<PAGE> 1
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 September 30,
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)
<TABLE>
<CAPTION>
Delaware 68-0137069
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4440 Rosewood Drive, Pleasanton, CA 94588-3031
(Address of principal executive officers) (Zip Code)
</TABLE>
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 September 30, 1996
<S> <C> <C>
Common Stock, $.01 par value 50,758,689
</TABLE>
1
<PAGE> 2
PEOPLESOFT, INC.
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1995 and
September 30, 1996 3
Condensed Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 1995 and September 30, 1996 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1995 and September 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 22
ITEM 2 - Change in Securities 22
ITEM 3 - Defaults upon Senior Securities 22
ITEM 4 - Submission of Matters to a Vote of Security Holder 22
ITEM 5 - Other Information 22
ITEM 6 - Exhibits and Reports on Form 8 - K 22
SIGNATURES 23
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PEOPLESOFT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 88,052 $ 130,739
Short-term investments 37,687 41,897
Accounts receivable, net 97,773 142,903
Other current assets 5,908 9,726
Deferred tax assets 14,170 21,514
-------------- -----------
Total current assets 243,590 346,779
Property and equipment, at cost 81,383 122,564
less accumulated depreciation and amortization (18,164) (35,092)
-------------- -----------
63,219 87,472
Long-term investments - 9,034
Capitalized software, less accumulated amortization 7,342 7,300
Other assets - 8,415
-------------- -----------
$ 314,151 $ 459,000
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 25,730 $ 35,954
Accrued compensation and related expenses 24,290 36,783
Income taxes payable 10,600 18,514
Deferred revenue 96,830 153,133
-------------- -----------
Total current liabilities 157,450 244,384
Stockholders' equity:
Common stock $0.01 par value, 160,000,000
shares authorized;
Shares issued and outstanding:
1995-49,320,516, 1996-50,758,689 493 508
Additional paid-in capital 98,667 120,060
Foreign currency translation adjustment (264) (94)
Retained earnings 57,805 94,142
-------------- -----------
Total stockholders' equity 156,701 214,616
-------------- -----------
$ 314,151 $ 459,000
============== ===========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE> 4
PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 35,872 $ 66,439 $ 87,038 $164,388
Services 24,221 49,134 64,511 132,099
-------- -------- -------- --------
Total revenues 60,093 115,573 151,549 296,487
Costs and expenses:
Cost of license fees 2,419 2,720 6,277 8,257
Cost of services 15,072 31,444 37,196 78,144
Sales and marketing 17,537 33,496 45,630 89,825
Product development 9,483 17,910 23,921 46,805
General and administrative 4,305 6,654 11,062 17,211
-------- -------- -------- --------
Total costs and expenses 48,816 92,224 124,086 240,242
-------- -------- -------- --------
Operating income 11,277 23,349 27,463 56,245
Other income, principally interest 1,130 1,268 2,851 4,316
-------- -------- -------- --------
Income before taxes 12,407 24,617 30,314 60,561
Provision for income taxes 4,962 9,847 12,126 24,224
-------- -------- -------- --------
Net income $ $ 7,445 $ 14,770 $ 18,188 $ 36,337
======== ======== ======== ========
Net income per share $ $ 0.13 $ 0.26 $ 0.33 $ 0.64
======== ======== ======== ========
Shares used in per share computation 55,494 57,693 54,466 56,983
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1995 1996
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 18,188 $ 36,337
Adjustments:
Depreciation and amortization 10,796 18,465
Provision for doubtful accounts 1,796 1,826
Changes in deferred tax assets - (7,344)
Changes in operating assets and liabilities:
Accounts receivable (34,892) (46,675)
Other current assets (2,258) (3,170)
Accounts payable and accrued liabilities 7,687 9,300
Accrued compensation and related expenses 7,485 12,454
Deferred revenue 30,295 56,303
Income taxes payable (7,072) 7,914
Tax benefits of employee stock transactions 4,972 7,025
-------- ----------
Net cash provided by operating activities 36,953 92,435
INVESTING ACTIVITIES
Purchase of investments (29,511) (29,157)
Sale of investments 33,409 15,912
Purchase of property and equipment (21,402) (41,148)
Additions to capitalized software, net (6,269) (1,494)
Additions to other assets - (8,415)
--------- -----------
Net cash used in investing activities (23,773) (64,302)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 4,830 14,383
--------- ----------
Net cash provided by financing activities 4,830 14,383
Effect of foreign exchange rate changes on cash 31 171
--------- ----------
Net increase (decrease) in cash and cash equivalents 18,041 42,687
Cash and cash equivalents at beginning of period 61,241 88,052
--------- ----------
Cash and cash equivalents at end of period $ 79,282 $ 130,739
========= ==========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 6
PEOPLESOFT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at September 30, 1995 and 1996, as well as for the three and
nine month periods 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 flow for the interim
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 prior
period financial statement items in the Condensed Consolidated Balance Sheet
have been reclassified to conform to the current presentation.
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
and nine month periods ended September 30, 1996 are not necessarily indicative
of operating results to be expected 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. All shares and per share
amounts do not reflect the stock split to be effected on November 15, 1996 as
discussed further below. The computation of the weighted average number
of shares outstanding for the three and nine month periods ended September 30,
1995 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
1995 1996 1995 1996
--------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Weighted average shares:
Common stock 49,074 50,678 48,660 50,164
Common stock equivalents 6,420 7,015 5,806 6,819
--------------- ---------------- ---------------- -------------
55,494 57,693 54,466 56,983
=============== ================ ================ =============
</TABLE>
6
<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 September 30, 1996
were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
-------------- ---------------
<S> <C> <C>
Billed receivables $ 49,372 $ 67,826
Unbilled receivables 53,166 81,729
------------- --------------
102,538 149,555
Allowance for doubtful accounts (4,765) (6,652)
------------- --------------
$ 97,773 $ 142,903
============= ==============
</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 September 30, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
--------------- -----------------
<S> <C> <C>
License fees $ 20,775 $ 30,989
Maintenance 49,984 81,369
Training 17,264 26,336
Other services 8,807 14,439
------------- -------------
$ 96,830 $ 153,133
============= =============
</TABLE>
7
<PAGE> 8
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 would be made. Certain acquired software rights have been re-classified
to other current assets, in accordance with their expiration dates. Amortization
charges related to capitalized software amounted to $2,182,000 and $1,536,000
for the nine months ended September 30, 1995 and 1996, respectively. Capitalized
software costs and accumulated amortization at December 31, 1995 and September
30, 1996 were as follows (in thousands) :
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
---------------- ----------------
<S> <C> <C>
Capitalized software:
Internal development costs $ 7,016 $ 8,510
Purchased from third parties 5,137 4,300
--------------- ---------------
12,153 12,810
Accumulated amortization (4,811) (5,510)
--------------- ---------------
$ 7,342 $ 7,300
=============== ===============
</TABLE>
6. SUBSEQUENT EVENTS
ACQUISITION OF RED PEPPER SOFTWARE
On October 16, 1996, the Company completed the acquisition of Red
Pepper Software ("Red Pepper"). Under the terms of the acquisition, which was
accounted for as a pooling of interests, the Company exchanged 2,710,380 shares
of common stock for all of Red Pepper's 13,164,215 outstanding shares and
assumed 299,379 options to purchase its common stock, at a common exchange
ratio of approximately 0.20589 of a share of the Company's common stock for
each share of Red Pepper's common stock. All outstanding Red Pepper preferred
stock was converted into common stock immediately prior to the acquisition. Red
Pepper, based in San Mateo, California, is a leading provider of manufacturing
and supply chain optimization solutions.
8
<PAGE> 9
Presented below is unaudited selected pro forma financial information,
reflecting the combination, for the year ended December 31, 1995 and nine month
periods ended September 30, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA FINANCIAL Year Ended For the Nine Months Ended
INFORMATION December 31, September 30,
1995 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Total revenues $232,139 $153,982 $302,384
Net income $ 27,338 $ 16,628 $ 34,124
Net income per share $ 0.48 $ 0.29 $ 0.57
Shares used in per share computation 57,031 56,736 59,534
</TABLE>
The unaudited pro forma results for the nine months ended September 30, 1996
do not include non-recurring charges of approximately $3.0 to $3.5 million
arising from the acquisition of Red Pepper which will be recorded in the quarter
ending December 31, 1996.
The unaudited pro forma information is not necessarily indicative of the
actual results of operations had the acquisition occurred at the beginning of
the periods indicated, nor should it be used to project the Company's results of
operations for any future date or period.
STOCK SPLIT
On October 22, 1996, the Company announced a two-for-one split of its common
stock. The stock split will be effected as a stock dividend on November 29, 1996
for all shareholders of record on November 15, 1996. The stock split will
increase the number of shares of common stock outstanding from approximately
55,000,000 to 110,000,000. The accompanying condensed consolidated financial
statements do not reflect the retroactive effect of the stock split planned for
November 15, 1996.
ACQUISITION OF PEOPLESOFT MANUFACTURING L.P.
On October 22, 1996, the Company announced that it plans to acquire the
other outstanding equity interests in PeopleMan L.P. ("PeopleMan") and
PeopleSoft Manufacturing, Inc., a joint development venture and its general
partner, respectively. As of September 30 1996, PeopleSoft held a 41 percent
interest in PeopleMan. The joint development venture was founded for the
purpose of developing a line of manufacturing software applications. This
transaction, involving payment of $28.5 million in a combination of stock,
stock options, and other consideration, will be accounted for under the
purchase method and will result in a one-time charge to earnings for in-process
technology of a substantial portion of the purchase price in the quarter ending
December 31, 1996.
At September 30, 1996, $2.4 million was owed to the Company from the
partnership for funding of operations and purchases of property and equipment.
This receivable balance is classified in the other asset category at September
30, 1996.
9
<PAGE> 10
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 Private Securities Litigation Reform Act of
1995. The following discussion sets forth certain factors the Company believes
could cause actual results to differ materially from those contemplated by the
forward looking statements. Forward-looking statements are identified with
footnote # 1. The Company undertakes no obligation to update the information
contained in Item 2.
10
<PAGE> 11
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 SEPTEMBER 30,
------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
TOTAL REVENUES DOLLAR INCREASE
1995 1996 YEAR OVER YEAR
-------- -------- ------
Revenues:
<S> <C> <C> <C>
60% 58 % License fees 85 %
40 42 Services 103
------- ------- ------
100 100 Total revenues 92
Costs and expenses:
4 2 Cost of license fees 12
25 27 Cost of services 109
29 29 Sales and marketing 91
16 16 Product development 89
7 6 General and administrative 55
------- ------- ------
81 80 Total costs and expenses 89
------- ------- ------
19 20 Operating income 107
2 1 Other income 12
------- ------- ------
21 21 Income before taxes 98
9 8 Provision for income taxes 98
------- ------- ------
12% 13 % Net income 98 %
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
TOTAL REVENUES DOLLAR INCREASE
1995 1996 YEAR OVER YEAR
-------- -------- ------
<S> <C> <C> <C>
Revenues:
57 % 55 % License fees 89%
43 45 Services 105
-------- ------- ------
100 100 Total revenues 96
Costs and expenses:
4 3 Cost of license fees 32
25 26 Cost of services 110
30 30 Sales and marketing 97
16 16 Product development 96
7 6 General and administrative 56
-------- ------- ------
82 81 Total costs and expenses 94
-------- ------- ------
18 19 Operating income 105
2 1 Other income 51
-------- ------- ------
20 20 Income before taxes 100
8 8 Provision for income taxes 100
-------- ------- ------
12 % 12 % Net income 100%
======== ======= ======
</TABLE>
11
<PAGE> 12
REVENUES
The Company recognizes revenue when a non-cancellable license agreement has
been signed, the product has been shipped, the fees are fixed and determinable,
and collection is considered probable. The Company allocates the total value of
each customer license agreement between software license fees and services,
consisting of maintenance, training, consulting and support services based on
current list prices for services. For customer license agreements which have
payments due within one year, the portion allocated to software license fees
will generally 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 due one year or more
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 customer license agreements ("contracting activity") signed for
software license fees and services increased from $56.8 million in the quarter
ended September 30, 1995 to $114.6 million for the same period in 1996. The
aggregate value of customer license agreements related to PeopleSoft Human
Resources ("HRMS") signed during the third quarter of 1995 was $33.5 million and
was $63.7 million in the same period in 1996. The aggregate value of customer
license agreements related to PeopleSoft Financials during the third quarter was
$22.3 million in 1995 and was $45.5 million in the same period in 1996.
Revenues from licensing fees increased 85% from $35.9 million in the three
month period ended September 30, 1995 to $66.4 million for the same period in
1996. Revenues from licensing fees for the first nine months of 1996 increased
89% from $87 million in 1995 to $164.4 million for the same period in 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 103% from $24.2 million in the third
quarter of 1995 to $49.1 for the same period in 1996. In the first nine months
of 1996, service revenues increased 105%, from $64.5 million in 1995 to $132.1
million for the same period in 1996. The Company's customer license agreements
provide for initial maintenance, training, consulting and support services for
specified periods or amounts therefore increases in customer licensing
agreements have resulted in increases in revenues from these services. Service
revenues as a percentage of total revenues were 40% and 42% for the quarters
ended September 30, 1995 and 1996, and were 43% and 45% of total revenues for
the nine months ended September 30, 1995 and 1996, respectively. The increase in
the relative percentage of service revenues to total revenues in the three month
and nine months periods ended September 30, 1996 was attributable to two primary
factors: increases in the installed base of customers receiving ongoing
maintenance, training and other support services; and a significant investment
in the Company's professional services staff, which grew substantially over the
comparable 1995 periods as a result of increased demand for PeopleSoft's direct
assistance during enterprise implementation projects.
Total revenues increased from $60.1 million in the third quarter of 1995 to
$115.6 million in the same period of 1996, representing an increase of 92%. In
the first nine months of 1996, total revenues increased 96%, from $151.5 million
in 1995 to $296.5 million for the same period in 1996. During the third quarters
of 1995 and 1996, the Company's international revenues, principally from
customers located in Canada, were approximately 16% and 17% of total revenues,
respectively. International revenues were 15% and 17% of total revenues for the
first nine months of 1995 and 1996, respectively.
COSTS AND EXPENSES
Cost of license fees consists principally of royalties, technology access
fees to certain software vendors and amortization of capitalized software costs.
Cost of license fees increased from $2.4 million in the third quarter of 1995 to
$2.7 million in the third quarter of 1996, representing 4% and 2% of total
revenues and 7% and 4% of license fee revenues in those periods, respectively.
Cost of license fees increased from $6.3 million in the first nine months of
1995 to $8.3 million in the comparable period of 1996, comprising 4% and 3% of
total revenues and 7% and 5% of license fee revenues in those periods,
respectively. The Company's system solutions are based on a combination of
internally developed technology and application products, as well as bundled
third party products and technology. During 1996, the Company entered into
several additional third party marketing and sublicensing agreements which
required either initial payments and/or ongoing payments during the term of the
agreements. The absolute increase in cost of license fees in the 1996 periods
was partially attributable to costs associated with these agreements, as well as
royalties for the Company's Order Management module, which was developed by
PeopleMan under a joint business arrangement with PeopleSoft (See Note 7 of
"Notes to Consolidated Financial Statements" in the
12
<PAGE> 13
Company's Annual Report to Shareholders (Form 10-K) for the year ended December
31, 1995 and "Notes to Condensed Consolidated Financial Statements" included in
Part I -- Item I of this Quarterly Report). By virtue of the Company's
acquisition of PeopleMan, these royalties will no longer be incurred after
October 31, 1996. The decline in cost of license fees as a percentage of license
fee revenues in the 1996 periods was attributable to a relative decrease in
software amortization charges, the mix of royalty bearing software products,
reduction in documentation costs due to the move to the compact disk version of
PeopleSoft documentation and other reductions in royalty expenses primarily
associated with certain fixed price aggregate royalty payment arrangements. Cost
of license fees as a percentage of license fee revenues may fluctuate from
period to period due principally to the mix of sales of royalty-bearing software
products in each period and 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 joint business arrangement, and charges associated with software products and
technologies acquired during 1996 from various third party vendors, may cause
the cost of license fees as a percentage of license fee revenues to increase in
future periods.
Cost of services consist principally of account management support, training,
consulting and product support. These costs increased from $15.1 million in the
three month period ended September 30, 1995 to $31.4 million in the comparable
period of 1996, representing 25% and 27% of total revenues and 62% and 64% of
service revenues in the three month periods ending September 30, 1995 and 1996,
respectively. Cost of services increased from $37.2 million in the first nine
months of 1995 to $78.1 million in the comparable period of 1996, comprising 25%
and 26% of total revenues, and 58% and 59% of service revenues in the nine month
periods ending September 30, 1995 and 1996, respectively. These increases are
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.
Sales and marketing expenses increased from $17.5 million in the third
quarter of 1995 to $33.5 million in the comparable period in 1996, representing
29% of total revenues in both periods. These expenses increased from $45.6
million in the first nine months of 1995 to $89.8 million in the comparable
period of 1996, comprising 30% of total revenues in both periods. The increase
in sales and marketing expenses was attributable to the Company's expansion of
its direct sales force, increased depreciation from 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 address certain international and
vertical markets, establish an enterprise sales force structure, and fund sales
organization expansion for financial, distribution and manufacturing products.
Consequently, such expenses may increase as a percentage of total revenues in
future periods.
Software product development expenses increased from $9.5 million in the
three month period ending September 30, 1995 to $17.9 million in the comparable
period in 1996, representing 16% of total revenues in both periods. These
expenses increased from $23.9 million in the first nine months of 1995 to $46.8
million in the comparable period in 1996, representing 16% of total revenues in
both periods. In addition, the Company capitalized internal software development
costs of $2.0 million and $1.5 million in the nine month periods ended
September 30, 1995 and 1996, respectively. Software product development
expenditure increases are directly attributable to increases in the Company's
staff of software engineers and consultants, and the associated infrastructure
costs required to support product development initiatives in the following
areas: i) Expansion and enhancement of the Company's core product offerings in
the areas of Human Resource Management Systems, Financial Management Systems,
and Distribution/Materials Management Systems; ii) the enhancement of
the Company's platform development, certification, product testing and overall
release management capabilities; iii) the continued enhancement of the
Company's client/server architecture including its software development tools
and the integration of these tools with various third party purchased or
licensed technologies; iv) the localization and translation of certain versions
of the Company's products for specific foreign markets; and v) the development
of certain vertical market products and versions of its core products suitable
to the unique needs of customers within certain industries. The Company
anticipates software product development expenditures to significantly increase
in future periods due to continued incremental investment in all of the above
activities, the acquisition of Red Pepper and PeopleMan, L.P. and the
associated expansion of the Company's manufacturing application development
activities. Such expenditures may increase as a percentage of revenues.
13
<PAGE> 14
General and administrative expenses increased from $4.3 million in the three
month period ended September 30, 1995 to $6.7 million in the comparable period
in 1996, representing 7% and 6% of total revenues, respectively in these
periods. These expenses increased from $11.1 million in the first nine months of
1995 to $17.2 million in the comparable 1996 period, representing 7% and 6% of
total revenues, respectively in these periods. 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 $1.1 million
in the three month period ended September 30, 1995 to $1.3 million in the
comparable period in 1996. Interest income, totaling $1.1 million in the quarter
ended September 30, 1995 and $1.4 million in the comparable period in 1996, was
earned on the Company's investments of excess cash. In the first nine months of
1995, other income was $2.9 million compared to $4.3 million in the same 1996
period. Interest income, totaling $2.9 million in the first nine months of 1995
and $3.8 million in the comparable period in 1996, was earned on the Company's
investments of excess cash.
NON-RECURRING CHARGES
On October 22, 1996, the Company announced that it plans to acquire the
other outstanding equity interests in PeopleMan and PeopleSoft Manufacturing,
Inc., respectively, a joint development venture and its general partner. The
joint development venture was founded for the purpose of developing a line of
manufacturing software applications. This transaction will be accounted for
under the purchase method, with a purchase price of approximately $28.5 million
in a combination of stock, stock options and other consideration. Under
purchase accounting, the purchase price will be allocated to PeopleMan's
identifiable tangible assets, which are under $1 million in the aggregate, with
the remainder allocated to intangible assets and in-process research and
development. Accordingly, this acquisition will result in a one-time charge to
earnings of a substantial portion of the purchase price in the quarter ending
December 31, 1996. It is currently anticipated that approximately $22 to $28
million of the purchase price will be allocable to in-process technology and
consequently will be expensed in the fourth quarter of 1996. (1)
On October 16, 1996, PeopleSoft completed the acquisition of Red Pepper,
which was accounted for under the pooling of interests method of accounting.
The Company expects to incur certain transaction costs related to this
acquisition of between $3.0 and $3.5 million in the fourth quarter of 1996.
As a result of these transactions, the Company expects to report total
non-recurring charges in the fourth quarter of between $25 million and $31.5
million. Certain of these non-recurring charges will not be deductible for tax
purposes, which may increase the overall effective tax rate for the calendar
year 1996.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 40% for each of the three month and
nine month periods ended September 30, 1995 and 1996. During these periods,
there has not been a significant change in the components of the effective tax
rate. The provision for income taxes for the three month and nine month periods
ended September 30, 1996 is based upon the Company's estimate of the effective
tax rate for fiscal 1996. As permitted by the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," the Company has recorded $21.5
million in net deferred tax assets at September 30, 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
The Company finances its operations primarily through cash flows from
operations. In addition, under the Company's unsecured bank line of credit, up
to $30.0 million is available for working capital. This facility expires in July
1997. No borrowings were outstanding under this line at September 30, 1996.
The Company's operating activities provided cash of $37 million during
the nine month period ended September 30, 1995, compared to $92.4 million in
the nine month period ended September 30, 1996. Operating cash flows have
increased primarily due to increases in income before non-cash items including
depreciation and amortization, and increases in deferred revenue, both of which
were partially offset by increases in accounts receivable. From December 31,
1995 to September 30, 1996, accounts receivable increased from $97.8 million to
$142.9 million and deferred revenues increased from $96.8 million to $153.1
million. The increase in accounts receivable and deferred revenues resulted
from the growth in customer licensing activity and associated deferrals of
revenues related to services. 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 98 days as of September 30, 1995 as compared to 90 days as of September 30,
1996. The improvement in DSO is the result of enhancements to the collection
process, increased software leasing and early quarterly closings of contracting
activity. 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 nine 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 nine months of 1995 and 1996, the Company's principal
use of cash for investing activities was the purchase of property and
equipment. The increase in property and equipment was primarily attributable to
purchases of computer and networking equipment to accommodate employee and
facility expansions and to support the Company's growing training capacity
requirements. As of September 30, 1996, the Company had $102.4 million in
working capital, including $130.7 million in cash and cash equivalents and
$41.9 million in short-term investments, consisting primarily of high quality
municipal bonds and tax-advantaged money market instruments. In addition the
company had $9.0 million in long term investments, primarily high quality
municipal bonds, with a
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(1) Forward-looking statement
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remaining maturity of greater than one year. Long term investments have
increased this year due to a change in the Company's investment policy which
allows a portion of its investment portfolio to consist of securities with
maturities of up to 18 months. The Company believes that existing cash and
short-term investment balances, credit facilities, and potential cash flow
from operations will be sufficient to meet its operating cash requirements,
including the impact on operations of the acquisition of Red Pepper and
PeopleMan, at least through the middle of 1997.(1)
FACTORS THAT MAY EFFECT 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 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), and Item 3 - Risk
Factors, Ratio of Earnings to Fixed Charges and Other Information, Item 5 - Pro
Forma Financial Information, Item 14 - Information with Respect to Registrants
Other Than S-2 or S-3 Registrants and Item 17 - Information with Respect to
Registrants Other Than S-2 or S-3 Registrants contained in the Company's
registration form S-4 filed on October 2, 1996.
The Company has identified certain forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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 (contracting activity) 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 such as:
(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 product solutions for the
customer's overall enterprise, which has increased 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 where 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
unanticipated impact on seasonal business patterns; and (iii) enterprise
transactions often involve both software products that are immediately
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 both
software product categories, the license agreement and its supporting schedules
must contain very precise contractual provisions and terminology to permit any
revenue recognition under generally accepted accounting principals.
Additionally, changes in levels of consulting activity and the related
satisfaction of significant license agreement milestones, as well as 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.
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(1) Forward-looking statement
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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
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 affected. 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 the
foregoing, 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. 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 experienced sequential growth
in its contracting activity levels from the quarter ended December 30 to the
quarter ended September 30. Based on these historical patterns, the Company
believes that the quarter ended December 31, 1996, will have higher levels of
contracting activity and related license revenue than the quarter ended
September 30, 1996. 1
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. In addition, the
Company continues to evaluate opportunities to enhance and expand its technology
and product offerings through potential partnerships, licenses or acquisitions
which may, in the short term, negatively impact costs, expenses and earnings per
share.
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. In the third quarter of 1996, the
Company acquired the net assets and operations of InfoSoft S.A. in Madrid, Spain
and established PeopleSoft Iberica, S.L. PeopleSoft Iberica will provide direct
sales and support activities in the Mediterranean region. The acquisition was
accounted for under the purchase method. The purchase price paid by the Company
for this entity was not significant and the Company does not believe this
acquisition will have a material impact on the Company's statement of position
or results of operations.(1)
The Company's sales through its foreign operations are generally denominated
in each respective subsidiary's functional currency. Unexpected changes in the
exchange rates for these foreign currencies could result in significant
fluctuation in the foreign currency transaction as well as 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.
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1 Forward-looking statement
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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,
manufacturing management system and HRMS application software vendors; and
software tools vendors. Although PeopleSoft believes its success has been due
in part to its early emphasis on the client/server architecture, virtually all
of the Company's competitors now offer software products based on a
client/server architecture. Consequently, competitive differentiators now
include more subtle architectural and technology factors, enterprise product
breadth and individual product features, service reputation, product
flexibility, ease of implementation, international product version availability
and support, and price.
In the enterprise application software market, PeopleSoft faces significant
competition from SAP and Oracle and to a lesser degree, Dun & Bradstreet
Software, Baan Company N.V., Computer Associates International, Inc., and other
companies such as System Software Associates who previously focused primarily on
the AS/400 marketplace. In this 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, larger installed bases, longer operating and product development
histories and greater financial, technical and marketing resources than
PeopleSoft.
In the manufacturing software application market, in which PeopleSoft will be
competing with its next release, PeopleSoft faces competition from several of
its existing competitors such as QAD, Ross Systems and J.D. Edwards and a large
number of niche competitors already in the manufacturing market place,
including, but not limited to: Numetrix Software, I2 Technologies, Chesapeake
Systems, Berclain, Manugistics, Waterloo Manufacturing Software and Caps
Logistics.
PeopleSoft also faces competition from providers of HRMS software providers
including Cyborg, Lawson Associates, Integral Systems, Inc., InPower,
Incorporated and Ceridian, and from providers of financial management system
software products including Hyperion, Computron Software, Inc., Lawson, and
other smaller companies. In addition, since June 1992 ADP Inc. ("ADP") and,
since August 1995, Shared Medical Systems ("SMS") have the right to sublicense
selected 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 of vendors within the industry
also create a potential source of competition.
Intense competition could potentially lead to increased price reductions
in the market and by the Company. Price reductions may lead to 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 affected in an adverse manner. In addition, Red Pepper applications
also include a suite of proprietary software development tools known as
"Response Agent Business Modeler," which is proprietary and therefore faces
similar risks relative to its proprietary nature should an alternative industry
standard become widely accepted.
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 which 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. Also, 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 affected. 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 recommended 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.
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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 or 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,
SINIX, IRIX 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
AS/400, certain products to Microsoft's SQL Server 6 (NT), and its PeopleTools
to Apple Computer Inc.'s ("Apple") native Macintosh family of computers. 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.
During 1996, the Company announced its plans to integrate, over the next
several releases, several third party software products into its PeopleTools
and core applications products in order to enhance and expand performance,
reporting capabilities and self diagnostics. BEA Software's Tuxedo product will
be integrated into PeopleTools to allow applications to run on a distributed
basis using multi-tiered client/server architecture. Cognos's Powerplay will be
bundled to incorporate desktop OLAP capabilities and PeopleSoft run time
version of SQA's Robot automated testing product will be integrated to allow
improved performance management and monitoring. Integration of these products
is complex and no assurance can be made that these efforts will be successful
or result in significant product enhancements which will generate incremental
revenue for PeopleSoft.
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 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 associated updated versions, PeopleSoft application
modules, third party software and associated updated versions, and RDBMS
platforms and associated updated versions, the effort and expense of developing,
testing and maintaining these software product lines in an expanding number of
software and hardware combinations will increase. 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 ARRANGEMENT
PeopleSoft has entered into a separate development arrangement ("Development
Arrangement") 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 this Development Arrangement, PeopleSoft is
the exclusive remarketer of the developed software products and pays a royalty
to the development entities based on license fees received from end user
licenses of these software products. While the intent of the 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 Arrangement
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
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using the purchase method which is likely to result in a charge to earnings for
in-process technology which would be recorded to the Statement of Operations in
the period such acquisition was completed or the creation of significant
intangible assets by virtue of an 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.
ACQUISITION OF PEOPLEMAN L.P. AND PEOPLESOFT MANUFACTURING, INC
On October 22, 1996 the Company announced that it plans to acquire the
other outstanding equity interests in PeopleMan L.P. and PeopleSoft
Manufacturing, Inc., a joint development venture and its general partner,
respectively. The joint development venture was founded for the purpose of
developing a line of manufacturing software applications. This transaction will
be accounted for under the purchase method with a purchase price of
approximately $28.5 million in a combination of stock, stock options, and other
consideration. The acquisition will result in a one-time charge to earnings for
in-process technology representing a substantial portion of the purchase price
in the quarter ending December 31, 1996.
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 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 be suspected or 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, the market
price of the Company's stock and/or the Company's financial results due to lost
or delayed closing of software product licensing opportunities.
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, 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. Additionally, many customers are beneficiaries of a source code
escrow 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, local 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
create a potential 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. In
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addition, as PeopleSoft begins to compete in the manufacturing software
application market, the mission critical nature of such software products may
increase PeopleSoft's exposure to product liability claims against the Company.
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 increase in the number of its employees,
heightened 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. 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
PeopleSoft believes that its continued success and the success of its
recent merger and acquisition activity 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' key employees
could have a materially adverse effect on the Company's business, operating
results and financial condition. The Company continues to hire a significant
number of additional sales, service and technical personnel. 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 expanded and plans to continue to significantly expand the
number of employees at its corporate headquarters location in Pleasanton,
California. The Company acquired a building in 1995 to address office space
needs; however, the space is partially occupied by existing tenants and may not
be available rapidly enough to meet the Company's growth. Thus, alternative
office space is required to address planned expansion. The commercial real
estate market in the Tri-Valley area is constrained by the extremely low rate of
new commercial real estate development over the past several years with
increased economic growth and increased demand for office space which makes
obtaining additional quality office space increasingly difficult. The Company is
in the process of attempting to locate and contract for additional space;
however, there can be no assurance that the Company will be able to secure local
facilities. Additionally, if local facilities are obtained, it is not certain
that reasonable terms or acceptable financing arrangements will be attained.
Failure to obtain local facilities, under commercially reasonable terms, may
result in lower employee productivity, constrained hiring plans or increased
facility charges which could adversely impact the Company's business and
operating results.
VOLATILITY OF STOCK PRICE
As is frequently the case with stock of high technology companies, the
market price of the PeopleSoft stock has been and may continue to be quite
volatile. Factors such as quarterly fluctuations in results of operations,
announcements of technological innovations or the introduction of new products
by PeopleSoft or its competitors, macroeconomic conditions in the computer
hardware and software industries generally, and disposition of substantial
amounts of common stock may have a significant impact on the market price of the
stock of PeopleSoft. In addition, if revenue or earnings in any quarter fail to
meet expectations of the investment community, there could be an immediate
impact on PeopleSoft's stock price. The Company has just completed the
acquisition of Red Pepper Software for 2.7 million shares of PeopleSoft common
stock and the assumption of 299,379 options to purchase PeopleSoft common stock,
which may be disposed of from time to time on the open market. Also, the Company
has outstanding warrants to purchase 2,000,000 shares of PeopleSoft common stock
which currently have exercise prices below the current market price. The
exercise of these warrants and resale of the underlying shares could adversely
affect the market price of the Company's common stock. Furthermore, the stock
market has from time to time experienced extreme price and volume fluctuations
which have particularly affected the market price for many high technology
companies which, on occasion, have been unrelated to the operating performance
of these companies. These broad market fluctuations may materially affect the
market price of the stock of PeopleSoft.
INVESTMENTS AND LIQUIDITY
20
<PAGE> 21
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.
21
<PAGE> 22
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
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8 - K
No reports on Form 8 - K were filed during the quarter ended
September 30, 1996.
22
<PAGE> 23
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: November 13, 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)
23
<PAGE> 24
PEOPLESOFT, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT TITLE
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 130,739
<SECURITIES> 41,897
<RECEIVABLES> 149,555
<ALLOWANCES> 6,652
<INVENTORY> 0
<CURRENT-ASSETS> 346,779
<PP&E> 122,564
<DEPRECIATION> 35,092
<TOTAL-ASSETS> 459,000
<CURRENT-LIABILITIES> 244,384
<BONDS> 0
0
0
<COMMON> 120,568
<OTHER-SE> 94,048
<TOTAL-LIABILITY-AND-EQUITY> 459,000
<SALES> 0
<TOTAL-REVENUES> 296,487
<CGS> 0
<TOTAL-COSTS> 86,401
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,887
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 60,561
<INCOME-TAX> 24,224
<INCOME-CONTINUING> 36,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,337
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
