<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- - ----- Exchange Act of 1934 for the quarterly period ended March 31, 1996 or
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: 0-20710
PEOPLESOFT, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0137069
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4440 Rosewood Drive, Pleasanton, CA 94588-3031
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code:
510/225-3000
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at March 31, 1996
----- -----------------------------
<S> <C>
Common Stock, $.01 par value 49,891,959
</TABLE>
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PEOPLESOFT, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1995 and
March 31, 1996 3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 1995 and March 31, 1996 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1995 and March 31, 1996 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 16
ITEM 2 - Change in Securities 16
ITEM 3 - Defaults upon Senior Securities 16
ITEM 4 - Submission of Matters to a Vote of Security Holder 16
ITEM 5 - Other Information 16
ITEM 6 - Exhibits and Reports on Form 8 - K 16
SIGNATURES 17
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PEOPLESOFT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------ ---------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 88,052 $ 109,913
Short-term investments 37,687 32,121
Accounts receivable, net 97,773 100,742
Other current assets 5,908 8,150
Deferred tax assets 14,170 15,955
--------- ---------
Total current assets 243,590 266,881
Property and equipment, at cost 81,383 92,573
less accumulated depreciation and amortization (18,164) (22,634)
--------- ---------
63,219 69,939
Capitalized software, less accumulated amortization 7,342 7,144
--------- ---------
$ 314,151 $ 343,964
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 25,730 $ 27,243
Accrued compensation and related expenses 24,290 22,748
Income taxes payable 10,600 10,792
Deferred revenue 96,830 110,891
--------- ---------
Total current liabilities 157,450 171,674
Stockholders' equity:
Common stock and paid-in capital 99,160 105,122
Foreign currency translation adjustment (264) (190)
Retained earnings 57,805 67,358
--------- ---------
156,701 172,290
--------- ---------
$ 314,151 $ 343,964
========= =========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 4
PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1995 1996
------- -------
<S> <C> <C>
Revenues:
License fees $21,968 $42,171
Services 18,158 38,114
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Total revenues 40,126 80,285
Costs and expenses:
Cost of license fees 1,957 2,527
Cost of services 10,126 20,820
Sales and marketing 12,047 24,715
Product development 6,057 12,925
General and administrative 2,936 4,969
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Total costs and expenses 33,123 65,956
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Operating income 7,003 14,329
Other income, principally interest 775 1,593
------- -------
Income before taxes 7,778 15,922
Provision for income taxes 3,112 6,369
------- -------
Net income $ 4,666 $ 9,553
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Net income per share $ 0.09 $ 0.17
======= =======
Shares used in per share computation 53,450 56,198
======= =======
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 5
PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1995 1996
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,666 $ 9,553
Adjustments:
Depreciation and amortization 2,769 4,915
Provision for doubtful accounts 177 386
Provision for deferred tax assets - (1,785)
Changes in operating assets and liabilities:
Accounts receivable (7,580) (3,355)
Other current assets (1,282) (2,242)
Accounts payable and accrued liabilities 3,351 1,513
Accrued compensation and related expenses 610 (1,542)
Deferred revenue 4,693 14,061
Income taxes payable (2,314) 192
Tax benefits of employee stock transactions - 1,146
-------- ---------
Net cash provided by operating activities 5,090 22,842
INVESTING ACTIVITIES
Purchase of short-term investments (13,972) (3,765)
Sale of short-term investments 2,737 9,331
Purchase of property and equipment (7,555) (11,190)
Additions to capitalized software, net (558) (247)
-------- ---------
Net cash used in investing activities (19,348) (5,871)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 1,925 4,816
-------- ---------
Net cash provided by financing activities 1,925 4,816
Effect of foreign exchange rate changes on cash (41) 74
-------- ---------
Net increase (decrease) in cash and cash equivalents (12,374) 21,861
Cash and cash equivalents at beginning of period 61,241 88,052
-------- ---------
Cash and cash equivalents at end of period $ 48,867 $ 109,913
======== =========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 6
PEOPLESOFT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at March 31, 1995 and 1996 and for the three month period
then ended is unaudited, but includes all adjustments (consisting only of
normal, recurring adjustments) which the Company's management believes to be
necessary for the fair presentation of the financial position, results of
operations, and changes in cash flows for the periods presented. The preparation
of financial statements in conformity with generally accepted accounting
principals requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. While management makes its best effort to achieve its estimates and
assumptions, actual results may differ. Certain financial statement items in the
Condensed Consolidated Balance Sheet have been reclassified to conform to the
current year's format.
The accompanying interim financial statements should be read in conjunction
with the financial statements and related notes included in the Company's Annual
Report to Shareholders (Form 10-K) for the year ended December 31, 1995. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. Interim results of operations for the three
month period ended March 31, 1996 are not necessarily indicative of operating
results for the full fiscal year.
2. EARNINGS PER SHARE
Net income per share is computed on the basis of the weighted average
number of shares outstanding plus the common stock equivalents, consisting of
outstanding dilutive stock options and warrants (using the treasury stock
method). Fully diluted per share amounts are not presented, as the effect is not
material. In November 1995, the Company's Common Stock was split two-for-one.
All shares, common stock equivalents, and per share amounts applicable to prior
periods have been restated to reflect the stock split. The computation of the
weighted average number of shares outstanding for the three month period ended
March 31, 1995 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1995 1996
------ ------
<S> <C> <C>
Weighted average shares:
Common stock 48,098 49,554
Common stock equivalents 5,352 6,644
------ ------
53,450 56,198
====== ======
</TABLE>
<PAGE> 7
3. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of billed receivables arising from
recognized and deferred revenues, and unbilled receivables, which include
accrued license fees, accrued services, and deferred services. The principle
components of accounts receivable at December 31, 1995 and March 31, 1996 were
as follows (in thousands):
<TABLE>
<CAPTION>
Dec. 31, March 31,
1995 1996
--------- ---------
<S> <C> <C>
Billed receivables $ 49,372 $ 64,078
Unbilled receivables 53,166 41,811
--------- ---------
102,538 105,889
Allowance for doubtful accounts (4,765) (5,147)
--------- ---------
$ 97,773 $ 100,742
========= =========
</TABLE>
4. DEFERRED REVENUE
Deferred revenue is comprised of deferrals for license fees, maintenance,
training, and other services. The principle components of deferred revenue at
December 31, 1995 and March 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
Dec. 31, March 31,
1995 1996
-------- ---------
<S> <C> <C>
License fees $ 20,775 $ 24,063
Maintenance 49,984 58,296
Training 17,264 18,475
Other services 8,807 10,057
-------- --------
$ 96,830 $110,891
======== ========
</TABLE>
5. CAPITALIZED SOFTWARE
The Company capitalizes certain software acquired from third parties and
certain costs incurred internally in developing its software products. As
discussed in Note 1 of the Notes to the Consolidated Financial Statements in the
Company's Annual Report to Shareholders (Form 10-K) for the year ended December
31, 1995, if actual software license sales of PeopleSoft Manufacturing and other
PeopleSoft software products utilizing acquired and internally developed
software are below management's estimates and cannot be licensed or resold at
terms favorable to the Company, then a reduction to the carrying value of such
software will be required. Certain acquired software rights have been
re-classified to other current assets, in accordance with their expiration
dates. Annual software amortization charges related to capitalized software
amounted to $647,000 and $445,000 for the three months ended March 31, 1995 and
1996, respectively. Capitalized software costs and accumulated amortization at
December 31, 1995 and March 31, 1996 were as follows (in thousands) :
<TABLE>
<CAPTION>
Dec. 31, March 31,
1995 1996
-------- --------
<S> <C> <C>
Capitalized software:
Internal development costs $ 7,016 $ 7,263
Purchased from third parties 5,137 4,300
-------- --------
12,153 11,563
Accumulated amortization (4,811) (4,419)
-------- --------
$ 7,342 $ 7,144
======== ========
</TABLE>
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of the Company's expectations regarding future
trends affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon safe harbor provisions of the Securities Litigation Reform Act of 1995. The
discussion in the section entitled "Factors That May Affect Future Results"
attempts to highlight some of those factors which the Company, in its
experience, has identified as affecting those forward-looking statements.
Forward-looking statements are identified with footnote # 1. The Company
undertakes no obligation to update this discussion except as may be legally
required in its reporting statements.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenues and the percentage of period over period growth represented by
certain line items in the Company's statements of operations:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
TOTAL REVENUES DOLLAR INCREASE
1995 1996 YEAR OVER YEAR
-------------- ------------- -------------------
<S> <C> <C> <C> <C>
Revenues:
55% 53% License fees 92%
45 47 Services 110
-------------- ------------- ------------------
100 100 Total revenues 100
Costs and expenses:
5 3 Cost of license fees 29
25 26 Cost of services 106
30 31 Sales and marketing 105
15 16 Product development 113
7 6 General and administrative 69
-------------- ------------- ------------------
82 82 Total costs and expenses 99
-------------- ------------- ------------------
18 18 Operating income 105
2 2 Other income 106
-------------- ------------- ------------------
20 20 Income before taxes 105
8 8 Provision for income taxes 105
-------------- ------------- ------------------
12% 12% Net income 105%
============== ============= ==================
</TABLE>
REVENUES
The Company recognizes revenue in accordance with the Statement of Position
on Software Revenue Recognition ("SOP 91-1"), issued by the American Institute
of Certified Public Accountants. In accordance with SOP 91-1, the Company
allocates the total value of each end user license agreement between software
license fees and services, consisting of maintenance, training, consulting and
support services. For end user license agreements which have payments due within
one year, the portion allocated to software license fees will be recognized in
the current period, while the portion allocated to services is recognized as the
services are performed. The Company defers recognition of revenues associated
with payments which are not due within one year from the date of the license
agreement. When the Company enters into a license agreement with a customer
requiring significant customization of the software products, the Company
recognizes revenue related to the license agreement using the percentage-of
completion method of contract accounting. The total dollar amount of end user
license agreements ("contracting activity") signed for software license fees and
services increased from $43.7 million in the quarter ended March 31, 1995 to
$72.7 million for the same period in 1996. The aggregate value of end user
license agreements related to PeopleSoft Human Resources ("HRMS") signed during
the first quarter of 1995 was $28.6 million and was $42.0 million in the same
period in 1996. The aggregate value of end user contracting activity related to
PeopleSoft Financials during the first quarter was $15.2 million in 1995 and
$30.2 million in the same period in 1996.
<PAGE> 9
Total revenues increased from $40.1 million in the first quarter of 1995 to
$80.3 million in the same period of 1996, representing an increase of 100%.
During the first quarter of 1995 and 1996 the Company's international revenues,
principally from customers located in Canada, were approximately 13% and 18% of
total revenues, respectively.
Revenues from licensing fees increased 92% from $22.0 million in the three
month period ended March 31, 1995 to $42.2 million in three month period ended
March 31, 1996. The increase in license fee revenues was attributable to
increased market acceptance of, and breadth of, the Company's software product
offerings and the increased capacity created by the growth in the Company's
sales, marketing and customer service organizations.
Revenues from services increased by 110% from $18.2 million in the first
quarter of 1995 to $38.1 million in the first quarter of 1996. To date, the
Company's customer agreements have provided for initial maintenance, training,
consulting and support services for specified periods or amounts such that
increases in licensing activity have resulted in increases in revenues from
these services. Service revenues as a percentage of total revenues were 45% for
the quarter ended March 31, 1995 and 47% for the quarter ended March 31, 1996.
Services revenue as a percentage of total revenues was higher in the quarter
ended March 31, 1996 as compared to the quarter ended March 31, 1995 due to
increases in the installed base of customers receiving ongoing maintenance,
training and support services and increases in PeopleSoft's professional
services consulting staff and related consulting revenues.
COSTS AND EXPENSES
Cost of license fees, consisting principally of royalties paid to certain
software vendors and amortization of capitalized software costs, increased from
$2.0 million in the first quarter of 1995 to $2.5 million in the first quarter
of 1996, representing 5% and 3% of total revenues and 9% and 6% of license fee
revenue in those periods, respectively. The decrease in cost of license fees as
a percentage of license fees in 1996 as compared to 1995 was attributable to
continued decreases in documentation expenses, the mix of royalty bearing
software products, certain fixed price royalty arrangements with vendors, a
relatively modest increase in capitalized software amortization and other
reductions in royalty expenses in 1996. Capitalized software is amortized
linearly over periods not exceeding three years. Cost of license fees as a
percentage of license fees may fluctuate from period to period due principally
to the mix of sales of royalty bearing software products in each period and the
seasonal fluctuations in revenues contrasted with certain fixed expenses such as
the amortization of capitalized software. Royalties associated with certain
software products currently under development by affiliates, and charges
associated with software products and technologies acquired during the first
quarter of 1996 from various third party vendors, may cause the cost of license
fees as a percentage of license fees to increase in future periods.(1)
Cost of services consists principally of account management support,
training, product support and consulting. These costs increased from $10.1
million in the three month period ended March 31, 1995 to $20.8 million in the
three month period ended March 31, 1996, representing 25% and 26% of total
revenues in periods, respectively. The cost, as a percentage of service
revenues, increased slightly from March 31, 1995 to March 31, 1996. The increase
is due to the significant expansion of the Company's customer service resources
across all categories, including consulting, telephone support, and account
management staff. The Company anticipates these expenditures will increase in
dollar amount, and may increase as a percentage of total revenues, in future
periods.(1)
Sales and marketing expenses increased from $12.0 million in the first
quarter of 1995 to $24.7 million in the comparable period in 1996, representing
30% and 31% of total revenues in such periods, respectively. The increase in
sales and marketing expenses was attributable to the Company's expansion of its
direct sales force, related equipment and facility expenditures, investment in
building an international direct sales force and increased marketing expenses
for the Company's expanded software product line. The Company is in the process
of significantly increasing its direct sales and marketing expenditures to (i)
address certain international and vertical markets, (ii) establish an enterprise
sales force structure, and (iii) fund sales organization expansion for
financial, distribution and manufacturing products. Consequently, such expenses
may increase as a percentage of total revenues in future periods.(1)
Software product development expenses increased from $6.1 million in the
first quarter of 1995 to $12.9 million in the first quarter of 1996,
representing 15% and 16% of total revenues in such periods, respectively. The
Company capitalized internal software development costs of $0.6 million and $0.2
million in the three month periods ended March 31, 1995 and 1996, respectively.
The increase in software product development and engineering expenditures was
due to increased staffing and associated support costs of software engineers and
consultants required to expand and
- - ----------------------
(1) Forward-looking statement
<PAGE> 10
enhance the Company's product line. In addition, the Company has incurred
significant expenditures to enhance its platform development, certification and
product testing capabilities. Furthermore, the Company has additional financial,
distribution and human resources modules under development, and anticipates
software product development expenditures in future periods will increase.(1)
General and administrative expenses increased from $2.9 million in the
three month period ended March 31, 1995 to $5.0 million in the three month
period ended March 31, 1996, representing 7% and 6% of total revenues in such
periods, respectively. The dollar increase in general and administrative
expenses resulted primarily from increases in staffing to support the Company's
growth and increases in expenses associated with the operation of foreign
subsidiaries.
Other income, consisting primarily of interest, increased from $0.8 million
in the first quarter of 1995 to $1.6 million in the same period of 1996.
Interest income, totaling $0.8 million in the quarter ended March 31, 1995 and
$1.2 million in the quarter ended March 31, 1996, was earned on the Company's
investments of excess cash.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 40% for each of the three month
periods ended March 31, 1995 and 1996. There has been no significant change in
the components of the effective tax rate. As permitted by the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," the
Company has recorded $15.9 million in net deferred tax assets at March 31, 1996.
The Company has concluded that no valuation allowance is required based on its
assessment that current levels of taxable income will be sufficient to realize
the tax benefit.(1)
LIQUIDITY AND CAPITAL RESOURCES
Since the beginning of 1992, the Company has financed its operations
primarily through cash flows from operations and the sale of equity securities.
In addition, under the Company's secured bank line of credit, up to $30.0
million is available for working capital advances, based on the level of
eligible accounts receivable. Within this amount, $15.0 million may be used for
issuance of letters of credit. This facility expires in July 1996 and the
Company presently anticipates that it will be able to renew the line of
credit.(1) No borrowings were outstanding under this line at March 31, 1996.
The Company's operating activities provided cash of $5.1 million during the
three month period ended March 31, 1995, compared to $22.8 million in the three
month period ended March 31, 1996. Operating cash flows have increased primarily
due to increases in deferred revenue and income before depreciation and
amortization charges. From December 31, 1995 to March 31, 1996, accounts
receivable increased from $97.8 million to $100.7 million and deferred revenues
increased from $96.8 million to $110.9 million. The increase in accounts
receivable and in deferred revenues resulted from the growth in licensing
activity and associated deferrals of revenues related to services. The increase
in accounts receivable in 1996 was more than offset by increases in deferred
revenues, accounts payable and accrued liabilities. The Company calculates
accounts receivable days sales outstanding ("DSO") as the ratio of quarter-end
accounts receivable to the sum of quarterly revenues and the net change in
deferred revenues, multiplied by 90. The Company believes this calculation is
appropriate because license fees are typically billable regardless of whether
revenue has been recognized or deferred. Under this method, accounts receivable
days outstanding was 117 days as of March 31, 1995 as compared to 96 days as of
March 31, 1996. The improvement in DSO is the result of increased focus on
improving the collection process. Since billing terms of the Company's
agreements typically are spread out over a sequence of events (including
contract execution through acceptance) or dates that generally span four to six
months, and revenue generation is concentrated at the end of each quarter, the
Company anticipates that its DSO will continue to be substantial in future
periods.
During the first three months of 1995 and 1996, the Company's principal
uses of cash for investing activities were for short-term investments and the
purchase of property and equipment. The increase in property and equipment
related to additional computer equipment was primarily the result of the
increase in personnel. As of March 31, 1996, the Company had $95.2 million in
working capital, including $109.9 million in cash and cash equivalents and $32.1
million in short-term investments, consisting primarily of high quality
municipal bonds and tax-advantaged money
- - -------------------
(1) Forward-looking statement
<PAGE> 11
market instruments. As of March 31, 1996, there were no significant capital
purchase commitments. The Company believes that existing cash and short-term
investment balances, credit facilities expected to be renewed, and potential
cash flow from operations will be sufficient to meet its operating cash
requirements at least through 1996.(1)
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The following section lists some, but
not all, of these risks and uncertainties which may potentially cause a
significant impact on the Company's future results of operations. This section
should be read in conjunction with the unaudited condensed consolidated
financial statements and notes thereto included in Part I -- Item 1 of this
Quarterly Report, the audited consolidated financial statements and notes
thereto and the Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 1995 contained in the
Company's 1995 Annual Report to Stockholders (Form 10-K).
The Company has identified certain forward-looking statements in this
section entitled "Factors That May Affect Future Results" by a footnote # 1. The
Company may also make oral forward-looking statements from time to time. Actual
results may differ materially from those projected in any such forward-looking
statements due to a number of factors, including those set forth below.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenues and operating results can vary substantially from
quarter to quarter. License revenues in any quarter are substantially dependent
on the execution of license agreements governing the use of the Company's
software products booked and shipped in that quarter. Contracting activity is
difficult to forecast for a variety of reasons including: (i) a significant
portion of the Company's license agreements are completed within the last few
weeks of each quarter; (ii) the duration of the Company's sales cycle is
relatively long and increasingly variable because the Company has broadened its
marketing emphasis to encompass software solutions for the customer's overall
enterprise, thereby increasing the financial value of individual transactions
and the complexity of the customer selection, negotiation and approval process;
(iii) the size of license transactions can vary significantly; (iv) system
replacement projects and new system evaluations may be postponed or canceled at
any time due to changes in a customer's project, company management, budgetary
constraints, or strategic priorities; (v) customer evaluations and procurement
processes vary significantly from company to company, and a customer's internal
approval and expenditure authorization process can be arduous, even subsequent
to actual vendor selection; (vi) the number, timing and significance of software
product enhancements and new software product announcements by the Company and
its competitors; and (vii) changes in economic, political and market conditions
can adversely impact business opportunities without reasonable notice. In
addition, certain license agreements executed during a quarter may not meet the
Company's revenue recognition criteria. Consequently, a situation could occur in
which the Company meets or exceeds its forecast of aggregate contracting
activity, but is not able to meet its forecast for license revenues.
In addition to factors impacting contracting activity, license revenues are
difficult to forecast because: (i) the timing of new software product
availability to fulfill delivery obligations under both new and existing license
agreements is difficult to predict because of the increasing complexity of the
Company's software product solutions and underlying technology; (ii) changes in
the Company's sales incentive plans have had and may continue to have an adverse
impact on seasonal business patterns; and (iii) enterprise transactions often
involve both software products that are then currently deliverable, as well as
software products that are still under development. To the extent the Company
enters into a license agreement for the provision of certain software products
that are then available and certain software products that are then still under
development, the license agreement and supporting schedules to the license
agreement must contain very precise contractual provisions and terminology under
generally accepted accounting principals to permit any revenue recognition under
the license agreement. In addition, changes in levels of consulting activity and
the related satisfaction of significant license agreement milestones, and
seasonality in training revenues which tend to lag license revenues by
approximately one quarter, have resulted in variability of service revenues from
quarter to quarter.
OPERATING LEVERAGE
Consistent with many companies in the software industry, the Company's
business model is characterized by a very high degree of operating leverage. The
Company's expense levels are based, in significant part, on the Company's
- - -----------------
(1) Forwarding-looking statement
<PAGE> 12
expectations as to future revenues and are therefore relatively fixed in the
short term. If revenue levels fall below expectations, net income is likely to
be disproportionately adversely effected. There can be no assurance that the
Company will be able to increase or even maintain its current level of
profitability on a quarterly or annual basis in the future. Due to all the
foregoing factors, it is likely that in one or more future quarters the
Company's operating results will be below the expectations of public securities
market analysts. In such event, the price of the Company's Common Stock would
likely be materially adversely effected.
UNEVEN PATTERNS OF QUARTERLY OPERATING RESULTS
Although the Company's 1996 operating budget is based on a material
increase in total revenues over the corresponding actual results for 1995, the
Company does not believe that the percentage increases in revenues achieved in
prior periods should be anticipated in future periods.(1) The operating results
of many software companies reflect seasonal trends, and the Company has been,
and expects to continue to be, effected by such trends in the future. Seasonal
patterns of revenue achievement can be caused by a variety of factors, including
sales incentives, customer demand based on available capital budgets and release
of new technologies. Historically, PeopleSoft has had stronger fourth and first
quarter performance because of customer demand in the quarters ended December 31
and expiration of sales incentives in the quarters ended March 31. Accordingly,
it is likely the quarter ending June 30 will have lower year over year increases
in contracting activity, and, possibly, lower year over year increases in total
revenue, than were achieved in the quarter ended March 31.
FUTURE OPERATING RESULTS UNCERTAIN
Segments of the software industry have experienced significant economic
downturns characterized by decreased product demand, price erosion,
technological shifts, work slowdowns and layoffs. The Company's operations may,
in the future, experience substantial fluctuations from period to period as a
consequence of such industry patterns, general economic conditions effecting the
timing of orders from customers and other factors effecting capital spending.
There can be no assurance that such factors will not have a materially adverse
effect on the Company's business, operating results or financial condition. The
Company's continued success is dependent on its continued ability to introduce,
develop and market new and enhanced versions of its software products, although
there can be no assurance that such ability can be maintained.
INTERNATIONAL OPERATIONS
The Company has, and will continue to utilize substantial resources and
funding to build its international service and support infrastructure. Operating
costs in many countries, including some of those in which the Company operates,
are often higher than in the United States. In order to increase international
sales in 1996 and subsequent periods, the Company must continue to expand
existing as well as establish additional foreign operations, hire additional
personnel, identify suitable locations for sales and service operations, and
recruit international distributors and resellers in selected territories. In the
event international expansion is not successful, it is likely to have a negative
impact on the Company's operating results.
The Company's sales through its foreign operations are generally
denominated in each country's functional currency. The Company experienced minor
foreign currency transaction gains or losses resulting from fluctuations in
foreign exchange rates for the periods ended March 31, 1995 and 1996, that were
included in other income in the those periods. Unexpected changes in the
exchange rates for these foreign currencies could result in significant
fluctuation in the foreign currency transaction and translation gains and losses
in future periods. In the future, the Company expects to have an increased
amount of non-U.S. dollar denominated license agreements and intends to
implement hedging programs designed to mitigate the potential adverse impact of
exchange rate fluctuations.(1)
COMPETITION
The market for business application software is intensely competitive. The
Company faces competition from a variety of software vendors including
enterprise application software vendors, financial management system and HRMS
application software vendors, and software tools vendors. In the enterprise
application software market, the chief competitive factors include the breadth
and completeness of the enterprise solution offered by each vendor, the extent
of product integration across the enterprise solution, and the availability of
localized software products and technical support in key markets outside the
United States. Several competitors have significant worldwide presence's and
longer operating and product development histories along with greater financial,
technical and marketing resources, and larger
- - -------------------
(1) Forward-looking statement
<PAGE> 13
installed bases than PeopleSoft. PeopleSoft also faces competition from niche
providers of HRMS software products, financial management system software
products and distribution software products. In addition, two large software
providers have sublicensed PeopleSoft products in competition with PeopleSoft's
marketing efforts in selected markets. Recent trends in the software industry
toward cooperative agreements between competitors and the potential for
consolidation in the industry also pose a potential source of competition.
Intense competition could potentially lead to increased price reductions in
the market and by the Company, reduced gross margins and loss of market share by
the Company which therefore, could materially adversely effect the Company's
business, operating results and financial condition. Therefore, there can be no
assurance that the Company will continue to compete successfully with its
existing competitors or will be able to compete successfully with new
competitors.
RELIANCE ON PROPRIETARY SOFTWARE DEVELOPMENT TOOLS
The Company's software products include a suite of proprietary software
development tools known as "PeopleTools," which are fundamental to the effective
use of the Company's software products. While no industry standard exists for
software development tools, several companies are focused specifically on
providing software development tools and are attempting to establish their
software development tools as accepted industry standards. In the event that a
software product other than the Company's PeopleTools software product becomes
the clearly established and widely accepted industry standard, the Company may
need to abandon or modify PeopleTools in favor of such an established standard,
may be forced to redesign its software products to operate with such third
party's software development tools, or may be faced with the potential sales
obstacle of marketing a proprietary software product against other vendors'
software products incorporating a standardized software development toolset.
Accordingly, in any of these cases, the Company's results of operations could be
materially adversely effected.
RELIANCE ON THIRD PARTIES
A key aspect of the Company's sales and marketing strategy is to build and
maintain strong working relationships with businesses the Company believes play
an important role in the successful marketing of its software products. The
Company's customers and potential customers often rely on third party system
integrators to develop, deploy and manage client/server applications. These
include: (i) RDBMS software vendors; (ii) hardware vendors which offer both
hardware platforms and, in the case of IBM, proprietary RDBMS products on which
the Company's software products run; (iii) technology consulting firms and
systems integrators, some of which are active in the selection and
implementation of large information systems for the information-intensive
organizations that comprise the Company's principal customer base; and (iv)
benefits consulting firms that are active in the implementation of human
resource management systems. The Company believes that its marketing and sales
efforts are enhanced by the worldwide presence of these companies. However,
there can be no assurance that these companies, most of which have significantly
greater financial and marketing resources than PeopleSoft, will not start, or in
some cases increase, the marketing of business application software in
competition with PeopleSoft, or will not otherwise discontinue their
relationships with or support of PeopleSoft. If the Company or its partners are
unable to adequately train a sufficient number of consulting personnel to
support the implementation of the Company's software products, demand for these
software products could subsequently be adversely effected. In addition,
PeopleSoft's software application architecture, including PeopleTools, may
facilitate reduced implementation efforts for customers compared to the
competitive alternatives. Consequently, PeopleSoft's software products may be a
less desirable recommendation alternative for integrators who both provide
selection advice and generate consulting fees from customers by providing
implementation services. Due to the foregoing factors, it is reasonably possible
that in a future quarter or quarters the Company's operating results could fall
short of the published expectations of certain public market financial analysts.
COMPLEXITY OF SOFTWARE PRODUCTS AND PRODUCT DEVELOPMENT
PeopleSoft's software products can be licensed for use with the following
RDBMSs and run on the following operating systems: Centura Software
Corporation's ("Centura", formerly Gupta Corporation) SQLBase (OS/2 and NT),
IBM's DB2 for MVS/ESA (MVS, using connectivity products from Centura and Sybase,
Inc. ("Sybase")), IBM's DB2 for AIX Informix Corporation's INFORMIX-OnLine
Dynamic Server (AIX, Dynix, Solaris, MP RAS, Digital Unix, Unisys Unix, DG/UX
and HP-UX), Microsoft Corporation's ("Microsoft") SQL Server, (NT for HRMS
products only), Oracle Corporation's ORACLE (VMS, Open VMS, NT and over 10
versions of Unix), and Sybase's System 11 (HP-UX, AIX and Solaris). In addition,
the Company is in the process of porting its software products to IBM's DB2 for
OS/400, and certain products to Microsoft's SQL Server 6 (NT), Sybase's System
11 (PeopleSoft Financials became generally available on System 11 on April 22,
1996) and its PeopleTools to Apple Computer Inc.'s ("Apple") native Macintosh
<PAGE> 14
family of computers and peripherals.(1) No assurance can be given concerning the
successful development of PeopleSoft software products on these additional
platforms, the specific timing of the releases of any future modules, the
performance characteristics of PeopleSoft applications on these platforms or
their acceptance in the marketplace. In addition, there may be future or
existing RDBMS platforms which achieve popularity within the business
application marketplace and which PeopleSoft may desire to offer its
applications thereon. Such future or existing RDBMS products may or may not be
architecturally compatible with PeopleSoft's software product design. No
assurance can be given concerning the successful porting to new platforms, the
specific timing of completion of any such ports or their acceptance in the
marketplace.
Software programs as complex as those offered by the Company are likely to
contain a number of undetected errors or "bugs" when they are first introduced
or as new versions are thereafter released. Despite testing by the Company and
by third-parties, errors or system performance issues may arise with the
possible result of reduced acceptance of the Company's software products in the
marketplace. Due to the increasing number of possible combinations of vendor
hardware platforms, operating systems and updated versions thereof, PeopleSoft
application modules, third party, and updated versions thereof, and RDBMS
platforms and updated versions thereof, the effort and expense of developing,
testing and maintaining these software product lines in an increasing number of
combinations will increase, and the ability to develop consistent product
performance characteristics across all of these combinations could place a
significant strain on the Company's development resources and deliverable
schedules.
RELIANCE ON SINGLE CLIENT INTERFACE
At the present time, the Company supports client (workstation) platforms
exclusively utilizing Microsoft's Windows software products, including Windows
3.1, Windows NT and Windows 95. If Microsoft were to fundamentally change the
architecture of its software product such that users of PeopleSoft's software
applications experienced significant performance degradation or were rendered
incompatible with future versions of Microsoft's Windows Operating System, the
Company's results of operations could be adversely effected. If a new user
interface software product, such as an Internet browser, were to gain broad
acceptance in the marketplace, there can be no assurance PeopleSoft's
architecture would be compatible with such an interface. In addition, as the
Company expands its software product offerings into new vertical markets, the
dependency on Microsoft's Windows technology may adversely impact the Company's
ability to successfully compete in those markets. For example, failure to
support Apple's Macintosh platform could adversely effect PeopleSoft's ability
to compete in the higher education market. No assurance can be given concerning
the Company's successful development of, and support for new client platforms,
the specific timing of their availability or their acceptance in the
marketplace.
RELIANCE ON JOINT BUSINESS ARRANGEMENTS
PeopleSoft has entered into two separate development arrangements
("Development Arrangements"), one for the purpose of developing a line of
manufacturing software applications and the other for the purpose of developing
a line of student administration software applications (See Note 7 of the Notes
to Consolidated Financial Statements in the Company's Annual Report to
Shareholders (Form 10-K) for the year ended December 31, 1995). Under these
Development Arrangements, PeopleSoft is the exclusive remarketer of the
developed software products and pays a royalty to them based on license fees
received from end user licenses of these software products. While the intent of
each Development Arrangement is to develop business applications which are
integrated with PeopleSoft's software products, there can be no assurance that
such software products will in fact be integrated or that an integrated
enterprise solution will be accepted by the market. In addition, should the
Development Arrangements require additional funds to complete development or
enhance the software product, there can be no assurance that funds will be
available on terms acceptable to the existing or other potential third partY
funding source(s). Should PeopleSoft acquire title to the software products or
technology from the third party entity, such acquisition would be accounted for
using the purchase method which is likely to result in the creation of
significant intangible assets by virtue of the allocation of a substantial
portion of the purchase price to the acquired technology or other intangible
assets. Such intangible assets would be amortized in future periods as a cost of
operations.
APPLICATION SECURITY ARCHITECTURE
The Company's application software products incorporate extensive security
features designed to protect certain sensitive data managed by these
applications from unauthorized retrieval or modification. To date, the Company
is not
- - ----------------
(1) Forward-looking statement
<PAGE> 15
aware of any violations of its application security architecture within its
installed base. The Company has developed a security architecture utilizing the
capabilities of its own applications, the client operating system software, some
of the security features contained in the RDBMS platforms on which the
applications run, as well as certain third party security products. Although
these security features are subject to constant review and enhancement, no
assurances can be given concerning the successful implementation of these
security features and their effectiveness within a particular customer's
operating environment. Should a breach of security or a suspected breach of
security occur, the accompanying publicity or any subsequent claims against the
Company could have an adverse impact on the demand for the Company's software
products and/or cause a decline in the market price of the Company's stock.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards certain features of its internal operations, software
and documentation as proprietary, and relies on a combination of contract,
patent, copyright, trademark and trade secret laws and other measures to protect
its proprietary information. The Company received its first patent in 1995, its
second patent in the first quarter of 1996 and has one additional patent
application pending. Existing copyright laws afford only limited protection. The
Company believes that, because of the rapid pace of technological change in the
computer software industry, trade secret and copyright protection are less
significant than factors such as the knowledge, ability and experience of the
Company's employees, frequent product enhancements and the timeliness and
quality of support services. There can be no assurance that these protections
will be adequate or that PeopleSoft's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. Many customers are beneficiaries of a source code escrow company
arrangement to enable the customer to acquire a future limited right to use
PeopleTools source code solely for their internal provision of maintenance
services. This possible access to PeopleTools source code may increase the
likelihood of misappropriation or other misuse of the Company's intellectual
property. In addition, the laws of certain countries in which the Company's
software products are or may be licensed do not protect the Company's software
products and intellectual property rights to the same extent as the laws of the
United States.
The Company does not believe that its software products, third party
software products the Company offers under sublicense agreements, Company
trademarks or other Company proprietary rights infringe the property rights of
third parties. However, there can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future software products or that any such assertion may not require
the Company to enter into royalty arrangements or result in costly litigation.
PRODUCT LIABILITY
The Company's license agreements with its customers contain provisions
designed to limit the Company's exposure to potential product liability claims.
It is possible, however, that the limitation of liability provisions contained
in the Company's license agreements may not be valid as a result of federal,
state, local laws or ordinances or unfavorable judicial decisions. Although the
Company has not experienced any product liability claims to date, the license
and support of its software for use in mission critical applications creates a
potential adverse risk in the event such a claim was successfully pursued
against the Company. Damage or injunctive relief resulting under such a
successful claim could cause a materially adverse impact on the Company's
business, operating results and financial condition.
GROWTH IN OPERATIONS
The Company has experienced an extended period of significant revenue
growth, growth in the Company's customer base, expansion of its software product
lines and supported platforms, a significant expansion in the number of its
employees, increased pressure on the viability and scope of its operating and
financial systems and expansion in the geographic scope of its operations. This
growth has resulted in new and increased responsibilities for management
personnel and has placed a significant strain upon the Company's management,
operating and financial controls and resources, including its services and
development organizations. To accommodate recent growth, compete effectively and
manage potential future growth, the Company must continue to implement and
improve the speed and quality of its information decision systems, management
decisions, reporting systems, procedures and controls and further expand, train
and motivate its workforce. There can be no assurance that the Company's
personnel, procedures, systems and controls will be adequate to support the
Company's future operations.
KEY PERSONNEL
<PAGE> 16
PeopleSoft believes that its continued success will depend in large
part upon its ability to attract and retain highly-skilled technical,
managerial and marketing personnel. The loss of services of one or more of
the Company's key employees could have a materially adverse effect on the
Company's business, operating results and financial condition. The Company
intends to hire a significant number of additional sales, service and
technical personnel in 1996. Competition for the hiring of such personnel in the
software industry is intense, and the Company from time to time experiences
difficulty in locating candidates with appropriate qualifications,
particularly within various desired geographic locations. There can be no
assurance that the Company will be successful in attracting and retaining the
personnel it requires to develop, market and support new or existing software.
EXPANSION OF FACILITIES
The Company has and plans to significantly expand the number of employees
at its Corporate headquarters location in Pleasanton, California.(1) While the
Company is making every effort to obtain sufficient office space to house these
employees in a productive environment, the commercial real estate market in the
Tri-Valley area is constrained by the decrease of new commercial real estate
development over the past several years which makes obtaining additional quality
office space increasingly difficult. The Company has acquired a building for the
purpose of addressing office space needs, however, the space is largely occupied
by existing tenants. Thus, alternative office space is required to address
planned expansion. The Company is in the process of attempting to locate and
contract for adequate space, however, no assurance can be made that sufficient
office space will become available to meet the Company's near term needs. In the
event economic office space does not become available, hiring plans may be
slowed or a distant location may be selected which could possibly decrease
employee productivity. There can be no assurance that local facilities will be
obtained, and such failure to obtain local facilities may result in lower
employee productivity and constrained hiring plans which could adversely impact
the Company's business and operating results.
INVESTMENTS AND LIQUIDITY
The Company's short-term investments consist primarily of high quality
municipal bonds and tax-advantaged money market instruments. Despite favorable
credit ratings on these investments there can be no assurance the issuing
agencies will not default on their obligations which may result in losses of
principal and accrued interest by PeopleSoft. While operating activities may
provide cash in certain periods, to the extent the Company experiences growth in
the future, operating and investing activities may use cash, and, consequently,
such growth may require the Company to obtain additional sources of financing.
In addition, material acquisitions of complementary businesses, products or
technologies, and capital expenditures may require additional sources of
financing.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not party to any legal proceeding which would have a
material impact on the Company, its operations or financial results.
Item 2. Change in Securities
None
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8 - K
- - ----------------
(1) Forward-looking statement
<PAGE> 17
(a) Exhibits
None
(b) Reports on Form 8 - K
No reports on Form 8 - K were filed during the quarter ended March
31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 1996
PEOPLESOFT, INC.
By: /s/ RONALD E. F. CODD
---------------------
Ronald E. F. Codd
Senior Vice President of Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE> 18
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 109,913
<SECURITIES> 32,121
<RECEIVABLES> 105,889
<ALLOWANCES> 5,147
<INVENTORY> 0
<CURRENT-ASSETS> 266,881
<PP&E> 92,573
<DEPRECIATION> 22,634
<TOTAL-ASSETS> 343,964
<CURRENT-LIABILITIES> 171,674
<BONDS> 0
0
0
<COMMON> 105,122
<OTHER-SE> 67,168
<TOTAL-LIABILITY-AND-EQUITY> 343,964
<SALES> 0
<TOTAL-REVENUES> 80,285
<CGS> 0
<TOTAL-COSTS> 23,347
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 386
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,922
<INCOME-TAX> 6,369
<INCOME-CONTINUING> 9,553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,553
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
