 2001, and
July 31, 2001,
respectively)............ 84.5% 82.7% 86.8% 87.3% 81.1% 85.0% 82.5% 87.1%
Gross margin on service
revenue.................. 40.3% 38.3% 33.3% 36.3% 38.8% 45.4% 48.5% 51.0%
</Table>
We believe that future revenue, expenses, and operating results are likely
to vary significantly from quarter to quarter. As a result, quarterly
comparisons of operating results are not necessarily meaningful or indicative of
future performance. Furthermore, we believe that in some future quarter our
operating results will be below the expectations of public market analysts or
investors. In such event -- or in the event that adverse conditions prevail, or
are perceived to prevail, with respect to our business or generally -- it is
likely that the market price of our common stock would be materially adversely
affected. See "Risk Factors."
42
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2001, our principal sources of liquidity consisted of
$232.0 million of unrestricted cash and cash equivalents, $2.2 million of short-
and long-term investments, and a $100.0 million secured, revolving line of
credit that can be utilized for working capital requirements and other general
corporate purposes. As of October 31, 2001, we had working capital of $125.2
million, and no amounts were outstanding under our bank line of credit.
Short-term deferred revenue and customer deposits totaling $167.5 million are
included in determining this amount. The short-term deferred revenue primarily
represents annual maintenance payments billed to customers and recognized
ratably as revenue over the support service period. Without the short-term
deferred revenue and customer deposits, working capital would have been $292.7
million. Comparatively, as of October 31, 2000, we had working capital of $157.7
million, and no amounts were outstanding under our bank line of credit. Without
the short-term deferred revenue and customer deposits totaling $135.4 million,
working capital would have been $293.1 million.
We calculate accounts receivable days sales outstanding (DSO) on a "gross"
basis by dividing the accounts receivable balance at the end of the quarter by
revenue recognized for the quarter multiplied by 90 days. The impact of accounts
receivable related to deferred revenue is not included in the computation.
Calculated as such, DSO remained flat at 82 days as of October 31, 2001,
compared to 81 days as of October 31, 2000, despite a 15% decline in total
revenues in the fourth quarter of fiscal 2001 compared to the fourth quarter of
fiscal 2000. Additionally, there were improvements in collections of accounts
receivables during the fourth quarter of fiscal 2001 compared to the fourth
quarter of fiscal 2000. Our DSO can fluctuate depending on a number of factors,
including the concentration of transactions that occur toward the end of each
period and the variability of period operating results. See "Risk Factors -- Our
quarterly financial results are subject to significant fluctuations, and a
failure to meet expectations could adversely affect the price of our stock."
Accrued liabilities decreased from October 31, 2000, by $40.4 million
primarily due to the payment of higher commissions and incentive accruals at the
end of fiscal 2000 from higher revenue compared to fiscal 2001. The accrual
balance at October 31, 2000, also included accrued royalties, amounts payable
for purchased software, bonuses, and restructuring accruals that were
subsequently paid. The $32.0 million increase in unearned revenue and customer
deposits from October 31, 2000, was primarily due to an increase in maintenance
pricing, growing install base of customers, and consistent renewal rates.
Prepaid expenses, other receivables, and current assets decreased $27.8 million
from October 31, 2000 primarily due to a decline in prepaid business partner
commissions and our exit from certain reseller arrangements where prepaid
royalty balances existed.
We generated $66.6 million in cash from operating activities during fiscal
2001 compared to $4.3 million for fiscal 2000 and $12.3 million in fiscal 1999.
The increase in cash generated in fiscal 2001 from operations was primarily due
to fewer third-party contractual prepayments in fiscal 2001 compared to fiscal
2000 and increased collections of domestic accounts receivable. The decrease in
operating cash flows from fiscal 2000 compared to fiscal 1999 was due primarily
to restructuring related liabilities and contractual obligations to third
parties for products and source code rights, offset somewhat by a reduction in
the net loss in fiscal 2000 resulting from increased license fee revenue and
gains on sales of equity investments and a product line.
We used $14.6 million in cash from non-operating activities during fiscal
2001 compared to sources of cash of $68.8 million in fiscal 2000 and use of
$79.8 million in fiscal 1999. The fiscal 2001 decrease from fiscal 2000 was
primarily attributable to decreased net proceeds from the purchase and sales or
maturities of our investments in marketable securities, additional investments
in capitalized software development costs and a decline in the proceeds
resulting from issuances of our common stock under stock options and employee
stock plans. The increase in fiscal 2000 from fiscal 1999 was primarily the
result of the liquidation and sale of a portion of our portfolio of marketable
securities and investments in marketable securities, which was partially used to
repurchase our common stock under equity forward contracts that were part of our
stock repurchase plan.
We have a stock repurchase plan, that was designed to partially offset the
effects of share issuances under the stock option plans and Employee Stock
Purchase Plan (ESPP). In August 1999, our Board of Directors
43
authorized the repurchase of up to 8.0 million shares of our common stock under
this plan. The actual number of shares that are purchased and the timing of the
purchases are based on several factors, including the level of stock issuances
under the stock plans, the price of our stock, general market conditions, and
other factors. The stock repurchases may be effected at our discretion through
forward purchases, put and call transactions, or open market purchases.
There were no outstanding forward contracts that required the future
purchase of common stock as of October 31, 2001. During fiscal 2001, we executed
settlements of forward contracts to purchase approximately 5.0 million of our
shares for $94.4 million in cash, which included contracts for 2.2 million
shares, that upon settlement, were sold to a counter-party with whom we
simultaneously entered into forward contracts to repurchase the shares at a
later date. During fiscal 2000, we entered into forward contracts for the
purchase of approximately 5.2 million common shares in accordance with the share
repurchase plan, and we settled contracts for the purchase of approximately 2.5
million shares for a total of $90.5 million in cash. At October 31, 2000, we
held forward contracts requiring the future purchase of approximately 2.7
million shares of common stock at an average redemption price of $32.17 per
share. These forward purchase contracts required full physical settlement, and
the aggregate redemption cost of $89.1 million was included in the accompanying
balance sheet in temporary equity with a corresponding decrease in additional
paid-in capital. At October 31, 2001, approximately 1.7 million of the
repurchased shares have been reissued to fund our ESPP and the discretionary
401(k) Plan contribution, and approximately 3.6 million remaining shares were
held as treasury stock to fund future stock issuances. As of October 31, 2000,
approximately 1.9 million remaining shares were held as treasury stock to fund
future stock issuances. The treasury shares are recorded at cost, and
reissuances are accounted for on the first-in, first-out method.
In November 2001, we amended and restated our Certificate of Incorporation
and created a series of 300,000 shares of preferred stock designated as Series A
Participating Preferred Stock with a par value of $0.001 per share, pursuant to
a Stockholder Rights Plan (the Plan). Under the Plan, we issued one right for
each share of our common stock, held by our stockholders of record as of the
close of business on November 26, 2001. The Plan is designed to deter coercive
or unfair takeover tactics and to prevent an acquiring entity from gaining
control of us without offering a fair price to all of our stockholders.
We lease our corporate headquarters office buildings under operating
leases. The corporate headquarters were constructed on land owned by us. The
lessor, a wholly owned subsidiary of a bank and a syndication of banks,
collectively financed $121.2 million in purchase and construction costs through
a combination of debt and equity. We guarantee the residual value of each
building up to approximately 85% of its original cost. At October 31, 2001, we
believe that the fair market value of the leased property exceeds the original
cost. Our lease obligations are based on a return on the lessor's costs. We can
elect to reduce the interest rate used to calculate lease expense by
collateralizing up to 97% of the financing arrangements with investments
consistent with our investment policy. At October 31, 2000 and 2001, investments
totaling $123.3 million and $67.2 million were designated as collateral for
these leases, respectively. As a result of the write-off of our deferred tax
asset in fiscal 2001, we obtained a covenant compliance waiver related to the
profitability covenant from one of the syndicate banks that included the
execution of an amendment to the security agreement of one of the leased
buildings designating $16.0 million of the collateral as restricted cash and
cash equivalents on the accompanying consolidated balance sheets. During the
first quarter of fiscal 2002, we executed subsequent amendments to the security
agreements of the remaining leased buildings designating an additional $19.4
million of the collateral as restricted cash and cash equivalents, for a total
restricted amount of $35.4 million. We may withdraw the funds used as collateral
at our sole discretion, excluding the amounts classified as restricted, provided
that we are not in default under the lease agreements. Investments designated as
collateral, including a required coverage margin, are held in separate
investment accounts. At October 31, 2001, we were in compliance with the
covenants and representations and warranties required under the lease agreement.
We believe the cash and cash equivalents balance, short- and long-term
investments, the $100 million bank line of credit, and funds generated from
operations will be sufficient to meet cash needs for the short- and long term.
We may acquire additional short- and long-term investments in the future and may
use a portion of those investments to make strategic investments in other
companies, acquire businesses, products, or
44
technologies that are complementary to our business. There can be no assurance,
however, that we will not require additional funds to support working capital
requirements or for other purposes, in which case we may seek to raise such
additional funds through public or private equity financing or from other
sources. There can be no assurance that such additional financing will be
available or that, if available, such financing will be obtained on terms
favorable to us and would not result in additional dilution to our stockholders.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements in Item 14 of this Annual Report on Form 10-K, beginning on page F-6.
Note that our preparation of this Annual Report on Form 10-K requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
- Revenue recognition. Our revenue recognition policy is significant
because our revenue is a key component of our results of operations. In
addition, our revenue recognition determines the timing of certain
expenses, such as commissions and royalties. We follow very specific and
detailed guidelines in measuring revenue; however, certain judgments
affect the application of our revenue policy. Revenue results are
difficult to predict, and any shortfall in 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.
- Capitalized software research and development costs. Our policy on
capitalized software costs determines the timing of our recognition of
certain development costs. In addition, this policy determines whether
the cost is classified as development expense or cost of license fees.
Management is required to use professional judgment in determining
whether development costs meet the criteria for immediate expense or
capitalization.
- Acquired software and other acquired intangibles. Our business
acquisitions typically result in goodwill and other intangible assets,
which affect the amount of future period amortization expense and
possible impairment expense that we will incur. The determination of the
value of such intangible assets requires management to make estimates and
assumptions that affect our consolidated financial statements.
- Income taxes. Our income tax policy records the estimated future tax
effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying consolidated balance
sheets, as well as operating loss and tax credit carryforwards. We follow
very specific and detailed guidelines regarding the recoverability of any
tax assets recorded on the balance sheet and provide any necessary
allowances as required.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which supersedes APB Opinion No. 16, "Business
Combinations." SFAS No. 141 requires that purchase method of accounting be used
for business combinations initiated after June 30, 2001, and eliminates the
pooling-of-interests method. In addition, SFAS No. 141 establishes specific
criteria for the recognition of intangible assets separately from goodwill and
requires unallocated negative goodwill to be written off immediately as an
extraordinary gain. The provisions of this statement apply to all business
combinations initiated after June 30, 2001, and applies to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001, or later. The adoption of SFAS No. 141 will not
change the method of accounting we used in previous business combinations.
45
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which is effective for fiscal years beginning after December
15, 2001. Certain provisions shall also be applied to acquisitions initiated
subsequent to June 30, 2001. SFAS No. 142 supersedes APB Opinion No. 17
"Intangible Assets," and requires, among other things, the discontinuance of
amortization related to goodwill and indefinite lived intangible assets. These
assets will then be subject to an impairment test at least annually. In
addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles, and
reclassification of certain intangibles out of previously reported goodwill.
We will adopt SFAS No. 142 no later than November 1, 2002. When we adopt
SFAS No. 142, this will result in us no longer amortizing our existing goodwill
and indefinite lived intangible assets. In addition, we will be required to
measure goodwill for impairment as part of the transition provisions. Any
impairment resulting from these transition tests will be recorded and recognized
as the cumulative effect of a change in accounting principle. We have determined
that SFAS No. 142 will not have a material impact on our previous business
acquisitions, as the majority of our remaining goodwill and intangibles related
to those acquisitions will be fully amortized by November 1, 2002.
The YOUcentric acquisition was completed during the first quarter of fiscal
2002 and was accounted for under the new acquisition rules set forth in SFAS No.
141 and No. 142. The total purchase price was allocated to YOUcentric's assets
and liabilities based on their fair values. The total purchase price was
allocated to tangible assets and liabilities, and intangible assets, including
goodwill, completed technology, IPR&D, and employee non-competition agreements.
The completed technology and employee non-competition agreements will be
amortized over three years beginning in the first quarter of fiscal 2002.
Acquired IPR&D was expensed immediately on the closing date of the acquisition.
Goodwill will be subject to an annual impairment test and will not be amortized
under SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective for fiscal years beginning after
June 15, 2002. SFAS No. 143 requires, among other things, that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are then capitalized as part of the carrying
amount of the long-lived asset. We will adopt SFAS No. 143 no later than
November 1, 2002. We anticipate that the adoption of SFAS No. 143 will not have
a material impact on our consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. We will adopt SFAS No. 144 no later
than November 1, 2002. We anticipate that the adoption of SFAS No. 144 will not
have a material impact on our consolidated financial statements.
In November 2001, the FASB issued a Staff Announcement Topic D-103 (Topic
D-103), "Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred." Topic D-103 establishes that reimbursements
received for out-of-pocket expenses should be reported as revenue in the
statement of operations. Currently, we classify reimbursed out-of-pocket
expenses as a reduction of operating expenses. We are required to adopt this
guidance effective in our second quarter of fiscal 2002. Our adoption of Topic
D-103 will result in increased services revenue and increased costs of services
revenue. Our results of operations for prior periods will be reclassified to
conform to the new presentation. We are currently in the process of determining
the impact on our services revenue and cost of services revenue. Our adoption of
Topic D-103 will not affect our net income or loss in any past or future
periods.
We adopted SFAS No. 133, "Accounting for Derivative Instruments and for
Hedging Activities," during first quarter of fiscal 2001. SFAS No. 133, as
amended, requires that we recognize all derivatives on the balance sheet at fair
value. The gains or losses resulting from changes in the fair value of
derivative instruments will either be recognized in current earnings or in other
comprehensive income, depending on the
46
use of the derivative and whether the hedging instrument is effective or
ineffective when hedging changes in fair value. Our adoption of SFAS No. 133, as
amended, during the first quarter of fiscal 2001 did not have a material impact
on our consolidated financial position, results or operations, or cash flows.
Additionally, we do not currently anticipate that the adoption of SFAS No. 133,
as amended, will have a future material impact on our consolidated financial
position, results of operations, or cash flows.
We adopted SAB No. 101, "Revenue Recognition in Financial Statements,"
during the fourth quarter of fiscal 2001. SAB No. 101, as amended, provides
further interpretive guidance for public companies on the recognition,
presentation, and disclosure of revenue in financial statements. Our adoption of
SAB No. 101, as amended, during the fourth quarter of fiscal 2001 did not have a
material impact on our on our licensing or revenue recognition practices.
Additionally, we do not currently anticipate that the adoption of SAB No. 101,
as amended, will have a future material impact on our consolidated financial
position, results of operations, or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of operations, we are exposed to certain market
risks, primarily changes in foreign currency exchange rates and interest rates.
Uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax, other regulatory, or credit risks, are not included in
the following assessment of our market risks.
Foreign currency exchange rates. Operations outside the U.S. expose us to
foreign currency exchange rate changes and could affect translations of foreign
denominated assets and liabilities into U.S. dollars and future earnings and
cash flows from transactions denominated in different currencies. The exposure
to currency exchange rate changes is diversified due to the number of different
countries in which we conduct business. We operate outside the U.S. primarily
through wholly owned subsidiaries in Europe, Africa, Asia Pacific, Canada, and
Latin America. These foreign subsidiaries use the local currency, or in certain
European countries, the euro as their functional currency because revenue is
generated and expenses are incurred in such currencies.
A substantial portion of our total revenue is derived from international
sales and is therefore subject to the related risks, including general economic
conditions in each country, overlap of different tax structures, difficulty of
managing an organization spread over various countries, changes in regulatory
requirements, compliance with a variety of foreign laws and regulations, longer
payment cycles, and volatilities of exchange rates in certain countries. A
significant portion of our business is conducted in currencies other than the
U.S. dollar. During fiscal 2001, 37% of our total revenue was generated from
international operations and the net liabilities of our foreign operations
totaled 5% of consolidated net assets as of October 31, 2001. We do not enter
into foreign exchange contracts to hedge the exposure of currency revaluation in
operating results. Foreign exchange rates could adversely affect our total
revenue and results of operations throughout fiscal 2002 if the U.S. dollar
strengthens relative to certain foreign currencies.
In addition to the above, we have balance sheet exposure related to foreign
net asset and forward foreign exchange contracts. We enter into forward foreign
exchange contracts to hedge the effects of exchange rate changes on cash
exposures from receivables and payables denominated in foreign currencies. Such
hedging activities cannot completely protect us from the risk of foreign
currency losses due to the number of currencies in which we conduct business,
the volatility of currency rates, and the constantly changing currency
exposures. Foreign currency gains and losses will continue to result from
fluctuations in the value of the currencies in which we conduct operations as
compared to the U.S. dollar, and future operating results will continue to be
affected by gains and losses from foreign currency exposure.
We prepared sensitivity analyses of our exposures from foreign net asset
and forward foreign exchange contracts as of October 31, 2001, and our exposure
from anticipated foreign revenue during fiscal 2002 to assess the impact of
hypothetical changes in foreign currency rates. Our analysis assumed a 10%
adverse change in foreign currency rates in relation to the U.S. dollar. Based
on the results of the forward foreign exchange contract analyses, a 10% adverse
change in foreign exchange rates from the October 31, 2001, rates
47
would not result in a material impact to our results of operations, cash flows,
or financial condition for the next fiscal year.
Interest rates. Our portfolio of investments is subject to interest rate
fluctuations. Investments, including cash equivalents, consist of U.S.
government, state, municipal, and corporate debt securities with maturities of
up to 30 months, as well as money market mutual funds and corporate equity
securities. We classify all investments in marketable securities as available
for sale, and these investments were carried at fair value as determined by
their quoted market prices. Unrealized gains or losses were included, net of
tax, as a component of accumulated other comprehensive income. Additionally, we
have lease obligations calculated as a return on the lessor's costs of funding
based on the London Interbank Offered Rate and adjusted from time to time to
reflect any changes in our leverage ratio. Changes in interest rates could
affect our anticipated interest income and lease obligations or could affect the
fair market value of our investments.
We prepared sensitivity analyses of our interest rate exposures and our
exposure from anticipated investment and borrowing levels for fiscal 2001 to
assess the impact of hypothetical changes in interest rates. Based on the
results of these analyses, a 10% adverse change in interest rates from the
October 31, 2001, rates would not have a material adverse effect on the fair
value of investments and would not materially affect our results of operations,
cash flows, or financial condition for the fiscal year ending October 31, 2002.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required pursuant to this item are included in
Item 14 of this Annual Report on Form 10-K and are beginning on page F-1. The
supplementary financial information required by this item is included in "Item
7: Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the subsection titled "Quarterly Results of
Operations/Supplementary Financial Information."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the sections titled
"Information About Nominees and Other Directors," "Directors' Compensation," and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's proxy
statement for the 2002 Annual Meeting of Stockholders (the 2002 Proxy Statement)
to be filed with the Commission within 120 days after the end of the Company's
fiscal year ended October 31, 2001, except that the information required by this
item concerning the executive officers of the Company is incorporated by
reference to the information set forth in the section titled "Our Executive
Officers" at the end of Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the section titled
"Compensation of Executive Officers" in the Company's 2002 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section titled "Beneficial Owners and Management's
Ownership of J.D. Edwards' Stock" in the Company's 2002 Proxy Statement.
48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section titled "Certain Relationships and Related Transactions" in the
Company's 2002 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. Consolidated Financial Statements.
The following consolidated financial statements of J.D. Edwards are
filed as part of this report:
<Table>
<Caption>
PAGE
----
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
</Table>
2. Consolidated Financial Statements Schedules.
The following financial statement schedule of the Company for each of
the years ended October 31, 1999, 2000, and 2001, is filed as part of this
Form 10-K and should be read in conjunction with the Consolidated Financial
Statements, and the related notes thereto, of the Company.
<Table>
<Caption>
PAGE
-------
Schedule II -- Valuation and Qualifying Accounts............ S-1
</Table>
Schedules other than the one listed above have been omitted since they
are either not required, not applicable, or the information is otherwise
included.
3. Exhibits.
The exhibits listed on the accompanying index to exhibits immediately
following the financial statement schedule are filed as part of, or
incorporated by reference into, this Form 10-K.
(b) Reports on Form 8-K:
1. On November 15, 2001, we filed a Current Report on Form 8-K
reporting that the board of directors adopted a Stockholder Rights Plan.
2. On November 30, 2001, we filed a Current Report on Form 8-K
reporting the completion of the acquisition of YOUcentric, Inc., a
Charlotte, N.C., a provider of Java-based customer relationship management
software.
3. On January 22, 2002, we filed a Current Report on Form 8-K
reporting the announcement related to the retirement of our CEO, C. Edward
McVaney, and his replacement, Robert M. Dutkowsky.
4. On January 28, 2002, we filed an Amendment to our November 30,
2001, Current Report on Form 8-K reporting the required financial
information related to our acquisition of YOUcentric.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized on this
24th day of January 2002.
J.D. EDWARDS & COMPANY
By: /s/ RICHARD G. SNOW, JR.
----------------------------------
Name: Richard G. Snow, Jr.
Title: Vice President, General
Counsel,
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on January 24, 2002, on
behalf of the Registrant and in the capacities indicated.
<Table>
<Caption>
NAME TITLE
---- -----
/s/ ROBERT M. DUTKOWSKY President, Chief Executive Officer, and
- ----------------------------------------------------- Director (principal executive officer)
Robert M. Dutkowsky
/s/ C. EDWARD MCVANEY Chairman of the Board and Director
- -----------------------------------------------------
C. Edward McVaney
/s/ RICHARD E. ALLEN Chief Financial Officer, Executive Vice
- ----------------------------------------------------- President, Finance and Administration, and
Richard E. Allen Director (principal financial officer)
/s/ PAMELA L. SAXTON Vice President of Finance, Controller, and
- ----------------------------------------------------- Chief Accounting Officer (principal
Pamela L. Saxton accounting officer)
/s/ GERALD HARRISON Director
- -----------------------------------------------------
Gerald Harrison
/s/ DELWIN D. HOCK Director
- -----------------------------------------------------
Delwin D. Hock
/s/ HARRY T. LEWIS, JR. Director
- -----------------------------------------------------
Harry T. Lewis, Jr.
/s/ MICHAEL J. MAPLES Director
- -----------------------------------------------------
Michael J. Maples
/s/ TRYGVE E. MYHREN Director
- -----------------------------------------------------
Trygve E. Myhren
/s/ ROBERT C. NEWMAN Director
- -----------------------------------------------------
Robert C. Newman
</Table>
50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
J.D. Edwards & Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) (1) on page 49 present fairly, in all material
respects, the financial position of J.D. Edwards & Company and its subsidiaries
at October 31, 2000 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the consolidated financial statement
schedule listed in the index appearing under Item 14(a) (2) on page 49 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management; our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
November 20, 2001
F-1
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
OCTOBER 31,
-------------------
2000 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $180,674 $231,952
Short-term marketable securities and other investments.... 49,434 1,515
Accounts receivable, net of allowance for doubtful
accounts of $14,000 and $17,000 at October 31, 2000 and
2001, respectively..................................... 247,919 214,621
Other current assets...................................... 59,205 31,370
-------- --------
Total current assets.............................. 537,232 479,458
Long-term investments in marketable securities.............. 107,458 702
Restricted cash and cash equivalents........................ -- 15,960
Property and equipment, net................................. 83,677 70,021
Non-current portion of deferred income taxes................ 122,537 --
Software costs, net......................................... 61,352 72,821
Other assets, net........................................... 38,785 22,170
-------- --------
$951,041 $661,132
======== ========
LIABILITIES, COMMON SHARES SUBJECT TO REPURCHASE,
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 59,591 $ 42,616
Unearned revenue and customer deposits.................... 135,445 167,487
Accrued liabilities....................................... 184,542 144,163
-------- --------
Total current liabilities......................... 379,578 354,266
Unearned revenue, net of current portion, and other......... 11,352 7,807
-------- --------
Total liabilities................................. 390,930 362,073
Commitments and contingencies (Note 11) Common shares
subject to repurchase, at redemption amount............... 89,113 --
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none outstanding........................... -- --
Common stock, $.001 par value; 300,000,000 shares
authorized; 112,034,460 issued and 110,086,555
outstanding as of October 31, 2000; 114,193,712 issued
and 110,620,096 outstanding as of October 31, 2001..... 112 114
Additional paid-in capital................................ 416,716 442,511
Treasury stock, at cost; 1,947,905 shares and 3,573,616
shares as of October 31, 2000 and 2001, respectively... (71,087) (72,323)
Deferred compensation..................................... (88) (32)
Accumulated earnings (deficit)............................ 122,678 (57,075)
Accumulated other comprehensive income (loss): unrealized
gains (losses) on equity securities and foreign
currency translation adjustments, net.................. 2,667 (14,136)
-------- --------
Total stockholders' equity........................ 470,998 299,059
-------- --------
$951,041 $661,132
======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
-----------------------------------
1999 2000 2001
---------- ---------- ---------
Revenue:
License fees........................................... $ 312,817 $ 419,103 $ 271,869
Services............................................... 631,414 581,962 602,111
---------- ---------- ---------
Total revenue.................................. 944,231 1,001,065 873,980
Costs and expenses:
Cost of license fees (including write-offs of certain
third-party product arrangements of $20.6 million in
fiscal 2001)........................................ 29,882 59,963 64,189
Cost of services....................................... 408,293 366,081 323,888
Sales and marketing.................................... 334,201 367,050 292,758
General and administrative............................. 94,241 97,556 91,963
Research and development............................... 109,206 116,866 99,943
Amortization and write-offs of acquired software and
other intangibles................................... 9,488 25,044 27,388
Acquired in-process research and development........... 26,141 -- --
Restructuring and other related charges................ -- 28,016 25,621
---------- ---------- ---------
Total costs and expenses....................... 1,011,452 1,060,576 925,750
Operating loss........................................... (67,221) (59,511) (51,770)
Other income (expense):
Interest and dividend income........................... 19,324 14,980 13,081
Gains (losses) on equity investments and product
line................................................ -- 24,582 (8,516)
Interest expense, foreign currency gains (losses) and
other, net.......................................... (268) (683) (1,115)
---------- ---------- ---------
Loss before income taxes................................. (48,165) (20,632) (48,320)
(Benefit from) provision for income taxes, including
valuation allowance................................. (8,941) (5,210) 131,433
---------- ---------- ---------
Net loss................................................. $ (39,224) $ (15,422) $(179,753)
========== ========== =========
Net loss per common share:
Basic and diluted...................................... $ (0.37) $ (0.14) $ (1.61)
========== ========== =========
Shares used in computing per share amounts:
Basic and diluted...................................... 105,378 109,376 111,778
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
COMMON STOCK
(INCLUDES SHARES
SUBJECT TO REPURCHASE) ADDITIONAL TREASURY STOCK ACCUMULATED
---------------------- PAID-IN --------------------- DEFERRED EARNINGS
SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION (DEFICIT)
------------ ------- ---------- ---------- -------- ------------ -----------
Balance, October 31,
1998..................... 102,681,608 $103 $406,886 -- $ -- $(677) $ 177,324
Stock option exercises,
issuances under employee
stock purchase plan and
other.................... 4,177,886 4 36,258 -- -- 394 --
Tax benefit from stock
compensation............. -- -- 10,077 -- -- -- --
Stock issuance for
acquisition.............. 250,000 -- 3,166 -- -- -- --
Net loss................... -- -- -- -- -- -- (39,224)
Change in cumulative
translation adjustment... -- -- -- -- -- -- --
----------- ---- -------- ---------- -------- ----- ---------
Balance, October 31,
1999..................... 107,109,494 107 456,387 -- -- (283) 138,100
Stock option exercises,
issuances under employee
stock purchase plan, and
other.................... 4,924,966 5 26,488 524,595 19,399 195 --
Adjustment for redemption
amount of stock
repurchase contracts..... -- -- (89,113) -- -- -- --
Repurchase of shares of
common stock, net........ -- -- 430 (2,472,500) (90,486) -- --
Tax benefit from stock
compensation............. -- -- 22,524 -- -- -- --
Net loss................... -- -- -- -- -- -- (15,422)
Unrealized gains on equity
securities, net.......... -- -- -- -- -- -- --
Change in cumulative
translation adjustment... -- -- -- -- -- -- --
----------- ---- -------- ---------- -------- ----- ---------
Balance, October 31,
2000..................... 112,034,460 112 416,716 (1,947,905) (71,087) (88) 122,678
Stock option exercises,
issuances under employee
stock purchase plan, and
other.................... 2,159,252 2 (11,428) 1,165,289 41,239 56 --
Repurchase of shares of
common stock, net........ -- -- 89,113 (4,969,500) (94,365) -- --
Reissuance of shares of
common stock, net........ -- -- (51,890) 2,178,500 51,890 -- --
Net loss................... -- -- -- -- -- -- (179,753)
Unrealized losses on equity
securities, net.......... -- -- -- -- -- -- --
Change in cumulative
translation adjustment... -- -- -- -- -- -- --
----------- ---- -------- ---------- -------- ----- ---------
Balance, October 31,
2001..................... 114,193,712 $114 $442,511 (3,573,616) $(72,323) $ (32) $ (57,075)
=========== ==== ======== ========== ======== ===== =========
<Caption>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
(LOSS)
-------------
Balance, October 31,
1998..................... $ 360
Stock option exercises,
issuances under employee
stock purchase plan and
other.................... --
Tax benefit from stock
compensation............. --
Stock issuance for
acquisition.............. --
Net loss................... --
Change in cumulative
translation adjustment... (1,951)
--------
Balance, October 31,
1999..................... (1,591)
Stock option exercises,
issuances under employee
stock purchase plan, and
other.................... --
Adjustment for redemption
amount of stock
repurchase contracts..... --
Repurchase of shares of
common stock, net........ --
Tax benefit from stock
compensation............. --
Net loss................... --
Unrealized gains on equity
securities, net.......... 9,240
Change in cumulative
translation adjustment... (4,982)
--------
Balance, October 31,
2000..................... 2,667
Stock option exercises,
issuances under employee
stock purchase plan, and
other.................... --
Repurchase of shares of
common stock, net........ --
Reissuance of shares of
common stock, net........ --
Net loss................... --
Unrealized losses on equity
securities, net.......... (14,557)
Change in cumulative
translation adjustment... (2,246)
--------
Balance, October 31,
2001..................... $(14,136)
========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
---------------------------------
1999 2000 2001
--------- --------- ---------
Operating activities:
Net loss.................................................. $ (39,224) $ (15,422) $(179,753)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 25,421 31,039 31,910
Amortization of capitalized software costs, intangible
assets, and securities premiums or discounts......... 18,376 27,992 35,945
(Gain) loss on sale of product line (Note 9)........... -- (5,686) 1,299
(Gain) loss on investments in equity securities........ -- (18,896) 7,217
Write-off of third-party product arrangements.......... -- -- 20,566
(Benefit from) provision for deferred income taxes,
including valuation allowance........................ (18,535) (14,050) 122,547
Write-off of acquired in-process research and
development and other intangible assets.............. 26,141 -- 2,547
Other.................................................. 4,965 6,993 3,307
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable, net............................... 25,212 (17,247) 33,708
Other assets........................................... (6,307) (23,944) 8,570
Accounts payable....................................... (14,843) 14,250 (16,788)
Unearned revenue and customer deposits................. (11,452) 7,511 29,696
Accrued liabilities.................................... 2,558 11,783 (34,185)
--------- --------- ---------
Net cash provided by operating activities......... 12,312 4,323 66,586
Investing activities:
Purchase of marketable securities and other investments... (284,284) (108,419) (17,361)
Proceeds from sales or maturities of investments in
marketable securities.................................. 322,322 292,595 151,168
Purchase of property and equipment and other, net......... (51,991) (31,824) (23,913)
Payment for purchase of acquired companies, net of cash
acquired............................................... (97,378) (10,151) --
Capitalized software costs................................ -- (24,755) (40,114)
--------- --------- ---------
Net cash (used in) provided by investing
activities...................................... (111,331) 117,446 69,780
Financing activities:
Proceeds from issuance of common stock.................... 31,568 41,829 25,962
Repurchase of common stock under repurchase contracts and
other, net............................................. -- (90,486) (94,365)
Restricted cash and cash equivalents...................... -- -- (41,436)
Release of restriction on cash and cash equivalents....... -- -- 25,476
--------- --------- ---------
Net cash provided by (used in) financing
activities...................................... 31,568 (48,657) (84,363)
Effect of exchange rate changes on cash..................... (2,323) (5,779) (725)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ (69,774) 67,333 51,278
Cash and cash equivalents at beginning of period............ 183,115 113,341 180,674
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 113,341 $ 180,674 $ 231,952
========= ========= =========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Interest paid............................................. $ 868 $ 135 $ 2,818
Income taxes paid......................................... 22,717 5,476 9,649
Retirement savings plan contribution funded with common
stock.................................................. 4,694 2,782 3,697
Common stock issued for acquired company.................. 3,166 -- --
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
J.D. Edwards (the Company) is a leading provider of agile, collaborative
enterprise software. For more than 20 years, the Company has developed,
marketed, and supported innovative, flexible solutions that help run
multinational organizations, including more than 6,000 companies of all sizes.
The Company delivers integrated, collaborative software for supply chain
planning, procurement, and customer relationship management, in addition to
supply chain execution (also known as Enterprise Resource Planning, or ERP),
workforce management, and other functional support. To help customers rapidly
achieve benefits from its software, the Company provides implementation and
education services through its own direct services organization and business
partners. The Company's services organization is focused on being a responsive
and proactive extension of the software offerings. The Company distributes,
implements, and supports its software worldwide through 55 offices and more than
350 third-party business partners.
Principles of Consolidation and Basis of Presentation
The accounts of the Company have been consolidated. All intercompany
accounts and transactions have been eliminated. The consolidated financial
statements are stated in U.S. dollars and are prepared in accordance with
accounting principles generally accepted in the United States of America.
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash, Cash Equivalents, and Investments
The Company's investment portfolio consisted of investments classified as
cash equivalents, short-term investments, or long-term investments. All highly
liquid investments with an original maturity of three months or less when
purchased are considered to be cash equivalents. All cash equivalents are
carried at cost, which approximates fair value. During fiscal 2000, the Company
liquidated a portion of its portfolio of marketable securities prior to their
maturity dates in order to settle certain equity contracts. As a result, the
Company's entire held-to-maturity portfolio was reclassified to available for
sale as defined in Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Accordingly,
at October 31, 2000, all investments were carried at fair value as determined by
their quoted market prices and included as appropriate in either short- or
long-term investments. Short- and long-term investments consisted of U.S.
government, state, municipal, and corporate debt securities with maturities of
up to 30 months, as well as money market mutual funds and corporate equity
securities. At October 31, 2001, all investments, with the exception of equity
securities of certain publicly traded or privately held technology companies,
were classified as cash equivalents. All unrealized gains or losses were
included, net of tax, in stockholders' equity as a component of accumulated
other comprehensive income.
The Company's short- and long-term investments (excluding equity securities
of certain publicly traded or privately held technology companies) had a fair
value at October 31, 2000, of $132.4 million and a gross unrealized loss of
$509,000. The Company did not hold any short- and long-term investments
(excluding equity securities of certain publicly traded or privately held
technology companies) at October 31, 2001.
F-6
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal 1999, the Company did not realize any gains or losses on the
investment portfolio. During fiscal 2000, the Company realized losses of
$747,000 from the sales of certain municipal bonds. During fiscal 2001, the
Company realized gains of $960,000 from the sales of certain corporate,
treasury, and agency fixed-income securities. These realized gains and losses
are shown in the accompanying statements of operations as a component of other
income. At October 31, 2000 and 2001, $13.1 million and $16.0 million of the
total investments were foreign mutual funds and other foreign short- and
long-term investments.
The Company's investments in the equity securities of certain publicly
traded or privately held technology companies are classified as
available-for-sale and are included at fair value in short-term marketable
securities and other investments on the accompanying consolidated balance
sheets. During fiscal 2000 the Company invested $16.7 million in the equity
securities of these technology companies. At October 31, 2000, the aggregate
fair value of these investments was $24.5 million, resulting in a net unrealized
gain of $9.6 million. During fiscal 2000, the Company realized gains of $18.9
million on the sale of certain securities. These realized gains are shown in the
accompanying statement of operations as a component of other income or expense.
During fiscal 2001, the Company recorded realized losses of $7.2 million on
certain equity investments for the portion of the decline in market value that
was deemed to be other than temporary. The realized losses are shown in the
accompanying consolidated statement of operations in other income or expense. At
October 31, 2001, the remaining aggregate fair value of the equity securities in
certain publicly traded or privately held technology companies was $2.2 million,
and there were no unrealized gains or losses. A portion of one of the equity
securities is subject to a lock-up provision, which expires in January 2002. At
October 31, 2001, the Company had $5.3 million in unrealized tax liability
related to the mark to market investments that are included in equity and will
be recorded in operations once the related investments are sold.
The amortized cost basis, aggregate fair value, and unrealized gains or
losses for the Company's cash, cash equivalents, short- and long-term investment
portfolio is shown below. The unrealized gains and losses are included net of
tax in stockholders' equity as follows (in thousands):
<Table>
<Caption>
GROSS GROSS
AMORTIZED AGGREGATE UNREALIZED UNREALIZED
COST BASIS FAIR VALUE GAINS LOSSES
---------- ---------- ---------- ----------
OCTOBER 31, 2000:
Debt securities issued by the United States
Treasury and other United States
government agencies...................... $ 51,739 $ 51,554 $ -- $185
Corporate debt securities.................. 95,566 95,236 -- 330
Money market funds......................... 80,622 80,622 -- --
Debt securities issued by states of the
United States and political subdivisions
of the states............................ 15,333 15,321 -- 12
Corporate equity securities................ 9,203 24,510 15,307 --
Other debt and equity securities........... 8,559 8,559 -- --
Cash....................................... 61,764 61,764 -- --
-------- -------- ------- ----
Total cash, cash equivalents, and
investments.................... $322,786 $337,566 $15,307 $527
======== ======== ======= ====
OCTOBER 31, 2001:
Money market funds......................... $206,212 $206,212 $ -- $ --
Corporate equity securities................ 2,217 2,217 -- --
Other debt and equity securities........... 5,937 5,937 -- --
Cash....................................... 35,763 35,763 -- --
-------- -------- ------- ----
Total cash, cash equivalents, and
investments.................... $250,129 $250,129 $ -- $ --
======== ======== ======= ====
</Table>
F-7
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with certain lease transactions discussed in Note 11,
management has elected to reduce the interest rate used to calculate lease
expense by collateralizing a portion of the financing arrangements with certain
of its investments. The Company may withdraw the funds used as collateral at its
sole discretion provided the withdrawals are limited to amounts in excess of the
restricted cash and cash equivalents and it is not in default under the lease
agreement.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables. In accordance with the Company's cash investment policies, the
majority of its investments are made in investment grade securities. Management
believes the risk with respect to trade receivables is mitigated by the fact
that the Company's customer base is geographically widespread and is highly
diversified. No single customer accounted for 10% or more of revenue for fiscal
1999, 2000, or 2001 or of accounts receivable at October 31, 2000 or 2001.
Fair Value of Financial Instruments
For certain Company financial instruments, including trade receivables and
accounts payable, the carrying amounts approximate fair market value due to
their short maturities.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs
totaled $38.7 million, $47.2 million, and $53.0 million in fiscal 1999, fiscal
2000, and fiscal 2001, respectively, and are primarily included in sales and
marketing expenses on the accompanying statements of operations.
Property and Equipment and Long-Lived Assets
Property and equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method. The Company estimates a
useful life for furniture and fixtures of five to seven years, two to three
years for computer equipment, and three years for internal-use software. The
Company evaluates long-lived assets based on the net future cash flow expected
to be generated from the asset on an undiscounted basis whenever significant
events or changes in circumstances occur that indicate that the carrying amount
of an asset may not be recoverable. In performing this evaluation, if the
Company determines that impairment occurred, the impairment is measured based on
a comparison of discounted cash flows or fair value, whichever is more
determinable.
Capitalized Software Research and Development Costs
The Company capitalizes internally developed software costs and software
purchased from third parties in accordance with SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." The
Company's internal software development costs include application and tools
development, translation, and localization costs incurred in producing software
to be licensed to customers. The Company also may contract with third parties to
develop software that will be licensed to customers. In addition, from time to
time the Company purchases source code or product rights from third parties that
will be integrated with the Company's software. The associated fees paid to
third parties are a component of capitalized software costs. Capitalization of
development costs related to these software products begins once the
technological feasibility of the product is established. Based on the Company's
product development process, technological feasibility is established upon
completion of a detailed program design, or in certain cases where a detailed
program design has not been completed, a working model is used. Capitalization
ceases when such software is ready for general release, at which time
amortization of the capitalized costs begins. During fiscal 2000, the Company
capitalized $12.0 million of internal development costs and $31.4 million of
F-8
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs related to third-party product rights and outsourced development. During
fiscal 2001, the Company capitalized $29.2 million of internal development costs
and $8.2 million of costs related to third-party product rights and outsourced
development.
Amortization of capitalized internal software costs is computed as the
greater of: (a) the amount determined by ratio of the product's current revenue
to its total expected future revenue; or (b) the straight-line method over the
product's estimated useful life, generally three years. During all periods
presented herein, the Company has used the straight-line method to amortize such
capitalized costs. Amortization expense for internally developed software is
included in the cost of license fees and was $4.8 million, $1.3 million, and
$11.4 million in fiscal 1999, 2000, and 2001, respectively.
Research and development (R&D) costs relating principally to the design and
development of products (exclusive of costs capitalized under SFAS No. 86) are
expensed as incurred. The costs of developing routine enhancements are expensed
as R&D costs as incurred because of the short time between the determination of
technological feasibility and the date of general release of related products.
Acquired Software and Other Acquired Intangibles
From time to time the Company may acquire software or other intangible
assets in business combinations (see Note 8). For business combinations
accounted for using the purchase method of accounting prior to June 30, 2001,
acquired software and other acquired intangibles represent the amount of
purchase price allocated to such intangible assets, such as core software,
in-place workforce, customer base, and goodwill at the date of each acquisition.
Goodwill represents the excess of purchase price over fair value of the net
assets acquired. Amortization of intangible assets is computed on a
straight-line basis over their estimated useful lives, which are generally three
years for acquired core software and four years for other acquired intangible
assets. The amortization of acquired software and other acquired intangible
assets is shown in aggregate, as a separate line item, in the consolidated
statement of operations.
During the fourth quarter of fiscal 2001, management performed an
impairment analysis of the Company's acquired intangibles under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This impairment analysis was performed as a result of the
overall decline in the Company's stock price during fiscal 2001, the year over
year decline in revenue from fiscal 2000, increased operating losses compared to
prior fiscal periods, and the Company's fiscal 2001 restructuring. Management
retained an independent appraisal firm to perform valuations and review the
Company's acquired software, customer base, and goodwill for impairment. The
estimated fair value of in-place workforce represented a replacement cost
estimate, and the Company's impairment testing was based on employee turnover
within each acquired organization since the respective acquisition dates. The
Company's impairment analysis resulted in a write-off of $2.5 million of
intangible workforce assets during the fourth quarter of fiscal 2001. Software,
customer base, and goodwill were reviewed by analyzing the forecasted
undiscounted cash flows from operations for the enterprise and the acquired
entities on a pro forma stand-alone basis and were deemed to not be impaired.
The gross allocated cost basis and allocated cost net of accumulated
amortization and currency translation adjustments as of October 31, 2000 and
2001, along with the amortization expense and write-offs
F-9
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for fiscal 2000 and 2001 related to the software, in-place workforce, customer
base, and goodwill is shown in the following table (in thousands):
<Table>
<Caption>
FISCAL YEAR
ALLOCATED AMORTIZATION
ALLOCATED COST, EXPENSE AND
COST NET WRITE-OFFS
--------- --------- ------------
OCTOBER 31, 2000:
Software.............................................. $34,186 $18,281 $11,767
In-place workforce.................................... 13,331 8,928 3,178
Customer base......................................... 22,415 15,267 5,578
Goodwill.............................................. 15,773 12,244 4,521
------- ------- -------
Total....................................... $85,705 $54,720 $25,044
======= ======= =======
OCTOBER 31, 2001:
Software.............................................. $32,856 $ 6,340 $11,579
In-place workforce.................................... 10,506 2,929 5,871
Customer base......................................... 21,551 9,302 5,572
Goodwill.............................................. 17,520 7,742 4,366
------- ------- -------
Total....................................... $82,433 $26,313 $27,388
======= ======= =======
</Table>
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective for fiscal years beginning after December 15, 2001.
Certain provisions shall also be applied to acquisitions initiated subsequent to
June 30, 2001. SFAS No. 142 supersedes Accounting Principles Board (APB) Opinion
No. 17 "Intangible Assets," and requires, among other things, the discontinuance
of amortization related to goodwill and indefinite-lived intangible assets.
These assets will then be subject to an impairment test at least annually. In
addition, the standard includes provisions for the reclassification of certain
existing recognized intangibles such as goodwill, reassessment of the useful
lives of existing recognized intangibles, and reclassification of certain
intangibles out of previously reported goodwill.
The Company will adopt SFAS No. 142 no later than November 1, 2002. When
the Company adopts SFAS No. 142, this will result in the Company no longer
amortizing existing goodwill and indefinite-lived intangible assets. In
addition, the Company will be required to measure goodwill for impairment as
part of the transition provisions. Any impairment resulting from these
transition tests will be recorded and recognized as the cumulative effect of a
change in accounting principle. The Company has determined that SFAS No. 142
will not have a material impact on the Company's previous business acquisitions
as the majority of the remaining goodwill and intangibles related to those
acquisitions will be fully amortized by November 1, 2002.
The YOUcentric acquisition was completed during the first quarter of fiscal
2002 and was accounted for under the new acquisition rules set forth in SFAS No.
142. The total purchase price was allocated to YOUcentric's assets and
liabilities based on their fair values. The total purchase price was allocated
to tangible assets and liabilities and intangible assets, including goodwill,
completed technology, IPR&D, and employee non-competition agreements. The
completed technology and employee non-competition agreements will be amortized
over three years beginning in the first quarter of fiscal 2002. Acquired IPR&D
was expensed immediately on the closing date of the acquisition. Goodwill will
be subject to an annual impairment test and will not be amortized under SFAS No.
142.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company will adopt SFAS No. 144
no later than November 1, 2002. Management
F-10
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
anticipates that the adoption of SFAS No. 144 will not have a material impact on
the Company's consolidated financial statements.
Acquired In-Process Research and Development
For business combinations accounted for using the purchase method of
accounting, the amount of purchase price allocated to acquired in-process
research and development (IPR&D) at the date of acquisition is expensed
immediately as of the date of such acquisition in accordance with Financial
Accounting Standards Board (FASB) Interpretation No. 4, "Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase Method,
an Interpretation of SFAS No. 2" (see Note 8). IPR&D consists of products or
technologies that are not yet proven to be technologically feasible, but have
been developed to a point where there is value associated with them in relation
to potential future revenue. When technological feasibility is not yet proven
and if no alternative future uses are believed to exist for in-process
technologies, the assigned values are expensed immediately upon the closing
dates of the acquisitions. Amounts allocated to IPR&D are shown as a separate
line item in the consolidated statement of operations.
Restructuring and Other Related Charges
Restructuring and related charges include the costs associated with the
Company's restructuring during the third quarter of fiscal 2000 and a two-phased
strategic global restructuring plan that occurred during the second and third
quarters of fiscal 2001. Restructuring charges were recorded at the time the
decision was made to restructure operations and when the Company's Board of
Directors formally approved the restructuring plans (see Note 7). The fiscal
2000 and 2001 charges primarily consisted of costs that were incremental to the
Company's ongoing operations and were incurred to exit an activity or cancel an
existing contractual obligation, employee termination related charges, and the
buyout of operating leases. A liability was recorded in those quarters only for
exit costs that could be reasonably estimated. Additionally, the Company
incurred certain other incremental costs that were directly related to and
separately identified in the restructuring plan. Other related costs, consisting
primarily of equipment disposals, and move out costs associated with the
consolidation of office space were expensed as incurred.
Foreign Currency Translation
The functional currency of each subsidiary is the local currency or, in
certain European countries, the euro. Translation of asset and liability
balances to U.S. dollars is based on exchange rates as of each balance sheet
date. Cumulative currency translation adjustments, net of related deferred
taxes, are shown as a separate component of stockholders' equity. Accumulated
foreign currency translation balances consisted of a net loss of $6.6 million
and $8.8 million at October 31, 2000 and 2001, respectively. The deferred taxes
allocated to these amounts for fiscal 2000 and 2001 were $3.9 million.
Statements of operations and cash flow amounts are translated at the
average exchange rates for the period. Transaction gains and losses and
unrealized gains and losses on short-term intercompany receivables and payables
are included in results of operations as incurred. Net foreign exchange
transaction losses are included in other income and expense and totaled
$568,000, $422,000 in fiscal 1999 and 2000, respectively, and gains of $741,900
for fiscal 2001.
Accounting for Derivative Instruments and Hedging Activities
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and for Hedging Activities," in the first quarter of fiscal 2001. SFAS No. 133,
as amended, requires the Company to recognize all derivatives on the balance
sheet at fair value. The gains or losses resulting from changes in the fair
value of derivative instruments are recognized in current earnings. The
Company's adoption of SFAS No. 133, as
F-11
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amended, did not have a material impact on its consolidated financial position,
results of operations, or cash flows.
The Company uses hedging instruments to mitigate foreign currency exchange
risk of assets and liabilities denominated in foreign currency. The hedging
instruments used are forward foreign exchange contracts with maturities of
generally three months or less in term. All contracts are entered into with
major financial institutions. At October 31, 2001, the Company had approximately
$65.4 million of gross U.S. dollar equivalent forward foreign exchange contracts
outstanding as hedges of monetary assets and liabilities denominated in foreign
currency. Gains and losses from the mark to market adjustments on these
contracts were included with foreign currency gains and losses on the
transactions being hedged and were recognized as non-operating income or expense
in the period in which the gain or loss on the underlying transaction is
recognized. All gains and losses related to foreign exchange contracts were
included in cash flows from operating activities in the consolidated statements
of cash flows.
Revenue Recognition
The Company licenses software under non-cancelable license agreements and
provides related services, including consulting, support, and education. The
Company recognizes revenue in accordance with Statement of Position (SOP) 97-2,
"Software Revenue Recognition," as amended and interpreted by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with respect to certain
transactions," as well as Technical Practice Aids (TPA) issued from time to time
by the American Institute of Certified Public Accountants. The Company adopted
SAB No. 101, "Revenue Recognition in Financial Statements," during the fourth
quarter of fiscal 2001. SAB No. 101, as amended, provides further interpretive
guidance for public companies on the recognition, presentation, and disclosure
of revenue in financial statements. The Company's adoption of SAB No. 101, as
amended, during the fourth quarter of fiscal 2001, did not have a material
impact on the Company's licensing or revenue recognition practices.
Additionally, management does not currently anticipate that the adoption of SAB
No. 101, as amended, will have a future material impact on the Company's
consolidated financial position, results of operations, or cash flows.
In general, 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 of 12 months or more from the date of delivery, revenue is recognized as
payments become due and all other conditions for revenue recognition have been
satisfied. Consulting and education services are separately priced and generally
are available from a number of suppliers and are not essential to the
functionality of our software products. Revenue from these services is recorded
separately from the license fees as the services are performed. Revenue from
agreements for supporting and providing periodic unspecified upgrades to the
licensed software is recorded as unearned revenue and is recognized ratably over
the support service period. Such unearned revenue includes a portion of the
related arrangement fee equal to the fair value of any bundled support services
and unspecified upgrades. The Company anticipates that the majority of our
arrangement fees will continue to be recognized as described above. The Company
does not require collateral for receivables; however, an allowance is maintained
for potential losses. In certain instances where services are deemed essential
to the customer's use of the software, the entire arrangement is accounted for
in accordance with SOP 81-1, "Accounting for Performance of Construction Type
and Certain Production Type Contracts."
In November 2001, the FASB issued a Staff Announcement Topic D-103 (Topic
D-103), "Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred." Topic D-
F-12
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
103 establishes that reimbursements received for out-of-pocket expenses should
be reported as revenue in the statement of operations. Currently, the Company
classifies reimbursed out-of-pocket expenses as a reduction of operating
expenses. The Company is required to adopt this guidance effective in the second
quarter of fiscal 2002. The Company's adoption of Topic D-103 will result in
increased services revenue and increased costs of services revenue. The
Company's results of operations for prior periods will be reclassified to
conform to the new presentation. Management is currently in the process of
determining the impact on the Company's services revenue and cost of services
revenue. The Company's adoption of Topic D-103 will not affect our net income or
loss in any past or future periods.
Stock-Based Compensation
The Company has elected to determine the value of stock-based compensation
arrangements under the provisions of (APB Opinion No. 25 "Accounting for Stock
Issued to Employees"; and the pro forma disclosures required under SFAS No. 123,
"Accounting for Stock-Based Compensation," are included in Note 5. SFAS No. 123
permits the use of either a fair value based method or the method defined in APB
No. 25 to account for stock-based compensation arrangements. Companies that
elect to use the method provided in APB No. 25 are required to disclose the pro
forma net income (loss) and earnings per share that would have resulted from the
use of the fair value based method. In March 2000, the FASB issued
Interpretation (FIN) No. 44 ("Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB No. 25. FIN No. 44 clarifies the
application of APB No. 25 for: (a) the definition of the employee for purposes
of applying APB No. 25; (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan; (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award; and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
Income Taxes
Deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying consolidated balance
sheets, as well as operating loss and tax credit carryforwards. These deferred
tax assets may be reduced by a valuation allowance when current evidence
indicates that it is more likely than not that these benefits will not be
realized. During fiscal 2001, the Company provided a valuation allowance to
fully offset its net deferred tax asset (see Note 6).
Earnings Per Common Share
Basic earnings per share (EPS) excludes the dilutive effect of common stock
equivalents and is computed by dividing net income or loss by the
weighted-average number of shares outstanding during the period. Diluted EPS
includes the dilutive effect of common stock equivalents and is computed using
the weighted-average number of common and common equivalent shares outstanding
during the period. Common stock equivalents consist of stock options and certain
equity instruments. Diluted loss per share for the fiscal years 1999, 2000, and
2001 exclude common stock equivalents because the effect of their inclusion
would be anti-dilutive, or would decrease the reported loss per share. Using the
treasury stock method, the weighted-average common stock equivalents excluded
were 6.1 million shares, 5.2 million shares, and 1.6 million shares for fiscal
1999, 2000, and 2001, respectively. The weighted-average outstanding shares for
fiscal 2000 and 2001 are reflected net of treasury shares, if any. All shares
owned by the Employee Retirement Savings Plans (401(k) Plan) were included in
the weighted-average common shares outstanding for all periods.
F-13
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The computation of basic and diluted EPS was as follows (in thousands,
except per share amounts):
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
-------------------------------
1999 2000 2001
-------- -------- ---------
Numerator:
Net loss.......................................... $(39,224) $(15,422) $(179,753)
======== ======== =========
Denominator:
Basic and diluted loss per share.................. 105,378 109,376 111,778
======== ======== =========
Basic and diluted net loss per share................ $ (0.37) $ (0.14) $ (1.61)
======== ======== =========
</Table>
Comprehensive Income
Comprehensive income or loss includes unrealized gains or losses on equity
securities and foreign currency translation gains or losses that have been
reflected as a component of stockholders' equity and have not affected net loss.
The amount of income tax expense or benefit allocated to each component of
comprehensive loss is equivalent to the effective income tax rate in each of the
periods presented below. The following table summarizes the components of
comprehensive loss as of the balance sheet dates indicated (in thousands):
<Table>
<Caption>
OCTOBER 31,
-------------------------------
1999 2000 2001
-------- -------- ---------
Net loss............................................ $(39,224) $(15,422) $(179,753)
Change in unrealized gains (losses) on equity
securities, net of tax............................ -- 9,240 (14,557)
Change in foreign currency translation losses....... (1,951) (4,982) (2,246)
-------- -------- ---------
Total comprehensive loss, net............. $(41,175) $(11,164) $(196,556)
======== ======== =========
</Table>
F-14
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) CERTAIN BALANCE SHEET COMPONENTS
The components of certain balance sheet line items are as follows (in
thousands):
<Table>
<Caption>
OCTOBER 31,
--------------------
2000 2001
-------- ---------
OTHER CURRENT ASSETS:
Prepaid expenses.......................................... $ 33,541 $ 16,880
Other receivables and current assets...................... 25,664 14,490
-------- ---------
$ 59,205 $ 31,370
======== =========
PROPERTY AND EQUIPMENT:
Furniture and fixtures.................................... $ 95,027 $ 93,700
Computer equipment and software........................... 75,953 75,391
Land and improvements..................................... 9,897 9,184
-------- ---------
180,877 178,275
Less: accumulated depreciation............................ (97,200) (108,254)
-------- ---------
$ 83,677 $ 70,021
======== =========
UNEARNED REVENUE AND CUSTOMER DEPOSITS:
Unearned revenue.......................................... $129,835 $ 165,933
Customer deposits......................................... 5,610 1,554
-------- ---------
$135,445 $ 167,487
======== =========
ACCRUED LIABILITIES:
Compensation and related accruals......................... $ 95,410 $ 62,223
Accrued income taxes...................................... 11,177 12,310
Other accrued costs....................................... 77,955 69,630
-------- ---------
$184,542 $ 144,163
======== =========
</Table>
Prepaid expenses, other receivables, and current assets consist primarily
of prepaid insurance, prepaid business partner commissions, international value
added tax receivables, and other miscellaneous receivables. Unearned revenue and
customer deposits consist primarily of annual maintenance renewals that are
recorded as unearned revenue when billed and amortized over the contract period.
Other accrued costs consist primarily of restructuring related liabilities,
accrued royalties, taxes payable, property tax accruals, rent accruals, and
other miscellaneous liabilities.
(3) BANK LINE OF CREDIT
In July 2001, the Company renewed its $100 million revolving line of credit
with a syndication of banks expiring in July 2002. Any advances under the line
of credit will be secured by the Company's eligible accounts receivable.
Borrowing availability under the line of credit is determined by certain
factors, including the eligible accounts receivable, cash and investment
balances, and cash flow generation. The line of credit requires the Company's
compliance with certain affirmative and negative covenants and representations
and warranties. At October 31, 2001, the Company was in compliance with these
covenants and representations and warranties, had access to the entire loan
commitment, and there were no borrowings outstanding.
(4) COMMON SHARES SUBJECT TO REPURCHASE
The Company has a stock repurchase plan, which was designed to partially
offset the effects of share issuances under the stock option plans and Employee
Stock Purchase Plan (ESPP). In August 1999, the
F-15
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's Board of Directors authorized the repurchase of up to 8.0 million
shares of J.D. Edwards' common stock under this plan. The actual number of
shares that are purchased and the timing of the purchases are based on several
factors, including the level of stock issuances under the stock plans, the price
of the Company's stock, general market conditions, and other factors. The stock
repurchases may be effected at the Company's discretion through forward
purchases, put and call transactions, or open market purchases.
During fiscal 2000, the Company entered into forward contracts for the
purchase of approximately 5.2 million common shares in accordance with the share
repurchase plan, and the Company settled contracts for the purchase of
approximately 2.5 million shares for a total of $90.5 million in cash. At
October 31, 2000, the Company held forward contracts requiring the future
purchase of approximately 2.7 million shares of common stock at an average
redemption price of $32.17 per share. These forward purchase contracts required
full physical settlement, and the aggregate redemption cost of $89.1 million and
was included in the accompanying balance sheet in temporary equity with a
corresponding decrease in additional paid-in capital. There were no outstanding
forward contracts that required the future purchase of common stock as of
October 31, 2001. During fiscal 2001, the Company executed settlements of all
forward contracts to purchase approximately 5.0 million of J.D. Edwards shares
for $94.4 million in cash, which included contracts for 2.2 million shares, that
upon settlement, were sold to a counter-party with whom the Company
simultaneously entered into forward contracts to repurchase the shares at a
later date. At October 31, 2001, approximately 1.7 million of the repurchased
shares have been reissued to fund the Company's ESPP and the discretionary
401(k) Plan contribution, and approximately 3.6 million remaining shares were
held as treasury stock to fund future stock issuances. As of October 31, 2000,
approximately 1.9 million remaining shares were held as treasury stock to fund
future stock issuances. The treasury shares are recorded at cost, and
reissuances are accounted for on the first-in, first-out method.
In accordance with the Emerging Issues Task Force (EITF) Issue No. 98-12,
"The Application of EITF Issue No. 96-13 'Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,' to
Forward Equity Sales Transactions," the forward purchase commitments for the
purchase of the shares under the contracts entered into during fiscal 2001 were
included in temporary equity prior to settlement of the contracts during fiscal
2001 with a corresponding decrease in additional paid-in capital and were
accreted to the redemption value over the twelve-month life of the forward
contracts. The accretion amount reduces net income (or increases a net loss)
allocable to common stockholders and related per share amounts for each period
until settlement occurs. For fiscal 2001, the accreted amount of interest did
not materially affect the net loss allocable to common stockholders or the
related per share amounts.
In March 2000, the EITF reached a consensus on the application of EITF
Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock" with Issue No. 00-7, "Equity
Derivative Transactions that Require Net Cash Settlement if Certain Events
Outside the Control of the Issuer Occur" (EITF 00-7). Under EITF 00-7, equity
derivatives that contain any provision that could require net cash settlement
(except upon the complete liquidation of the Company) must be marked to fair
value and any gains or losses are recognized through earnings. The EITF reached
a consensus on EITF 00-19 in September 2000 that addresses questions regarding
the application of EITF 00-7 and sets forth a model to be used to determine
whether equity derivative contracts could be recorded as equity. Under the
transition provisions of EITF 00-19, all contracts existing prior to the date of
the consensus were grandfathered until June 30, 2001, with cumulative catch-up
adjustment to be recorded at that time if still outstanding. There are no
outstanding contracts as of October 31, 2001; however, outstanding contracts as
of June 30, 2001 were in accordance with the requirements of EITF 00-19 for
equity instrument accounting.
F-16
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) EMPLOYEE RETIREMENT SAVINGS PLAN AND STOCK-BASED BENEFIT PLANS
Employee Retirement Savings Plan (401(k) Plan)
The Company established the 401(k) Plan subject to the provisions of the
Employee Retirement Income Security Act of 1974 in 1988 and made certain
amendments during fiscal 1998. The retirement savings plan is an Internal
Revenue Code Section 401(k) plan, commonly known as a salary reduction
retirement plan. The Company merged the U.S. employee portion of its Employee
Stock Ownership Plan (ESOP) into the 401(k) Plan in August 1998.
Employees are eligible to participate in the 401(k) Plan on the first day
of the calendar quarter following one complete calendar month of service. The
401(k) Plan allows for both matching and discretionary contributions. Generally,
the Company matches 50% of an employee's eligible contributions to the 401(k)
Plan, up to a maximum match of 3% of eligible compensation for each calendar
year. Employees must complete 1,000 hours of service and be employed by the
Company on the last day of the calendar year to receive the matching
contribution, which is fully vested when made for all participants. The Company
recognized expense for matching contributions of $4.2 million, $6.2 million, and
$5.8 million for fiscal 1999, 2000, and 2001 respectively. Discretionary
contributions to the 401(k) Plan are subject to a five-year vesting schedule
based on number of years of service with the Company. In fiscal 2000 and 2001,
the Company accrued $3.1 million and $4.4 million, respectively, for
discretionary contributions to be made in Company common stock.
Equity Incentive Plans
In August 1997, the Company established an Equity Incentive Plan (the 1997
Plan). A total of 10,000,000 shares of common stock are reserved for issuance
under the 1997 Plan, of which 9,606,285 and 10,000,000 were available for grant
as of October 31, 2000 and 2001, respectively. The number of shares of common
stock reserved for issuance is increased on each anniversary date of the
adoption of the 1997 Plan by a number of shares equal to the number of shares
needed to restore the maximum aggregate number of shares to 10,000,000 or a
lesser amount determined by the Company's Board of Directors. The 1997 Plan
provides for the granting of incentive stock options to employees and the
granting of non-statutory stock options and stock purchase rights to employees,
directors, and consultants.
In November 1992, the Company established an Incentive Stock Option Plan
and a Nonqualified Stock Option Plan (the 1992 Option Plans). The options that
were granted vest over a period of time ranging from four to five years with a
term of not more than 10 years. A total of 35 million shares of common stock are
authorized for issuance under the 1992 Option Plans, of which 13,888,000 and
14,132,419 shares were available for grant as of October 31, 2000 and 2001,
respectively. The Company does not anticipate granting additional options under
the 1992 Option Plans.
Employee Stock Purchase Plans
In August 1997, the Company established the Employee Stock Purchase Plan
(ESPP). A total of 2,000,000 shares of common stock were reserved for issuance
under the ESPP. An annual increase is made to the ESPP on each anniversary date
of the plan in an amount equal to the number of shares of common stock required
to restore the maximum number of shares reserved for issuance to 2,000,000
shares, or a lesser amount determined by the Company's Board of Directors.
Eligible employees may purchase common stock totaling up to 10% of an employee's
compensation through payroll deductions. The ESPP for U.S. employees is intended
to qualify under Section 423 of the Internal Revenue Code. The price of common
stock to be purchased is 85% of the lower of the fair market value of the common
stock on the first or last day of each purchase period. During the years ended
October 31, 2000 and 2001, a total of 1,085,744 and 957,747 shares,
respectively, were issued under the ESPP, generating total proceeds to the
Company of $15.3 million and
F-17
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$12.0 million, respectively. At October 31, 2001, a total of $2.6 million had
been withheld from employees' payroll for the purchase offering period ending on
December 31, 2001. Subsequent six-month purchase offering periods will commence
on January 1, 2002, and June 1, 2002.
Stock-Based Compensation
The Company records compensation expense related to its stock plans using
the intrinsic value based method and discloses a pro forma compensation value
measured using the fair value accounting method. Generally, stock options are
granted with an exercise price equal to the fair value at the date of grant. For
the fair value disclosure below, compensation value is estimated for each option
grant under the 1992 Option Plans and 1997 Plan on the date of grant using a
Black-Scholes option pricing model. Based on the calculations using a
Black-Scholes valuation model, the weighted-average grant date fair value of
options was $10.65, $9.73, and $6.78 in fiscal 1999, 2000, and 2001,
respectively. The weighted-average grant date fair value of shares issued
through the ESPP in fiscal 1999, 2000, and 2001 was $8.91, $7.35, and $5.41,
respectively.
The following weighted-average assumptions were used for grants in fiscal
1999, 2000, and 2001:
<Table>
<Caption>
STOCK-BASED EXPECTED LIFE EXPECTED RISK-FREE
COMPENSATION (IN YEARS) VOLATILITY INTEREST RATE
- ------------ ------------- ---------- -------------
Options:
1999............................................. 3.38 60% 4.64%
2000............................................. 3.32 71% 6.23%
2001............................................. 3.38 75% 4.49%
ESPP:
1999............................................. 0.53 60% 4.63%
2000............................................. 0.50 71% 5.14%
2001............................................. 0.50 75% 5.99%
</Table>
The pro forma impact on the Company's net income or loss and net income or
loss per share had compensation expense been recorded as determined under the
fair value method is shown below (in thousands, except per share data):
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
-------------------------------
1999 2000 2001
-------- -------- ---------
Net loss:
As reported....................................... $(39,224) $(15,422) $(179,753)
Pro forma......................................... (73,421) (52,130) (215,529)
Basic and diluted net loss per share:
As reported....................................... (0.37) (0.14) (1.61)
Pro forma......................................... (0.70) (0.48) (1.93)
</Table>
F-18
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity of the 1992 Option Plans and 1997 Plan is summarized in the
following table:
<Table>
<Caption>
WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE OPTIONS AVERAGE
SHARES EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- -------------- ----------- --------------
Options outstanding, October 31, 1998....... 16,792,916 $14.40 4,478,186 $ 4.17
Options granted............................. 5,975,428 23.29
Less: options exercised..................... (2,937,932) 4.06
Less: options forfeited..................... (1,513,327) 22.75
----------
Options outstanding, October 31, 1999....... 18,317,085 18.25 6,381,692 11.29
Options granted............................. 10,203,179 18.45
Less: options exercised..................... (4,270,704) 6.22
Less: options forfeited..................... (3,438,149) 25.56
----------
Options outstanding, October 31, 2000....... 20,811,411 19.59 6,536,434 18.53
Options granted............................. 5,197,922 13.27
Less: options exercised..................... (2,154,252) 6.46
Less: options forfeited..................... (4,559,746) 22.23
----------
Options outstanding, October 31, 2001....... 19,295,335 18.73 8,738,884 21.33
==========
</Table>
The status of total stock options outstanding and exercisable under the
1992 Option Plans and 1997 Plan as of October 31, 2001, follows:
<Table>
<Caption>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS
------------------------------------- EXERCISABLE
WEIGHTED- ---------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
- ------------------------ ---------- ------------ --------- --------- ---------
$ 2.66-3.44.................. 580,462 2.6 $ 3.09 580,462 $ 3.09
6.24-9.31.................. 1,223,078 5.1 6.69 898,205 6.24
9.50-13.69.................. 8,885,555 6.8 11.63 1,965,192 10.80
14.75-21.94.................. 725,735 6.6 17.69 345,664 17.62
22.38-33.13.................. 5,383,699 5.5 25.73 3,007,042 25.47
33.94-44.88.................. 2,496,806 4.3 38.71 1,942,319 38.68
---------- ---------
2.66-44.88.................. 19,295,335 5.9 18.73 8,738,884 21.33
========== =========
</Table>
F-19
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
Income or loss before income taxes consists of the following, and the
components of the provision for or benefit from income taxes are as follows (in
thousands):
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
Income (loss) before income taxes:
Domestic........................................... $ (3,738) $ 2,150 $(33,614)
Foreign............................................ (44,427) (22,782) (14,706)
-------- -------- --------
$(48,165) $(20,632) $(48,320)
======== ======== ========
Components of the provision for (benefit from) income
taxes:
Current:
U.S. Federal.................................... $ (2,258) $ 1,349 $ 541
State........................................... 276 80 209
Foreign......................................... 11,576 7,411 8,136
-------- -------- --------
9,594 8,840 8,886
Deferred:
U.S. Federal.................................... (13,098) (13,700) 106,554
State........................................... (1,552) (1,109) 10,548
Foreign......................................... (3,885) 759 5,445
-------- -------- --------
(18,535) (14,050) 122,547
-------- -------- --------
Total provision for (benefit from) income taxes...... $ (8,941) $ (5,210) $131,433
======== ======== ========
</Table>
The provisions for or benefit from income taxes are different from the
amounts computed by applying the U.S. federal statutory rate to income before
income taxes. The amounts are reconciled as follows (in thousands):
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
-----------------------------
1999 2000 2001
-------- ------- --------
Statutory rate........................................ $(16,858) $(7,221) $(16,912)
Foreign income taxed at higher rates.................. 6,752 7,268 3,097
Non-deductible expenses/non-taxable income............ (3,015) (1,244) 2,443
State income taxes, net of U.S. Federal benefit....... (830) (470) (1,141)
Income tax credits.................................... (4,983) (4,594) (7,354)
Other................................................. 1,113 1,051 (26)
Acquisition-related permanent differences............. 8,880 -- --
Valuation allowance................................... -- -- 151,326
-------- ------- --------
Provision for (benefit from) income taxes............. $ (8,941) $(5,210) $131,433
======== ======= ========
</Table>
The company received a tax deduction for compensation in excess of
compensation expense recognized for financial purposes. Such benefit arises from
an increase in the market price of the stock under employee option agreements
between the measurement date (as defined in APB No. 25, "Accounting for Stock
Issued to Employees") and the date at which the compensation deduction for
income tax purposes is determinable. Additional paid-in capital was increased by
$22.5 million for fiscal 2000 and is included in the accompanying consolidated
statement of changes in stockholders' equity.
F-20
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities included in the balance sheet are
comprised of the following components (in thousands):
<Table>
<Caption>
OCTOBER 31,
--------------------
2000 2001
-------- ---------
Deferred tax assets:
Revenue deferred for book purposes........................ $ 2,879 $ 809
Foreign tax credit carryforwards.......................... 14,624 18,159
Allowance for doubtful accounts........................... 3,226 3,856
Vacation and other accruals............................... 13,600 12,470
Fixed assets.............................................. 961 389
Research and development credit carryforward.............. 7,120 12,198
Net operating loss carryforwards.......................... 104,387 121,440
Currency translation adjustment........................... 3,929 4,773
-------- ---------
Other..................................................... 5,278 11,436
-------- ---------
Total deferred tax assets......................... 156,004 185,530
Deferred tax liabilities:
Capitalized software development costs.................... (9,673) (2,853)
Revenue deferred for tax.................................. (8,362) (7,789)
Other..................................................... (6,682) (324)
-------- ---------
Total deferred tax liabilities.................... (24,717) (10,966)
Less valuation allowance.................................... (9,651) (174,564)
-------- ---------
Net deferred tax asset...................................... $121,636 $ --
======== =========
Deferred taxes in other current assets...................... $ (901) $ --
Non current portion of deferred taxes....................... 122,537 --
-------- ---------
Net deferred tax asset...................................... $121,636 $ --
======== =========
</Table>
The Company has a U.S. net operating loss carryforward (NOL) of
approximately $309.1 million, of which $121.2 million will expire in 2018, $52.5
million will expire in 2019, $69.0 million will expire in 2020 and $66.4 million
will expire in 2021. The Company has available approximately $18.2 million of
foreign tax credit carryforwards, of which $.5 million will expire in 2002, $4.8
million will expire in 2003, $8.4 million will expire in 2004, $1.6 million will
expire in 2005, and $2.9 million will expire in 2006. Additionally, a research
and development credit carryforward of approximately $12.2 million is available,
of which $3.5 million will expire in 2019, $4.6 million will expire in 2020, and
$4.1 million will expire in 2021.
The Company has deferred tax assets of $174.5 million before valuation
allowance at October 31, 2001, against which the Company has recorded a full
valuation allowance of $174.5 million. This valuation allowance was recorded
after considering a number of factors, including the Company's cumulative
operating losses in fiscal 1999, 2000, and 2001. Based on the weight of both
positive and negative evidence regarding the recoverability of deferred tax
assets, the Company concluded that a valuation allowance was required to fully
offset the net deferred tax assets, as it is more likely than not that the
deferred tax assets will not be realized. Included in the deferred tax asset
balance at October 31, 2001, are approximately $121.4 million in tax-effected
net operating losses (NOLs). Approximately $84.4 million of the deferred tax
asset related to NOLs was generated from the benefit from employee stock plans.
Realization of the deferred tax asset associated with the NOLs is dependent on
generating sufficient taxable income to utilize the NOLs prior to their
expiration.
F-21
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At October 31, 2001, and October 31, 2000, unremitted earnings of foreign
subsidiaries totaled $1.1 million and $2.0 million, respectively, and were
deemed to be permanently invested. The unrecognized deferred tax liability for
such earnings is immaterial.
(7) RESTRUCTURINGS AND OTHER RELATED CHARGES
Fiscal 2000 Restructuring
Overview. During fiscal 2000, the Company's Board of Directors approved a
global restructuring plan to reduce the Company's operating expenses and
strengthen both its competitive and financial positions. Overall expense
reductions were necessary both to lower the Company's existing cost structure
and to reallocate resources to pursue its future operating strategies. The
restructuring plan was precipitated by declining gross margins and other
performance measures such as revenue per employee over several fiscal quarters,
as the Company's headcount and operating expenses grew at a faster rate than
revenue. The Company also had incurred operating losses in certain geographic
areas. Management effected the restructuring plan during the third quarter of
fiscal 2000 by eliminating certain employee positions, reducing office space and
related overhead expenses, and modifying the Company's approach to providing
certain services for customers. Restructuring and related charges primarily
consisted of severance-related costs for the involuntarily terminated employees,
operating lease termination payments, and office closure costs. The majority of
the restructuring activity occurred during the second half of fiscal 2000, and
remaining actions, such as office closures or consolidations and lease
terminations, were completed within a one-year time frame.
Employee severance and termination costs. The Company paid termination
salaries, benefits, stock compensation, outplacement, and other related costs to
the employees involuntarily terminated worldwide. The total workforce reduction
was effected through a combination of involuntary terminations and reorganizing
operations to permanently eliminate open positions resulting from normal
employee attrition.
Specifically targeted were areas with opportunities for more efficient
processes that would reduce staffing, where operations were generating losses,
or where redundancy existed. The Company decreased its workforce by a total of
775 employees across most geographic areas and functions of its business,
including administrative, professional, and management positions. All employee
terminations occurred during the third quarter of fiscal 2000, although a
limited number of involuntarily terminated employees continued to provide
transitional services to the Company (generally 30 to 60 days from the
termination date). Salary and benefits earned during the transition period were
not included in the restructuring charge, and severance packages were only
provided to the 688 involuntarily terminated employees. The employee severance
and termination costs included $1.3 million in non-cash charges.
F-22
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the number of employee positions eliminated
in accordance with the restructuring plan by geographic region and function:
<Table>
GEOGRAPHIC REGION:
United States............................................... 472
Asia Pacific................................................ 143
EMEA........................................................ 96
Canada and Latin America.................................... 64
---
Total............................................. 775
===
FUNCTION:
Sales and marketing......................................... 265
Consulting and technical support............................ 208
Research and development.................................... 100
Training services........................................... 80
Finance, human resources, legal, and other general and 63
administrative............................................
Information technology...................................... 33
Customer support and product delivery....................... 26
---
Total............................................. 775
===
</Table>
Office closures. In addition to the decrease in employee positions, the
restructuring plan provided for reduction in office space and related overhead
expenses. Office and training facility closure and consolidation costs are the
estimated costs to close specifically identified facilities, costs associated
with obtaining subleases, lease-termination costs, and other related costs, all
of which are in accordance with the restructuring plan. The Company closed or
consolidated several offices worldwide, including offices in Denver, Colorado,
and regional offices in the U.S., Europe, and the Asia Pacific region. During
the third quarter of fiscal 2000, the majority of Denver-based personnel were
consolidated into the main corporate headquarters campus, with the remaining
moves completed within one year. Other significant reductions, such as those
that occurred in Japan and certain European countries, were substantially
completed during fiscal 2000.
The Company also closed or downsized several underutilized training
facilities in order to modify its education approach. Certain regional
facilities -- including Denver, Colorado; Chicago, Illinois; Dallas, Texas;
Secaucus, New Jersey; Rutherford, New Jersey; and Toronto, Canada -- were
closed, downsized, or significantly reduced. These closures and reductions were
completed in December 2000.
Operating lease buyouts. Operating lease buyouts and related costs are the
actual or estimated costs associated with the early termination of leases for
computer equipment, phones, and automobiles that were no longer necessary for
operations due to the reduced workforce and facilities.
Asset disposal losses and other costs. During fiscal 2000, the Company
wrote off certain assets, consisting primarily of leasehold improvements,
computer equipment, and furniture and fixtures that were deemed unnecessary due
to the reduction in workforce. These assets were taken out of service and
disposed of during fiscal 2000. During the last half of fiscal 2000, the Company
incurred other expenses of $557,000 related to additional asset write-offs,
consolidation of office space, and relocation of employees.
The Company has completed all actions related to this restructuring as of
April 30, 2001. An outstanding accrual of $2.9 million remained at October 31,
2001, primarily consisting of lease obligations for office and training
facilities closed and consolidated, which will be paid over the remaining lease
terms and unsettled employee termination costs.
F-23
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
EMPLOYEE TOTAL
SEVERANCE & OPERATING RESTRUCTURING ASSET DISPOSAL RESTRUCTURING
SUMMARY OF FISCAL 2000 RESTRUCTURING ACCRUAL TERMINATION OFFICE LEASE COSTS LOSSES AND AND RELATED
ACTIVITY (IN THOUSANDS): ACCRUAL CLOSURES BUYOUTS SUBTOTAL OTHER COSTS CHARGES
- -------------------------------------------- ----------- -------- --------- ------------- -------------- -------------
Consolidated charge, July 31, 2000..... $ 16,683 $12,667 $ 647 $ 29,997 $ 116 $ 30,113
Fiscal 2000 cash payments.............. (15,487) (4,154) (223) (19,864) (557) (20,421)
Fiscal 2000 adjustments................ (342) (2,696) -- (3,038) 941 (2,097)
-------- ------- ----- -------- ------- --------
Accrual balance, October 31, 2000.... 854 5,817 424 7,095 500 7,595
Fiscal 2001 cash payments.............. (485) (2,693) (237) (3,415) (382) (3,797)
Fiscal 2001 asset disposals............ -- -- -- -- (1,078) (1,078)
Fiscal 2001 restructuring adjustments... (134) (306) (187) (627) 960 333
Fiscal 2001 operational adjustments.... (132) -- -- (132) -- (132)
-------- ------- ----- -------- ------- --------
Accrual balance, October 31, 2001.... $ 103 $ 2,818 $ -- $ 2,921 $ -- $ 2,921
======== ======= ===== ======== ======= ========
</Table>
Reductions in accrual amounts will continue to occur until all remaining
obligations have been settled by 2007. The Company recorded adjustments to
decrease the restructuring accrual by $627,000 during fiscal 2001. The
adjustments are primarily a result of the final amount of operating lease
buyouts being effectively reduced from the original estimate and successful
elimination of further rental obligations on office closures earlier in the
fiscal year. Additionally, the provision was reduced, resulting from favorable
negotiations and reduced obligations surrounding employee termination costs.
Cost true-ups subsequent to April 30, 2001, related to the fiscal 2000
restructuring will be recorded through normal operations with no impact on the
restructuring charge.
Fiscal 2001 Restructuring
Overview. During the second and third quarters of fiscal 2001, the
Company's Board of Directors approved a two-phased global restructuring plan
(referred to as the fiscal 2001 restructuring plan) precipitated by the
Company's operating losses, lower employee productivity levels, and the general
economic downturn. Actions included the elimination of certain employee
positions in order to reduce the total workforce and the computer equipment
either owned or leased for employee use, and the closure or consolidation of
some operating facilities. The fiscal 2001 restructuring plan consists of two
phases (Phase I and Phase II), initiated during the second and third quarters of
fiscal 2001, respectively. The Company expects that the remaining actions, such
as office closures or consolidations and lease terminations, will be completed
within a one-year time frame.
Employee severance and termination costs. The Company paid termination
salaries, benefits, outplacement, and other related costs to employees
terminated in the second and third quarters of fiscal 2001. Specifically
targeted were areas with opportunities for increasing the management span of
control by improving staffing ratios, reducing layers of management, and
eliminating non-essential functions. The Company decreased its workforce by a
total of 34 employee positions during Phase I and 364 employee positions during
Phase II across administrative, professional, and management positions and
various functions of the Company's business. All employee terminations as part
of Phase I occurred during the second quarter of fiscal 2001, and all employee
terminations as part of Phase II occurred during the third quarter of fiscal
2001. A limited number of terminated employees continued to provide transitional
services to the Company (generally 30 to 60 days from the termination date).
Salary and benefits earned during the transition period were not included in the
restructuring charge.
F-24
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the number of employee positions eliminated
in accordance with the fiscal 2001 restructuring plan by geographic region and
function:
<Table>
GEOGRAPHIC REGION:
United States(1)............................................ 265
Asia Pacific................................................ 39
EMEA Asia Pacific........................................... 56
Canada and Latin America(1)................................. 38
---
Total............................................. 398
===
FUNCTION:
Sales and marketing(2)...................................... 150
Consulting and information technology(2).................... 110
Research and development.................................... 24
Education services(2)....................................... 16
Finance, human resources, legal, and other general and 49
administrative............................................
Customer support and product delivery....................... 49
---
Total............................................. 398
===
</Table>
- ---------------
(1) Phase I eliminated 18 employee positions in the United States and 16
employee positions in Canada and Latin America.
(2) Phase I eliminated 25 employee positions in sales and marketing, 8 in
consulting and information technology, and 1 in education services.
Operating lease buyouts. In accordance with the fiscal 2001 restructuring
plan, operating lease buyouts and related costs are the actual or estimated
costs associated with the early termination of leases for personal computer
equipment and equipment in training facilities or technology labs that were no
longer necessary for operations due to the reduced workforce and the closure or
consolidation of those training facilities or technology labs.
Office closures. In addition to the decrease in employee positions, Phase
II of the fiscal 2001 restructuring plan provided for reduction in specific
office space, underutilized training facilities, and related overhead expenses.
Office and training facility closure and consolidation costs are the estimated
costs to close specifically identified facilities, costs associated with
obtaining subleases, lease termination costs, and other related costs, all of
which are in accordance with the fiscal 2001 restructuring plan. The Company
closed or consolidated several offices worldwide, including offices in Denver,
Colorado, and regional offices in the U.S., Europe, and the Asia Pacific region.
All office consolidations and closures are expected to be completed no later
than April 2002.
Asset disposal losses and other costs. During fiscal 2001, the Company
wrote off certain assets, consisting primarily of leasehold improvements,
computer equipment, and furniture and fixtures that were deemed unnecessary due
to the reduction in workforce as part of Phase II of the fiscal 2001
restructuring plan. These assets were taken out of service and disposed of
during the second half of fiscal 2001.
F-25
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fiscal 2001 restructuring costs. The following table summarizes the
components of the Phase I and Phase II restructuring charge, the payments made
during the periods presented, and the remaining accrual as of October 31, 2001,
by geographic region:
<Table>
<Caption>
ASSET
SUMMARY OF FISCAL 2001 DISPOSAL TOTAL
RESTRUCTURING EMPLOYEE RESTRUCTURING LOSSES AND RESTRUCTURING
CHARGE AND PAYMENTS (IN SEVERANCE & OFFICE OPERATING LEASE COSTS OTHER AND RELATED
THOUSANDS): TERMINATION COSTS CLOSURES BUYOUTS SUBTOTAL COSTS CHARGES
- ----------------------- ----------------- -------- --------------- ------------- ---------- -------------
Phase I:
United States................ $ 1,412 $ -- $ 28 $ 1,440 $ -- $ 1,440
Canada and Latin America..... 694 -- 22 716 -- 716
------- ------- ------ ------- ------- -------
Consolidated Phase I charge,
quarter- ended April 30,
2001....................... 2,106 -- 50 2,156 -- 2,156
Second quarter cash
payments................... (574) -- -- (574) -- (574)
------- ------- ------ ------- ------- -------
Accrual balance, April 30,
2001..................... 1,532 -- 50 1,582 -- 1,582
------- ------- ------ ------- ------- -------
Third quarter cash
payments................... (1,031) -- -- (1,031) -- (1,031)
Third quarter adjustment..... (280) -- -- (280) -- (280)
------- ------- ------ ------- ------- -------
Accrual balance, July 31,
2001....................... 221 -- 50 271 -- 271
------- ------- ------ ------- ------- -------
Fourth quarter cash
payments................... (232) -- (50) (282) -- (282)
Fourth quarter adjustments... 11 -- -- 11 -- 11
------- ------- ------ ------- ------- -------
Accrual balance, October
31, 2001................. -- -- -- -- -- --
------- ------- ------ ------- ------- -------
Phase II:
United States................ 4,031 8,755 1,396 14,182 1,959 16,141
EMEA......................... 1,848 997 71 2,916 49 2,965
Canada, Asia Pacific, and
Latin America.............. 1,416 1,144 20 2,580 331 2,911
------- ------- ------ ------- ------- -------
Consolidated Phase II charge,
quarter-ended July 31,
2001....................... 7,295 10,896 1,487 19,678 2,339 22,017
Third quarter cash
payments................... (6,349) (552) (296) (7,197) -- (7,197)
Third quarter asset
disposals.................. -- -- -- -- (2,339) (2,339)
------- ------- ------ ------- ------- -------
Accrual balance, July 31,
2001..................... 946 10,344 1,191 12,481 -- 12,481
------- ------- ------ ------- ------- -------
Fourth quarter cash
payments................... (786) (1,190) (885) (2,861) -- (2,861)
Fourth quarter asset
disposals.................. -- -- -- -- (1,086) (1,086)
Fourth quarter adjustments... 108 190 -- 298 1,086 1,384
------- ------- ------ ------- ------- -------
Accrual balance, October
31, 2001................. 268 9,344 306 9,918 -- 9,918
------- ------- ------ ------- ------- -------
Phase I and Phase II
combined:
Accrual balance, July 31,
2001..................... $ 1,167 $10,344 $1,241 $12,752 $ -- $12,752
======= ======= ====== ======= ======= =======
Accrual balance, October
31, 2001................. $ 268 $ 9,344 $ 306 $ 9,918 $ -- $ 9,918
======= ======= ====== ======= ======= =======
</Table>
Fiscal 2001 exit from certain reseller agreements. Management reviewed the
Company's business alliances during fiscal 2001. As a result of this review, the
Company decided to exit certain reseller arrangements for which prepaid royalty
balances existed. The Company wrote off $12.8 million in prepaid royalties
associated with these third-party agreements, and $7.8 million of capitalized
third-party products resulting from a change in strategy related to a portion of
the Company's XPI product. These charges are included in cost of license fees on
the accompanying consolidated statement of operations.
F-26
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Adjustments. The Company recorded immaterial adjustments to the
restructuring provision during fiscal 2001.
(8) ACQUISITIONS
All of the Company's business acquisitions have been accounted for using
the purchase method, and, accordingly, the total purchase price of each acquired
company was allocated to the acquired assets and liabilities at their fair
values as of the closing date of the acquisition. For purposes of allocating the
purchase price to the identified acquired assets, the term "fair value" is
defined as fair market value, or the price at which an asset would change hands
between a willing buyer and a willing seller when the former is not under any
compulsion to buy and the latter is not under any compulsion to sell, and both
parties are able, as well as willing, to trade and are well-informed about the
asset and the market for that asset. The Company's consolidated statements of
operations do not include any revenue or expenses related to the acquisitions
prior to their closing dates.
The Premisys Corporation. On February 26, 1999, the Company completed its
acquisition of The Premisys Corporation, a privately held Illinois corporation
that provides visual configuration software and consulting services. Technology
acquired from The Premisys Corporation is being integrated with OneWorld, the
Company's multi-platform software. The purchase price was paid with a
combination of J.D. Edwards' common stock and cash. The acquisition was
accounted for as a purchase, and the purchase price of $7.1 million was
allocated to the acquired assets and liabilities at their fair values as of
February 26, 1999. Acquired intangible assets consisted of $2.4 million of
capitalized software and $5.0 million of in-place workforce, including a gross
up for deferred taxes. Additionally, $2.1 million was allocated to IPR&D.
Additional consideration of $3.8 million was paid in fiscal 2001 and recorded as
compensation expense from March 1999 through the second quarter of fiscal 2001.
Pro forma results of operations as though the companies had combined at the
beginning of fiscal 1998 and fiscal 1999, the two most recently completed fiscal
years at the time of acquisition, would not be materially different from
reported results and therefore have been omitted.
As of the date of acquisition of The Premisys Corporation, major
enhancements of the CustomWorks product were underway. Additionally, The
Premisys Corporation and J.D. Edwards began developing an interface between
CustomWorks and OneWorld under a Product Alliances Partner Agreement entered
into by the two companies in August 1997. Technology acquired in the Company's
purchase of The Premisys Corporation is now functionally integrated with
OneWorld, and the integrated version was released in August 2000.
The percentage completion variation of the income approach was used to
value the IPR&D from The Premisys Corporation acquisition based on projected
revenue and expenses likely to be realized. However, both a replacement cost
approach and market approach also were considered and provided further support
for the valuation. The percentage of completion for the in-process technology
was based on the development expense spent as of the valuation date as a
percentage of the total required development expense. The financial projections
include revenue from license fees, implementation, and consulting services and
maintenance, along with costs of the revenue components, major operating expense
categories, and income taxes for fiscal 1999 through fiscal year 2003. Charges
for other assets were also deducted, including a royalty for the core
technology, fixed assets, working capital, and other intangibles. Income taxes
were deducted at the estimated effective tax rate for the company. A discount
rate of 21% was deemed appropriate for the level of risk associated with the
development projects. This rate was used over the economic life to calculate the
net present value for the developed and in-process technology.
The financial model used in the valuation anticipated revenue growth
consistent with the historical and projected results of competitors, as well as
general market expectations for the supply chain management space and front
office applications, such as CustomWorks. Operating expense assumptions showed
significant
F-27
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increases, gradually falling in line with industry averages consistent with
established enterprise and supply chain solutions providers. Accordingly, the
operating margin in the financial model is expected to grow over fiscal 2000 and
fiscal 2001, but then gradually decline as the developed and in-process products
mature.
Numetrix Ltd. On June 16, 1999, the Company completed an acquisition of
privately held Numetrix Ltd. (Numetrix), a Toronto-based provider of
Internet-enabled supply chain planning software. Numetrix's product suite was
integrated with the Company's existing enterprise application solutions to link
customers, suppliers, and trading partners in collaborative enterprise networks
and is also being sold separately. The purchase price was paid in cash and
consisted of $83.0 million for outstanding common and preferred shares of
Numetrix. The Company incurred direct costs related to the transaction totaling
$5.2 million. Additionally, the Company repaid debt and assumed net liabilities
from Numetrix totaling $10.6 million. The total purchase price of $98.8 million
was allocated to the acquired assets and liabilities at their fair values as of
June 16, 1999. The acquired intangible assets consisted of capitalized software
valued at $32.8 million, the in-place workforce valued at $5.3 million, and the
existing customer base valued at $19.9 million. The remaining excess purchase
price of $16.4 million was recorded as goodwill. Additionally, $24.0 million of
the purchase price was allocated to IPR&D.
Pro forma results of operations have been prepared as though the companies
had combined at the beginning of fiscal 1998 and fiscal 1999, the two most
recently completed fiscal years at the time of acquisition. These unaudited pro
forma results of operations have been prepared for comparative purposes only and
include certain adjustments, including the write-off of IPR&D, additional
amortization expense as a result of goodwill and other intangibles, interest,
and income tax adjustments. Giving effect to such adjustments as of the
beginning of the fiscal year ended October 31, 1998, pro forma total revenue,
net income, and diluted net income per share were $961.1 million, $35.0 million,
and $0.32, respectively. Reflecting these same adjustments as of the beginning
of the fiscal year ended October 31, 1999, pro forma total revenue, net loss,
and net loss per share were $957.1 million, $51.9 million, and $0.49,
respectively. This information is not intended to be indicative of the results
of operations that would have actually resulted had the acquisitions occurred at
the beginning of the period presented or of results for any future period.
The Company retained an independent appraiser to assist with assigning fair
values to the intangible assets. The valuations relied on methodologies that
most closely related the fair market value assignment with the economic benefits
provided by each asset and the risks associated with the assets. In valuing both
the developed and in-process technology, an income-based approach was determined
to best quantify the economic benefits using projections of net cash flows and
the risks by applying an appropriate discount rate.
The Numetrix purchase agreement included provisions under which the Company
is able to make claims on funds held in escrow related to certain liabilities,
anticipated liabilities, and other representations and warranties made in the
purchase agreement. In June 2000, the Company notified the escrow agent of such
a claim. The amount that may be received from the claim cannot currently be
reasonably estimated.
The most significant in-process technology acquired was being designed by
Numetrix prior to the fiscal 1999 acquisition to provide an operational-level
planning and scheduling optimization solution targeted at discrete manufacturing
industries. Additionally, prior to the fiscal 1999 acquisition, a new
demand-planning module was in the process of design by Numetrix to enhance
enterprise-wide collaborative forecasting and address forecast reconciliation.
Both technologies were released in October 2000. Another in-process technology
of Numetrix, a collaborative enabler, is designed to efficiently interface the
messaging architecture among applications to allow real-time, alert-driven
collaboration. This technology is now part of J.D. Edwards' advanced planning
integration project.
Both the developed technology and in-process development valuations were
based primarily on an income approach that examined all projected revenue and
expenses attributable to the assets over the economic life of each. A variation
of the income approach that applies a percentage of completion calculation also
was used to
F-28
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value in-process technology, and this method was used for recording the fair
value of in-process development. In this approach, the research and development
costs to complete the in-process technology are not deducted as an expense.
However, the net cash flows are multiplied by the percentage of completion of
the technology. The percentage of completion was based on the development
expense spent as of the valuation date as a percentage of the total required
development expense for each new product and each new release of the existing
products.
The basis of the financial projections used in the valuation analysis was
management projections of the revenue and expenses likely to be realized by
Numetrix. Projected revenue was split between developed, in-process, and future
technology to be developed subsequent to the valuation date. The classification
of each research and development project as complete or under development was
made in accordance with the guidelines of SFAS No. 86, SFAS No. 2, and FASB
Interpretation No. 4. All expenses associated with those revenues were deducted,
including cost of goods sold, sales and marketing, general and administrative
expenses, and research and development expenses. Allocations of revenue and
expenses between developed, in-process, and future technology were based on the
development schedule of new products and new versions of existing products and
the estimated lines of code needed to complete each in-process product phase as
provided by Numetrix. Unless otherwise appropriate, these expenses were
allocated to developed, in-process, and future technology in the same ratio as
the revenue. An economic rent for use of other assets was deducted, including
the in-place workforce, working capital, fixed assets, trademark, and customer
base. A royalty rate for the proprietary Distributed Object Messaging
Architecture was deducted where appropriate for applications relying on this
existing technology. Income taxes were deducted at the estimated effective tax
rate for the company. An appropriate discount rate was applied to the projects
to calculate the net present value of the developed and in-process technology
over their economic lives.
The valuations used a discounted cash flow analysis of financial
projections over the estimated useful lives of the existing technology. After
the end of the projection period, no further revenue was assumed and no residual
value of the technologies was used. The projected revenue stream by
product -- developed, in-process, and future -- was determined by the existing
lines of software code and incremental lines of code for future releases of each
product. The discount rate was based on the weighted-average cost of capital
method and was determined to be 22.5% for Numetrix. This same rate was used for
valuing the IPR&D due to the level of risk, which was considered the same as
that for the company as a whole. A discount rate of 17.5% was used for developed
technology due to the lower level of risk.
Financial projections used to value the intangibles included breakdowns of
revenue from license fees, implementation and consulting services, and
maintenance, along with costs of the revenue components, major operating expense
categories, and income taxes for the current fiscal year through Numetrix's
fiscal year ending February 28, 2009. Based on historical data provided by
Numetrix management regarding the rate at which the code base for developed
technology would become obsolete, the expected replacement and augmentation of
existing software code for each product, as well as the rate at which
replacement technology would be developed, the projection period was deemed
appropriate. Significant changes were not anticipated from historical pricing or
gross margins. Management anticipated solid revenue growth consistent with
historical and projected results of competitors, as well as general market
expectations for the supply chain management space and especially Web-enabled
applications, such as those currently and expected to be offered by Numetrix.
Also, the discrete scheduling product targeted the much larger market of
mid-sized manufacturing companies in addition to the Company's traditional
market of Fortune 500 customers. Operating expenses were assumed to increase
significantly but, as a percentage of revenue, are projected to fall closer in
line with industry averages consistent with the major ERP providers, including
J.D. Edwards, Oracle, and SAP. Accordingly, the operating margin was assumed to
be at a break-even point in fiscal 1999 and gradually increase through the
fiscal year ending February 28, 2009.
F-29
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Australia/New Zealand business partner. On March 6, 2000, the Company
completed an acquisition of its long-standing business partner serving Australia
and New Zealand, J.D. Edwards New Zealand, Ltd. (JDE-NZ). In connection
therewith, the Company acquired the remaining 90% of JDE-NZ not previously
owned. Prior to the acquisition, the Company owned 10% of JDE-NZ. With this
acquisition, J.D. Edwards strengthened its sales and service operations and
expanded its reach into the Asia Pacific region. The integration of the two
companies is enabling J.D. Edwards to further leverage joint business and sales
channel strengths in Australia and New Zealand to better serve its customers,
while positioning the Company for greater market focus in the region.
The Company paid cash for the common shares of JDE-NZ not already owned by
the Company, making JDE-NZ a wholly owned subsidiary. The acquisition was
accounted for as a purchase during the second quarter of fiscal 2000.
Accordingly, the total purchase price of $13.0 million was allocated to the
acquired assets and assumed liabilities at their fair values as of the closing
date of the transaction. Pro forma results of operations as though the companies
had combined at the beginning of the two most recently completed fiscal years
would not be materially different from reported results and therefore have been
omitted.
Acquired assets include net tangible assets of $1.7 million and intangible
assets related to the in-place workforce, customer base, and goodwill of
approximately $3.8 million, $3.7 million, and $3.8 million, respectively. The
valuations of intangible assets were based on methodologies that most closely
related the fair market value assignment with the economic benefits provided by
each asset and the risks associated with the assets. A replacement cost approach
was determined to best quantify the in-place workforce. An income-based approach
was applied to value the economic benefits of the existing customer base using
projections of net cash flows and an appropriate discount rate was applied as a
factor of the associated risk. The intangible assets are being amortized on a
straight-line basis over their estimated useful lives of four years. The effect
of adjusting the cost basis of the Company's previous 10% investment to reflect
equity method accounting is insignificant.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which supersedes APB Opinion No. 16, "Business
Combinations." SFAS No. 141 requires that purchase method of accounting be used
for business combinations initiated after June 30, 2001, and eliminates the
pooling-of-interests method. In addition, SFAS No. 141 establishes specific
criteria for the recognition of intangible assets separately from goodwill and
requires unallocated negative goodwill to be written off immediately as an
extraordinary gain. The provisions of this statement apply to all business
combinations initiated after June 30, 2001, and applies to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001, or later. The adoption of SFAS No. 141 will not
change the method of accounting used by the Company in previous business
combinations.
(9) SALE OF PRODUCT LINE
In January 2000, the Company sold the assets of its homebuilding software
product line to a privately held provider of e-business, technology, and project
management systems. The buyer acquired all of the rights to the J.D. Edwards
homebuilder software, including its source code, contracts, license agreements,
maintenance agreements, and customer lists. The Company received $6.5 million in
a combination of cash and a promissory note secured by the software code and the
customer base. The Company allocated the total proceeds to the components of the
agreement and recognized a one-time gain of approximately $5.7 million as other
income during the first quarter of fiscal 2000. The secured promissory note
obligation was not collected when due; therefore, during the second quarter of
fiscal 2001 the Company recorded a reserve against the note receivable of $4.6
million in order to reduce the note to its net realizable value, based on the
fair value of the collateral. The loss is reflected in the accompanying
consolidated statement of operations in other income or expense for the fiscal
year ended October 31, 2001. As of October 31, 2001, the remaining $1.9 million
fair
F-30
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the collateral was included in software costs, in the accompanying
consolidated balance sheets, which is being amortized over a three-year period.
(10) SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company defines operating segments as
components of an enterprise for which discrete financial information is
available and is reviewed regularly by the chief operating decision-maker, or
decision-making group, to evaluate performance and make operating decisions. The
Company identified its chief operating decision-makers as three key
executives -- the Chief Executive Officer, Chief Operating Officer, and Chief
Financial Officer. This chief operating decision-making group reviews the
revenue and overall results of operations by geographic regions. The accounting
policies of the operating segments shown below are the same as those described
in the summary of significant accounting policies. Total revenue from each
country outside the U.S. was less than 10% of the Company's consolidated
revenue. The groupings shown below represent an aggregation of financial
information for countries meeting certain criteria, including economic
characteristics, similar customers, and the same products, services, and
distribution methods.
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
--------------------------------
1999 2000 2001
-------- ---------- --------
REVENUE FROM UNAFFILIATED CUSTOMERS:
United States....................................... $578,804 $ 652,279 $553,720
Europe, Middle East, and Africa..................... 224,601 196,841 176,753
Canada, Asia Pacific, and Latin America............. 140,826 151,945 143,507
-------- ---------- --------
Consolidated........................................ $944,231 $1,001,065 $873,980
======== ========== ========
INCOME (LOSS) FROM OPERATIONS:
United States....................................... $(24,808) $ (47,851) $(38,028)
Europe, Middle East, and Africa..................... (10,027) 35,451 39,914
Canada, Asia Pacific, and Latin America............. 3,243 5,949 19,919
IPR&D and amortization of acquired intangibles...... (35,629) (25,044) (27,388)
Write-off of certain third-party arrangements....... -- -- (20,566)
Restructuring and other related charges............. -- (28,016) (25,621)
-------- ---------- --------
Consolidated........................................ $(67,221) $ (59,511) $(51,770)
======== ========== ========
</Table>
(11) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space and equipment under various operating
leases. Rent expense for office space and equipment during fiscal 1999, fiscal
2000, and fiscal 2001 was $59.6 million, $74.8 million, and $64.2 million
respectively. The minimum future lease commitments under non-cancelable leases
as of
F-31
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
October 31, 2001 (including the operating leases for the Company's corporate
headquarters discussed below), are as follows (in thousands):
<Table>
<Caption>
FISCAL YEAR AMOUNT
- ----------- --------
2002..................................................... $ 52,883
2003..................................................... 40,720
2004..................................................... 36,612
2005..................................................... 14,248
2006..................................................... 7,289
Thereafter............................................... 15,012
--------
$166,764
========
</Table>
The Company leases its corporate headquarters office buildings under
operating leases. The corporate headquarters 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. At
October 31, 2001, management believes that the fair market value of the leased
property exceeds the original cost. The Company's lease obligations are based on
a return on the lessor's costs. Management can elect 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.
At October 31, 2000 and 2001, investments totaling $123.3 million and $67.2
million were designated as collateral for these leases, respectively. As a
result of the write-off of the Company's deferred tax asset in fiscal 2001, the
Company obtained a covenant compliance waiver related to the profitability
covenant from one of the syndicate banks that included the execution of an
amendment to the security agreement of one of the leased buildings designating
$16.0 million of the collateral as restricted cash and cash equivalents on the
accompanying consolidated balance sheets. During the first quarter of fiscal
2002, the Company executed subsequent amendments to the security agreements of
the remaining leased buildings designating an additional $19.4 million of the
collateral as restricted cash and cash equivalents, for a total restricted
amount of $35.4 million. The Company may withdraw the funds used as collateral
at its sole discretion, excluding the amounts classified as restricted, provided
that the Company is not in default under the lease agreements. Investments
designated as collateral, including a required coverage margin, are held in
separate investment accounts. At October 31, 2001, the Company was in compliance
with the covenants and representations and warranties required under the lease
agreement.
Legal Matters
On September 2, 1999, a complaint was filed in the U.S. District Court (the
Court) for the District of Colorado against the Company and certain of its
officers and directors. Two subsequent suits were later consolidated and an
Amended Consolidated Complaint (the Complaint) was filed on March 21, 2000. The
Complaint purported 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 alleged 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 was seeking to recover unspecified
compensatory damages on behalf of all purchasers of J.D. Edwards' common stock
during the class period.
The Company has reached a settlement in principle of these shareholder
class action lawsuits. The terms of the settlement are still being resolved but
management believes the final terms will not have a material adverse effect on
the Company's financial position, results of operations, or cash flows. The
negotiated settlement will be funded entirely with proceeds from the Company's
directors and officers' insurance policies. The final settlement agreement is
subject to Court approval and class notice provisions.
F-32
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is involved in certain other disputes and legal actions arising
in the ordinary course of its business. In management's opinion, none of such
other disputes and legal actions is expected to have a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
(12) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's quarterly financial information for fiscal 2000 and fiscal
2001 is as follows (in thousands, except per share data):
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- --------- --------
YEAR ENDED OCTOBER 31, 2000:
Total revenue............................. $231,706 $231,049 $ 261,116 $277,194
Less: costs and expenses................ 240,896 258,389 296,687 264,604
-------- -------- --------- --------
Operating income (loss)................... (9,190) (27,340) (35,571) 12,590
-------- -------- --------- --------
Income (loss) before income taxes......... (241) (3,703) (31,985) 15,297
Net income (loss)......................... $ (152) $ (2,333) $ (22,603) $ 9,666
======== ======== ========= ========
Net income (loss) per common share:
Basic................................... $ 0.00 $ (0.02) $ (0.21) $ 0.09
Diluted................................. $ 0.00 $ (0.02) $ (0.21) $ 0.08
YEAR ENDED OCTOBER 31, 2001:
Total revenue............................. $217,685 $216,662 $ 204,205 $235,428
Less: costs and expenses................ 227,960 230,510 252,836 214,444
-------- -------- --------- --------
Operating income (loss)................... (10,275) (13,848) (48,631) 20,984
-------- -------- --------- --------
Income (loss) before income taxes......... (6,950) (12,502) (50,501) 21,633
Net income (loss)......................... $ (4,379) $ (7,467) $(185,901) $ 17,994
======== ======== ========= ========
Net income (loss) per common share:
Basic................................... $ (0.04) $ (0.07) $ (1.65) $ 0.16
Diluted................................. $ (0.04) $ (0.07) $ (1.65) $ 0.16
</Table>
(13) SUBSEQUENT EVENTS (UNAUDITED)
On November 16, 2001, J.D. Edwards & Company completed its acquisition of
YOUcentric, Inc., a Charlotte, N.C. provider of Java-based customer relationship
management (CRM) software. J.D. Edwards acquired all of the issued and
outstanding capital stock of YOUcentric, valued at $86 million as calculated
under the terms of the Agreement and Plan of Reorganization (the Agreement). The
YOUcentric shareholders received $6.0 million in cash, and J.D. Edwards issued
7.7 million shares of its common stock. Pursuant to the Agreement, YOUcentric
became a wholly-owned subsidiary of J.D. Edwards. The completion of this
acquisition expands J.D. Edwards collaborative commerce software product
offerings and management believes the Company is now better positioned to
compete in the CRM market. The acquisition will be accounted for as a purchase
and, accordingly, the total purchase price of YOUcentric will be allocated to
the acquired assets, including goodwill and other intangible assets, and
liabilities at their fair values as of November 16, 2001. J.D. Edwards'
consolidated statement of operations will not include any revenue or expense
related to YOUcentric prior to November 16, 2001.
The Agreement includes an escrow arrangement, and J.D. Edwards may claim
reimbursement of certain losses, up to $10 million, through the escrow fund.
These financial statements disclosures have been prepared on the basis of the
full purchase price being paid, including the amount in the escrow fund.
Excluding the 1.1 million shares currently held in an escrow account, the
purchase price and goodwill would be reduced by
F-33
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$11.6 million. The shares held in escrow will be transferred to the YOUcentric
shareholders in September 2002 to the extent that such shares are not required
to be held to satisfy any claims that J.D. Edwards may make against the escrow
fund.
The purchase price allocation presented is preliminary. The final
determination of required purchase accounting will be made upon the completion
of the Company's analysis of the total purchase cost, d the fair value of the
assets and liabilities assumed, and the amount of goodwill by reportable
segment.
The allocation of the preliminary purchase price to the net assets acquired
as of November 16, 2001 is presented below (in millions):
<Table>
Assets:
Cash and cash equivalents................................. $ 3.0
Short-term marketable securities and other investments.... 2.8
Accounts receivable, net.................................. 3.7
Other current assets...................................... 3.3
-----
Total current assets.............................. 12.8
Certificate of deposit (restricted)....................... 1.3
Property and equipment, net............................... 3.7
Software costs............................................ 8.0
Goodwill and other acquired intangibles................... 72.3
-----
$98.1
=====
Liabilities:
Accounts payable and accrued liabilities.................. 7.4
Unearned revenue.......................................... 1.8
-----
Total current liabilities......................... 9.2
Unearned revenue, net of current portion, and other....... 0.2
-----
Total liabilities................................. 9.4
Stockholders' Equity:
Retained earnings......................................... (4.6)
Deferred compensation..................................... (2.1)
Additional paid in capital................................ 95.4
-----
Total stockholders' equity........................ 88.7
-----
$98.1
=====
</Table>
The value of stock will be recorded in accordance with EITF Issue No.
99-12, "Accounting for Formula Arrangements under EITF Issue No. 95-19,
"Determination of the Measurement Date for the Market Price of Securities Issued
in a Purchase Business Combination," which differs from the value as calculated
in accordance with the Agreement due to the number of days used to calculate an
average share price for the share exchange ratio. The purchase price recorded by
the Company also included $2.8 million of direct acquisition costs. Certain
vested and unvested options to purchase YOUcentric capital stock outstanding at
the time of the acquisition under YOUcentric's stock option plans were assumed
by J.D. Edwards. The fair value of the options assumed was $2.8 million and was
determined using a Black Scholes option pricing model with an expected life of
2.75 years, expected volatility of 75%, and a risk free interest rate of 2.78%.
The intrinsic value of $2.1 million related to the unvested portion of the
options will be recorded as deferred compensation. These options were converted
into options to purchase an equivalent number of shares of J.D. Edwards common
stock based upon the acquisition share exchange ratio.
J.D. Edwards retained an independent appraiser to assist with determining
the estimated fair values of the intangible assets acquired in the acquisition.
The valuations relied on methodologies that most closely related
F-34
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the fair market value assignment with the economic benefits provided by each
asset and the risks associated with the assets. In valuing the software costs,
an income-based approach was determined to best quantify the economic benefits
and risks. The economic benefits were quantified using projections of net cash
flows and the risks by applying an appropriate discount rate. The estimated fair
value assigned to software costs was $8.0 million and non-compete agreements
were $200,000. The software costs and non-compete intangible assets will be
amortized over estimated useful lives of three years. Goodwill of approximately
$72.1 million will be recorded as a result of the acquisition and will be
subject to an annual impairment test and will not be amortized under SFAS No.
142.
The value of $4.6 million assigned to acquired IPR&D was determined by
identifying research projects in areas for which technological feasibility has
not been established and there is no alternative future use. The fair value of
acquired IPR&D include revisions to the YOUrelate Platform V4.X, High Tech
Application V4.5, High Tech Application V5.0, and FinServ Application V4.5. The
value was determined by a hypothetical royalty receipts method, a variation of
the discounted cash flow method. Using this method, a hypothetical royalty rate
was applied to the after-tax cash flows of the IPR&D application projects that
leverage Platform V4.X. A royalty rate ranging from 5 to 20 percent was used to
discount the cash flows varying in relation to the increased reliance on
Platform V4.X and decreased reliance on the Core Technology. The estimated net
free cash flows generated by the products over a 3-year period were discounted
at rates ranging from 35 to 60 percent in relation to the stage of completion
and the technical risks associated with achieving technological feasibility. The
net cash flows for such projects were based on management's estimates of
revenue, expenses, asset requirements, and the royalty rate to core technology.
F-35
SCHEDULE II
J.D. EDWARDS & COMPANY
VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO TRANSLATION END OF
CLASSIFICATION OF PERIOD OPERATIONS WRITE-OFFS ADJUSTMENT PERIOD
- -------------- ---------- ---------- ---------- ----------- ----------
Allowance for Doubtful Accounts
Year Ended:
October 31, 1999...................... $12,900 $ 6,615 $ (7,301) $ (214) $12,000
------- ------- -------- ------- -------
October 31, 2000...................... $12,000 $15,552 $(12,538) $(1,014) $14,000
------- ------- -------- ------- -------
October 31, 2001...................... $14,000 $16,617 $(13,720) $ 103 $17,000
------- ------- -------- ------- -------
</Table>
S-1
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Agreement and Plan of Reorganization, by and among J.D.
Edwards & Company, Hornet Acquisition Corporation,
YOUcentric, Inc., and Laura Witt as stockholder
representative, dated August 14, 2001, and Amendment No.
1 to Agreement and Plan of Reorganization, dated October
3, 2001, both of which are incorporated herein by
reference to Exhibit 2.2 to Registrant's Form 8-K, filed
with the Securities and Exchange Commission on November
30, 2001.
3.1(i) -- Amended and Restated Certificate of Incorporation of
Registrant, which is incorporated herein by reference to
Exhibit 3.1(i) to the Registrant's Registration Statement
on Form S-1, No. 333-30701, as Amended (Registrant's Form
S-1).
3.1(ii) -- Bylaws of Registrant, which is incorporated herein by
reference to Exhibit 3.1(ii) to the Registrant's Form
S-1.
3.2 -- Certificate of Designation of Rights, Preferences and
Privileges of Series A Participating Preferred Stock of
J.D. Edwards & Company, which is incorporated herein by
reference to Exhibit 3.2 to the Registrant's Form 8-A,
filed with the Securities and Exchange Commission on
November 15, 2001.
4.1 -- Specimen stock certificate of Registrant's Common Stock,
which is incorporated herein by reference to Exhibit 4.1
to the Registrant's Form S-1.
4.2 -- Preferred Stock Rights Agreement, dated as of October 22,
2001, between J.D. Edwards & Company and Computershare
Trust Company, Inc., as Rights Agent, which is
incorporated herein by reference to Exhibit 4.2 to the
Registrant's Form 8-A, filed with the Securities and
Exchange Commission on November 15, 2001.
10.1 -- Original Software Vendor Marketing and License Agreement
between Seagull Business Software and J.D. Edwards &
Company dated August 19, 1994, which is incorporated
herein by reference to Exhibit 10.1 to the Registrant's
Form S-1.
10.2+ -- Form of Indemnification Agreement entered into between
the Registrant and each of its officers and directors,
which is incorporated herein by reference to Exhibit
10.13 to the Registrant's Form S-1.
10.3+ -- J.D. Edwards & Company Retirement Savings Plan, amended
and restated as of January 1, 1997, which is incorporated
herein by reference to the Registrant's Form 10-K for the
period ended October 31, 1998.
10.4+ -- J.D. Edwards & Company 1992 Incentive Stock Option Plan,
which is incorporated herein by reference to Exhibit
10.16 to the Registrant's Form S-1.
10.5+ -- J.D. Edwards & Company 1992 Nonqualified Stock Option
Plan, which is incorporated herein by reference to
Exhibit 10.17 to the Registrant's Form S-1.
10.6+ -- Restricted Stock Grant Plan for employees of J.D. Edwards
& Company, which is incorporated herein by reference to
Exhibit 10.18 to the Registrant's Form S-1.
10.7+ -- Stock Plan for Employees of J.D. Edwards & Company, which
is incorporated herein by reference to Exhibit 10.19 to
the Registrant's Form S-1.
10.8+ -- J.D. Edwards & Company 1997 Employee Stock Purchase Plan,
which is incorporated herein by reference to Exhibit
10.20 to the Registrant's Form S-1.
10.9+ -- J.D. Edwards & Company 1997 Equity Incentive Plan, which
is incorporated herein by reference to Exhibit 10.21 to
the Registrant's Form S-1.
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.10+ -- J.D. Edwards & Company 1997 Employee Stock Purchase Plan
for Non-U.S. Employees, which is incorporated herein by
reference to Exhibit 10.23 to the Registrant's Form S-1.
10.11 -- Technology License Agreement, dated April 1, 1999,
between J.D. Edwards & Company and Seagull Software
Systems, Inc. (and addendum dated September 26, 2000),
incorporated herein by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
October 31, 2000.
10.12+ -- Employment Agreement, dated August 1, 2000, but effective
as of May 1, 2000, between David E. Girard and J.D.
Edwards & Company, incorporated herein by reference to
Exhibit 10.15 to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 2000.
10.13+ -- Employment Agreement, dated August 1, 2000, but effective
as of May 1, 2000, between Richard E. Allen and J.D.
Edwards & Company, incorporated herein by reference to
Exhibit 10.16 to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 2000.
10.14+ -- Form of Management Change in Control Plan, participated
in by J.D. Edwards & Company's executive officers,
incorporated herein by reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 2000.
10.15+ -- Employment Agreement, dated January 2, 2002, between J.D.
Edwards & Company and Robert M. Dutkowsky.
10.16+ -- Employment Agreement, dated February 5, 2001, and amended
as of October 25, 2001, between J.D. Edwards & Company
and Leslie E. Wyatt.
10.17+ -- Employment Agreement, dated July 10, 2001, but effective
as of May 1, 2001, between J.D. Edwards & Company and
Richard Mathews.
10.18+ -- Employment Agreement, dated May 4, 2001, but effective as
of May 14, 2001, between J.D. Edwards & Company and Harry
Debes.
10.19+ -- Employment Agreement, dated December 21, 2000, but
effective as of September 1, 2000, between J.D. Edwards &
Company and David Siebert.
10.20+ -- Termination of Employment Agreement, dated July 30, 2001,
but effective as of May 31, 2001, between J.D. Edwards &
Company and Gerry Bleau.
21.1* -- Subsidiaries of Registrant
23.1* -- Consent of PricewaterhouseCoopers LLP
</Table>
- ---------------
* Filed herewith
+ Management compensatory plan or arrangement required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K