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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 000-23091
J.D. EDWARDS & COMPANY
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 84-0728700
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
ONE TECHNOLOGY WAY, DENVER, CO 80237
(Address of principal executive offices) (Zip Code)
</Table>
Registrant's telephone number, including area code: (303) 334-4000
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of March 11, 2002, there were 118,154,950 shares of the Registrant's
Common Stock outstanding.
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J.D. EDWARDS & COMPANY
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
NO.
----
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Consolidated Balance Sheets as of October 31, 2001 and
January 31, 2002............................................ 3
Consolidated Statements of Operations for the Three Months
Ended January 31, 2001 and 2002............................. 4
Consolidated Statements of Cash Flows for the Three Months
Ended January 31, 2001 and 2002............................. 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 31
Item 2. Changes in Securities and Use of Proceeds................... 31
Item 3. Defaults upon Senior Securities............................. 31
Item 4. Submission of Matters to a Vote of Security Holders......... 31
Item 5. Other Information........................................... 31
Item 6. Exhibits and Reports on Form 8-K............................ 31
SIGNATURES............................................................... 33
</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.
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J.D. EDWARDS & COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
OCTOBER 31, JANUARY 31,
2001 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $231,952 $231,974
Short-term marketable securities and other investments.... 1,515 1,785
Accounts receivable, net of allowance for doubtful
accounts of $17,000 at October 31, 2001 and January 31,
2002.................................................... 214,621 226,172
Other current assets...................................... 31,370 37,988
-------- --------
Total current assets............................... 479,458 497,919
Long-term investments in marketable securities.............. 702 597
Restricted cash and cash equivalents........................ 15,960 35,995
Property and equipment, net................................. 70,021 70,083
Software costs, net......................................... 72,821 80,544
Intangibles and other assets, net........................... 22,170 81,153
-------- --------
$661,132 $766,291
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 42,616 $ 29,460
Unearned revenue and customer deposits.................... 167,487 209,789
Accrued liabilities....................................... 144,163 142,399
-------- --------
Total current liabilities.......................... 354,266 381,648
Unearned revenue, net of current portion, and other......... 7,807 5,906
-------- --------
Total liabilities.................................. 362,073 387,554
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, no series, $.001 par value; 4,700,000
shares authorized; none issued and outstanding.......... -- --
Preferred stock, series A, $.001 par value; 300,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $.001 par value; 300,000,000 shares
authorized; 114,193,712 issued and 110,620,096
outstanding as of October 31, 2001; 121,294,328 issued
and 118,125,389 outstanding as of January 31, 2002...... 114 121
Additional paid-in capital................................ 442,511 512,478
Treasury stock, at cost; 3,573,616 shares and 3,168,939
shares as of October 31, 2001 and January 31, 2002,
respectively............................................ (72,323) (55,720)
Deferred compensation..................................... (32) (3,336)
Accumulated deficit....................................... (57,075) (61,208)
Accumulated other comprehensive loss: unrealized losses on
equity securities and foreign currency translation
adjustments, net........................................ (14,136) (13,598)
-------- --------
Total stockholders' equity......................... 299,059 378,737
-------- --------
$661,132 $766,291
======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
3
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
JANUARY 31,
-------------------
2001 2002
-------- --------
Revenue:
License fees.............................................. $ 82,669 $ 43,940
Services.................................................. 135,016 156,619
-------- --------
Total revenue..................................... 217,685 200,559
Costs and expenses:
Cost of license fees...................................... 15,662 5,283
Cost of services.......................................... 82,593 74,410
Sales and marketing....................................... 72,809 63,735
General and administrative................................ 23,700 22,380
Research and development.................................. 25,942 29,131
Amortization of acquired software and other acquired
intangibles and other acquisition related charges...... 6,211 6,328
Acquired in-process research and development.............. -- 4,600
Restructuring and other related charges................... 1,043 (30)
-------- --------
Total costs and expenses.......................... 227,960 205,837
Operating loss.............................................. (10,275) (5,278)
Other income (expense):
Interest and dividend income.............................. 4,495 1,424
Interest expense, foreign currency gains (losses) and
other, net............................................. (1,170) (954)
-------- --------
Loss before income taxes.................................... (6,950) (4,808)
Benefit from income taxes................................. (2,571) (675)
-------- --------
Net loss.................................................... $ (4,379) $ (4,133)
======== ========
Net loss per common share:
Basic and diluted......................................... $ (0.04) $ (0.04)
======== ========
Shares used in computing per share amounts:
Basic and diluted......................................... 110,758 116,500
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
4
J.D. EDWARDS & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
JANUARY 31,
-------------------
2001 2002
-------- --------
Operating activities:
Net loss.................................................... $ (4,379) $ (4,133)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation.............................................. 8,080 7,410
Amortization and write-offs of capitalized software costs,
intangible assets, and securities premiums or
discounts.............................................. 6,553 10,063
Write-off of acquired in-process research and
development............................................ -- 4,600
Benefit from deferred income taxes........................ (5,353) --
Other..................................................... (2,210) 3,387
Changes in operating assets and liabilities, net of
acquisition:
Accounts receivable, net.................................. (41,272) (11,209)
Other assets.............................................. (292) (6,630)
Accounts payable.......................................... (17,847) (12,650)
Unearned revenue and customer deposits.................... 63,298 41,431
Accrued liabilities....................................... (29,074) (9,754)
-------- --------
Net cash (used in) provided by operating
activities....................................... (22,496) 22,515
Investing activities:
Purchase of marketable securities and other investments... (17,253) --
Proceeds from sales or maturities of investments in
marketable securities.................................. 28,452 --
Purchase of property and equipment, net................... (9,892) (3,900)
Cash issued for acquisition of business, net of cash
acquired............................................... -- (751)
Capitalized software costs................................ (15,619) (5,616)
-------- --------
Net cash used in investing activities............. (14,312) (10,267)
Financing activities:
Proceeds from issuance of common stock.................... 13,936 8,418
Restricted cash and cash equivalents...................... -- (19,422)
Release of restricted cash and cash equivalents........... -- 729
-------- --------
Net cash provided by (used in) financing
activities....................................... 13,936 (10,275)
Effect of exchange rate changes on cash..................... 3,251 (1,951)
-------- --------
Net (decrease) increase in cash and cash equivalents........ (19,621) 22
Cash and cash equivalents at beginning of period............ 180,674 231,952
-------- --------
Cash and cash equivalents at end of period.................. $161,053 $231,974
======== ========
Supplemental disclosure of other cash and non-cash investing
and financing transactions:
Retirement savings plan contribution funded with common
stock.................................................. $ 3,697 $ --
</Table>
Reconciliation for acquisition of business:
The Company acquired all of the issued and outstanding capital stock of
YOUcentric, Inc., in exchange for $81.7 million of consideration. In conjunction
with the acquisition, the fair value of assets and liabilities received were as
follows:
<Table>
Fair value of assets acquired............................... $ 78,684
Common stock issued for acquired company and fair value of
options assumed........................................... (74,984)
Acquired in-process research and development................ 4,600
Deferred stock compensation for assumed options............. 2,099
Cash issued for acquisition of business, net of cash
acquired.................................................. (751)
--------
Fair value of liabilities assumed........................... $ 9,648
========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
5
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Interim Financial Statements. The accompanying consolidated financial
statements of J.D. Edwards & Company (the Company) have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. However, the Company believes that the disclosures are adequate
to make the information presented not misleading. The unaudited consolidated
financial statements included herein have been prepared on the same basis as the
annual consolidated financial statements and reflect all adjustments, which
include only normal recurring adjustments necessary for a fair presentation in
accordance with accounting principles generally accepted in the United States of
America. The results for the three-month period ended January 31, 2002 are not
necessarily indicative of the results expected for the full fiscal year. These
consolidated financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 2001.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
(2) 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
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. 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.
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, generally
are available from a number of suppliers, and are typically not essential to the
functionality of the Company's 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. Management 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
6
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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."
(3) EARNINGS PER COMMON SHARE
Basic earnings per share (EPS) excludes the dilutive effect of common stock
equivalents and is computed by dividing net income or loss by the
weighted-average number of shares outstanding during the period. Diluted EPS
includes the dilutive effect of common stock equivalents and is computed using
the weighted-average number of common and common equivalent shares outstanding
during the period. Common stock equivalents consist of stock options and certain
equity instruments. Diluted loss per share for the first quarter of fiscal 2001
and 2002 excludes 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 4.1 million shares and 2.8 million shares for the first quarter of fiscal
2001 and 2002, respectively. The weighted-average outstanding shares for the
first quarter of fiscal 2001 and 2002 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.
The computation of basic and diluted EPS was as follows (in thousands,
except per share amounts):
<Table>
<Caption>
THREE MONTHS ENDED
JANUARY 31,
-------------------
2001 2002
-------- --------
Numerator:
Net loss.................................................. $ (4,379) $ (4,133)
======== ========
Denominator:
Basic and diluted loss per share -- weighted shares
outstanding............................................ 110,758 116,500
======== ========
Basic and diluted net loss per share........................ $ (0.04) $ (0.04)
======== ========
</Table>
(4) OTHER BALANCE SHEET COMPONENTS
Significant components of certain balance sheet line items were as follows
(in thousands):
<Table>
<Caption>
OCTOBER 31, JANUARY 31,
2001 2002
----------- -----------
Intangibles and other assets, net:
Deposits.................................................. $ 1,464 $ 1,648
Intangibles............................................... 19,972 78,937
Other long-term assets.................................... 734 568
-------- --------
$ 22,170 $ 81,153
======== ========
Unearned revenue and customer deposits:
Unearned revenue.......................................... $165,933 $208,055
Customer deposits......................................... 1,554 1,734
-------- --------
$167,487 $209,789
======== ========
</Table>
Intangibles and other assets, net consists primarily of long-term deposits
and intangible assets related to the software, in-place workforce, customer
base, and goodwill resulting from the Company's business acquisitions. The $59.1
million increase from October 31, 2001 for the intangible component is related
to the Company's first quarter of fiscal 2002 acquisition of YOUcentric, Inc.
(see Note 6 for acquisition detail).
7
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The $42.1 million increase in unearned revenue from October
31, 2001 is primarily due to calendar year maintenance billings.
(5) STOCKHOLDERS' EQUITY
Preferred Share Rights Purchase Plan. In November 2001, the Company
created a series of 300,000 shares of preferred stock designated as Series A
Preferred Stock with a par value of $0.001 per share, pursuant to a Preferred
Stock Rights Agreement (the Rights Agreement), approved by the Board of
Directors. The Rights Agreement is intended to protect stockholders' rights in
the event of an unsolicited takeover attempt. It is not intended to prevent a
takeover of the Company on terms that are favorable and fair to all stockholders
and will not interfere with a merger approved by the Board of Directors. Upon
becoming exercisable, each right entitles stockholders to buy 1/1000 of a share
of Series A Preferred Stock of the Company at an exercise price of $75.00,
subject to adjustment. The rights will be exercisable only if a person or a
group (an Acquiring Person) acquires or announces a tender or exchange offer to
acquire 15% or more of the Company's common stock. The rights will expire on the
earlier of November 26, 2011 or the date of their redemption or exchange.
In the event that an Acquiring Person acquires 15% or more of the Company's
common stock (a Triggering Event), each right not held by the Acquiring Person
will entitle the holder to purchase for the exercise price that number of shares
of common stock having a market value equal to two times the exercise price. In
addition, in the event that, following a Triggering Event, the Company is
acquired in a merger or sells 50% or more of its assets, each right not held by
an Acquiring Person will entitle the holder to purchase for the exercise price
that number of shares of common stock of the acquiring company having a market
value equal to two times the exercise price. The rights are redeemable, at the
Company's option, at a price of $0.001 per right. The Company may also exchange
the rights for shares of common stock under certain circumstances.
Warrant Grant. During the first quarter of fiscal 2002, the Company
granted a warrant for professional services rendered to purchase 160,417 and
16,667 shares of the Company's common stock at an exercise price of $15.90 and
$.01 per share, respectively. The estimated fair value of the warrant of $1.6
million was recorded in operating expenses and was determined using a
Black-Sholes option-pricing model with the following assumptions: volatility
factor of 75%, risk free interest rate of 4.49%, expected life of 3.38 years,
and a dividend yield of zero. The warrant expires in January 2005 and as of
January 31, 2002 the warrant was outstanding and fully exercisable.
(6) ACQUISITION
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. The completion of the acquisition allowed the Company
to position itself in the CRM applications market and integrate the CRM product
into its suite of product offerings. J.D. Edwards acquired all of the issued and
outstanding capital stock of YOUcentric, for $81.7 million (excluding $11.6
million held in escrow, see discussion below), calculated under the terms of the
Agreement and Plan of Reorganization (the Agreement). The YOUcentric
stockholders received $6.0 million in cash, and J.D. Edwards issued
approximately 7.7 million shares of its common stock valued at $10.91 per share.
The value of stock issued was recorded in accordance with Emerging Issues Task
Force (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." " In addition, 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 vested and unvested options assumed was
$2.8 million, which was determined using a Black Scholes option pricing model
with an expected life of 2.75 years, expected volatility
8
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of 75%, and a risk free interest rate of 2.78%. The intrinsic value related to
the unvested portion of the options that was recorded as deferred compensation
was $2.1 million. The fair value of the vested and unvested options assumed of
$2.8 million was included in the total purchase price, net of the $2.1 million
recorded as deferred compensation. All assumed options, vested and unvested,
were converted into options to purchase an equivalent number of shares of J.D.
Edwards common stock based upon the acquisition share exchange ratio.
Additionally, the purchase price recorded by the Company included $2.8 million
of direct acquisition costs.
The Agreement included an escrow arrangement, under which J.D. Edwards may
claim reimbursement of certain losses as calculated under the terms of the
Agreement, through an escrow fund that is administered by an independent escrow
agent. There are 1.1 million shares, of the total 7.7 million shares issued,
that are currently held in escrow that were valued at $11.6 million in
accordance with EITF 99-12. The $11.6 million has been excluded from the
purchase price and related goodwill in these financial statements as the outcome
of any claims against the escrow, if any, is currently not determinable. The
shares held in escrow will be transferred to the former YOUcentric stockholders
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. Upon
resolution and release of the shares in the escrow fund to the YOUcentric
stockholders, an adjustment to increase the purchase price and related goodwill
will be made.
Pursuant to the Agreement, YOUcentric became a wholly owned subsidiary of
J.D. Edwards. The acquisition was accounted for as a purchase and, accordingly,
the total purchase price of YOUcentric was allocated to the assets acquired and
liabilities assumed at fair value, certain identifiable intangibles determined
by the independent appraiser, and the remainder to goodwill. Goodwill was
recorded as part of the transaction during the first quarter of fiscal 2002
because the Company paid a premium over the fair market value of the net assets
and intangibles identified as part of the purchase, in order to invest in the
CRM applications market and integrate the CRM product into its suite of product
offerings. Additionally, in-process research and development (IPR&D) in the
amount of $4.6 million was written-off during the first quarter of fiscal 2002.
YOUcentric activity subsequent to the consummation date of the acquisition is
included on the accompanying consolidated financial statements for the first
quarter of fiscal 2002.
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 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 their estimated useful lives of three years. Goodwill of approximately
$61.4 million was recorded as a result of the acquisition and is subject to an
annual impairment test and will not be amortized under Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets."
None of the goodwill is expected to be deductible for tax purposes, as the
historical cost will be used as the tax basis.
The estimated 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% 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
9
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from 35% to 60% 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.
The allocation of the purchase price to the net assets acquired, excluding
the amount in the escrow fund, as of November 16, 2001 is presented below (in
millions):
<Table>
NET ASSETS ACQUIRED:
Assets:
Total current assets................................... $12.1
Certificate of deposit (restricted).................... 1.3
Property and equipment, net............................ 3.7
-----
Total assets acquired............................. $17.1
-----
Liabilities:
Total current liabilities.............................. $ 9.4
Unearned revenue, net of current portion, and other.... 0.2
-----
Total liabilities assumed......................... $ 9.6
-----
Net assets acquired....................................... $ 7.5
=====
PURCHASE PRICE COMPONENTS:
Net assets acquired....................................... $ 7.5
Identified Intangibles:
Goodwill............................................. 61.4
Acquired in-process research and development......... 4.6
Software development costs and other identified
intangibles......................................... 8.2
-----
Total purchase price.............................. $81.7
=====
</Table>
The following unaudited pro forma combined financial information is
presented as if the Company and YOUcentric had been combined as of the beginning
of the periods presented. This information is presented for illustrative
purposes only and is not necessarily indicative of the results that actually
would have been realized had the entities been a single entity during the
periods presented. The unaudited pro forma results of operations for the first
quarter of fiscal 2002 do not reflect any adjustments as the acquisition date
was near the beginning of the period and the activity was immaterial. Unaudited
pro forma results of operations for the first quarter of fiscal 2001 and 2002
are as follows (in thousands, except per share amounts):
<Table>
<Caption>
JANUARY 31, JANUARY 31,
2001 2002
----------- -----------
PRO FORMA RESULTS OF OPERATIONS:
Revenue................................................... $224,526 $200,559
Net loss.................................................. (16,552) (4,133)
Basic and diluted earnings per share...................... $ (0.14) $ (0.04)
</Table>
(7) RESTRUCTURINGS AND OTHER RELATED CHARGES
Fiscal 2001 Restructuring
Overview. During the second and third quarter 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
10
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating facilities. The fiscal 2001 restructuring plan consisted of two phases
(Phase I and Phase II), initiated during the second and third quarter of fiscal
2001, respectively. All actions related to Phase I were completed by the fourth
quarter of fiscal 2001 with no remaining accrual. Remaining actions related to
Phase II were completed by the first quarter of fiscal 2002 with a remaining
accrual totaling $8.2 million.
Employee severance and termination costs. The Company paid termination
salaries, benefits, outplacement, and other related costs to employees
terminated in the second and third quarter 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.
The following table summarizes the number of employee positions eliminated
in accordance with the fiscal 2001 restructuring plan by geographic region and
function:
<Table>
<Caption>
GEOGRAPHIC REGION:
United States(1)....................... 265
Asia Pacific........................... 39
EMEA Asia Pacific...................... 56
Canada and Latin America(1)............ 38
---
Total.................................. 398
===
</Table>
<Table>
<Caption>
FUNCTION:
Sales and marketing(2)................. 150
Consulting and information
technology(2)........................ 110
Education services(2).................. 16
Finance, human resources, legal, and
other general and administrative..... 49
Customer support and product
delivery............................. 49
---
Total.................................. 398
===
</Table>
- ---------------
(1) Phase I eliminated 18 employee positions in the United States and 16
employee positions in Canada and Latin America.
(2) Phase I eliminated 25 employee positions in sales and marketing, 8 in
consulting and information technology, and 1 in education services.
Operating lease buyouts. In accordance with the fiscal 2001 restructuring
plan, operating lease buyouts and related costs are the actual or estimated
costs associated with the early termination of leases for personal computer
equipment and equipment in training facilities or technology labs that were no
longer necessary for operations due to the reduced workforce and the closure or
consolidation of those training facilities or technology labs.
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 have been completed.
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
11
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Fiscal 2001 restructuring costs. The following table summarizes the
components of the Phase II restructuring charge, the payments made during the
periods presented, and the remaining accrual as of January 31, 2002, by
geographic region:
SUMMARY OF FISCAL 2001 RESTRUCTURING CHARGE AND PAYMENTS (IN THOUSANDS):
<Table>
<Caption>
EMPLOYEE TOTAL
SEVERANCE & OPERATING RESTRUCTURING ASSET DISPOSAL RESTRUCTURING
TERMINATION OFFICE LEASE COSTS LOSSES AND AND RELATED
COSTS CLOSURES BUYOUTS SUBTOTAL OTHER COSTS CHARGES
----------- -------- --------- ------------- -------------- -------------
PHASE 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
------- ------- ------ ------- ------- -------
First quarter cash
payments.............. (27) (1,637) (45) (1,709) (20) (1,729)
First quarter asset
disposals............. -- -- -- -- 20 20
First quarter
adjustments........... (25) -- (25) (50) -- (50)
------- ------- ------ ------- ------- -------
Accrual balance,
January 31, 2002... $ 216 $ 7,707 $ 236 $ 8,159 $ -- $ 8,159
======= ======= ====== ======= ======= =======
</Table>
Fiscal 2000 Restructuring
Overview. During fiscal 2000, the Company's Board of Directors approved a
global restructuring plan to reduce the Company's operating expenses and
strengthen both its competitive and financial positions. Management effected the
restructuring plan during the third quarter of fiscal 2000 by eliminating 775
employee positions, reducing office space and related overhead expenses, and
modifying the Company's approach for providing certain services for customers.
Restructuring and related charges primarily consisted of severance related costs
for the involuntarily terminated employees, operating lease termination
payments, and office closure costs.
12
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has completed all actions related to this restructuring as of
April 30, 2001. An outstanding accrual of $2.4 million remained at January 31,
2002 primarily consisting of lease obligations for office and training
facilities closed and consolidated which will be paid over the remaining lease
terms and unsettled employee termination costs.
SUMMARY OF FISCAL 2000 RESTRUCTURING ACCRUAL ACTIVITY (IN THOUSANDS):
<Table>
<Caption>
EMPLOYEE TOTAL
SEVERANCE & OPERATING RESTRUCTURING ASSET DISPOSAL RESTRUCTURING
TERMINATION OFFICE LEASE COSTS LOSSES AND AND RELATED
ACCRUAL CLOSURES BUYOUTS SUBTOTAL OTHER COSTS CHARGES
----------- -------- --------- ------------- -------------- -------------
Consolidated charge, July 31,
2001........................ $ 16,683 $12,667 $ 647 $ 29,997 $ 116 $ 30,113
Fiscal 2000 cash payments..... (15,487) (4,154) (223) (19,864) (557) (20,421)
Fiscal 2000 adjustments....... (342) (2,696) -- (3,038) 941 (2,097)
-------- ------- ----- -------- ------- --------
Accrual balance, October
31, 2000............... 854 5,817 424 7,095 500 7,595
Fiscal 2001 cash payments..... (485) (2,693) (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, July 31,
2001................... 103 2,818 -- 2,921 -- 2,921
-------- ------- ----- -------- ------- --------
Fiscal 2002 cash payments..... (54) (499) -- (553) -- (553)
Fiscal 2002 operational
adjustments................. -- -- -- -- -- --
-------- ------- ----- -------- ------- --------
Accrual balance, January
31, 2002............... $ 49 $ 2,319 $ -- $ 2,368 $ -- $ 2,368
======== ======= ===== ======== ======= ========
</Table>
Reductions in accrual amounts will continue to occur until all remaining
obligations have been settled through 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. Any
cost true-ups subsequent to April 30, 2001 related to the fiscal 2000
restructuring have been recorded through normal operations with no impact to the
restructuring charge.
(8) COMPREHENSIVE INCOME
Comprehensive income or loss includes unrealized gains or losses on equity
securities and foreign currency translation gains or losses that have been
reflected as a component of stockholders' equity and have
13
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not impacted net loss. The following table summarizes the components of
comprehensive income or loss as of the balance sheet dates indicated (in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED
JANUARY 31,
------------------
2001 2002
-------- -------
Net loss.................................................... $ (4,379) $(4,133)
Change in unrealized losses on equity securities............ (8,004) 218
Change in foreign currency translation adjustments.......... 1,973 322
-------- -------
Total comprehensive loss, net..................... $(10,410) $(3,593)
======== =======
</Table>
(9) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
At January 31, 2002, the Company had approximately $140.4 million of gross
U.S. dollar equivalent forward foreign exchange contracts outstanding as hedges
of monetary assets and liabilities denominated in foreign currency. Included in
other income were net foreign exchange transaction losses of $1.1 million and
$1.7 million for the first quarter of fiscal 2001 and 2002, respectively.
(10) SEGMENT INFORMATION
Operating segments are defined as components of an enterprise for which
discrete financial information is available and is reviewed regularly by the
chief operating decision-maker, or decision-making group, to evaluate
performance and make operating decisions. The Company identified its chief
operating decision-makers as three key executives -- the Chief Executive
Officer, Chief Operating Officer, and Chief Financial Officer. This chief
operating decision-making group reviews the revenue and overall results of
operations by geographic regions. The accounting policies of the operating
segments presented below are the same as those described in the summary of
significant accounting policies included in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 2001. Total revenue from each country
outside of the United States was less than 10 percent of the Company's
consolidated revenue for all periods presented. The groupings presented below
represent an aggregation of financial information for countries meeting certain
criteria, including economic characteristics, similar customers, and the same
products, services, and distribution methods (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED
JANUARY 31,
-------------------
2001 2002
-------- --------
REVENUES FROM UNAFFILIATED CUSTOMERS:
United States............................................. $138,925 $124,122
Europe, Middle East, and Africa........................... 38,053 42,979
Canada, Asia, and Latin America........................... 40,707 33,458
-------- --------
Consolidated.............................................. $217,685 $200,559
======== ========
INCOME (LOSS) FROM OPERATIONS:
United States............................................. $(20,042) $(13,865)
Europe, Middle East, and Africa........................... 6,168 11,215
Canada, Asia, and Latin America........................... 10,853 8,270
Amortization of acquired software and other acquired
intangibles and other acquisition related charges...... (6,211) (6,328)
Acquired in-process research and development.............. -- (4,600)
Restructuring and other related charges................... (1,043) 30
-------- --------
Consolidated.............................................. $(10,275) $ (5,278)
======== ========
</Table>
14
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES
Leases. Our corporate headquarters facilities were constructed on land
owned by the Company and the Company leases the headquarters office buildings
under operating leases. 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. 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 January 31, 2001 and 2002, investments totaling $67.2 million were designated
as collateral for these leases. 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 designation of $16.0 million of restricted cash and cash
equivalents as collateral on one of the buildings on the accompanying
consolidated balance sheets. During the first quarter of fiscal 2002, the
Company executed subsequent amendments to the security agreements on the
remaining leased buildings designating an additional $19.4 million of the
collateral as restricted cash and cash equivalents, representing the majority of
the $36.0 million restricted cash and cash equivalents on the accompanying
consolidated balance sheets. 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 January 31, 2002, the
Company was in compliance with the covenants and representations and warranties
required under the lease agreement.
Litigation. On September 2, 1999, a complaint was filed in the U.S.
District Court (the Court) for the District of Colorado against the Company and
certain of its officers and directors. Two subsequent suits were later
consolidated and an Amended Consolidated Complaint (the Complaint) was filed on
March 21, 2000. The Complaint 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 is anticipated to be funded entirely with insurance
proceeds and is recorded net of such insurance proceeds. Therefore, no accrued
settlement costs are reflected on the accompanying consolidated statement of
operations or the consolidated balance sheet. 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.
15
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which supersedes Accounting Principles Board
(APB) Opinion No. 16, "Business Combinations." SFAS No. 141 requires that
purchase method of accounting be used for business combinations initiated after
June 30, 2001, and eliminates the pooling-of-interests method. In addition, SFAS
No. 141 establishes specific criteria for the recognition of intangible assets
separately from goodwill and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. The provisions of this
statement apply to all business combinations initiated after June 30, 2001, and
applies to all business combinations accounted for using the purchase method for
which the date of acquisition is July 1, 2001, or later. The adoption of SFAS
No. 141 will not change the method of accounting the Company used in previous
business combinations. Management does not anticipate that the adoption of SFAS
No. 141 will have a material impact on the Company's consolidated financial
statements.
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.
The Company will adopt SFAS No. 142 no later than November 1, 2002. When
the Company adopts SFAS No. 142, it 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. Management anticipates that SFAS No. 142 will
not have a material impact on the Company's business acquisitions completed
prior to June 30, 2001, as the majority of remaining goodwill and intangibles
related to those acquisitions will be fully amortized by November 1, 2002.
Goodwill in the amount of $61.4 million related to the YOUcentric acquisition
will be subject to the annual impairment test and is not being amortized under
SFAS No. 142. Management cannot determine the future extent of impairment, if
any, until the completion of such impairment review.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective for fiscal years beginning after
June 15, 2002. SFAS No. 143 requires, among other things, that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are then capitalized as part of the carrying
amount of the long-lived asset. The Company will adopt SFAS No. 143 no later
than November 1, 2002. Management anticipates that the adoption of SFAS No. 143
will not have a material impact on the Company's 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. The Company will adopt SFAS No. 144
no later than November 1, 2002. Management anticipates that the adoption of SFAS
No. 144 will not have a material impact on the Company's consolidated financial
statements.
16
J.D. EDWARDS & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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.
In accordance with Topic D-103, reimbursable expenses will be reflected as
revenue and cost of revenue. The Company previously offset reimbursable expenses
with customer billings. The Company's financial results of operations for prior
periods will be reclassified to conform to the new presentation. If the Company
had classified out-of-pocket expenses as revenue during the first quarter of
fiscal 2001 and 2002, total services revenue and cost of services would have
been $4.4 million and $4.0 million higher than reported, respectively. The
Company's adoption of Topic D-103 will not affect the Company's net income or
loss in any past or future periods.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE
PURSUANT TO THE PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS,
ESTIMATES, AND PROJECTIONS ABOUT J.D. EDWARDS' INDUSTRY, MANAGEMENT'S BELIEFS,
AND CERTAIN ASSUMPTIONS MADE BY J.D. EDWARDS' MANAGEMENT. WORDS SUCH AS
"ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES,"
VARIATIONS OF SUCH WORDS, AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES, AND ASSUMPTIONS
THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH
RISKS AND UNCERTAINTIES INCLUDE THOSE SET FORTH IN THE COMPANY'S ANNUAL REPORT
ON FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001 UNDER "RISK FACTORS" ON
PAGES 11 THROUGH 21. UNLESS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE. HOWEVER, READERS SHOULD
CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS THE
COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION,
PARTICULARLY THE QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT REPORT ON FORM
8-K.
RESULTS OF OPERATIONS
J.D. Edwards is a leading provider of agile, collaborative enterprise
software solutions. 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 (CRM), in addition to supply chain execution
(also known as Enterprise Resource Planning, or ERP), workforce management, and
other functional support. To help customers achieve benefits from our software,
we provide implementation and education services through our own direct services
organization and business partners. We distribute, implement, and support our
software worldwide through 55 offices and nearly 350 third-party business
partners.
We are continuing to focus on improving our revenue growth, organizational
effectiveness, and profitability throughout fiscal 2002. While we have made and
continue to make organizational changes that we believe will position us to meet
our long-term goals, the current downturn in the global economy and the
seasonality in our business operations are having a negative impact on our
short-term financial performance. Additionally, the uncertainties of the
maturity of the traditional ERP market, the challenges of entering new markets,
the slowdown in global economic conditions, strong competitive forces, and the
potential negative effects from our organizational and management changes could
reduce revenue and reduce or eliminate improvements in operating margins. These
uncertainties have made our ability to forecast future revenue and operating
results particularly challenging. There can be no assurance of the level of
revenue growth that will be achieved, if any, of a return to 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 CRM software, including
applications for sales force automation, campaign management, contact center
management, and partner relationship management. We expect most of YOUcentric's
employees will remain with J.D. Edwards in Charlotte, North Carolina. This
acquisition was accounted for as a purchase and, accordingly, operating expenses
were impacted in the first quarter of fiscal 2002 subsequent to the consummation
date of the acquisition, primarily as a result of a write-off of in-process
research and development (IPR&D) and amortization of acquired intangible assets.
Our financial results for the first quarter of fiscal 2002 reflected a
reduced operating loss of $5.3 million compared to $10.3 million for the first
quarter of fiscal 2001. This reduced loss is primarily a result of our cost
savings efforts and a 5% company-wide decrease in headcount since January 31,
2001, resulting in increased operating efficiencies and decreased operating
expenses for the first quarter of fiscal 2002. The operating loss for the first
quarter of fiscal 2002 included a charge for acquired in-process research and
development of
18
$4.6 million related to our YOUcentric acquisition. The operating loss for the
first quarter of fiscal 2001 included restructuring and other related charges of
$1.0 million. Both first quarter of fiscal 2001 and 2002 included approximately
$6.0 million of charges related to the amortization of acquired software and
other acquired intangibles and other acquisition related charges. The net loss
for the first quarter of fiscal 2002 was $4.1 million, or $0.04 per share,
compared to a net loss of $4.4 million, or $0.04 per share for the first quarter
of fiscal 2001.
We historically have experienced and expect to continue to experience a
high degree of seasonality in our business operations. Because our operating
expenses are somewhat fixed in the near term, our operating margins have
historically been significantly higher in our fourth fiscal quarter than in
other quarters, and we expect this to continue in future fiscal years. We
believe that such seasonality is primarily the result of both the efforts of our
direct sales force to meet or exceed fiscal year-end sales quotas and the
tendency of certain customers to finalize sales contracts at or near the end of
our fiscal year. Our first quarter revenue historically has slowed during
November and December, and our total revenue, license fee revenue, services
revenue, and net results for our first fiscal quarter historically have been
lower than in the immediately preceding fourth quarter.
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>
THREE MONTHS
ENDED
JANUARY 31,
-------------
2001 2002
----- -----
Revenue:
License fees.............................................. 38.0% 21.9%
Services.................................................. 62.0 78.1
----- -----
Total revenue..................................... 100.0 100.0
Costs and expenses:
Cost of license fees...................................... 7.2 2.6
Cost of services.......................................... 37.9 37.1
Sales and marketing....................................... 33.5 31.8
General and administrative................................ 10.9 11.2
Research and development.................................. 11.9 14.5
Amortization of acquired software and other acquired
intangibles and other acquisition related charges...... 2.8 3.1
Acquired in-process research and development.............. -- 2.3
Restructuring and other related charges................... 0.5 --
----- -----
Total costs and expenses.......................... 104.7 102.6
Operating loss.............................................. (4.7) (2.6)
Other income, net........................................... 1.5 0.2
----- -----
Loss before income taxes.................................... (3.2) (2.4)
Benefit from income taxes................................. (1.2) (0.3)
----- -----
Net loss.................................................... (2.0)% (2.1)%
===== =====
Gross margin on license fee revenue......................... 81.1% 88.0%
Gross margin on service revenue............................. 38.8% 52.5%
</Table>
Total revenue. Our total revenue for the first quarter of fiscal 2002
decreased 7.9% to $200.6 million compared to $217.7 million for the first
quarter of fiscal 2001. The revenue mix between license fees and services was
21.9% and 78.1%, respectively, for the first quarter of fiscal 2002 compared to
38.0% and 62.0%, respectively, for the first quarter of fiscal 2001. We believe
the decrease in total revenue is primarily a result of a continued general
downturn in the global economy.
19
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. 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 also have a material adverse impact on our total revenue and results
of operations.
For the first quarter of fiscal 2002, the geographic areas defined as the
U.S., Europe, the Middle East, and Africa (EMEA), and the rest of the world
accounted for 62%, 21%, and 17% of total revenue, respectively. Comparatively,
the geographic breakdown of total revenue for the first quarter of fiscal 2001
was 64%, 17%, and 19% for the U.S., EMEA, and the rest of the world,
respectively.
License fees. License fee revenue declined 47% to $43.9 million for the
first quarter of fiscal 2002 compared to $82.7 million for the first quarter of
fiscal 2001. During the first quarter of fiscal 2002, the number of license
transactions exceeding $1.0 million decreased to 9 transactions, representing
$17.0 million or 39% of license fee revenue, compared to 21 transactions,
representing $38.7 million or 47% of license fee revenue, for the first quarter
of fiscal 2001. The total number of transactions for the first quarter of fiscal
2002 decreased 34% to 214 transactions compared to 322 transactions for the
first quarter of fiscal 2001. Revenue resulting from reseller arrangements for
the first quarter of fiscal 2002 declined to 2% of license revenue compared to
14% of license revenue in the first quarter of fiscal 2001, mainly due to our
exit from certain third-party reseller arrangements during late fiscal 2001. We
increased our total number of customers to approximately 6,400 at January 31,
2002, a 3% increase compared to the end of the first quarter of fiscal 2001. The
percentage of license revenue from new customers was 55% for both the first
quarter of fiscal 2001 and 2002. 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.
Services. Services revenue consists of fees generated by our personnel
providing direct consulting, software maintenance services, and education to
customers, fees generated through subcontracted third-party arrangements, and
referral fees from service providers who contract directly with customers.
Services revenue for the first quarter of fiscal 2002 increased 16% to $156.6
million from $135.0 million for the first quarter of fiscal 2001. This increase
is primarily a result of increased software maintenance revenue and consulting,
offset, in part, by a decline in education revenue. The increase in maintenance
revenue is primarily a result of increased maintenance pricing, our growing
installed base of customers, and consistent maintenance renewals. We expect
maintenance revenue to continue to rise during fiscal 2002 over fiscal 2001 as a
result of these factors. There can be no assurance, however, that we will
maintain consistent maintenance renewals in the future due to the increase in
prices or that we will achieve maintenance revenue growth.
The increase in consulting revenue for the first quarter of fiscal 2002
compared to the first quarter of fiscal 2001 is due to improved utilization and
realization rates of our consultants. For fiscal 2002, we are continuing to
focus on generating more direct service engagements and increasing utilization.
Additionally, we have initiated an incentive program for our account executives
to sell direct service engagements. We seek to provide our 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
intend to continue business partner relationships under both subcontract and
referral arrangements.
The decline in education revenue for the first quarter of fiscal 2002 is
attributed to the consolidation or elimination of education classes due to
weakening customer demand for classroom training coupled with a slowdown in
customer travel subsequent to September 11, 2001. We intend to offer more custom
on-site
20
customer training as well as on-line offerings throughout fiscal 2002 to
mitigate the decline in classroom training revenue; however, we expect total
education revenue in fiscal 2002 to decrease as compared to fiscal 2001.
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, maintenance, and education revenue, the mix of
direct, subcontract, and referral arrangements from our business partners. There
can be no assurance that future fluctuations in our license revenue will not
have an adverse affect on future services revenue. 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 operating expenses. Our total costs and expenses declined 10% to
$205.8 million for the first quarter of fiscal 2002 from $228.0 million for the
first quarter of fiscal 2001. Operating expenses before amortization of acquired
intangibles, IPR&D, and restructuring charges for the first quarter of fiscal
2002 declined 12% to $194.9 million from $220.7 million for the first quarter of
fiscal 2001. Operating expenses for the first quarter of fiscal 2002 included
amortization of acquired intangibles and other acquisition related charges of
$6.3 million and acquired IPR&D of $4.6 million. Comparatively, the first
quarter of fiscal 2001 operating expenses included amortization of acquired
intangibles of $6.2 million and restructuring and related charges of $1.0
million. The decrease in operating expenses before amortization of acquired
intangibles, acquired IPR&D, and restructuring charges is mainly due to the cost
savings and organizational changes effected in our fiscal 2001 restructuring
plan. There has been a 5% decrease in company-wide headcount since the first
quarter of fiscal 2001 as a result of the fiscal 2001 restructuring plan. These
reductions have caused company-wide salary expense for the first quarter of
fiscal 2002 to decline by $3.5 million, or 4%, compared to the first quarter of
fiscal 2001. Commissions expense declined in the first quarter of fiscal 2002 by
$4.0 million, or 37%, compared to the first quarter of fiscal 2001, primarily
due to reduced license transactions and our fiscal 2002 commission plans.
Additionally, travel and entertainment expenses declined across our organization
for the first quarter of fiscal 2002 by $4.2 million, or 38%, compared to the
first quarter of fiscal 2001, primarily due to our overall focus on cost savings
and reduced number of employees.
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 that are used in development of products for external sale), documentation,
and software delivery expenses. The total dollar amount for cost of license fees
decreased by 66% to $5.3 million for the first quarter of fiscal 2002 from $15.7
million for the first quarter of fiscal 2001. The decline is primarily due to
lower royalties on reseller agreements resulting from lower related revenue
during the first quarter of fiscal 2002 compared to the first quarter of fiscal
2001, due to our exit from certain third-party reseller arrangements during late
fiscal 2001.
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. We recorded amortization expense primarily related to major
enhancements of our OneWorld applications of $925,000 and $3.7 million for the
first quarters of fiscal 2001 and 2002, respectively.
Gross margin on license fee revenue varies from quarter to quarter
depending on the revenue volume in relation to certain fixed costs, such as the
amortization of capitalized software development costs and the portion of our
software products subject to royalty payments. During the first quarter of
fiscal 2002, gross margin on license fee revenue increased to 88.0% from 81.1%
for the first quarter of fiscal 2001. The improvement over the first quarter of
fiscal 2001 is primarily a result of the decrease in reseller royalties in the
first quarter of fiscal 2002, offset, in part, by increased amortization of
capitalized software.
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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 the first quarter of fiscal 2002 decreased 10% to
$74.4 million from $82.6 million for the first quarter of fiscal 2001. The
decrease for the period is mainly due to a decrease in education services costs
attributable to the elimination and consolidation of several training facilities
as part of our fiscal 2001 restructuring and overall consolidation of classes
offered. Additionally, a 12% decline in headcount from January 31, 2001,
resulting from the fiscal 2001 restructuring, and our overall cost savings
efforts, contributed to declines in salary and bonus expense, computer and other
office occupancy costs, and travel and entertainment expenses. The overall
decline from the first quarter of fiscal 2001 is offset, in part, by increased
costs in outside contract professional services.
The gross margin on services revenue for the first quarter of fiscal 2002
improved to 52.5% compared to 38.8% for the first quarter of fiscal 2001. The
increase is primarily due to increased maintenance revenue and improved internal
consultant utilization from direct service engagements. Gross margins on
services revenue for the remainder of 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.
Gross margins on services revenue are expected to decline primarily due to the
adoption of the Financial Accounting Standards Board (FASB) Staff Announcement
Topic D-103 (Topic D-103), "Income Statement Characterization of Reimbursements
Received for "Out-of-Pocket" Expenses Incurred," which was issued in November
2001. 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. In accordance with Topic D-103, reimbursable
expenses will be reflected as services revenue and cost of services. We
previously offset reimbursable expenses with customer billings. The adoption of
Topic D-103 will reduce margins, as we do not recognize any profit on the
expenses reimbursed by customers. Our financial results of operations for prior
periods will be reclassified to conform to the new presentation. If we
classified out-of-pocket expenses as revenue during the first quarter of fiscal
2001 and 2002, total services revenue and costs of services would have been $4.4
million and $4.0 million higher than reported, respectively. Our adoption of
Topic D-103 will not affect our net income or loss in any past or future
periods.
Sales and marketing. Sales and marketing expense consists of personnel,
commissions, and related overhead costs for the sales and marketing activities,
together with advertising and promotion costs. Sales and marketing expense for
the first quarter of fiscal 2002 decreased 13% to $63.7 million from $72.8
million for the first quarter of fiscal 2001. The decrease was primarily due to
an 11% decline in headcount since January 31, 2001, resulting from the fiscal
2001 restructuring, coupled with our company-wide cost savings efforts, that
decreased salary, bonus, travel and entertainment, and other office occupancy
expenses. Additionally, commission expense was lower for the first quarter of
fiscal 2002 from the first quarter of fiscal 2001 due to reduced revenue from
license fees.
General and administrative. General and administrative expense includes
personnel and related overhead costs for support and administrative functions.
General and administrative expense for the first quarter of fiscal 2002
decreased 6% to $22.4 million from $23.7 million for the first quarter of fiscal
2001. The total dollar amount of expense declined due to a 6% decline in
headcount since January 31, 2001, resulting primarily from the fiscal 2001
restructuring that decreased salary, bonus, travel and entertainment expenses,
and other office occupancy expenses.
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
the first quarter of fiscal 2002 increased 12% to $29.1 million compared to
$25.9 million for the first quarter of fiscal 2001, and represented 15% of total
revenue. The increase was primarily due to the addition of approximately 60
employees resulting from the YOUcentric acquisition in the first quarter of
fiscal 2002. Additionally, the
22
capitalization of internally developed software decreased in the first quarter
of fiscal 2002 compared to the first quarter of fiscal 2001. These increases
were offset, in part, by our overall cost savings efforts that resulted in
decreased bonus, travel and entertainment, and other office occupancy expenses.
Including current period capitalized internal development cost, R&D expenditures
were $34.9 million for the first quarter of fiscal 2002, representing 17% of
total revenue. Including capitalized internal development costs, R&D
expenditures were $33.8 million for the first quarter of fiscal 2001,
representing 16% of total revenue.
During the first quarter of fiscal 2002, we continued to devote development
resources to major enhancements and new products associated with our OneWorld
application suites. 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
the first quarter of fiscal 2001, we capitalized $7.9 million associated with
internal development costs and $2.6 million of costs related to third-party
product rights and outsourced development. During the first quarter of fiscal
2002, we capitalized $5.8 million associated with internal development costs and
$1.1 million of costs related to third-party product rights and outsourced
development.
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 products and technologies, enhancements to existing products,
and the addition of key development personnel. 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 of acquired software and other acquired intangibles and other
acquisition related charges. Total amortization for the first quarter of fiscal
2002 related to the software, in-place workforce, customer base, and goodwill
resulting from our business acquisitions was $3.2 million, $408,000, $1.4
million, and $1.1 million, respectively. Additionally, amortization of deferred
stock compensation related to our YOUcentric acquisition totaled $279,000 for
the first quarter of fiscal 2002. Total amortization for the first quarter of
fiscal 2001 related to the software, in-place workforce, customer base, and
goodwill was $2.9 million, $839,000, $1.4 million, and $1.1 million,
respectively.
Acquired IPR&D. The estimated value of $4.6 million assigned to acquired
IPR&D from YOUcentric 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% 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% 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
our estimates of revenue, expenses, asset requirements, and the royalty rate to
core technology.
Fiscal 2001 restructuring and related charges and exit from certain
third-party arrangements. During the second and third quarter 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 consisted of two phases (Phase I and Phase II),
initiated during the second and third quarter of fiscal 2001,
23
respectively. Remaining actions, such as office closures or consolidations and
lease terminations, have been completed by January 31, 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.
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 quarter of fiscal 2001.
We recorded immaterial adjustments to both the Phase I and Phase II
restructuring charges during the first quarter of fiscal 2002 and during fiscal
2001. For a detailed reconciliation refer to Note 7 in the Notes to the
Consolidated Financial Statements in Item 1 of this Quarterly Report on Form
10-Q.
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 $2.4 million remaining at January 31, 2002, primarily consists 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 through
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:
24
Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Fiscal Years Ended October 31, 1999 and 2000," in
our Annual Report on Form 10-K for October 31, 2001.
Other income (expense). Other income and expense includes interest and
dividend income earned on cash, cash equivalents, 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 the first quarter of fiscal 2002 compared to
the first quarter of fiscal 2001 primarily due to lower investment balances
during the first quarter of fiscal 2002, as well as lower interest rates. Also
included in other income and expense were net foreign exchange transaction
losses of $1.1 million and $1.7 million for the first quarters of fiscal 2001
and 2002, respectively. The losses related primarily to the overall
strengthening of the U.S. dollar against European currencies.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2002, our principal sources of liquidity consisted of
$232.0 million of unrestricted cash and cash equivalents, $2.4 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 January 31, 2002, we had working capital of $116.3
million, and no amounts were outstanding under our bank line of credit.
Short-term deferred revenue and customer deposits totaling $210.0 million are
included in determining working capital. The short-term deferred revenue
primarily represents annual maintenance billings to customers that are
recognized as revenue ratably over the support service period. Without the
short-term deferred revenue and customer deposits, working capital would have
been $326.1 million. Comparatively, as of January 31, 2001, we had working
capital of $158.2 million, and no amounts were outstanding under our bank line
of credit. Without the short-term deferred revenue and customer deposits
totaling $200.1 million, working capital would have been $358.3 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 increased to 100 days as of January 31, 2002, compared
to 82 days as of October 31, 2001, and decreased compared to 122 days at January
31, 2001. Our DSO can fluctuate depending on a number of factors, including the
concentration of transactions that occur toward the end of each period, such as
the timing of annual maintenance billings during the first quarter of any fiscal
year, and the variability of period operating results.
Accrued liabilities of $142.4 million at January 31, 2002 remained flat
when compared to $144.2 million at October 31, 2001. The small decrease from
October 31, 2001 is the result of the payment of accrued commissions and
benefits, restructuring accruals, and amounts payable for purchased software,
offset, in part, by acquired YOUcentric accruals. The $42.3 million increase in
unearned revenue and customer deposits from October 31, 2001, was primarily due
to calendar year maintenance billings. Prepaid expenses, other receivables, and
current assets increased $6.6 million from October 31, 2001 primarily due to
payments for third-party licensed software.
We generated $22.5 million in cash from operating activities during the
first quarter of fiscal 2002 compared to using $22.5 million in the first
quarter of fiscal 2001. The increase in cash generated in fiscal 2002 from
operations was primarily due to increased collections of accounts receivable,
fewer reseller arrangements, and reduced operating expenses in the first quarter
of fiscal 2002 compared to the first quarter of fiscal 2001.
We used $22.5 million in cash from non-operating activities during the
first quarter of fiscal 2002 compared to generating $2.9 million in cash in the
first quarter of fiscal 2001. The decrease in the first quarter of fiscal 2002
from the same quarter in fiscal 2001 was primarily attributable to decreased net
proceeds from the purchase and sales or maturities of our investments in
marketable securities. Additionally, an increase in restricted cash and cash
equivalents and the payment for the purchase of YOUcentric during the first
quarter of fiscal 2002 contributed to the decrease. These decreases were offset
in part by less capitalized software development costs.
25
Our corporate headquarters facilities were constructed on land owned by us
and we lease the headquarters office buildings under operating leases. 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. 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 January 31, 2001 and 2002, investments totaling $67.2 million were
designated as collateral for these leases. As a result of this collateral and
reduced interest rates, we expect to pay approximately $3.8 million in rent
expense for our headquarters during the remainder of fiscal 2002 based on
current and expected interest rates. 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 designation of $16.0 million of restricted cash and cash
equivalents as collateral on one of the buildings on the accompanying
consolidated balance sheets. During the first quarter of fiscal 2002, we
executed subsequent amendments to the security agreements on the remaining
leased buildings designating an additional $19.4 million of the collateral as
restricted cash and cash equivalents, representing the majority of the $36.0
million restricted cash and cash equivalents on the accompanying consolidated
balance sheets. 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 January 31, 2002, 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.
During fiscal 2001, a significant portion of our cash inflows was generated by
our operations. Because our operating results may fluctuate significantly, as a
result of decrease in customer demand or decrease in the acceptance of our
future products, our ability to generate positive cash flow from operations may
be jeopardized. 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 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
Management's Discussion and Analysis of our financial condition and
financial results of operations are based on our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. We review the accounting
policies we use in reporting our financial results on a regular basis. The
preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, accounts receivable, capitalized software costs,
intangible assets, and income taxes. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. These estimates and
judgments are reviewed by senior management on an ongoing basis, and by the
Audit Committee at the end of each quarter prior to the public release of our
financial results. We have identified the policies below as critical to our
business operations and the understanding of our financial results of
operations. 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 our Annual Report on Form 10-K for October 31, 2001,
beginning on page F-6.
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- 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, such as our allowances for
doubtful accounts. We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make
required payments and decrease our revenue for the related amount. If the
financial condition of our customers or business partners were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. Additionally, 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.
- Intangible assets. 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. When we adopt SFAS 142, no later than November 1, 2002, we will
cease to amortize goodwill. In lieu of amortization we will be required
to perform an initial impairment review of our goodwill beginning in
fiscal 2003 and an annual impairment review thereafter. We expect to
complete our initial review during the first quarter of fiscal 2003. We
cannot determine the future extent of impairment, if any, until such
impairment review is completed and there can be no assurance that at the
time the review is completed a material impairment charge will not be
recorded. In addition to the annual impairment reviews, we will continue
to assess the impairment of goodwill and other identifiable intangibles,
whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Some factors we consider important which
could trigger an impairment review outside of the annual impairment
reviews include the following:
- Significant underperformance relative to expected historical or
projected future operating results;
- Significant decline in our stock price for a sustained period;
- Significant changes in the manner of our use of the acquired assets or
the strategy for our overall business; and,
- Significant negative industry or economic trends.
When we determine that an impairment review is necessary based upon the
existence of one or more of the above indicators of impairment, we
evaluate whether or not impairment has occurred based on future
undiscounted cash flows. If that analysis indicates that impairment has
occurred, we measure it based on a comparison of discounted cash flows or
fair values, whichever is more readily determinable, to the carrying value
of the related asset.
- 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
The FASB has recently issued certain accounting pronouncements that may
impact our business. For a complete discussion on these accounting
pronouncements, see Note 12 of Notes to Consolidated Financial Statements in
Item 1 of this Quarterly Report on Form 10-Q.
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RISK FACTORS
IN ADDITION TO OTHER INFORMATION CONTAINED IN THIS QUARTERLY REPORT ON FORM
10-Q, THERE ARE NUMEROUS FACTORS THAT SHOULD BE CAREFULLY CONSIDERED IN
EVALUATING THE COMPANY AND ITS BUSINESS BECAUSE SUCH FACTORS CURRENTLY HAVE A
SIGNIFICANT IMPACT OR MAY HAVE A SIGNIFICANT IMPACT IN THE FUTURE ON THE
COMPANY'S BUSINESS, OPERATING RESULTS, OR FINANCIAL CONDITIONS.
We operate in a rapidly changing industry that involves numerous risks,
some of which are beyond our control. Additional risks and uncertainties that we
do not presently know or that we currently deem immaterial may also impair our
business. You should carefully consider the risk factors listed below before
making an investment decision. For a more complete discussion of risk factors
that affect our business, see "Risk Factors" in our Annual Report on Form 10-K
for the fiscal year ended October 31, 2001. These risk factors include the
following:
- Downturns in general economic and market conditions could materially
affect our business;
- Our quarterly financial results are subject to significant fluctuations,
and a failure to meet expectations could adversely affect the price of
our stock;
- The enterprise software industry is highly competitive, and we may be
unable to successfully compete;
- 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;
- We may not successfully integrate or realize the intended benefits of our
acquisitions;
- Our recent expansion into new business areas and partnerships is
uncertain and may not be successful;
- Our continued growth depends on our ability to develop and maintain our
third-party relationships;
- We depend on third-party technology that could result in increased costs
or delays in the production and improvement of our software offerings;
- Our restructuring could result in business distractions;
- We depend to a significant extent on certain key personnel and our
continued ability to hire qualified personnel;
- Our sales cycle is often lengthy and unpredictable, which could affect
our sales;
- If use of the Internet for commerce and communication does not increase
as we anticipate, our business will suffer;
- Our continued success depends on our ability to achieve growth;
- We continue to depend on revenue from customers who use the IBM iSeries
platform for a large portion of our total revenue;
- Our implementation process may be lengthy, which could result in customer
dissatisfaction or damage to our reputation;
- We depend to a significant extent on our services revenue, which could be
adversely effected in the future by fluctuations in our license revenue;
- Recent terrorist activities and resulting military and other actions
could adversely affect our business;
- Our international operations and sales subject us to various risks
associated with growth outside the U.S;
- We may be unable to compete effectively if we are forced to offer a
significant number of fixed-price service contracts;
- We have limited protection of our proprietary technology and intellectual
property and face potential infringement claims;
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- We face risks associated with the security of our products;
- Our stock price is volatile, and there is a risk of litigation;
- Control by existing shareholders could significantly influence matters
requiring stockholder approval;
- Future regulation of the Internet may slow its growth, resulting in
decreased demand for our products and services and increased cost of
doing business;
- Our stockholder rights plan or anti-takeover provisions and Delaware law
could materially affect our stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of our operations, we are exposed to certain market
risks, primarily changes in foreign currency exchange rates and interest rates.
Uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax, other regulatory, or credit risks, are not included in
the following assessment of our market risks.
Foreign Currency Exchange Rates. Operations outside the U.S. expose us to
foreign currency exchange rate changes and could 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, more
recently, the euro as their functional currency because revenue is generated and
expenses are incurred in such currencies.
A substantial portion of our total revenue is derived from international
sales and is therefore subject to the related risks, including general economic
conditions in each country, overlap of different tax structures, difficulty of
managing an organization spread over various countries, changes in regulatory
requirements, compliance with a variety of foreign laws and regulations, longer
payment cycles, and volatilities of exchange rates in certain countries. A
significant portion of our business is conducted in currencies other than the
U.S. dollar. During the first quarter of fiscal 2002, 38% of our total revenue
was generated from international operations, and the net liabilities of our
foreign operations totaled 8% of consolidated net assets as of January 31, 2002.
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 certain 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 January 31, 2002, and our exposure
from anticipated foreign revenue during the remainder of 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. At January 31, 2002, there was not a material change in the sources or
the estimated effects of foreign currency rate exposures from our quantitative
and qualitative disclosures presented in Form 10-K for the year ended October
31, 2001. Based upon the results of these analyses, a 10% adverse change in
foreign exchange rates from the January 31, 2002 rates would not result in a
material impact to our forecasted results of operations, cash flows, or
financial condition for a future quarter and the fiscal year ending October 31,
2002.
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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
(prior to our valuation allowance), 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, or LIBOR, and adjusted from time to time to reflect any changes in our
leverage ratio. Changes in interest rates could impact our anticipated interest
income and lease obligations or could impact the fair market value of our
investments.
We prepared sensitivity analyses of our interest rate exposures and our
exposure from anticipated investment and borrowing levels for fiscal 2002 to
assess the impact of hypothetical changes in interest rates. At January 31,
2002, there was not a material change in the sources or the estimated effects of
interest rate exposures from our quantitative and qualitative disclosures
presented in our Annual Report on Form 10-K for the year ended October 31, 2001.
Additionally, based upon the results of these analyses, a 10% adverse change in
interest rates from the January 31, 2002 rates would not have a material adverse
effect on the fair value of investments and would not materially impact our
forecasted results of operations, cash flows, or financial condition for the
fiscal year ending October 31, 2002.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 2, 1999, a complaint was filed in the U.S. District Court (the
Court) for the District of Colorado against us and certain of our 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 our common stock
during the period between January 22, 1998, and December 3, 1998. The Complaint
alleged that we and certain of our 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 our common stock during the class period.
We have reached a settlement in principle of these shareholder class action
lawsuits. The terms of the settlement are still being resolved but we believe
the final terms will not have a material adverse effect on our financial
position, results of operations, or cash flows. We anticipate that the
negotiated settlement will be funded entirely with insurance proceeds and is
recorded net of such insurance proceeds. Therefore, no accrued settlement costs
are reflected on the accompanying consolidated statement of operations or the
consolidated balance sheet. The final settlement agreement is subject to Court
approval and class notice provisions.
We are involved in certain other disputes and legal actions arising in the
ordinary course of our business. In our opinion, none of such other disputes and
legal actions is expected to have a material impact on our consolidated
financial position, results of operations, or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 16, 2001, in connection with our acquisition of YOUcentric,
Inc., we acquired 100 percent of the capital stock of YOUcentric, Inc., for
$81.7 million. The YOUcentric stockholders received $6.0 million in cash, and we
issued approximately 7.7 million shares of our common stock. 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
1. On November 5, 2001, we filed a Current Report on Form 8-K
reporting that the board of directors had adopted a stockholder rights
plan.
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2. On November 30, 2001, we filed a Current Report on Form 8-K
reporting the completion of the acquisition of YOUcentric, Inc.
3. On January 22, 2002, we filed a Current Report on Form 8-K
reporting the retirement of C. Edward McVaney as Chief Executive Officer,
and the appointment of Robert M. Dutkowsky as Chief Executive Officer.
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.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
J.D. EDWARDS & COMPANY
By: /s/ RICHARD E. ALLEN
----------------------------------
Name: Richard E. Allen
Title: Chief Financial Officer,
Executive Vice President,
Finance and
Administration and Director
(principal financial officer)
Dated: March 13, 2002
By: /s/ PAMELA L. SAXTON
----------------------------------
Name: Pamela L. Saxton
Title: Vice President of Finance,
Controller and Chief Accounting
Officer
(principal accounting officer)
Dated: March 13, 2002
33