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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
____X Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1996
______ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-20710
PEOPLESOFT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Delaware 68-0137069
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
4440 Rosewood Drive, Pleasanton, CA 94588
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (510) 225-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION> Name of each exchange
Title of each class on which registered
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<S> <C>
None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on March 14, 1997
as reported on the NASDAQ National Market, was approximately $2.0 billion.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 14, 1997, Registrant had 108,502,679 outstanding shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders to be held May 27, 1997 are incorporated by reference in Part III
of this Form 10-K Report.
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References in this Report to the "Company" or "PeopleSoft" refer to PeopleSoft,
Inc. which was incorporated in Delaware in 1987. PeopleSoft, PeopleTools,
PeopleCode, the PeopleSoft logo, and PS/nVision are registered trademarks of
the Company. In addition, Red Pepper, and the Red Pepper logo are trademarks
of the Company. This report also contains other companies' trademarks.
References to beta versions of software products refer to software products
delivered to select customers for testing or evaluation prior to the general
commercial release of such software products.
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PART I
ITEM 1. BUSINESS
This Business section and other parts of this Form 10K contain
forward-looking statements that involve risk and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed below and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
GENERAL
PeopleSoft designs, develops, markets and supports a family of
enterprise client/server application software products for use throughout large
and medium sized organizations, including corporations worldwide, and higher
education institutions and federal, state, provincial and local government
agencies in North America. The Company designed its software products
specifically for the client/server model of computing and believes that its
architecture is among the most flexible available for enterprise level
applications software. The Company's strategy is to offer comprehensive
enterprise application software solutions to a variety of industries with
best-in-class software products utilized in a wide variety of cross-industry
solutions. The Company's software products utilize the Microsoft Windows family
of operating systems on the desktop, and a wide variety of popular relational
database management systems ("RDBMS") operating systems and hardware platforms
choices on the server, making its software solutions among the most flexible,
scaleable and portable in the application software industry. The software
products run on the NT, OS400, MVS, VMS and various UNIX operating systems (see
further details under "Related Database Management Systems" below) utilizing
RDBMSs from vendors such as Oracle Corporation ("Oracle"), IBM, Informix
Corporation ("Informix"), Sybase, Inc. ("Sybase"), Microsoft Corporation
("Microsoft") and Centura Software Corporation ("Centura"),. The software
products operate on a wide range of hardware platforms, including IBM
Mainframes, UNIX-based computers from Digital Equipment Corporation ("Digital"),
Hewlett Packard Corporation ("HP"), IBM, Sun Microsystems, Inc. ("Sun"), Sequent
Computer Systems, Inc. ("Sequent") and others, and Intel based servers running
Windows NT. The software products have been developed using PeopleTools, the
Company's integrated rapid application development toolset which is delivered to
customers along with the application software products to facilitate end user
modification and customization.
PeopleSoft was incorporated in Delaware in August 1987 and initially
shipped its first software product suite, a Human Resource Management System
("HRMS") in December 1988. In 1992, PeopleSoft introduced the first of a
series of Financial Management and Accounting System software products, and has
since introduced a suite of Distribution Management products, a suite of
Manufacturing products, a suite of Public Sector Financial Management products,
additional Human Resource and Financial Management software products, and has
tailored portions of its HRMS for the US Federal government marketplace. In
addition, in October 1996, the Company acquired Red Pepper Software Company
("Red Pepper"), a leader in the emerging supply chain management systems
market. The acquisition furthers PeopleSoft's best-in-class strategy by adding
significant expertise in the area of supply chain management, a key
differentiator in the market. PeopleSoft's Red Pepper family of intelligent
planning and scheduling solutions enables manufacturers to respond rapidly to
customers needs while minimizing supply chain costs. Red Pepper technology is
embedded in certain PeopleSoft Manufacturing software products and is also sold
separately for integration into customer environments that incorporate
enterprise resource planning ("ERP"), material requirement planning ("MRP") and
demand requirement planning ("DRP") products from other vendors.
SOFTWARE PRODUCT ARCHITECTURE
PeopleSoft's software products are based on a scaleable, multi-tiered,
client/server architecture. The Company believes that its architecture provides
the system performance required for business transactions, reduce overall system
costs and facilitate faster, easier and less expensive implementations of the
initial system as well as subsequent upgrades. In addition to the advantage of
a pure client/server architecture, the PeopleSoft solution offers a number of
other important features. PeopleSoft applications are designed for ease of use,
are integrated with the Microsoft Windows family of products and are compatible
with personal productivity applications such as word processors and
spreadsheets. PeopleSoft software products are also designed specifically for
use with RDBMSs, which offer power and
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functionality superior to flat files, hierarchical, or other non-relational
databases that are generally used with legacy software applications. The
Company's software products are also scaleable, permitting changes in network
size, server platforms and other architectural components with minimal
disruption. Further, PeopleSoft software products are portable across major
RDBMS software and server hardware platforms. The Company believes that the
intuitive design of its software products reduce end-user training requirements
and allow end-users and decision makers increased access to critical data not
always readily available to them with legacy systems.
CLIENT/SERVER ARCHITECTURE
Under the Company's multi-tiered client/server architecture, user
intensive functions such as presentation and interactive application logic, as
well as data intensive application processing logic and database management
functions may be distributed or concentrated between single or multiple clients
and servers. For example, under a distributed function model of cooperative
processing, application logic related to online user interaction, and user
presentation are resident on the client, and the underlying database management
functions are located on the server, thereby optimizing the utilization of
computing resources on the network. Certain other application logic, including
high volume data manipulation and other batch mode processes, are transferable,
and, based on user defined run-time specifications, can be run on either the
client, an application server or the database server. The design and
flexibility of this architecture also significantly enhances: (i) the
portability of the Company's software across a broad range of hardware
platforms; and (ii) the scalability of PeopleSoft's applications which allows
customers to maximize the value of their information technology investments by
downsizing, rightsizing or expanding their computing environments with minimal
disruption. With the availability of Release 6 in the fourth quarter of 1996,
the Company's application products now can take advantage of messaging using
remote calls ("RC") which facilitate real-time initiation of certain application
logic routines on an application server or database server machine.
PEOPLETOOLS
Today's users are demanding system solutions that address specific
business needs, are quickly adaptable to changing information requirements and
provide for ease of access to information. PeopleSoft addresses this need by
providing PeopleTools, a set of integrated development and reporting tools
including: (i) Development tools for use by business process or system analysts
to rapidly design and deploy custom modifications; (ii) Administration tools for
use by systems managers and support staff to improve the efficiency of
implementing, operating and upgrading PeopleSoft's applications; (iii) Reporting
and Analysis tools for use by application users to easily access, summarize and
analyze information; and (iv) PeopleSoft Workflow for use by business process
analysts and application users to automate business processes in a paperless
environment. PeopleTools continues to be used by the Company to develop most of
its application software products. Unique features and functions which
PeopleTools provides include effective date capabilities, extensive security at
both a user and object level, and a tree editor for managing hierarchical
relationships among data elements. PeopleTools is used to build and modify data
tables, design and customize user interface windows, modify user pull-down
menus, define security privileges of individual users and operator access to
system objects, define and build workflow based processes, and facilitate data
importation from other systems into PeopleSoft applications. PeopleTools
simplifies system customization and implementation and reduces the time and cost
of implementing the system. Upgrades to new releases are simplified with a tool
which provides an automated comparison of the customer's customized systems to
base level systems, and helps define how to install new releases. In addition,
PeopleTools provides customers with significant flexibility to modify their
systems quickly and inexpensively, so that internal maintenance costs can be
reduced significantly.
RELATIONAL DATABASE MANAGEMENT SYSTEMS
By utilizing relational databases and designing the system from the
ground up, the Company has been able to develop integrated software products
with fully normalized data structures. A fully integrated system provides
convenient access to shared data such as department tables, tax rates and
organization charts, without requiring users to maintain this information
redundantly. Collecting and capturing information once ensures that all data
is consistent, readily available and easier to maintain. Through adherence to
ANSI Structured Query Language ("SQL"), the industry standard data manipulation
language for RDBMSs, and other relational database standards, the Company's
software products are available in a range of environments. PeopleSoft's
software products can be licensed for use with the following RDBMSs and run on
the following operating systems: Centura's SQLBase (Windows 95 single user
version only and NT), IBM's DB2 (MVS/ESA using connectivity products from IBM,
Centura or Sybase, and separately on AIX and OS/400), Informix's
INFORMIX-OnLine Dynamic Server (AIX,
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Dynix, Solaris, MP RAS, Digital Unix, Unisys Unix, DG/UX, DC/Osx, IRIX, SCO Open
Server, Reliant Unix, NT, SGI and HP-UX), Microsoft SQL Server NT version 6.5,
Oracle's Oracle (NT and over 10 versions of Unix), and Sybase's System 11
(Digital Unix, HP-UX, AIX and Solaris). If the customer decides to switch to
other PeopleSoft supported RDBMS or hardware platforms, user disruption is
usually minimized because only the "back-end" database changes, while the
"front-end" application remains the same. In addition, the Company is in the
process of porting 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 additional platforms,
the specific timing of the releases of any future software products, the
performance characteristics of PeopleSoft applications on additional platforms
or their acceptance in the marketplace.
Not all software products or release versions of the Company's
software products are currently available on all of the above platforms. The
Company expects to continue expanding platform availability to address general
marketplace demand. Presently, releases or new software products are initially
introduced on Oracle with a subsequent release supporting other RDBMS versions.
As a result of the complexities inherent in the DB2 environment and the
performance demanded by customers in the DB2 environment, the DB2 version
requires more lengthy development and testing periods to achieve market
acceptance. 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.
GRAPHICAL USER INTERFACE
All PeopleSoft software products share a common graphical user
interface ("GUI") based on Microsoft's Windows family of products, which
provides a consistent "look and feel" to the Company's applications, including
similar pull down menus, error handling, system navigation and point-and-click
mouse-driven functionality. PeopleSoft release 6 operates exclusively in a
32-bit architecture on Windows 95 and NT; but earlier versions are also
compatible with 16-bit architectures including Windows 3.1. The intuitive
nature of GUI-based systems increases productivity and reduces user training
requirements. The GUI's ease of use encourages non-technical users to utilize
the information system capabilities more fully. In addition, the GUI allows
users to integrate enterprise applications and data with other Microsoft
Windows-based desktop applications. For example, customers can easily query
the system and download data into either a word processing document or a
spreadsheet. By leveraging the public's widespread familiarity with personal
computers ("PC"), previously difficult access to enterprise information is
readily available to the casual employee user, resulting in potentially
significant improvements in employee productivity.
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. 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. To date, the Company is not
aware of any violations of its application security architecture within its
installed base.
ELECTRONIC COMMERCE
PeopleSoft's Release 6 includes an enhanced application interface that
facilitates the integration of PeopleSoft applications with the World Wide Web,
the Internet, extranets and intranets. Electronic Data Interchange ("EDI") is
supported by the EDI Manager feature to handle transactions based on EDI
documents utilizing standard X-12 and EDIFACT formats. The transactions can be
passed over the Internet or private extranets. The Message Agent feature allows
initiation of PeopleSoft transactions from sources such as electronic forms,
electronic mail, Interactive Voice Response ("IVR") systems, touch screen
information kiosks and Web browsers. In addition, the Message Agent allows
initiation of PeopleSoft transactions through Web based applications such as
those from Edify, Seeker Software and Talx or by utilizing Web based tools from
PeopleSoft partners OneWave, Inc. and NetDynamics.
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APPLICATION SOFTWARE PRODUCTS
At December 31, 1996, PeopleSoft's commercially available application
software products include PeopleSoft HRMS 6, PeopleSoft Financials 6,
PeopleSoft Financials for Public Sector 5.1, PeopleSoft Distribution 6,
PeopleSoft Manufacturing 6, PeopleSoft HRMS for the Federal Government 5.1 and
PeopleTools 6. Listed below are the commercially available and beta software
products for the following software product lines:
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<CAPTION>
HRMS FINANCIALS DISTRIBUTION MANUFACTURING SUPPLY CHAIN OPTIMIZATION
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Human Resources General Ledger Purchasing Bills and Routings Red Pepper Enterprise
Benefits Planning
Administration Receivables Inventory Production Planning Red Pepper Order
Promising
FSA Administration Payables Order Management Production Red Pepper Production
Management Planning
Payroll Asset Billing Cost Management
Management
Payroll Interface Projects Enterprise Engineering *
Planning
Pension Budgets Product
Administration Configurator *
Time and Labor Treasury *
Expenses *
* in beta release
</TABLE>
Release 6 software products have been enhanced to include many global
features and functions and development is underway to provide translated
releases for a variety of languages including: French, German, Spanish,
Canadian French, Canadian English, UK English, International English, Japanese
(Kanji), Dutch, and Portuguese (for the Brazilian marketplace). The Company
intends to continue to enhance its software products through new releases,
including extending global functionality throughout its core software products
and updating current country-specific and non-English language releases of its
applications.
Application software products currently under development and planned
for future release include: Payroll and Payroll Interface applications of
PeopleSoft HRMS for the Federal Government, PeopleSoft HRMS for the Public
Sector, and PeopleSoft Student Administration. The PeopleSoft Student
Administration system (Admissions/Recruitment, Financial Aid, Student Records,
Academic Advisement, Student Financials and Campus Community) is under a joint
development arrangement, as further described under " Software Product
Development" and Note 7 to the Consolidated Financial Statements. The
following new enterprise software products are currently in beta release:
Expenses, Treasury, Product Configurator and Engineering. No assurance can be
given concerning the successful development of enhancements or new modules, the
specific timing of completing new releases or new features of software products
or the level of their acceptance in the marketplace.
The Company's software products are generally licensed to end-user
customers under non-exclusive, non-transferable, perpetual license agreements.
In most cases, the Company licenses its software products solely for the
customer's internal operations. License fees for the Company's software
products are a function of the particular combination of PeopleSoft software
products chosen and, the number of employees for HRMS products or revenues of
the licensing entity for Financial, Distribution and Manufacturing software
products and the number of named users for various PeopleSoft and third party
workstation based software tools. All RDBMS platforms are priced the same
except for DB2 mainframe versions, which have a higher price. The following
range of individual software product license fees include a single copy of the
software, system and user documentation, one year of software product
maintenance, a one-year software product warranty, limited installation support
and limited software product training. Current list prices for license fees
for a company with 1,500 employees and revenues of $375 million, can range as
follows:
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HRMS FINANCIALS DISTRIBUTION MANUFACTURING
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<S> <C> <C> <C> <C>
Mainframe $36,000-144,000 $108,000-304,000 $162,000-387,000 $108,000-387,000
Other servers $30,000-120,000 $90,000-254,000 $135,000-322,000 $90,000-322,000
</TABLE>
These prices are subject to upward adjustments on an annual basis in the
event the licensee's employee base or revenue base increase beyond certain
ranges.
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Prices for PeopleSoft's Red Pepper software products are based on the
revenues of the licensing entity, beginning at $485,000 for the first server
with additional servers priced at 30% of the first server.
The Company also offers PeopleTools to PeopleSoft customers who are
interested in developing their own custom, internal client/server business
applications. License fees for PeopleTools are a function of the number of
licensed users, and such fees start at $45,000. The contractual terms of
PeopleTools licenses are similar to those for other PeopleSoft applications and
generally do not restrict the customer's internal use of PeopleTools.
PEOPLESOFT APPLICATION PRODUCTS - HUMAN RESOURCE MANAGEMENT SYSTEM (HRMS)
The Company's license revenues from the PeopleSoft HRMS software
products were 77%, 62%, and 55% of total license revenue for the years ended
December 31, 1994, 1995, 1996, respectively. PeopleSoft HRMS 6 is a family of
fully integrated human resource management application software products
available for a variety of industries. Release 6 HRMS software products which
are currently commercially available include: Human Resources, Benefits
Administration, FSA Administration, Payroll, Payroll Interface, Time and Labor
and Pension Administration. A brief summary of each software products follows:
PEOPLESOFT HUMAN RESOURCES. The base human resources software product
provides support for the human resource function, including personnel
administration (employee biographical information and record keeping),
recruitment, position management, training and development, health and safety,
skills inventory, career planning, affirmative action planning, COBRA
administration and EEO reporting. This software product also contains
capabilities to perform discrimination testing, individual plan enrollment
panels, and reference tables to define benefit programs and plans. Additional
features include: globalization for managing operations and requirements
specific to a country or region, competency management for identifying and
analyzing job skills or competencies associated with individuals, jobs, teams
and positions and variable compensation to align the workforce with strategic
business objectives, including the administration and tracking of various types
of incentive compensation plans. With this foundation as a building block, the
following software products can be added to expand the range of system
capabilities.
PEOPLESOFT BENEFITS ADMINISTRATION. The benefits administration
software product provides the capabilities required to support daily benefits
administration activities and is an important management tool for controlling
costs as well as complying with government regulations. This software product
supports both flexible and non-flexible benefits programs that require complex
eligibility checking, open enrollment processing, and other automatic
enrollment processing capabilities. This software product also provides for
user-defined benefit eligibility criteria, enrollment rules and flexible credit
calculations as well as voice- activated open enrollment and event maintenance.
Features include: a COBRA administration process to more fully automate
compliance, benefits billing, family medical leave act administration, multiple
job eligibility and coverage calculations, and retroactive benefit/deduction
calculations.
PEOPLESOFT FSA ADMINISTRATION. The flexible spending account
administration ("FSA") software product provides a comprehensive flexible
benefits software solution for companies that offer "cafeteria" benefits plans.
The FSA software product includes capabilities for FSA claims tracking and
processing, extensive editing to ensure that funds are available and that
duplicate claims are not processed and support for check preparation for
reimbursements.
PEOPLESOFT PAYROLL. The payroll software product provides a full
in-house payroll administration and production facility. This application
processes payroll calculations, check printing, tax reporting, deduction and
benefit calculations, and has comprehensive audit trail and reporting
capabilities. Features include: Fair Labor Standards Act overtime
calculations, retroactive pay calculations, online-interactive manual checks,
prior period rates, company transfers and complete payroll tax processing
information.
PEOPLESOFT PAYROLL INTERFACE. This software product provides a bridge
between the PeopleSoft HRMS data and third party payroll systems for those
companies that use their own payroll system or a payroll service bureau. This
interface provides a subset of the capabilities of PeopleSoft Payroll along
with enhanced with import facilities.
PEOPLESOFT PENSION ADMINISTRATION. This software product automates
pension administration functions from benefit plan administration to employee
communication and retirement calculations for defined benefit plans.
PeopleSoft Pension Administration streamlines operations regardless of the
number of plans or complexity of the structure.
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PEOPLESOFT TIME AND LABOR. This software product enables easy and
consistent recording in a single repository of the details of employee's daily
work. PeopleSoft Time and Labor supports a variety of business functions, such
as compensation, cost accounting, and organization administration. It also
enables an organization's recording of any information that can be attributed
to an individual employee and expressed in hours.
In addition to the above software products, the Company has extended the
functionality of PeopleSoft HRMS through the integration of numerous third
party software products including a resume reader from Restrac, tax reporting
and filing from Federal Liaison Services and interactive voice processing of
benefit, time and personal payroll-related information from TALX Corporation.
PEOPLESOFT APPLICATION PRODUCTS - FINANCIAL MANAGEMENT SYSTEMS
For the years ended December 31, 1994, 1995 and 1996, the Company's
financial, distribution and manufacturing software products accounted for
approximately 20%, 35% and 43% of license revenue, respectively. PeopleSoft
Financials is a family of fully integrated financial management system products
available for a variety of industries. Release 6 Financials software products
which are currently commercially available include: General Ledger,
Receivables, Payables, Asset Management, Projects and Budgets. Treasury and
Expenses are currently in beta release. No assurance can be given concerning
the successful development of enhancements or new software products, the
specific timing of completing new releases or new software products or the
level of their acceptance in the marketplace. A brief summary of each software
product follows:
PEOPLESOFT GENERAL LEDGER. The general ledger software product provides
financial analysis, flexible management reporting, general ledger accounting
and consolidations that enable the user to collect and report financial
information based on the organization's unique requirements. Features include:
unlimited charts of account (ChartFields) with alternate account codes
available to support multinational statutory requirements, unlimited ledger
versions (multibooks) allowing transaction level data capture in an unlimited
number of currencies, gross and net debit and credit balances, currency
precision to 15.3 digits, automatic generation of cross-currency exchange
rates, customer-defined ledgers, graphical "tree" maintenance of ChartField
elements, flexible calendars, dynamic budgeting, automated journal entry,
multi-currency capabilities, automated allocations processing and intercompany
journal entries
PEOPLESOFT RECEIVABLES. The receivables software product manages the
receipt of customer payments, and is designed to improve the organization's
ability to collect payments in a timely fashion. Features include: automatic
assessment of a customer's payment habits, generation of dunning letters,
value-added tax ("VAT") processing, automatic tape lock box processing for
electronic processing of high-volume transactions and cash position
projections.
PEOPLESOFT PAYABLES. The payables software product provides
comprehensive accounts payable and cash management functions. Features
include: the support of multiple currencies, flexible payment policies, VAT and
Goods and Services Tax ("GST") processing, automated three-way matching of
receiving including evaluated receipt settlement ("ERS"), integration with
PeopleSoft Asset Management and Purchasing to track asset acquisitions, invoice
and purchase order data, recurring vendor contracts, express checks, workflow
approval for vouchers and cash requirements analysis and planning.
PEOPLESOFT ASSET MANAGEMENT. The asset management software product
manages the acquisition, maintenance, transfer, depreciation and retirement of
fixed assets and tax compliance. Features include: asset tracking, maintenance
and insurance tracking, flexible depreciation accounting for book and tax
purposes, what-if depreciation modeling, and integration with PeopleSoft
Payables and Purchasing .
PEOPLESOFT PROJECTS. The projects software product integrates
operational and financial functions, allowing users to perform a variety of
tasks, from managing complex capital projects to calculating revenue for
billable projects. This software product was developed with input from experts
from a wide range of industries including the utilities, aerospace, health
care, education, mining and engineering.
PEOPLESOFT BUDGETS. The budgeting software product integrates all
aspects of the budgeting process, combining spreadsheets, workflow processing
and PeopleSoft reporting and query tools into a centralized budgeting solution.
Features include automatic routing, flexible levels of budget detail, access to
data from other applications, access to historical data, flexible time spans,
status monitoring and reports tailored to user requirements.
PEOPLESOFT TREASURY (BETA RELEASE). The treasury software product
provides a comprehensive and flexible toolset for control over corporate
treasury functions. Features include: flexible cash management, front office
functions
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such as: deal capture, deal modeling, market monitoring and
management reporting, position management, and in-house bank administration.
PEOPLESOFT EXPENSES (BETA RELEASE). The expenses software product
integrates all aspects of the travel and entertainment reimbursement process
providing tight control over expense management processing while enabling
timely and efficient employee reimbursement. Features include: the flexibility
to enable travelers to use their own PCs to enter expense reports outside of
the network and then submit them for approval and processing later, direct
input from credit card companies, or centralized input of employee receipts
submitted by travelers. This software can be integrated with the General Ledger
and Payables for reporting and disbursements and will contain workflow
capabilities for review and approval.
PEOPLESOFT APPLICATION PRODUCTS - DISTRIBUTION
PeopleSoft Distribution is a family of fully integrated distribution
software products providing optimum materials and supply chain management.
From materials procurement through complex outbound logistics, PeopleSoft
Distribution uses the latest technology for the supply chain and to streamline
business processes. Release 6 Distribution software products which are
currently commercially available for the commercial sector are: Purchasing,
Inventory, Billing, Order Management and Enterprise Planning. PeopleSoft
Product Configurator is in beta release. No assurance can be given concerning
the successful development of enhancements or new software products, the
specific timing of completing new releases or new software products or the
level of their acceptance in the marketplace. A brief summary of each software
product follows:
PEOPLESOFT PURCHASING. The purchasing software product automates
requisitioning, purchasing and receiving of raw materials, supplies, services,
products and assets, streamlines purchasing functions through on-line
requisitioning, automated sourcing, and application integration and enables
buyers to manage vendor selection and ongoing contracts more efficiently and
cost effectively. Features include: simplified paperless receiving which also
supports advanced shipment notifications ("ASN") via EDI, payment generation
without invoices using evaluated receipt settlement, and automatic receipt
requisitions from third party form providers.
PEOPLESOFT INVENTORY. The inventory software product provides the
ability to efficiently store and issue stock in response to changing demands,
accurately track the movement of stock on a realtime basis, and automatically
replenish stock as needed. Features include inventory set up based on
organizational structures, costing and valuation management, warehousing space
and stock management, schedule replenishment and distribution, inventory time
levels maintenance, material put away management, fulfillment of orders, item
identification, l, lot and serial number tracking, local planning and reporting
on inventory data.
PEOPLESOFT BILLING. The billing software product offers a flexible,
modular approach for managing billing and adjustments, processing sales taxes,
generating invoices, and creating account distributions. Organizations can
create an enterprise-wide billing information repository, streamline the
billing process, and customize billing requirements. The unique modular
approach opens PeopleSoft Billing to allow the billing process to be driven by
any number of PeopleSoft and non-PeopleSoft billing sources. Features include:
integration with PeopleSoft General Ledger and Order Management, ChartField
combination edits, support of Canadian sales and use taxes and automated RMA
credit generation.
PEOPLESOFT ORDER MANAGEMENT. The order management software product
handles the complete range of order processing requirements. Features include:
rapid online order entry, alternative order entry methods, workflow, EDI,
electronic forms, multimedia attachments, online ATP, quotation processing,
alternate product lists, credit card enabling that is integrated with
PeopleSoft Billing, flexible pricing and commissions, and contract management.
PEOPLESOFT ENTERPRISE PLANNING. The enterprise planning software product
addresses all demands and constraints in the supply chain and quickly creates
deployment plans to satisfy this demand. It offers realtime aggregate planning
and scheduling, product availability and what-if analysis. Features include:
automated transfer orders, alternate sourcing logic, integration with
PeopleSoft Bills and Routings, time fences and filters and the ability to
define and load different forecast releases. This software product
incorporates Red Pepper Enterprise Planning capabilities.
PEOPLESOFT PRODUCT CONFIGURATOR (BETA RELEASE). The configurator
software product, currently in beta release, is a highly efficient solution to
selling, producing and tracking individually configured products in a
make-to-order or assemble-to-order environment. Features include: built-in
rules types to prompt and validate order entry, price
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and cost items based on order data, calculation of ship dates, sales order to
workorder tracking and creation and tracking inventory lots of configured
products.
PEOPLESOFT APPLICATION PRODUCTS - MANUFACTURING
The first general release of PeopleSoft Manufacturing, Release 6, became
commercially available in December 1996. PeopleSoft Manufacturing is a family
of fully integrated software products designed for discrete manufacturers.
Release 6 Manufacturing software products which are commercially available
include: Bills and Routing, Production Planning, Production Management and Cost
Management. PeopleSoft Engineering is currently in beta release. In addition,
PeopleSoft's Red Pepper software product line includes optimization systems for
supply chain planning, sales order promising and plant level operations. Three
applications are commercially available in Red Pepper Release 2.5: Red Pepper
Enterprise Planning, Red Pepper Order Promising and Red Pepper Production
Planning. No assurance can be given concerning the successful development of
enhancements or new software products, the specific timing of completing new
releases or new software products or the level of their acceptance in the
marketplace. A brief summary of each software product follows:
PEOPLESOFT BILLS AND ROUTINGS. The bills and routings software product
provides all the features and functionality required to dynamically maintain
complex bills of material ("BOM"), resources, work centers and routings.
Features include: tight integration with PeopleSoft Engineering enabling BOM
transfers, integration with engineering change orders ("ECO") as well as
interfaces to PeopleSoft Production Planning and Enterprise Planning software
products.
PEOPLESOFT PRODUCTION PLANNING. The production planning software
product offers an advanced planning and scheduling system that enables
simultaneous, real-time optimization of plant-wide procurement and production.
Features include: automatic purchase orders and production orders, automatic
application of rescheduling messages for production orders which will remove
the manual effort necessary to reschedule or cancel orders from planners,
integration with PeopleSoft Production Management, net changes for DataLink
process which allows for the overlay of new changes in the transactional
database on top of existing production plans which reduces the time
required to generate the transactional model, aggregate work center capacity
requirements enabling the capture of capacity information, by time or unit, at
an aggregate level, and the scheduling of work centers for a specific
percentage of utilization. This software product incorporates Red Pepper
Production Planning technology.
PEOPLESOFT PRODUCTION MANAGEMENT. The production management software
product synchronizes planning and execution throughout the enterprise.
Features include: assignment of serial and lot numbers when recording
completions for assemblies and subassemblies, tracking of components by serial
and lot number in work in process ("WIP"), automatic conversion of planned
orders to production, automatic conversion of configured orders to production,
production maintenance through PS/nVision, rework production, production
cancellations and production document, component, operation and dispatch lists
and production replenishment.
PEOPLESOFT COST MANAGEMENT. The Cost Management software product
provides control and flexibility to manage costs throughout the supply chain.
This software product focuses on inventory accounting for specific locations.
Features include: definition of inventory accounts for storage and production
areas, the association of raw materials, WIP, and finished goods accounts with
storage locations, the ability to debit or credit storage accounts as material
moves throughout the enterprise, complete purchase price variance analysis,
variance reporting for actual labor and machine time, rework cost analysis and
reporting of storage and WIP inventory values by account to assist the
reconciliation of perpetual inventory records to general ledger balances.
PEOPLESOFT ENGINEERING (BETA RELEASE). The engineering software
product, currently in second generation beta release, provides the ability to
manage product introduction and change processes throughout the enterprise.
Features include: creation of engineering change requests ("ECR") and ECO with
change process support, seamless document management integration, integration
with PeopleSoft Cost Management and Bills and Routings and what-if modeling in
a non-production environment called the "Engineering Sandbox".
PEOPLESOFT'S RED PEPPER SOFTWARE PRODUCTS. PeopleSoft's Red Pepper
best-in-class supply chain optimization applications are provided for users of
Oracle, SAP AG ("SAP"), The Baan Company N.V. ("Baan"), J. D. Edwards, QAD,
Marcam and SSA applications. ERP, second generation MRP and DRP systems can be
optimized and modernized to enable responsiveness to changing demand and
resource availability. ERP systems provide the transactional infrastructure
upon which the Red Pepper software products can simultaneously optimize on many
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different business objectives. Customer orders, bills of material, purchase
orders, forecasts and other information are all stored and maintained in ERP
systems. The DataBridge seamlessly integrates with these ERP systems to ensure
that Red Pepper software products remain current. The DataBridge enables Red
Pepper to integrate with virtually any ERP or MRP system, whether client/server
or legacy. The Red Pepper client is a Microsoft Windows 95 and NT application
that incorporates many familiar user interface standards and can be used in
conjunction with desktop productivity tools such as Microsoft Word, Excel and
e-mail.
RED PEPPER ENTERPRISE PLANNING. This application allows the modeling
of the entire supply chain and create optimal sourcing plans in real-time.
PeopleSoft has embedded this technology in its Enterprise Planning product.
RED PEPPER ORDER PROMISING. This application allows for promising
sales order delivery dates for customers in real-time. It considers all the
constraints in the supply chain including capacity. PeopleSoft intends to embed
this technology in its Order Management application in Release 7. No assurance
can be given concerning the success of development efforts to embed this
technology into PeopleSoft Order Management, the specific timing of completing
it, or the level of its acceptance in the marketplace.
RED PEPPER PRODUCTION PLANNING. This application creates optimal plans
and schedules in a manufacturing facility. PeopleSoft has embedded this
technology in its Production Planning application to replace traditional master
scheduling, material and capacity requirements planning.
PEOPLESOFT APPLICATION DEVELOPMENT AND PRODUCTIVITY TOOLS - PEOPLETOOLS
The Company includes a restricted use license to PeopleTools with each
PeopleSoft application software product licensed. PeopleTools 6 includes the
following application development tools:
DEVELOPMENT TOOLS: Business process analysts use the following tools to
design and prototype custom modifications:
DATA DESIGNER. Data Designer is used to build new table definitions,
to add, drop or modify fields in existing tables and to facilitate
field editing. In addition, Data Designer includes PeopleCode, a
programming language similar to Visual Basic which is used for custom
field-level calculations, edits, defaults and processing routines
which minimizes complex coding inherent with standard computer
languages.
PANEL DESIGNER. Panel Designer is used to build or modify GUI-based
query and data entry screens.
MENU DESIGNER. Menu Designer is used to build or modify application
windows and pull-down menus in a graphical user interface environment.
OBJECT SECURITY. Object Security allows read or modification access
to individual objects and groups of objects, including tables, panels,
menus or tree structures.
APPLICATION REVIEWER. Application Reviewer works as a debugger to
help systems analysts perform problem identification and resolution
prior to placing a modified system into production.
APPLICATION PROCESSOR. Application Processor builds panels from
stored application objects. An image of the objects in memory is
written to local storage for reuse, but is automatically updated if
changed on the server.
ADMINISTRATION TOOLS: Information systems managers and support staff use the
following tools to improve the efficiency of implementing, operating and
upgrading PeopleSoft's software applications:
APPLICATION INSTALLER. Application Installer automates the
application installation process in various client/server network
environments, facilitating easier navigation through the many
hardware, database, and connectivity variables that affect PeopleSoft
applications.
APPLICATION UPGRADER. Application Upgrader facilitates customer
upgrades to successive releases of the application with retention of
all the function and feature modifications made by the customer
DATA MOVER. Data Mover archives and retrieves archived data stored in
PeopleSoft application databases.
OPERATOR SECURITY. Operator Security controls the scope and level of
data accessibility provided to individuals and classes of users.
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MASS CHANGE. Mass Change is a SQL generator used to develop and
perform custom applications. Through Mass Change, a developer can set
up a series of insert, update or delete SQL statements that the end
user can execute to perform business functions.
IMPORT MANAGER. Import Manager speeds the loading of data generated
by other systems into the RDBMS server for access by the Company's
application software products.
PROCESS SCHEDULER. Process Scheduler streamlines the execution of
routine tasks and controls time-based events from distributed clients
by running, on the client or server, batch processes or programs such
as journal creation, payroll processing, voucher posting and other
reports without requiring additional user interaction.
REPORTING AND ANALYSIS TOOLS: The following tools are used by application
users to easily access, analyze and report information:
PS/AVISION. PS/nVision integrates PeopleSoft applications with
Microsoft Excel for the production of financial statements,
responsibility reports and other ad hoc financial reports and
analyses.
TREE MANAGER. Tree Manager builds hierarchical relationships between
different data elements within a given table, such as among
departments or accounts.
PEOPLESOFT QUERY. PeopleSoft Query builds SQL queries which extract
and summarize information from an application's database.
QUERY LINK. Query Link provides a PeopleSoft Query interface to
Crystal Reports Pro, a versatile report designer and formatter from
Crystal Services. Through Query Link, data can be quickly and easily
formatted with a variety of fonts, borders and other special effects
or imported into a spreadsheet such as Microsoft Excel for further
analysis.
PEOPLESOFT WORKFLOW TOOLS: PeopleSoft Workflow is a suite of tools that
significantly extends the range of business tasks that can be automated.
The following are PeopleSoft Workflow tools:
BUSINESS PROCESS DESIGNER. Business Process Designer comprises the
tools used to design and build business processes, including workflow
rules and routings.
WORKFLOW PROCESSOR. Workflow Processor is a suite of online agents
that run and control the workflow in business processes. Once
business processes are defined, agents are created which perform the
business process tasks.
PEOPLESOFT NAVIGATOR. The Navigator is a graphical "browser" which
provides application users with a graphical map of the business
processes they participate in and enables them to navigate, or select,
application panels by clicking on activities they need to perform.
DATABASE AGENT. The Database Agent monitors the PeopleSoft database
to identify items that need to enter workflow for processing.
MESSAGE AGENT. The Message Agent processes messages sent to PeopleSoft
by external systems such as IVR, E-mail such as Lotus Notes or
Microsoft CC-Mail, Internet, intranet, extranet and kiosks. It
provides an application programming interface ("API") that enables
third party systems to integrate with PeopleSoft.
APPLICATION AGENT. The Application Agent detects when a business rule
has been triggered as users enter data into a PeopleSoft application.
The agent determines who should act on the data and routes it to them.
WORKLISTS. Worklists are ordered lists of work a person or
department has to process. The lists are sent to the correct person in
priority order as defined using the Business Process Designer.
WORKFLOW ADMINISTRATOR. The Workflow Administrator provides
capability to access, monitor, analyze and control workflow
applications.
WORKFLOW API. The Workflow Application Program Interface ("API")
consists of the Message Agent API, which enables third-party systems to
exchange information with PeopleSoft applications such as IVR products
from TALX Corporation and Edify, and the Forms API, which enables
PeopleSoft applications users to route business event information to
external electronic forms packages such as those from Delrina and
JetForm.
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SALES AND MARKETING
The Company markets and licenses its software products in most major
world markets primarily through a direct sales organization of 665 employees as
of December 31, 1996. The direct sales organization is based in 20 field sales
offices located in major metropolitan areas throughout the United States with
international sales activities performed out of the Company's offices in
Toronto, Vancouver, Ottawa, and Montreal, Canada; Amsterdam, The Netherlands;
Paris, France; Reading, England; Munich, Germany; Mexico City, Mexico; Sydney,
Perth and Melbourne, Australia; Auckland, New Zealand; Buenos Aires, Argentina;
Sao Paulo, Brazil; Tokyo, Japan; Madrid, Spain; and Singapore. Most of the
Company's licenses for PeopleSoft software products to date have been in the
U.S. and Canada, and a significant portion of international sales have been to
overseas affiliates of a customer's U.S. based enterprise. To augment its
direct sales channel, the Company has: (i) authorized ADP, Inc. ("ADP") to
market a prior release of its PeopleSoft HRMS software products; (ii) entered
into a teaming agreement with Andersen Consulting to address the PeopleSoft
HRMS and PeopleSoft Financials requirements of state and local government
agencies; (iii) entered into a systems integration agreement with Shared
Medical Systems Corporation ("SMS"); and (iv) utilized third party distributors
and system integrators in various countries where it does not have a direct
sales force. Further details concerning the Anderson Consulting, ADP and SMS
agreements are set forth below.
In support of its sales force, the Company conducts comprehensive
marketing programs which include direct mail, public relations, advertising,
seminars, trade shows and ongoing customer communication programs. The sales
cycle begins with the generation of a sales lead, or often the receipt of a
request for proposal ("RFP") from a prospect, which is followed by
qualification of the lead, an analysis of the customer's needs, response to an
RFP (if solicited by the customer), one or more presentations to the customer,
customer internal sign-off activities and contract negotiation and
finalization. While the sales cycle from customer to customer varies
substantially, the sales cycle has historically required six to twelve months.
Generally, customers are required to obtain separate licenses for the
underlying database management systems directly from the RDBMS vendors; however,
for certain releases of its applications, the Company includes an OS/2 or NT
version of Centura's SQLBase, or a version of Centura's SQLHost/DB2 product
which provides connectivity to IBM's DB2 RDBMS. The Company may also sublicense
runtime versions of Oracle's or Informix's RDBMSs and certain connectivity
software products to its customers, and in some cases, has made royalty
prepayments under these agreements. In addition, the Company incorporates
SQRIBE's (SQRIBE, formerly MITI) SQR ReportMate, Seagate's Crystal Report
Writer, BEA's Tuxedo, and SQA's Robot with all of its software products. In
future releases, subject to successful completion of integration efforts,
features and functions of Cogno's Powerplay will be incorporated as well. The
Company has sublicensing arrangements with Centura, Microsoft, Oracle, Informix,
SQRIBE, Seagate, BEA, Cognos and SQA and accordingly, the Company must rely on
the strength of such companies' trademarks, trade secrets, contractual
arrangements, copyrights and patents for protection and continued usage of such
intellectual property by the Company. Termination of the relationship with any
of these companies could adversely effect the Company's software product
offerings and ability to generate revenue software application license sales.
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 (such as Centura, Informix, Microsoft,
Oracle and Sybase); (ii) hardware vendors (such as Digital, HP, IBM, Sequent and
Sun) 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 (such as Andersen Consulting, IBM's
ISSC, Deloitte and Touche LLP, Coopers and Lybrand LLP, KPMG Peat Marwick LLP
and Price Waterhouse LLP) some of which are active in the
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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 (such as Towers Perrin, Wyatt
Co. and William M. Mercer & Co.) 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. PeopleSoft
has conducted several joint marketing and sales programs with these vendors,
including seminars, direct mail campaigns and trade show appearances. 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 products could ultimately be adversely effected. In addition,
PeopleSoft's software application architecture, including PeopleTools, may
facilitate reduced implementation costs for customers compared to the
competitive alternatives from Oracle and SAP, based in Germany. Therefore,
systems integrators may actually generate lower integration fees when
implementing PeopleSoft applications when compared to competitive offerings.
Due to the foregoing factors, it is possible that in a future quarter
or quarters, the Company's operating results could not meet the published
expectations of certain public market financial analysts. In such an event,
the price of the Company's Common Stock would very likely be materially
adversely effected.
RELATIONSHIP WITH ADP
In order to broaden the overall distribution of its PeopleSoft HRMS
software products and PeopleTools technology, in 1992 the Company signed a
Software License and Support Agreement with ADP. This agreement provides ADP
with a perpetual license to use internally, to modify and to sublicense to its
clients and prospects Release 3 of PeopleSoft HRMS and PeopleTools on the
Centura SQLBase (OS/2) and Oracle database environments. ADP does, however,
have the option to sublicense PeopleSoft HRMS for operation with several other
RDBMS platforms under certain circumstances. This license also permits ADP to
provide service bureau functions to its clients and prospects using these
software products. The service bureau and sublicense rights are limited to:
(i) ADP clients and prospects which have a majority of their employees located
in the United States, Canada, Mexico, the United Kingdom, Belgium, the
Netherlands and Luxembourg (for such clients' and prospects' employees wherever
located); and (ii) ADP clients and prospects for such clients' and prospects'
employees who are located in such countries, even if such clients and prospects
have a majority of their employees outside of such countries. Under the
agreement, the Company provides ADP with certain training, consulting and
support services and product modifications. The Company also agreed that,
prior to 1998, it would not act as a service bureau or grant a license to use
or modify PeopleSoft HRMS to parties in the United States, Canada and Mexico
that could be considered "remarketers" of the PeopleSoft HRMS software product
(excluding PeopleTools), such as consulting and facility management firms and
payroll service bureaus. On September 21, 1995, the Company and ADP amended
the agreement to permit their properly licensed customers to have a broad right
to implement and enter into outsourcing arrangements with third parties.
Through December 31, 1996, the Company has received payments from ADP
totaling $4.1 million for license fees and the fulfillment of certain
customization and training obligations and $14.1 million in minimum royalties
for sublicenses granted by ADP. In addition, the Company will receive $0.5
million upon completion of certain customization obligations and $4.9 million
in minimum royalties for 1997 and will receive additional royalties until such
time as a cumulative sum of $22.8 million, including the $4.6 million for
license fees, software product customizing, and training services, have been
paid to PeopleSoft.
On December 28, 1995, the Company and ADP entered into a fourth
amendment to the agreement. Under the fourth amendment, ADP obtained license
rights to use and distribute PeopleSoft Workflow release 5 and the Company
agreed to provide ADP with defined product maintenance services for all
updates, improvements, additions, modifications and/or enhancements to such
PeopleSoft Workflow licensed only up to but not including Release 6 of
PeopleSoft Workflow. Under the fourth amendment, ADP further agreed to: (i)
irrevocably commit to the 1996 and 1997 annual minimum royalty payments; (ii)
accelerate payment from an annual basis to a quarterly basis with associated
cost of money discounts; and (iii) pay the Company a negotiated license fee for
PeopleSoft Workflow. Consequently, under this revised agreement, ADP will be
required to make quarterly minimum royalty
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payments to PeopleSoft of approximately $1.2 million during 1997. ADP also
agreed to provide the Company with a license to use a copy of ADP's PC Payroll
and PC Exchange in connection with the Company's efforts to build an interface
between certain software products of the Company's software and ADP's Autopay
II payroll system. After 1997, ADP will continue to have a perpetual license
to Release 3 of PeopleSoft HRMS, PeopleSoft Workflow Release 5 as set forth
above, as well as to PeopleTools, including any enhancements to PeopleTools
made by the Company through 1997.
Under the terms of the agreement, the Company also has agreed to
notify ADP of each prospective customer with less than 2,000 employees and to
defer making a sale to that customer for a period of 60 days after the Company
has provided that customer with the Company's and ADP's respective marketing
materials, in order to give ADP an opportunity to market to that customer.
RELATIONSHIP WITH ANDERSEN CONSULTING
Under an exclusive five year teaming agreement executed in October
1993, PeopleSoft and Andersen Consulting are developing extensions to
PeopleSoft's software products and jointly marketing and delivering financial
and human resource client/server enterprise software solutions to state and
local government and public sector organizations in North America. Under the
terms of the agreement, PeopleSoft licenses its software application products
directly to the customer, refers consulting services exceeding certain amounts
to Andersen Consulting, and, will pay Andersen Consulting a royalty based on
the amount of the license fee. PeopleSoft's 1995 and 1996 contracting activity
included approximately $14.3 million and $32.7 million respectively in
contracts which were subject to this agreement.
In May 1995, PeopleSoft and Andersen Consulting announced a new
strategic alliance under which Andersen Consulting agreed to assist in designing
and developing a suite of manufacturing software applications, which are
currently owned, marketed and supported by PeopleSoft. Also during 1995,
Andersen Consulting contributed certain development services and technologies to
a limited partnership for the development of manufacturing software products, in
return for a 17.2% interest in the limited partnership. As a part of this
alliance, the Company purchased the rights to Andersen Consulting's Expert
Configurator software product and an associated patent. In 1996, PeopleSoft
acquired all of the outstanding interests in the limited partnership (PMI).
See "Note 10 of Notes to Consolidated Financial Statements."
RELATIONSHIP WITH SMS
In August 1995, PeopleSoft and SMS entered into a systems
integrator agreement whereby PeopleSoft appointed SMS as a distributor of
certain PeopleSoft HRMS and Financials software products. The term of the
agreement is ten years, with the possibility of annual renewals thereafter.
SMS has the right to market/sublicense such software products in the United
States and Puerto Rico to a defined base of SMS existing end users, and in
conjunction with the distribution of SMS' software products, to other entities
in the health care industry. Except in certain situations, SMS has exclusive
distribution rights to SMS' end users. SMS also obtained the right to use
certain software products of PeopleSoft HRMS and Financials software products
and PeopleTools for general development in support of SMS' internal operations.
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INTERNATIONAL OPERATIONS
During the years ended December 31, 1994, 1995 and 1996, the Company's
international revenues were approximately 12%, 16% and 16% of total revenues,
respectively. International revenues from each geographic region were less than
10% of total revenues. The Company operates in one industry segment, the
development and marketing of computer software products and related services,
and markets to a variety of industries through branches and foreign subsidiaries
located in Canada, United Kingdom, the Netherlands, Germany, France, Spain,
Mexico, Argentina, Brazil, Australia, Singapore, Japan and New Zealand The
Company established the sales offices in Spain, Brazil, Japan and New Zealand,
during 1996. In addition, the Company also markets through distributors in the
Asia/Pacific and Africa. The international revenue percentages above understate
the relative size of the Company's international installed base because U.S.
based companies frequently acquire the rights to utilize the Company's software
products in locations outside of the United States.
SERVICES AND CUSTOMER SUPPORT
The Company believes that a high level of customer service is required
to be successful in the client/server marketplace due to the number of
different hardware and software vendors involved in an implementation and the
inherent complexity of the architecture. The Company also believes that the
opportunity exists to differentiate itself from competitors on a service level
due to the demanding service requirements of this market. The Company's
customer service staff consisted of 1,072 employees as of December 31, 1996.
Service revenue consists primarily of software support (maintenance)
fees, customer training fees, consulting fees, and other miscellaneous fees.
Services revenues constituted 39%, 41% and 44% of the Company's total revenues
during the years ended December 31, 1994, 1995 and 1996, respectively. Service
revenue may fluctuate due to, but not limited to, changes in levels of
consulting activity, the related satisfaction of significant agreement
milestones, and satisfaction of the Company's revenue recognition criteria. In
addition, seasonality impacts training and installation revenue, both of which
tend to follow license fees by approximately one quarter.
The Company's service and support for each customer is coordinated by
an account manager. In addition to managing the account relationship and
verifying timely installation, the account manager is also responsible for
coordinating the Company's ongoing training, consulting and support services
provided to that customer. Such services include the following categories:
SOFTWARE MAINTENANCE AND SUPPORT
The Company provides 24-hour hot-line telephone support, staffed with a
group of experienced professionals and supported by a computerized call tracking
and problem reporting system. PeopleSoft has provided internet access to this
hotline as an alternative to telephone bound service since August of 1995. This
service provides subscribing customers with company news, direct access to other
PeopleSoft subscribing customers, the ability to download and apply software
product fixes and access to online troubleshooting database.
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Initial software product license fees include the first year of
maintenance support. Thereafter, ongoing maintenance contracts are offered to
customers, and are renewable on an annual basis. Annual maintenance fees are
generally based on 17% of the then current list price of the software products
under license by a customer and also entitle the customer to software product
enhancements or upgrades during the term of the maintenance agreement. To
date, almost 100% of all customers have renewed their maintenance contracts.
CUSTOMER EDUCATION AND TRAINING
The Company offers a comprehensive education and training program to
customers and third party consultants. Training classes are provided in
training facilities located in major metropolitan areas around the world. In
addition, the Company provides on-site training to customers for a fee plus
travel expenses. The Company's fees for training services are generally priced
at $450 per training unit (representing one student day of training). The
Company also offers price reductions to customers and consultants who acquire
training by prepaying for a block of units. The Company's training curriculum
is designed for both system support staff and application users and includes a
variety of training classes covering functional use, system administration and
PeopleTools.
CONSULTING SERVICES
The Company offers a variety of consulting services to its customers
including system integration assistance and planning, project planning and
strategy, upgrade implementation and minor software product enhancements. The
Company also frequently works closely with third party consulting and systems
integration firms such as Andersen Consulting, Deloitte and Touche LLP and
Price Waterhouse LLP who provide the customer with a full range of
reengineering, customization and project management services. These third
party consulting firms have also licensed PeopleSoft applications to develop
programs to support customers implementing the Company's software products. To
date the Company's consulting services, which are generally provided on a per
hour or per day charge basis, have been less than 15% of total annual revenues.
During the past year PeopleSoft significantly expanded its consulting services
group to meet growing customer demands for such services. There can be no
assurance that PeopleSoft will be successful in further expanding its
consulting services group, or that revenues from consulting services will in
fact increase, or be profitable.
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, manufacturing application software
vendors, supply chain management application software vendors, financial
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, Oracle and Baan and to a lesser degree, Dun &
Bradstreet Software (now operating as two separate divisions of Geac Computer
Systems, Inc.), 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. Primarily due to their significant
worldwide presence and longer operating and product development history, both
SAP and Oracle have certain competitive advantages over PeopleSoft in each of
these areas. In addition, both SAP and Oracle have substantially greater
financial, technical and marketing
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resources, and a larger installed base than PeopleSoft. Furthermore, Oracle's
RDBMS is a supported platform underlying a significant share of PeopleSoft's
installed applications.
In the manufacturing and supply chain management software application
markets, in which PeopleSoft has recently begun competing, PeopleSoft faces
competition from several of its existing competitors including those listed
immediately above and others such as QAD, Ross Systems and J.D. Edwards and a
large number of niche competitors already in the manufacturing or enterprise
resource planning markets.
PeopleSoft also faces competition from providers of HRMS software
products including Cyborg Systems ("Cyborg"), Lawson Associates ("Lawson"),
Integral Systems, Inc. ("Integral"), InPower, Inc. ("InPower") and Ceridian
("Ceridian"), and from providers of financial management systems software
products including Hyperion, Computron Software, Inc., Lawson, and other
smaller companies. In addition, since June 1992 ADP and, since August 1995, SMS
have the right to sublicense selected PeopleSoft products in competition with
PeopleSoft's marketing efforts in selected markets.
In the emerging supply chain management software solutions market,
which is a new market for the Company previously serviced by Red Pepper ,
PeopleSoft faces several current and potential competitors including: (i)
companies such as i2 Technologies, Manugistics, and Numetrix Software which
have developed or are attempting to develop advanced planning and scheduling
software products which complement or compete with MRP solutions; (ii) other
companies that provide specialized planning and scheduling software for niche
markets, including Chesapeake Systems, Waterloo Manufacturing Software and Cap
Logistics; (iii) other business application software vendors that may broaden
their product offerings by internally developing, or by acquiring (such as
Baan's recent acquisition of Berclain Group, Inc. and Antalys, Inc.) or
partnering with independent developers of, advanced planning and scheduling
software; (iv) internal development efforts by corporate information technology
departments; and (v) companies offering standardized or customized products on
mainframe and/or mid-range computer systems.
Intense competition could potentially lead to increased price
competition in the market, forcing the Company to reduce prices which may
result in reduced gross margins and loss of market share by the Company which
therefore, could materially adversely affect the Company's business, operating
results and financial condition. 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.
SOFTWARE PRODUCT DEVELOPMENT
Since inception, the Company has made substantial investments in
research and software product development. Through the end of 1994,
substantially all of the Company's software products have been developed by its
internal development staff. Beginning in 1995, the Company increased the
purchasing and licensing of third party software products. The Company
believes that timely development of new software products, enhancements to
existing software products and the acquisition of rights to sell or incorporate
complimentary technologies and products into its software product offerings, is
essential to maintain its competitive position in the market. The applications
software market is characterized by rapid technological change, frequent
introductions of new products, changes in customer demands and rapidly evolving
industry standards. For example, in order to gain broad market acceptance, the
Company maintains product availability across a number of RDBMS platforms. The
Company believes that software product development is most effectively and
expeditiously accomplished by small teams comprised of relatively senior people
who are focused on certain software product areas. Accordingly, the Company's
development organization is comprised of small, focused development groups
assigned to each of the software products within the primary software product
areas: PeopleSoft HRMS, PeopleSoft Financials, PeopleSoft Financials for the
Public Sector, PeopleSoft Human Resources for the Federal government,
PeopleSoft Distribution, PeopleSoft Manufacturing, Red Pepper and PeopleTools.
This development is typically undertaken in a single RDBMS environment on a
workstation-based LAN. In addition, the Company utilizes a platforms group
which is responsible for porting the Company's software products to other RDBMS
and hardware server environments. The Company's documentation group develops
the user and system administration documentation for each software product.
The Company utilizes a common technology and technical approach in the
development of all application products. Significant application development
is performed using PeopleTools.
16
<PAGE> 19
The Company released version 6 of PeopleSoft HRMS, PeopleSoft
Financials and PeopleSoft Distribution and the general release of PeopleSoft
Manufacturing in November and December of 1996, with each including significant
enhancements to the existing software products. The Company's current focus in
application development is to expand the functionality and breadth of the
Company's software product offerings by: (i) enhancing workflow capabilities;
(ii) developing new software products and adding new functionality to existing
software products including global product requirements and translated releases
of global product; (iii) supporting joint development arrangements under which
certain vertical market applications may be developed; and (iv) adding certain
architectural extensions. PeopleTools development activities have emphasized
the continued enhancement of a distributed processing architecture, graphical
user interface and navigation extensions, and functionality and utilities to
support the application development activities in PeopleTools. There can be no
assurance that such development effort will result in its products, features or
functionality or that software products, features or functionality that is
developed will be accepted by the market.
The Company's research and development staff consisted of 517 employees
as of December 31, 1996. The Company's total research and development expenses
were approximately $15.3 million, $38.6 million, and $70.7 million for the years
ended December 31, 1994, 1995 and 1996, respectively. In addition, the Company
capitalized software development costs of $2.1 million, $2.4 million and $3.7
million for the years ended December 31, 1994, 1995 and 1996, respectively.
Capitalized software development costs are amortized over the estimated useful
life of the software product beginning with general availability for a period
not to exceed three years. Total capitalized software development amortization,
which is charged to cost of license fees, amounted to $2.0 million in 1994, $1.7
million in 1995 and $1.6 million in 1996. In addition, in November 1996, the
Company recorded a one time charge of $22.5 million to in-process research
and development related to the acquisition of PMI.
PeopleSoft has entered into a development arrangement for the purpose
of developing a line of student administration software applications (See Note
7 of the Notes to Consolidated Financial Statements). Under the Development
Arrangement, PeopleSoft provides technology, development and administrative
support, financing is provided by outside investors, including the Company's
founder and principal shareholder, and the software product development is
performed by personnel employed or retained by the outside investors. Under
these agreements, PeopleSoft is the exclusive remarketer of the developed
software products, and pays a royalty to the third parties 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 PeopleSoft or the existing or other potential
third party funding source(s).
In January 1997, PeopleSoft entered into a development and marketing
agreement with Intrepid Systems, Inc. ("Intrepid") a leading supplier of
integrated software solutions for retailers. Under the arrangement, Intrepid
will port its Evolution software product for retail management to PeopleTools
and integrate its application with PeopleSoft's general ledger and accounts
payable software products. The companies will jointly market a retail
enterprise solution including PeopleSoft HRMS and Financial software
applications and Intrepid's merchandise management and decision support.
Concurrent with the execution of the agreement, PeopleSoft separately acquired
a minority equity interest in Intrepid. While the intent of the agreement 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 retail industry.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, LICENSES AND PRODUCT LIABILITY
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
for its technology in June 1995 and a second patent in August 1995. In July
1995, the Company received title to a third patent as part of a teaming and
development agreement.The Company also has four additional patent applications
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
17
<PAGE> 20
will be adequate or that PeopleSoft's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. 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 provides its software products to end users under non-exclusive
licenses, which generally are nontransferable and have a perpetual term. The
Company generally licenses its software products solely for the customer's
internal operations. The Company generally makes source code available to
licensed customers for certain of the Company's application products.
Customers have the option to utilize the services of a source code escrow
company for potential access to PeopleTools source code in certain rare
circumstances. The provision of source code may increase the likelihood of
misappropriation or other misuse of the Company's intellectual property.
The Company is not aware that its software products, products the
Company offers under sublicense agreements described in the Sales and Marketing
section above, trademarks or other proprietary rights significantly 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. As the number of software products in the
industry increases and the functionality of these software products further
overlap, the Company believes that software developers may become increasingly
subject to infringement claims. Any such claims, with or without merit, can be
time consuming and expensive to defend. In past years, the Company has been a
defendant in two proprietary rights disputes, both of which were settled
without the Company incurring any future royalty obligations.
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 future
federal, state or 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.
PERSONNEL
As of December 31, 1996, the Company employed 2,490 people, including
665 in sales and marketing, 517 in product development, 1,072 in customer
services, and 236 in administration. None of the Company's employees in the
United States are represented by a labor union or are subject to a collective
bargaining agreement. Certain of the international employees are covered by
the customary employment contracts and agreements of the countries in which
they are employed. The Company believes that relations with its employees are
good.
The executive officers of the Company as of December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David A. Duffield 56 Chairman of the Board, Chief Executive Officer, and President
Albert W. Duffield 53 Senior Vice President of Worldwide Operations, and Director
Kenneth R. Morris 46 Senior Vice President and Chief Technology Officer
Ronald E. F. Codd 41 Senior Vice President of Finance and Administration, Chief Financial Officer,
and Secretary
Margaret L. Taylor 45 Senior Vice President of Development and Customer Services
Aneel Bhusri 31 Senior Vice President of Product Strategy
</TABLE>
18
<PAGE> 21
Mr. David A. Duffield is a founder of the Company and has served as
Chairman of the Board, Chief Executive Officer and President since the Company's
incorporation in August 1987. Prior to that time, he was a founder and Chairman
of the Board of Integral, a vendor of human resource and financial applications
software, from April 1972 through April 1987. During a portion of that time,
Mr. Duffield also served as Integral's Chief Executive Officer. Mr. Duffield is
also the co-founder of Information Associates (now a subsidiary of Systems and
Computer Technology), where he was employed between 1969 and 1972. From 1964 to
1969, Mr. Duffield worked at IBM, as a marketing representative and systems
engineer. He holds a B.S. in Electrical Engineering and an M.B.A. from Cornell
University.
Mr. Albert Duffield joined the Company in June 1990 as Vice President
of Sales. Mr. Duffield was appointed Vice President of Operations in September
1991, and was appointed Vice President of Sales and Marketing in February 1993.
In November 1993, he was appointed Senior Vice President of Sales and
Marketing, and, effective January 1994, he was appointed Senior Vice President
of Worldwide Operations. He was elected to the Board of Directors in April
1991. Prior to joining the Company, Mr. Duffield served as Chief Operating
Officer of Data Design Associates, a division of Integral, from June 1989
through June 1990. Prior to the acquisition of Data Design Associates by
Integral in September 1989, he served as its Senior Vice President of Sales and
Marketing from October 1981 through June 1989. From 1970 to 1981, Mr. Duffield
worked at IBM in various sales, sales management and staff management
positions. He holds a B.Sc. in Hotel/Business Administration from Cornell
University and an M.B.A. from Rutgers University. Mr. David Duffield and Mr.
Albert Duffield are brothers.
Mr. Kenneth R. Morris is a founder of the Company and was appointed
Vice President of Product Development at the Company's incorporation in August
1987. In November 1993, he was appointed Senior Vice President of Product
Development, and, effective January 1994, he was appointed Senior Vice
President and Chief Technology Officer. From March 1982 to July 1987, Mr.
Morris held various product development and customer service positions with
Integral. Prior to March 1982, Mr. Morris held various positions, including as
a Principal, with American Management Systems, Inc., a supplier of application
software. He holds a B.B.A. from Southern Methodist University and an M.B.A.
from Harvard University.
Mr. Ronald E. F. Codd joined the Company in September 1991 as Vice
President of Finance and Chief Financial Officer. In November 1993, he was
appointed Senior Vice President of Finance and Administration and Chief
Financial Officer. He was appointed Secretary of the Company in March 1992.
Prior to joining the Company, Mr. Codd was Corporate Controller of MIPS
Computer Systems, Inc., a microprocessor designer and computer manufacturer,
from March 1989 through September 1991. From March 1984 through March 1989, he
was Corporate Controller and Chief Accounting Officer for Wyse Technology,
Inc., a computer and peripheral manufacturer. Mr. Codd is a Certified Public
Accountant, a Certified Managerial Accountant, and holds a Certified Production
and Inventory Management credential. He received a B.Sc. in Business
Administration from the University of California, Berkeley and an M.M. degree
from the J.L. Kellogg Graduate School of Management (Northwestern University).
Mr. Codd's father, Dr. Edgar F. Codd, is a director of the Company.
Ms. Margaret L. Taylor joined the Company in January 1989 as Vice
President of Customer Services, and was appointed Vice President of Customer
Services and International in February 1993. In November 1993, she was
appointed Senior Vice President of Customer Services, and, effective January
1994, she was appointed Senior Vice President of Application Development and
Customer Services. In the third quarter of 1995, Ms. Taylor assumed
responsibility for PeopleTools development, in addition to her other
responsibilities. From May 1986 to October 1988, she was Vice President of
Trust and Investment Management at The Hibernia Bank. From August 1978 to
August 1985, she held various positions with the Bank of California, N.A.,
including Vice President and Director of Human Resources. Ms. Taylor holds a
B.A. in Psychology and Communications from Lone Mountain College.
Mr. Aneel Bhusri joined PeopleSoft in August 1993 as Director of
Strategic Planning. In April of 1995, he was appointed Vice President of
Product Strategy. In November of 1995, Mr. Bhusri was appointed Senior Vice
President of Product Strategy. Prior to joining PeopleSoft, Mr. Bhusri was an
associate at Norwest Venture Capital from June 1992 to March 1993. From 1988
to 1991 he was a financial analyst in Morgan Stanley's Corporate Finance
Department. Mr. Bhusri is a director of Vantive Corporation. Mr. Bhusri holds
an M.B.A. from Stanford University and a B.S. in Electrical Engineering with a
B.A. in Economics from Brown University.
19
<PAGE> 22
The Company has experienced an extended period of significant revenue
growth, 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. 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, business
processes, 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.
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 1997. 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 the
desired geographic location. It is widely believed that the technology sector
is at or over a state of full employment. 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. The growth
in the Company's customer base and expansion of its product lines and supported
platforms have placed, and are expected to continue to place, a significant
strain on the Company's management and operations, including its services and
development organizations.
Any failure to implement and improve the Company's operational,
control, reporting, and management systems or to retain, expand, train,
motivate or manage employees could have a materially adverse effect on the
Company's business, operating results and financial condition.
ITEM 2. PROPERTIES
FACILITIES
As of December 31, 1996, the Company leased the majority of its
facilities and its principal locations are in or near the following cities:
<TABLE>
<CAPTION>
APPROXIMATE LEASE
LOCATION SQUARE FEET EXPIRATION DATE PRINCIPAL ACTIVITIES
-------- ----------- --------------- --------------------
<S> <C> <C> <C>
Irvine, CA 11,000 November 2000 Sales, Marketing and Customer
Pleasanton, CA 186,000 February 1998 Corporate HQ, Development and Technical Support
San Mateo, CA 29,000 December 1999 Development, Sales, Marketing and Customer Service
Walnut Creek, CA 21,000 July 1997 Sales, Marketing and Customer Service
Atlanta, GA 59,000 June 2000 Sales, Marketing and Customer Service
Chicago, IL 53,000 December 2001 Sales, Marketing and Customer Service
Boston, MA 21,000 November 1999 Sales, Marketing and Customer Service
Bethesda, MD 22,000 August 2000 Sales, Marketing and Customer Service
Teaneck, NJ 32,000 January 1998 Sales, Marketing and Customer Service
Philadelphia, PA 13,000 September 2001 Sales, Marketing and Customer Service
Dallas, TX 18,000 July 2000 Sales, Marketing and Customer Service
Sydney, Australia 20,000 September 2001 Sales, Marketing and Customer Service
Toronto, Canada 12,000 September 1999 Sales, Marketing and Customer Service
Vancouver, Canada 8,000 February 1997 Sales, Marketing and Customer Service
Reading, England 15,000 March 1998 Sales, Marketing, Customer Service and
Administration
Paris, France 9,000 May 2005 Sales, Marketing and Customer Service
</TABLE>
20
<PAGE> 23
<TABLE>
<S> <C> <C> <C>
Munich, Germany 9,000 Aug 1999 Sales, Marketing and Customer Service
Amsterdam, The 6,000 April 1999 Sales, Marketing, Customer Service and
Netherlands Administration
Madrid, Spain 3,500 January 1998 Sales, Marketing and Customer Service
</TABLE>
The Company also leases smaller facilities (generally under execusuite
arrangements) for sales, marketing and customer service activities in or near
Sacramento, California; Denver, Colorado; Coral Gables, Florida; Indianapolis,
Indiana; Troy, Michigan; Minneapolis, Minnesota; St. Louis, Missouri; Marlton,
New Jersey; Columbus, Ohio; Pittsburgh, Pennsylvania; Houston Texas; Bellevue,
Washington; Milwaukee, Wisconsin; and outside of the United States in Ottawa
and Montreal, Canada; Mexico City, Mexico; Buenos Aires, Argentina; Sao Paulo,
Brazil; Melbourne and Perth, Australia; Tokyo, Japan; Singapore and Auckland,
New Zealand. In 1997, the Company anticipates expanding existing facilities,
depending upon the availability of suitable additional space. Recently,
commercial building vacancy rates have significantly dropped in many of the
markets where the Company has significant operations. As a consequence, the
Company expects to experience increasing difficulty in obtaining additional
space within which to expand its operations. Failure to either obtain space,
or obtain it on reasonably attractive commercial terms, may inhibit the
Company's ability to grow, or otherwise adversely effect the Company's
operations and financial results.
The Company acquired an office building in Pleasanton, California in a
cash transaction in December of 1995. The total cost was approximately $25
million, including all related transaction costs, for approximately 275,000
square feet of office space. As of December 31, 1996, approximately 127,000
square feet or approximately 45.5% was occupied by the Company and 148,000
square feet was occupied by existing tenants.
In December 1996, the Company entered into a five-year lease for a new
office facility in Pleasanton, California. The lessor has committed to fund up
to a maximum of $70,000,000 for construction of the facility. Payments under
this lease are anticipated to commence in the first quarter of 1998 and will be
based on LIBOR rates applied to amounts funded. The Company has an option to
renew the lease for an additional three years, subject to certain conditions.
If at the end of the lease term the Company does not purchase the property, the
Company would guarantee a residual value to the lessor equal to a specified
percentage of the lessor's cost of the facility. Under this lease, the Company
is required to maintain compliance with certain financial covenants.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various legal disputes and proceedings arising
from the ordinary course of general business activities. In the opinion of
management, resolution of these matters is not expected to have a material
adverse effect on the results of operations of the Company. However, depending
on the amount and the timing, an unfavorable resolution of some or all of these
matters could materially affect the Company's future results of operation or
cash flows in a particular period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded over-the-counter on the NASDAQ
National Market under the symbol PSFT. In November 1996, the Company effected
a two-for-one split of its common stock. All share and per share data
applicable to prior periods have been restated to reflect the split. The
following table lists the high and low sales for the last two years:
HIGH LOW
---- ---
21
<PAGE> 24
<TABLE>
<CAPTION>
<S> <C> <C>
Fourth quarter of 1996 $52.25 $40.25
Third quarter of 1996 $42.38 $28.19
Second quarter of 1996 $36.50 $23.88
First quarter of 1996 $29.63 $17.38
Fourth quarter of 1995 $23.50 $18.38
Third quarter of 1995 $22.75 $13.19
Second quarter of 1995 $14.63 $ 9.81
First quarter of 1995 $12.19 $ 7.69
</TABLE>
The trading price of the Company's Common Stock is subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new software products by the
Company or its competitors, as well as other events or factors. In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations which have particularly effected the market price of many high
technology companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
effect the market price of the Company's Common Stock.
As of March 14, 1997, the approximate number of common stockholders of
record was 1,337, representing approximately 50,000 shareholder accounts.
The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends in the foreseeable future. In
addition, the Company's bank line of credit and new facility lease prohibits
the payment of cash dividends without the other's consent.
Certain provisions of the Company's Certificate of Incorporation and
Bylaws could delay the removal of incumbent directors and could make a merger,
tender offer or proxy contest involving the Company more difficult, even if
such events would be beneficial to the interests of the stockholders. In
addition, the Company has 2,000,000 shares of authorized Preferred Stock. The
Company may issue shares of such Preferred Stock in the future without further
stockholder approval and upon such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors may determine.
The rights of the holders of Common Stock will be subject to, and may be
adversely effected by, the rights of the holders of any Preferred Stock that
may be issued in the future. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, a majority of the
outstanding voting stock of the Company. In addition, the classification of
the Company's Board of Directors could have the effect of delaying or deferring
a change in control of the Company.
In February 1995, the Company adopted a stockholder rights plan
whereby each share of the Company's Common Stock carries the right (a "Right"),
under certain circumstances, to purchase equity securities of the Company or an
acquirer. Ten days after a tender offer or acquisition of 20 percent or more
of the Company's Common Stock, each Right may be exercised for $45 to purchase
one one-thousandth of one share of the Company's Series A Participating
Preferred Stock. Each one one-thousandth of each share of Series A
Participating Preferred Stock will generally be afforded economic rights
similar to one share of the Company's Common Stock. In addition after such
rights are triggered, each Right entitles the holder to purchase $90 worth of
common stock of the Company or, in certain circumstances, securities of the
acquirer for $45. Each Right expires in February 2005, and, during specified
periods, the Company may redeem or exchange each Right for $.00025 or one share
of common stock, respectively.
Based on the number of shares of Common Stock outstanding at December
31, 1996, officers and directors of the Company and persons who may be deemed
to be affiliates, as a group, beneficially owned approximately 32% of
PeopleSoft's outstanding Common Stock. As a result, officers and directors and
their affiliates may have influence over the election of the Board of Directors
and any matters requiring approval by the stockholders of the Company. In
addition, the Company has entered into agreements with its officers and
directors indemnifying them against losses they may incur in legal proceedings
resulting from their service to the Company.
22
<PAGE> 25
In October 1996, in connection with its acquisition of all of the
outstanding interests in PeopleMan, L.P. and PeopleMan, Inc., Registrant issued
49,689 shares of its Common Stock to PeopleMan, L.P. in exchange for $4,000,000
and 129,552 shares of its Common Stock to Norwest Equity Partner IV, L.P. for
certain interests in PeopleMan, L.P. and PeopleMan, Inc. The foregoing
transactions were exempt from the registration requirements of the Securities
Act of 1933 pursuant to Section 4(2) of said act.
23
<PAGE> 26
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1992 1993(a) 1994(a) 1995(a) 1996(b)
--------- -------- -------- --------- --------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues:
License fees $ 21,888 $ 37,656 $ 68,580 $137,808 $252,799
Services 9,677 20,565 44,503 94,331 197,253
------- ------- -------- -------- --------
Total revenues 31,565 58,221 113,083 232,139 450,052
Costs and expenses:
Cost of license fees 1,684 3,123 6,817 8,503 12,357
Cost of services 5,942 12,270 26,740 56,789 118,906
Sales and marketing 7,895 17,909 35,844 70,052 135,757
Product development and
engineering 5,321 8,688 15,318 38,625 70,653
General and administrative 2,596 4,317 8,167 16,182 27,162
In-process research and
development and merger related
costs - - - - 29,393
------- ------- -------- -------- --------
Total costs and expenses 23,438 46,307 92,886 190,151 394,228
------- ------- -------- -------- --------
Operating income 8,127 11,914 20,197 41,988 55,824
Other income, interest expense and other (45) 1,167 2,192 4,149 5,888
------- ------- -------- -------- --------
Income before income taxes 8,082 13,081 22,389 46,137 61,712
Provision for income taxes 3,240 5,265 9,308 18,799 25,851
------- ------- -------- -------- --------
Net income 4,842 7,816 13,081 27,338 35,861
Accretion of preferred stock
dividend (477) - - - -
------- ------- -------- -------- --------
Net income applicable to
common stockholders $ 4,365 $ 7,816 $ 13,081 $ 27,338 $ 35,861
======= ======= ======== ======== ========
Net income per common
share $ 0.06 $ 0.08 $ 0.12 $ 0.24 $ 0.30
======= ======= ======== ======== ========
Shares used in per share
computation 72,096 102,826 106,442 114,062 120,032
======= ======= ======== ======== ========
BALANCE SHEET DATA:
Working capital $ 44,549 $ 61,784 $ 72,290 $ 89,437 $109,806
Total assets $ 64,313 $ 108,584 $173,987 $322,241 $540,080
Long-term obligations $ 933 $ 989 $ 958 $ - $ -
Stockholders' equity $ 47,676 $ 72,054 $ 94,580 $161,094 $253,248
</TABLE>
(a) Historical financial information has been restated to
reflect the combination of PeopleSoft and Red Pepper,
accounted for as a pooling-of-interests.
(b) Historical results of operations are not necessarily
indicative of future results. Refer to the Results of
Operations - Risk Factors under Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" for the discussion of factors which may impact
future results.
24
<PAGE> 27
ITEM 7. 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 7.
25
<PAGE> 28
RESULTS OF OPERATIONS
During October of 1996, PeopleSoft completed a merger with Red Pepper
accounted for as a pooling-of-interests. All financial data presented herein
has been restated to include the financial position and results of operations
of Red Pepper beginning January 1, 1993 (Red Pepper's operations in 1992 were
insignificant). 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 consolidated statements of
income:
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------
Percentage of
Percentage of Dollar Increase
Total Revenues Year Over Year
------------------------------ -----------------
1994 1995 1996 95/94 96/95
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
61% 59% 56% License fees 101% 83%
39 41 44 Services 112 109
--- --- --- --- ---
100 100 100 Total revenues 105 94
Costs and expenses:
6 4 3 Cost of license fees 25 45
24 24 26 Cost of services 112 109
32 30 30 Sales and marketing 95 94
13 17 16 Product development 152 83
7 7 6 General and administrative 98 68
In-process research and
development and non-recurring
- - 6 acquisition costs - N/A
--- --- --- --- ---
82 82 87 Total costs and expenses 105 107
--- --- --- --- ---
18 18 13 Operating income 108 33
2 2 1 Other income, interest expense and other 89 42
--- --- --- --- ---
20 20 14 Income before income taxes 106 34
8 8 6 Provision for income taxes 102 38
--- --- --- --- ---
12% 12% 8% Net income 109% 31%
=== === === === ===
</TABLE>
26
<PAGE> 29
REVENUES
The Company recognizes revenue when a non-cancelable license
agreement has been signed, the product has been shipped, there are no
uncertainties surrounding product acceptance, the fees are fixed and
determinable, and collection is considered probable. 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.
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 $118.7 million in 1994 to $218.6 million in 1995 and to
$407.6 million in 1996. The aggregate value of customer license agreements
related to HRMS signed during the years ended December 31, 1994, 1995 and 1996
was $87.8 million, $130.2 million and $223.2 million, respectively. The
aggregate value of customer license agreements related to PeopleSoft
Financials, Distribution and Manufacturing software products during the years
ended December 31, 1994, 1995 and 1996 was $30.9 million, $88.4 million and
$184.4 million, respectively.
Revenues from licensing fees increased by 101% from $68.6 million in
1994 to $137.8 million in 1995 and increased by 83% to $252.8 million in 1996.
The increase in license fee revenues was attributable to increased market
acceptance of, and breadth of, the Company's software product offerings
including first commercial shipment in 1994 of PeopleSoft Distribution and
PeopleSoft Financials for the Public Sector, in March of 1995 the first
shipment of Red Pepper products, and the increased capacity created by the
continued growth in the Company's sales, marketing and customer service
organizations.
Revenues from services increased by 112% from $44.5 million in 1994 to
$94.3 million in 1995 and increased by 109% to $197.3 million in 1996. The
Company's customer license agreements provide for initial maintenance,
training, installation 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 39%, 41% and 44% for the years ended December 31, 1994, 1995 and
1996, respectively. The increase in the relative percentage of service
revenues to total revenues in the these periods 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 1994, 1995 and 1996 periods as a result of increased demand for
PeopleSoft's direct assistance during enterprise implementation projects.
Total revenues increased by 105% from $113.1 million in 1994 to $232.1
million in 1995 and increased by 94% to $450.1 million in 1996. During the
years ended December 31, 1994, 1995 and 1996, the Company's international
revenues were approximately 12%, 16% and 16% of total revenues, respectively.
The Company expects international revenues to grow substantially during 1997,
however, the percentage of international revenues in comparison to total
revenues may not increase significantly during 1997.(1) The Company continues
to invest heavily in building international infrastructure, developing global
product functionality and translated versions of financial and other products,
and expects material gains in the proportion of international revenues in 1998
and beyond.(1) In the event international expansion and/or product globalization
are not successful, it is likely to have a negative impact on the Company's
operating results.
COSTS AND EXPENSES
Cost of license fees consists principally of royalties, technology
access fees for certain third party software products and amortization of
capitalized software costs. Cost of license fees increased from $6.8 million
in 1994 to $8.5 million in 1995 and $12.4 million in 1996, representing 6%, 4%
and 3% of total revenues and 10%, 6% and 5% of license fee revenues in those
years, 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. The continued decline in the cost of
license fees as a percentage of license fee revenues in 1996 as compared to
1995 and 1994 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
__________________________________
(1) Forward-looking statement
27
<PAGE> 30
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 arrangements and charges associated with software
products and technologies acquired 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 field
support, training, consulting and product support. These costs increased from
$26.7 million in 1994 to $56.8 million in 1995 and $118.9 million in 1996,
representing 24%, 24% and 26%, of total revenues and 60% of service revenues in
those years, 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 $35.8 million in 1994 to
$70.1 million in 1995 and $135.8 million in 1996, representing 32%, 30% and 30%,
of total revenues, respectively. 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 $15.3 million in
1994 to $38.6 million in 1995 and $70.7 million in 1996, representing 13%, 17%
and 16% of total revenues, respectively. In addition, capitalized internal
software development costs increased from $2.1 million in 1994 to $2.4 million
in 1995 and $3.7 million in 1996. 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 HRMS, Financial Management Systems, and Distribution/Materials Management
Systems and Red Pepper's supply chain management software; 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 will significantly
increase in future periods due to continued incremental investment in all of
the above activities and the acquisition of PMI and the associated expansion of
the Company's manufacturing application development activities. In particular,
the Company plans to release a kanji based version of its HRMS and Financial
software products for the Japanese marketplace and multi-language translations
of a portion of its release 6 products, all in the first half of 1997.(1)
Overall development expenditures may increase as a percentage of revenues,
particularly during the first half of 1997.
General and administrative expenses increased from $8.2 million in
1994 to $16.2 million in 1995 and $27.2 million in 1996, representing 7% of
total revenues in years 1994 and 1995 and 6% in 1996. The dollar increase in
general and administrative expenses resulted primarily from increases in
staffing and information systems infrastructure 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 $2.2
million in 1994 to $4.1 million in 1995 and $5.9 million in 1996 due to
increased cash balances available for investment.
- --------------------
(1) Forward-looking statement.
28
<PAGE> 31
PROVISON FOR INCOME TAXES
The Company's income tax provision increased from $9.3 million in 1994
to $18.8 million in 1995 to $25.9 million in 1996. As permitted by SFAS No.
109, "Accounting for Income Taxes", the Company has recorded $41.5 million in
net deferred tax assets at December 31, 1996. The Company anticipates that its
1997 effective tax rate will be slightly lower than 1996.(1) However, this rate
may be affected by changes to the anticipated mix of geographic earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash flows
from operations and sale of equity securities. In addition, under the
Company's unsecured bank line of credit, up to $30.0 million is available for
working capital advances. Within this amount, $15.0 million may be used for
the issuance of letters of credit. This line of credit facility expires in
July 1997 and is expected to be renewed at that time. No borrowings were
outstanding under this line of credit facility at December 31, 1996.
The Company's operating activities provided cash of $130.9 million
during the year ended December 31, 1996, compared to $67.0 million in the year
ended December 31, 1995. Operating cash flows have increased primarily due to
increases in income before non-cash items, increased non-cash expenses and
increases in deferred revenue and the tax benefit from employee stock
transactions, which were partially offset by increases in accounts receivable
and deferred income taxes. From December 31, 1995 to December 31, 1996, net
accounts receivable increased from $100.2 million to $163.7 million and deferred
revenues increased from $98.1 million to $183.3 million. The increase in net
accounts receivable resulted from the growth in customer licensing activity.
Deferred revenue has increased as a result of the growth in customer licensing
activity and the associated deferrals of revenues related to services provided
to new licensees.
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 96 days
as of December 31, 1995 as compared to 83 days as of December 31, 1996. The
improvement in DSO is the result of enhancements to the collection process and
increased sales of receivables to third parties. 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.
The exercise of common stock options and issuance of stock under stock
purchase plans have represented a significant source of cash, contributing $2.2
million, $5.1 million and $15.1 million in the years ending December 31, 1994,
1995 and 1996, respectively. In addition, the Company believes granting stock
options is essential in attracting and retaining key employees who are critical
to the Company's success. In 1995 and 1996, the Company granted options
aggregating 6.1% and 5.4%, respectively, of the common stock issued and
outstanding at the beginning of each year. As discussed in Notes 1 and 4 of the
consolidated financial statements, the Company has continued to account for
employee stock options in accordance with Accounting Principals Board Opinion
No. 25 "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and has
provided the pro forma disclosures required by Statement of Financial Accounting
Standard No. 123, "Stock Based Compensation" ("SFAS 123"). The Company
anticipates that it will continue to grant a significant number of options each
year. The actual number of options made available each year is based on the
Company's historical and anticipated revenue and profitability and comparison of
the Company's compensation philosophy and practice to other similar technology
companies.
During the years ended December 31, 1995 and 1996, the Company's
principal use of cash for investing activities was the purchase of property and
equipment, including in December 1995, the purchase of an office building in
Pleasanton, California and purchases of computer and networking equipment to
accommodate employee and facility expansions and to support the Company's
growing training capacity requirements. Cash provided from financing
activities in 1995 included the sale and issuance of warrants in November 1995
to purchase 4,000,000
__________________________________
(1) Forward-looking statement
29
<PAGE> 32
shares of the Company's common stock for approximately $21.8 million. These
warrants carry the right to purchase the Company's common stock at prices
ranging from $27.50 to $38.75 per share of common stock. One fifth of the
warrants expire annually beginning in the fourth quarter of 1997. Upon notice
of exercise by the holders of the warrants, the Company, at its option, may
settle such exercise by either issuing the full amount of shares and receiving
cash proceeds, issuing a net amount of shares with no cash proceeds, or
purchasing the warrants for an amount equal to the difference between the
common stock's then fair market value of the common stock and the warrant
exercise price. If the Company elects to issue common stock for the warrants,
it will provide the Company with cash of up to $22 million in 1997, $48 million
in 1998 and $58 million in 1999. While the Company has not determined how the
warrants will be satisfied, the warrants represent a significant source of
potential liquidity.
As of December 31, 1996, the Company had $109.8 million in working
capital, including $169.9 million in cash and cash equivalents and $27.1
million in short-term investments, consisting primarily of high quality
municipal bonds and tax-advantaged money market instruments. The Company
believes that existing cash and short-term investment balances, credit
facilities, proceeds from sale of stock under the employee purchase plan and
stock option exercises, potential proceeds from issuance of stock for warrants,
and potential cash flow from operations will be sufficient to meet its
operating cash requirements, including the impact on operations of the
acquisitions of Red Pepper and PMI, at least through 1997.
FACTORS THAT MAY EFFECT FUTURE RESULTS
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 and elsewhere in this Form 10-K.
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 have a material
adverse effect on the Company's business, financial condition or results of
operations. This section should be read in conjunction with the audited
Consolidated Financial Statements and Notes thereto, and Management's
Discussion and Analysis of financial Condition and Results of Operations for
the years ended December 31, 1994, 1995 and 1996, contained elsewhere in the
Form 10-K.
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 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 product 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.
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<PAGE> 33
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 technology, software product solutions and
underlying development and testing processes; (ii) changes in the Company's
sales incentive plans have had and may continue to have an unpredictable impact
on seasonal business patterns; (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 both software product categories,
the license agreement and supporting schedules to the license agreement must
contain very precise contractual provisions and terminology consistent with
generally accepted accounting principals to permit any revenue recognition
under the license agreement; (iv) enterprise transactions may grant rights to
process data across complex, widely distributed computing environments. Due to
a variety of factors including differences in relational database product
performance across wide area networks, differences in speed of various
communication links, differences in hardware platform performance, and other
factors, there is a limited ability to accurately predict product performance
under certain of these environments. To the extent the Company enters into a
license agreement with an enterprise customer incorporating such non-standard
acceptance criteria which includes various on-line and batch performance
measures within such environments, revenue recognition could be postponed
pending verification of the performance capabilities within the operating
environment; and (v) all of the above factors, as well as other specific
requirements under recently published proposed generally accepted accounting
standards for software revenue recognition create circumstances under which the
Company must have very precise contractual language in order to recognize
revenue upon initial product delivery. Although the Company has a standard
license agreement which meets the demanding criteria under generally accepted
accounting principles, the Company must often negotiate and revise certain
terms and conditions in large enterprise transactions. Negotiation of mutually
acceptable language can extend the sales cycle, and in certain situations, the
Company does not always obtain terms and conditions which permit recognition of
revenue at the time of delivery or even under a percentage of completion
method.
Services revenues have varied from quarter to quarter due to 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.
Possible Adverse Effects of Recent Securities Issuances. In
connection with its recent acquisition of Red Pepper Software Company (the
"Acquisition") and PMI, the Company issued 5,779,242 shares of common and
assumed options to purchase 540,847 shares of common stock, which may be
disposed of from time to time on the open market. A significant portion of the
shares issued in the Acquisition have been subject to trading restrictions
which lapsed on or about February 7, 1997. Also, the Company has outstanding
warrants to purchase 4,000,000 shares of its common stock which have exercise
prices below the current market price of the common stock. The exercise of
these warrants and resale of the underlying shares or the sale of the shares
issued in the Acquisition could adversely affect the market price of the
Company's common stock. All share amounts in this section have been adjusted
where necessary to reflect a 2-for-1 stock split effected by PeopleSoft in
November 1996.
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. Employee and facility related expenditures comprise a
significant portion of the Company's operating costs and expenses, and are
therefore, relatively fixed at least over the short term. In addition, the
Company's expense levels are based, in significant part, on the Company's
expectations as to near term future revenue levels. 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 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 affected.
Uneven Patterns of Quarterly Operating Results. Although the Company's
1997 operating budget is based on projections of a material increase in total
revenues over the corresponding actual results for 1996, 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, affected by such trends in the future. Seasonal patterns of
revenue achievement can be
31
<PAGE> 34
caused by a variety of factors, including sales incentives, customer demand
based on available capital budgets and release of new technologies.
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 affecting the timing of orders from customers, and other
factors affecting 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. During the first half of 1997, the Company will be
realigning its North America sales organization into industry focused
independent business units. While the Company believes such alignment will
benefit sales in the long term, short term sales managment issue may arise
which would impact license revenues during the transition period. 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 utilized, 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 1997 and subsequent
periods, the Company must continue to globalize its software product lines,
expand existing, as well as establish additional, foreign operations, hire
additional personnel, identify suitable locations for sales, marketing,
customer service and development, and recruit international distributors and
resellers in selected territories. In the event international expansion and/or
product globalization are 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 respective subsidiary's functional currency. Unexpected
changes in the exchange rates for these foreign currencies could result in
significant fluctuations 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.
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,
manufacturing application software vendors, supply chain management application
software vendors, financial 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, Oracle and Baan and to a lesser degree, Dun &
Bradstreet Software (now operating as two separate divisions of Geac Computer
Systems, Inc.), 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. Primarily due to their significant
worldwide presence and longer operating and product development history, both
SAP and Oracle have certain competitive advantages over PeopleSoft in each of
these areas. In addition, both SAP and Oracle have substantially greater
financial, technical and marketing resources, and a larger installed base than
PeopleSoft. Furthermore, Oracle's RDBMS is a supported platform underlying a
significant share of PeopleSoft's installed applications.
In the manufacturing software application markets, in which PeopleSoft
has recently begun competing, PeopleSoft faces competition from several of its
existing competitors including those listed immediately above and others such
as QAD, Ross Systems and J.D. Edwards and a large number of niche competitors
already in the manufacturing market.
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<PAGE> 35
PeopleSoft also faces competition from providers of HRMS software
products including Cyborg, Lawson, Integral, InPower and Ceridian, and from
providers of financial management systems software products including Hyperion,
Computron Software, Inc., Lawson, and other smaller companies. In addition,
since June 1992 ADP, and, since August 1995, SMS have the right to sublicense
selected PeopleSoft products in competition with PeopleSoft's marketing efforts
in selected markets.
In the emerging supply chain management software solutions market,
which is a new market for the Company previously serviced by Red Pepper ,
PeopleSoft faces several current and potential competitors including: (i)
companies such as i2 Technologies, Manugistics, and Numetrix Software which
have developed or are attempting to develop advanced planning and scheduling
software products which complement or compete with MRP solutions; (ii) other
companies that provide specialized planning and scheduling software for niche
markets, including Chesapeake Systems, Waterloo Manufacturing Software and Cap
Logistics; (iii) other business application software vendors that may broaden
their product offerings by internally developing, or by acquiring (such as
Baan's recent acquisition of Berclain Group, Inc. and Antalys, Inc.) or
partnering with independent developers of, advanced planning and scheduling
software; (iv) internal development efforts by corporate information technology
departments; and (v) companies offering standardized or customized products on
mainframe and/or mid-range computer systems.
Intense competition could potentially lead to increased price
competition in the market, forcing the Company to reduce prices which may
result in reduced gross margins and loss of market share by the Company which
therefore, could materially adversely affect 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 affected. In addition, supply chain management
applications marketed by the Company include a suite of proprietary software
development tools known as the "ResponseAgent Business Modeler", which face
similar risks relative to its proprietary nature.
Reliance on Third Parties for Sales and Marketing. A key aspect of
the sales and marketing strategy for the Company 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 HRMS. 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 recruit and
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 materially 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 recommendation alternative for integrators
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<PAGE> 36
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 SQLBase (Windows 95 single user
version only and NT), IBM's DB2 ( MVS/ESA or OS/3 using connectivity products
from Centura or Sybase and separately, AIX and OS/400), Informix
INFORMIX-OnLine Dynamic Server (AIX, Dynix, Solaris, MP RAS, Digital Unix,
Unisys Unix, DG/UX, DC/Osx, IRIX, SCO Open Server, Reliant Unix, NT, SGI and
HP-UX), Microsoft SQL Server NT version 6.5, Oracle (NT and over 10 versions of
Unix), and Sybase's System 11 (Digital Unix, HP- UX, AIX and Solaris). In
addition, the Company is in the process of porting its PeopleTools to Apple's
native Macintosh family of computers. No assurance can be given concerning the
successful development of PeopleSoft software products on additional platforms,
the specific timing of the releases of any future software products, the
performance characteristics of PeopleSoft applications on additional platforms
or their acceptance in the marketplace. If the customer decides to switch to
other PeopleSoft supported RDBMS or hardware platforms, user disruption is
usually minimized because only the "back-end" database changes, while the
"front-end" application remains the same. 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.
Beginning with Release 6, the Company integrated certain features of
BEA's Tuxedo product into its applications. Over the next several releases,
additional Tuxedo features will be integrated to allow applications to run on a
distributed basis using a multi-tiered client/server architecture. Congos'
Powerplay product will be also bundled to incorporate desktop OLAP capabilities.
Such enhancements may be critical to the competitiveness of the Company's
products in the future, and will generate incremental revenue for PeopleSoft.
Integration of these and other products is complex and no assurance can be made
that these efforts will be successful or result in significant product
enhancements.
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 releases 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, PeopleSoft application software products and updated versions, and
RDBMS platforms and updated versions, 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 product release
schedules.
Reliance on Single Client Interface. At the present time, the Company
supports client (workstation) platforms exclusively utilizing Microsoft's
Windows family of software products, including Windows 3.1 (PeopleSoft releases
prior to Release 6 only), 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
materially adversely effected. If a new user interface were to gain broad
acceptance in the marketplace, there can be no assurance that 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.
The use of a Web browser (running on either a PC or network computer)
to access client/server systems is rapidly emerging as an alternative client to
the traditional desktop access through Microsoft Windows based personal
computers. The Company has enabled access to its applications through this new
emerging client only
34
<PAGE> 37
through the use of one of a number of third party products. However, it is
clear that the Company must develop extensions of its PeopleTools technology
which would facilitate client access to its applications using a Web browser but
without the use of third party solutions. Such client access via the internet
will be subject to numerous risks inherent in utilizing the internet including:
security, availability and reliability. 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"). Under this Development
Arrangement, PeopleSoft is the exclusive remarketer of the developed software
products and pays a royalty to the development entity and funding 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 might be accounted for using the purchase method which is likely to
result in either or both: a charge to earnings for in-process research and
development which would be recorded in the Statement of Income 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 tangible 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. 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. To date,
the Company is not aware of any violations of its application security
architecture within its installed base. 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 and/or adversely impact the
Company's financial results due to lost or delayed closing of software
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 and trade secret laws and other measures to protect their proprietary
information. The Company received its first patent in June 1995 and its second
patent in August 1995. In July 1995, the Company received title to a third
patent as part of a teaming and development agreement. The Company also has
four additional patent applications pending. There can be no assurance that any
issued patents will result from such applications or that, if issued, such
patents will provide any meaningful competitive advantage. 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 of
PeopleSoft are beneficiaries of a source code escrow arrangement to enable the
customer to acquire a future limited right to use the Company's source code
solely for their internal provision of maintenance services. This possible
access to the Company's 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
35
<PAGE> 38
of any 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 their
customers contain provisions designed to limit their exposure to potential
product liability claims. It is possible, however, that the limitation of
liability provisions contained in such 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 the risk of a claim being 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 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 both through internal
development and merger and acquisition, a significant expansion in the number
of its employees, and expansion in the geographic scope of its operations.
This growth has resulted in new and increased responsibilities for management
personnel, and has placed and is expected to continue to place a significant
strain upon the Company's management, operating, and financial controls and
resources. To accommodate recent growth, compete effectively, and manage
potential future growth, the Company must continue to implement and improve its
operational and financial systems, procedures and controls. In addition, the
Company must continue to expand, train and manage its employee base. There can
be no assurance that the Company will be able to manage this expansion
effectively, or 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 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
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. It is widely held that the
technology industry is at or beyond a condition of full employment. 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 during 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 needs. In addition, beginning in December 1996, the
Company has undertaken development of an additional facility under a lease
which will provide substantial new space. However, additional, 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 which
makes obtaining additional quality office space increasingly difficult. The
Company is in the process of attempting to locate and contract for adequate
space; however, sufficient office space may not become available to meet the
Company's near term needs. There can be no assurance that local facilities
will be obtained, that reasonable terms will be obtained or that acceptable
financing arrangements may be obtained. Any such failure to obtain local
facilities, under commercially reasonable terms, may result in lower employee
productivity, constrained hiring plans or increased facility charges which
could have a materially adverse impact on the Company's business and operating
results.
Recently, commercial building vacancy rates have significantly dropped
in many of the markets where the Company has significant operations. As a
consequence, the Company expects to experience increasing difficulty in
obtaining additional space within which to expand its operations. Failure to
either obtain space, or obtain it on
36
<PAGE> 39
reasonably attractive commercial terms, may inhibit the Company's ability to
grow, or otherwise adversely effect the Company's operations and financial
results.
Volatility of Stock Price. As is frequently the case with stock of
high technology companies, the market price of PeopleSoft's stock has been and
may continue to be quite volatile. Factors such as quarterly fluctuations in
results of operations, announcements of technological innovations by the
Company or its competitors or the introduction of new products by PeopleSoft or
its competitors, and macroeconomic conditions in the computer hardware and
software industries generally, may have a significant impact on the market
price of the stock of PeopleSoft. If revenue or earnings in any quarter fail
to meet the expectations (published or otherwise) of the investment community,
there could be an immediate impact on PeopleSoft's stock price. In addition,
as described in the Possible Adverse Effects of Recent Securities Issuances
section above, the Company has issued shares, stock options and warrants which,
if sold directly or exercised and sold on the open market in large
concentrations, could cause the Company's stock price to decline in the short
term. The Company makes no assurance as to when and if such a short term stock
price decline may recover. 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 and which, on
occasion, have been unrelated to the operating performance of those companies.
These broad market fluctuations may materially adversely affect the market
price of the stock of PeopleSoft.
Investments and Liquidity. The Company's short-term and long-term
investments consist primarily of high quality municipal bonds, US government
securities, corporate debt securities 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. There can be no assurance that
the Company would be able to obtain additional sources of financing or
additional financing at terms favorable to the Company.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included in Part IV Item
14(a) (1) and (2).
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report
because the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included
therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's officers required by this
Item is included in the section in Part I hereof entitled "Personnel." The
information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement under the heading
"Election of Directors - Nominees." Information concerning the Company's
officers, directors and 10% shareholders compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference to the information
contained in the Company's Proxy Statement under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance."
37
<PAGE> 40
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement under the heading "Certain Transactions with
Management."
38
<PAGE> 41
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements. The following consolidated
financial statements of PeopleSoft, Inc. are filed as part of
this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-1
Covered by Report of Independent Auditors:
Consolidated Balance Sheets at December 31, 1995 and 1996 F-2
Consolidated Statements of Income for the years ended
December 31, 1994, 1995 and 1996 F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995 and 1996 F-5
Notes to Consolidated Financial Statements F-6
Not Covered by Report of Independent Auditors:
Supplemental Quarterly Financial Information F-18
</TABLE>
2. Consolidated Financial Statements Schedules. None.
3. Exhibits.
<TABLE>
<S> <C>
2.1(7) Agreement and Plan of Reorganization between
PeopleSoft, Inc. and Red Pepper Company dated as
of September 4, 1996.
3.1(11) Restated Certificate of Incorporation of
Registrant filed with the Secretary of State of
the State of Delaware on May 25, 1996.
3.2(11) Certificate of Amendment to Certificate of
Incorporation of Registrant filed with the Secretary
of State of the State of Delaware on June 17, 1996.
3.3(12) Bylaws of Registrant, as amended to date.
4.1(9) Stockholder Rights Plan and Preferred Shares
Rights Agreement dated February 15, 1995
10.1(11)(5) Amended and Restated 1989 Stock Plan and forms of
option agreements thereunder.
10.2(11) 1992 Employee Stock Purchase Plan as amended to
date, and form of subscription agreement
thereunder.
10.3(1) 1992 Directors' Stock Option Plan and forms of
option agreements thereunder.
10.4(2,5) Executive Bonus Plan.
10.5(3) Amendment and Restatement of PeopleSoft, Inc.
401(K) Plan, dated December 13, 1995, Amendment No.
1 dated December 30, 1994, and Amendment No. 2,
dated August 25, 1995.
10.6(1) Form of Indemnification Agreement entered into
between the Registrant and each of its directors
and officers.
10.7(3) Loan Agreement between the Registrant and West
America Bank, N.A. dated October 31, 1995.
10.8(1) Office Lease for 1331 North California Boulevard
dated July 23, 1990 between the Registrant and 1333
North California Boulevard, a California limited
partnership, as amended by the First Amendment to
Lease dated April 24, 1991 and the Second Amendment
to Lease dated June 17, 1992 and related Lease
Guarantees dated July 26, 1990 and June 14, 1991
between 1333 North California Boulevard and David
A. Duffield.
10.9(1) Lease dated July 24, 1992 between the Registrant
and Glen Pointe Associates.
10.12(1,6) Software License and Support Agreement dated June
23, 1992 between the Registrant and ADP, Inc., as
amended by Amendment No. 1 dated September 30,
10.18(2) Lease dated June 23, 1993 between the Registrant
and Westbrook Corporate Center.
</TABLE>
39
<PAGE> 42
<TABLE>
<S> <C>
10.19(2) Lease dated January 17, 1994 between the Registrant and R-H
Associates Bldg. III Corp.
10.20(2) Lease dated March 10, 1994 between the Registrant and Rosewood
Associates.
10.21(3) Contract of Sale and Escrow Instructions between the Company and
Rosewood Owner of California (B) LLC, a California limited
liability company, dated October 4, 1995.
10.22(4) Warrant Agreement between the Registrant and The First National
Bank of Boston, as Warrant Agent, dated October 30, 1995.
10.23(4) Warrant Purchase Agreement between the Registrant and Goldman,
Sachs & Co. dated October 30, 1995.
10.24(4) Registration Rights Agreement between the Registrant and Goldman,
Sachs & Co. dated October 30, 1995.
10.25(8) Amendment No. 2 dated September 28, 1994, Amendment No. 3 dated
September 21, 1995 and Amendment No. 4 dated December 28, 1995 to
the Software License and Support Agreement dated June 23, 1992
between the Registrant and ADP, Inc. (Confidential treatment
requested for Amendment No. 2 and No. 4 only).
10.26(8) Amended Software Development Agreement dated December 22, 1995
between the Registrant and Solutions for Education Administrators,
Inc.
10.27(8) Exclusive Marketing and Distribution Agreement dated December 22,
1995 between the Registrant and SIS Development LLC ("SIS").
10.28 Amendment No. 1 dated September 19, 1994, Amendment No. 2 dated May
15, 1995 and Amendment No. 3 dated June 19, 1995 to the Lease dated
March 10, 1994 between the Registrant and Rosewood Associates.
10.29(8) Systems Integrator Agreement dated August 25, 1995 between the
Registrant and Shared Medical Systems Corporation.
10.32 Lease dated December 4, 1996 between the Registrant and Lease Plan
North America, Inc.
10.33 Purchase Agreement dated October 22, 1996 between the Registrant
and Norwest Equity Partners IV, L.P.
10.34(10) Red Pepper Software Company 1993 Stock Option Plan and forms of
stock option agreements thereunder.
11.1 Computation of per share earnings.
21.1 Subsidiaries.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (see page 32).
27.1 Financial Data Schedule
</TABLE>
- ----------------------------
(1) Incorporated by reference to the exhibit having the same number filed with
the Registrant's Registration Statement on Form S-1 (No. 33-53000) filed
October 7, 1992, Amendment No. 1 thereto filed October 26, 1992, Amendment
No. 2 thereto filed November 10, 1992 and Amendment No. 3 thereto filed
November 18, 1992, which Registration Statement became effective November
18, 1992 and the Registrant's Registration Statement on Form S-1 (No.
33-62356) filed on May 7, 1993, which Registration Statement became
effective May 24, 1993.
(2) Incorporated by reference to the exhibit having the same filed number with
the Company's Annual Report on Form 10-K for the year ended December 31,
1994.
(3) Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-K
filed with the Securities and Exchange Commission on December 15,1995.
(4) Exhibits 10.22, 10.23, and 10.24 are incorporated by reference to Exhibits
10.1, 10.2, and 10.3, respectively, filed with the Company's Registration
Statement on Form S-3 (No. 33-80755) filed with the Securities and Exchange
Commission on December 22, 1995.
(5) This agreement is a compensatory plan or arrangement required to be filed as
an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c).
40
<PAGE> 43
(6) Confidential treatment previously granted.
(7) Incorporated by reference to Exhibit 2.1 filed with the Company's Form S-4
filed with the Securities and Exchange Commission on October 4, 1996.
(8) Incorporated by reference to the exhibit having the same filed number with
the Company's Annual Report on Form 10-K for the year ended December 31,
1995.
(9) Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-A
filed with the Securities and Exchange Commission on February 15, 1995.
(10) Incorporated by reference to Exhibit 2.1 filed with the Company's Form S-8
filed with the Securities and Exchange Commission on October 24, 1996.
(11) Incorporated by reference to exhibits filed with the Company's Form S-8
(No. 333-08575) filed with the Securities and Exchange Commission on
July 22, 1996.
(12) Incorporated by reference to exhibits filed with the Company's Form 10-K/A
(No. 000-20710) filed with the Securities and Exchange Commission on
October 18, 1996.
(b) Reports on Form 8-K. None
41
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PEOPLESOFT, INC.
By: /s/ Ronald E. F. Codd
---------------------
Ronald E. F. Codd, Senior Vice President of Finance and
Administration and Chief Financial Officer
Dated: March 28, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, David A. Duffield and
Ronald E. F. Codd, and each one of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report (Form 10-K) and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ David A. Duffield President, Chief Executive Officer March 28, 1997
----------------------------- and Director (Principal Executive Officer)
David A. Duffield
/s/ Ronald E. F. Codd Senior Vice President of Finance and March 28, 1997
----------------------------- Administration and Chief Financial
Ronald E. F. Codd Officer (Principal Financial and
Accounting Officer)
/s/ Dr. Edgar F. Codd Director March 28, 1997
-----------------------------
Dr. Edgar F. Codd
/a/ Albert W. Duffield Director March 28, 1997
-----------------------------
Albert W. Duffield
/s/ A. George Battle Director March 28, 1997
-----------------------------
A. George Battle
/s/ George J. Still, Jr. Director March 28, 1997
-----------------------------
George J. Still, Jr.
/s/ Cyril J. Yansouni Director March 28, 1997
-----------------------------
Cyril J. Yansouni
</TABLE>
42
<PAGE> 45
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PeopleSoft, Inc.
We have audited the accompanying consolidated balance sheets of PeopleSoft,
Inc. at December 31, 1995 and 1996, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of PeopleSoft, Inc. at December 31, 1995 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Walnut Creek, California
January 31, 1997
ERNST & YOUNG LLP
F-1
<PAGE> 46
PEOPLESOFT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1996
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 90,682 $169,875
Short-term investments 37,687 27,138
Accounts receivable, less allowance for doubtful
accounts of $4,765 in 1995 and $7,423 in 1996 100,151 163,676
Deferred income taxes 16,120 28,246
Other current assets 5,944 7,703
-------- --------
Total current assets 250,584 396,638
Property and equipment, at cost:
Computer equipment 38,642 74,706
Furniture and fixtures 14,223 22,233
Leasehold improvements 5,150 18,485
Building 17,288 17,368
Land 7,487 7,487
-------- --------
82,790 140,279
Less accumulated depreciation and amortization (18,475) (43,581)
-------- --------
64,315 96,698
Investments - 18,270
Deferred income taxes - 13,302
Capitalized software, less accumulated amortization 7,342 11,173
Other assets - 3,999
-------- --------
$322,241 $540,080
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,035 $ 19,630
Accrued liabilities 14,250 27,498
Accrued compensation and related expenses 24,960 37,681
Income taxes payable 11,779 18,771
Deferred revenue 98,123 183,252
-------- --------
Total current liabilities 161,147 286,832
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.01 par value, 160,000,000 shares authorized;
shares issued and outstanding: 1995 - 103,491,000 and
1996 - 107,639,000 1,034 1,076
Additional paid-in capital 106,615 162,691
Accumulated foreign currency translation adjustment (264) (89)
Retained earnings 53,709 89,570
-------- --------
Total stockholders' equity 161,094 253,248
-------- --------
$322,241 $540,080
======== ========
</TABLE>
See accompanying notes.
F-2
<PAGE> 47
PEOPLESOFT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Revenues:
License fees $ 68,580 $137,808 $252,799
Services 44,503 94,331 197,253
-------- -------- --------
Total revenues 113,083 232,139 450,052
Costs and expenses:
Cost of license fees 6,817 8,503 12,357
Cost of services 26,740 56,789 118,906
Sales and marketing 35,844 70,052 135,757
Product development 15,318 38,625 70,653
General and administrative 8,167 16,182 27,162
In-process research and development and acquisition costs - - 29,393
-------- -------- --------
Total costs and expenses 92,886 190,151 394,228
-------- -------- --------
Operating income 20,197 41,988 55,824
Other income, interest expense and other 2,192 4,149 5,888
-------- -------- --------
Income before income taxes 22,389 46,137 61,712
Provision for income taxes 9,308 18,799 25,851
-------- -------- --------
Net income $ 13,081 $ 27,338 $ 35,861
======== ======== ========
Net income per share $ 0.12 $ 0.24 $ 0.30
======== ======== ========
Shares used in per share computation 106,442 114,062 120,032
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 48
PEOPLESOFT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Foreign
Additional Currency Total
Common Stock Paid-in Translation Retained Stockholders'
----------------------
Shares Amount Capital Adjustment Earnings Equity
------- ------------ ----------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 94,418 $ 944 $ 57,834 $ (14) $13,290 $72,054
Exercise of common stock options
and issuances under stock
purchase plan 2,878 28 2,218 - - 2,246
Proceeds from sale of Red Pepper
common and preferred stock 1,920 20 2,705 - - 2,725
Tax benefits from employee stock
transactions - - 4,592 - - 4,592
Translation adjustment - - - (118) - (118)
Net income for the year - - - - 13,081 13,081
------- ------ -------- ------ ------- --------
Balances at December 31, 1994 99,216 992 67,349 (132) 26,371 94,580
Exercise of common stock options
and issuances under stock
purchase plan 2,820 28 5,071 - - 5,099
Proceeds from sale of Red Pepper
common and preferred stock 1,455 14 5,069 - - 5,083
Issuance of warrants - - 21,793 - - 21,793
Tax benefits from employee stock
transactions - - 7,333 - - 7,333
Translation adjustment - - - (132) - (132)
Net income for the year - - - - 27,338 27,338
------- ------ -------- ------ ------- --------
Balances at December 31, 1995 103,491 1,034 106,615 (264) 53,709 161,094
Exercise of common stock options
and issuances under stock
purchase plan 3,790 38 15,053 - - 15,091
Acquisition of PMI 358 4 22,042 - - 22,046
Tax benefits from employee stock
transactions - - 18,981 - - 18,981
Translation adjustment - - - 175 - 175
Net income for the year - - - - 35,861 35,861
------- ------ -------- ------ ------- --------
Balances at December 31, 1996 107,639 $1,076 $162,691 $ (89) $89,570 $253,248
======= ====== ======== ====== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 49
PEOPLESOFT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $13,081 $27,338 $ 35,861
Adjustments to reconcile net income to net cash provided (used)
by operating activities, net of acquired companies:
Depreciation and amortization 7,335 11,540 26,691
Provision for doubtful accounts, net of write-offs and 953 2,860 2,597
recoveries
Provision for deferred income taxes (4,110) (7,790) (25,428)
In-process research and development costs and acquisition
costs - - 26,509
Changes in operating assets and liabilities:
Accounts receivable (15,463) (51,908) (65,840)
Other current assets (2,108) (2,896) (1,093)
Other noncurrent assets - - (7,245)
Accounts payable and accrued liabilities 8,176 12,841 15,214
Accrued compensation and related expenses 4,559 16,494 12,545
Deferred revenue 25,418 45,772 85,129
Income taxes payable 4,726 5,454 6,992
Tax benefits from employee stock transactions 4,592 7,333 18,981
-------- ------- --------
Net cash provided by operating activities 47,159 67,038 130,913
INVESTING ACTIVITIES
Purchase of available-for-sale investments (47,394) (69,571) (29,157)
Sale of available-for-sale investments 52,213 58,596 21,434
Purchase of property and equipment (18,340) (54,318) (57,086)
Additions to capitalized software, net (3,545) (5,631) (2,568)
Acquisitions, net of cash acquired under the purchase method - - 391
-------- ------- --------
Net cash used in investing activities (17,066) (70,924) (66,986)
FINANCING ACTIVITIES
Net proceeds from sale of common stock and exercise of common
stock options 2,246 5,099 15,091
Proceeds from sale of Red Pepper common and preferred stock 2,725 5,083 -
Net proceeds from the issuance of warrants - 21,793 -
-------- ------- --------
Net cash provided by financing activities 4,971 31,975 15,091
Effect of foreign exchange rate changes on cash (118) (132) 175
-------- ------- --------
Net increase in cash and cash equivalents 34,946 27,957 79,193
Cash and cash equivalents at beginning of period 27,779 62,725 90,682
-------- ------- --------
Cash and cash equivalents at end of period $ 62,725 $90,682 $169,875
======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 50
PEOPLESOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
PeopleSoft, Inc. (the "Company") designs, develops, markets, licenses
and supports a family of client/server enterprise application software
products, including manufacturing, distribution, financial, and human resource
management systems. The Company also provides services such as maintenance,
training, installation, consulting and product support services. Customers
consist primarily of large and medium sized organizations including
corporations, higher education institutions, non-profit entities and federal,
state and local government agencies. The Company's business is predominately
based in the United States. It does not have a concentration of credit or
operating risk in any one industry or any one geographic region within the
United States.
BASIS OF PRESENTATION
As more fully described in Note 10, on October 16, 1996 the Company
merged with Red Pepper Software Company ("Red Pepper"). The merger was
accounted for as a pooling-of-interests and the historical consolidated
financial statements of PeopleSoft for prior periods have been restated to
include the financial position, results of operations and cash flows of Red
Pepper.
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned. All significant
intercompany transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the period. Despite management's best effort to establish good
faith estimates and assumptions, actual results may differ from these
estimates.
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND LONG-TERM INVESTMENTS
Cash equivalents are highly liquid investments with insignificant
interest rate risk and remaining maturities of three months or less at the date
of purchase and are stated at amounts which approximate fair value, based on
quoted market prices. Cash equivalents consist principally of investments in
interest-bearing demand deposit accounts with financial institutions and highly
liquid debt securities of corporations, municipalities and the U.S. Government.
The Company accounts for its cash equivalents and investments under
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the
appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. Accordingly, at
December 31, 1995 and 1996 the Company has classified all of its debt
securities as available-for-sale, the components of which are as follow (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
State and Local Municipalities $47,199 $ 79,898
US Government 12,831 2,500
Corporate 18,745 25,605
------- --------
$78,775 $108,003
======= ========
</TABLE>
Unrealized gains and losses at December 31, 1995 and 1996 and realized
gains and losses for the years then ended were not material. The cost of
securities sold is based on the specific identification method.
At December 31, 1995 and 1996, $41.1 million and $62.6 million of debt
securities were included in cash equivalents, $37.7 million and $27.1 million
were included in short term investments, respectively. At December 31,
F-6
<PAGE> 51
1996, $18.3 million of debt securities were included in long term investments,
with a maturity date from one year to 18 months. All other cash was held in
bank demand deposits.
ACCOUNTS RECEIVABLE
Accounts receivable are comprised of billed receivables arising from
recognized and deferred revenues and unbilled receivables, which include
accrued license fees and accrued services. The Company does not require
collateral for its receivables. Reserves are maintained for potential credit
losses. Actual losses may differ from the Company's estimates which could have
a material impact on the Company's future results of operations. The principle
components of accounts receivable were as follows at December 31, (in
thousands):
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Billed Receivables $ 51,750 $ 94,343
Unbilled Receivables 53,166 76,756
-------- --------
104,916 171,099
Allowance for doubtful accounts (4,765) (7,423)
-------- --------
$100,151 $163,676
======== ========
</TABLE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization is computed using the straight-line
method over estimated useful lives of two to three years for computer
equipment, five to ten years for furniture and fixtures, the shorter of lease
term or the useful life of the asset for leasehold improvements and 30 years
for buildings. Intangible assets are amortized over a three to five year life.
CAPITALIZED SOFTWARE
The Company capitalizes software purchased from third parties if the
related product under development has reached technological feasibility or if
there are alternative future uses for the purchased software provided that
capitalized amounts will be realized over a period not exceeding five years.
In addition, the Company capitalizes certain internally incurred costs,
consisting of salaries, related payroll taxes and benefits, and an allocation
of indirect costs related to developing computer software products. Costs
incurred prior to the establishment of technological feasibility are charged to
product development expense. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized software development
costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future revenues,
estimated economic life and changes in software and hardware technologies.
Upon the general release of the product to customers, capitalization ceases and
such costs are amortized (using straight line) on a product by product basis
over the estimated life which is generally three years. All other research and
development expenditures are charged to research and development expense in the
period incurred.
Capitalized software costs and accumulated amortization at December
31, 1994, 1995 and 1996 and related software amortization expense (included in
cost of license fees) for the years then ended were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Capitalized software:
Internal development costs $ 4,573 $ 7,016 $10,737
Purchased from third parties 1,949 5,137 6,832
------- ------- -------
6,522 12,153 17,569
Accumulated amortization (3,089) (4,811) (6,396)
------- ------- -------
$ 3,433 $ 7,342 $11,173
======= ======= =======
Amortization expense $ 2,042 $ 1,722 $ 1,585
======= ======= =======
</TABLE>
During 1995, the Company acquired certain manufacturing software from
Andersen Consulting for $4.0 million for use in its manufacturing software
products. Upon the acquisition of PMI, and the subsequent general availability
of PMI's manufacturing software product line in December 1996, the Company
determined that the manufacturing software acquired from Andersen was redundant
and expensed the balance, at December 31, 1996, (see Note 10). Also, as part
of the acquisition of PMI, the Company allocated $6.5 million to developed
software costs which will be amortized over five years.
F-7
<PAGE> 52
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 December 31, 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
License Fees $21,706 $ 34,224
Maintenance 50,346 104,257
Training 17,264 30,607
Other services 8,807 14,164
------- --------
$98,123 $183,252
======= ========
</TABLE>
REVENUE RECOGNITION
The Company licenses software under noncancellable license agreements
and provides services including maintenance, training, installation, consulting
and support services. License fee revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been shipped,
there are no uncertainties surrounding product acceptance, the fees are fixed
and determinable and collection is considered probable. The Company allocates
a portion of contractual license fees to post-contract support activities
covered under the contract including first year maintenance and product support
services, installation assistance and limited training services. Revenues from
maintenance agreements for maintaining, supporting and providing periodic
upgrades are recognized ratably over the maintenance period, which in most
instances is one year. Revenues for training and consulting services are
recognized as services are performed. Revenue and profits under contracts
requiring significant customization are recognized using the
percentage-of-completion method of contract accounting based on the ratio of
incurred costs to total estimated costs.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
This statement provides for a liability approach under which deferred income
taxes are provided based upon enacted tax laws and rates applicable to the
periods in which the taxes become payable.
FOREIGN CURRENCY TRANSLATION
The Company has determined that the functional currency of each foreign
operation is the local currency. The effects of translation rate changes
related to long term assets and liabilities located outside the United States
are included as a component of stockholders' equity. Foreign currency
transaction gains and losses are included in Other income, interest expense and
other in the Consolidated Statement of Income. Through 1996, such gains and
losses have not been significant.
PER SHARE DATA
In connection with the restatement of the historical consolidated
financial statements for the pooling-of-interests with Red Pepper, net income
per common share for all periods presented has been restated to reflect the
conversion of Red Pepper preferred stock, common stock, warrants and stock
options to equivalent PeopleSoft weighted shares outstanding. The net income
per share for all prior periods presented also reflects restatement for the
two-for-one stock split in November 1996. The net income per common share is
computed based on weighted average number of common shares outstanding and the
effect of dilutive common stock equivalents, consisting of outstanding stock
options and warrants, computed using the treasury stock method.
STOCK-BASED COMPENSATION
In October 1995, the Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued and is
effective for the year ending December 31, 1996. As permitted by SFAS 123, the
Company has continued to account for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and has made the pro forma disclosures
required by SFAS 123 for the year ending December 31, 1996 in Note 4.
F-8
<PAGE> 53
NEWLY ISSUED ACCOUNTING STANDARDS
The FASB issued Statement No. 125, "Accounting for Transfers and
Services of Financial Assets and Extinguishments of Liabilities," which
requires an entity to recognize the financial and servicing assets it controls
and the liabilities it has incurred and to discontinue recognizing financial
assets when control has been surrendered in accordance with the criteria
provided in the Statement. The Company will apply the new rules prospectively
to transactions beginning in the first quarter of 1997. Based on current
circumstances, the Company believes the application of the new rules will not
have a material impact on the consolidated financial statements.
2. BANK CREDIT AGREEMENT
The Company has an unsecured bank credit agreement, expiring in July
1997, which provides a credit line for working capital advances of up to $30
million. The Company has no working capital advances through December 31, 1996.
A sub-limit within this line provides for issuance of letters of credit of up to
$15 million secured by cash deposits. Interest on borrowings under the credit
line is set at one month LIBOR (effective the first day of the following month
based on a 5 day average for the third week of the preceding month as published
in the Wall Street Journal. The rate was 5.375% at December 31, 1996) plus 125
basis points, or alternatively, at the bank's index rate (8.25% at December 31,
1996). The Company may elect which interest rate option to borrow under. Among
other provisions, the agreement requires the Company to maintain certain minimum
financial ratios.
3. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating leases which
require the Company to pay operating costs, including property taxes, insurance
and maintenance. The Company also leases certain computer equipment under
operating leases. Computer leases require the return of the equipment or
payment of residual values; residual values, which approximate fair values, are
not material to the consolidated financial statements.
Future minimum operating lease payments for the years ending December
31, are due as follows (in thousands):
<TABLE>
<S> <C>
1997 $14,025
1998 9,222
1999 7,900
2000 5,445
2001 4,975
Thereafter 4,450
-------
$46,017
=======
</TABLE>
Rent expense amounted to approximately $3.4 million, $6.9 million and
$9.8 million in 1994, 1995 and 1996, respectively.
In December 1996, the Company entered into a five-year lease for a new
office facility in Pleasanton, California. The lessor has committed to fund up
to a maximum of $70.0 million for construction of the facility. Payments under
this lease are anticipated by Management to commence in the first quarter of
1998. The interest rate charged on amounts funded is LIBOR plus 0.625% as
measured on the date of each funding or rollover. At each funding or rollover
date, the Company has its choice of term and LIBOR rate (1 month, 2 months, 3
months, 6 months, 9 months or 12 months) applicable to each tranche at the date
the respective funding amount is requested and approved. The Company has an
option to renew the lease for an additional three years, subject to certain
conditions. If at the end of the lease term the Company does not purchase the
property, the Company would guarantee a residual value to the lessor equal to a
specified percentage of the lessor's cost of the facility. Under this lease,
the Company is required to maintain compliance with certain financial
covenants.
F-9
<PAGE> 54
Under certain software license agreements, the Company is required to
maintain surety bonds and/or letters of credit benefiting third party customers
which may be drawn against if the Company fails to perform its contractual
obligations. At December 31, 1996, one such surety bond for $4.2 million with
a final maturity date of July, 2000, and one letter of credit for $991,000
which expires in April 1998 were outstanding pursuant to customer license
contracts. In addition, the Company had a $27,000 letter of credit outstanding
under its bank credit agreement at December 31, 1996.
The Company is party to various legal disputes and proceedings
arising from the ordinary course of general business activities. In the
opinion of management, resolution of these matters is not expected to have a
material adverse effect on the results of operations of the Company. However,
depending on the amount and the timing, an unfavorable resolution of some or
all of these matters could materially affect the Company's future results of
operations or cash flows in a particular period.
4. STOCKHOLDERS' EQUITY
REDEEMABLE PREFERRED STOCK
Under a stockholder rights plan established in 1995, every share of
common stock carries the right (a "Right"), under certain circumstances, to
purchase equity securities of the Company or an acquiring company. Ten days
after a tender offer or acquisition of 20 percent or more of the Company's
common stock, each Right may be exercised for $45 to purchase one
one-thousandth of one share of the Company's Series A Participating Preferred
Stock. Each one one-thousandth of each share of Series A Participating
Preferred Stock will generally be afforded economic rights similar to one share
of the Company's common stock. In addition, each Right entitles the holder to
purchase common stock of the Company with a fair value of $90 or, in certain
circumstances, securities of the acquiring company for $45. Each Right expires
in February 2005, and, during specified periods, the Company may redeem or
exchange each Right for $.00025 or one share of common stock, respectively.
COMMON STOCK
In November 1996, the Company's common stock was split two for one.
All share and per share amounts applicable to prior periods have been restated
to reflect the split. At December 31, 1996, 37,804,409 authorized but unissued
shares of common stock were reserved for issuance under the Company's stock
plans and for outstanding warrants.
STOCK PLANS
1992 EMPLOYEE STOCK PURCHASE PLAN
Under the 1992 Employee Stock Purchase Plan ("ESPP"), eligible
employees may purchase common stock at a price equal to 85% of the lower of the
fair market value of the common stock at the beginning or end of each offering
period. Participation in the offering is limited to the lesser of 10% of an
employee's compensation or $21,250 per year, may be terminated at any time by
the employee and automatically ends upon termination of employment with the
Company. A total of 3,000,000 shares of common stock have been reserved for
issuance under this plan of which 1,855,938 shares have been issued through
December 31, 1996. Under this plan, 486,272 shares, 515,784 shares and 434,978
shares were issued in 1994, 1995 and 1996, respectively. In January 1997,
178,908 shares were issued in connection with the offering period ended
December 31, 1996. Subsequent six month offering periods will commence on each
January 1 and July 1.
1989 STOCK PLAN
Pursuant to the 1989 Stock Plan, incentive and non-qualified stock
options to purchase shares of the Company's common stock may be granted, and
49,800,000 shares have been reserved for issuance under this Plan. The
exercise price of each incentive and non-qualified stock option shall not be
less than 100% and 85%, respectively, of the fair market value of the stock on
the date the option is granted. The options expire 10 years after the date of
grant and are exercisable to the extent vested. Vesting is established by the
Board of Directors and generally occurs at the rate of 20% per year from the
date of grant.
1993 RED PEPPER SOFTWARE COMPANY PLAN
F-10
<PAGE> 55
Pursuant to the 1993 Red Pepper Software Company Plan, incentive stock
options or nonqualified stock options were granted to employees, directors, and
consultants of Red Pepper. Exercise prices for incentive stock options may not
be less than the fair value of the common stock at the date of grant. Prices
for nonqualified stock options were established at not less than 85% of the
fair value of the common stock at the date of grant. Vesting was established
by the Red Pepper Board of Directors and occurs over a four or five year period
not to exceed five years from the date of grant. The options expire ten years
after the date of grant. In connection with the merger of PeopleSoft and Red
Pepper as described in Note 10, PeopleSoft assumed all of the outstanding stock
options of Red Pepper (adjusted for the merger common exchange ratio of
0.20589). As of the date of the merger, 540,847 shares of PeopleSoft common
stock were reserved for issuance upon the exercise of options assumed in
connection with the business combination.
COMBINED OPTION ACTIVITY
Option activity under the 1989 Stock Plan, including the 1993 Red
Pepper Software Company Plan stock options assumed by PeopleSoft as a result of
the merger, is as follows for the years ended December 31:
<TABLE>
<CAPTION>
Weighted
Average Exercise
Price Shares
------------- ----------
<S> <C> <C>
Balances at December 31, 1993 $ 0.556 11,538,658
Granted 4.442 5,789,174
Exercised 0.239 (2,400,224)
Canceled 4.654 (481,100)
------- ----------
Balances at December 31, 1994 2.029 14,446,508
Granted 10.516 6,034,462
Exercised 1.041 (2,305,020)
Canceled 13.519 (327,076)
------- ----------
Balances at December 31, 1995 4.815 17,848,874
Granted 25.366 5,538,768
Exercised 2.311 (3,355,453)
Canceled 18.205 (551,874)
------- ----------
Balances at December 31, 1996 $11.102 19,480,315
======= ==========
</TABLE>
The exercise prices for the above grants range from $0.0021 to
$47.938. At December 31, 1996, options to purchase 6,861,747 shares were
exercisable and options for 11,980,032 shares were available for grant. The
income tax benefits from employee stock transactions have been recorded as an
increase in additional paid-in capital.
1992 DIRECTORS' STOCK OPTION PLAN
Under the 1992 Directors' Stock Option Plan, directors who are not
officers or employees may receive nonstatutory options to purchase shares of
common stock. A total of 1,200,000 shares of common stock have been reserved
for issuance under this plan and, as of December 31, 1996, options to purchase
272,000 shares with exercise prices of $3.5325 to $21.50 per share have been
granted. Under this plan, 96,000, 88,000, and 24,000 options were issued in
1994, 1995 and 1996, respectively. At December 31, 1996, options to purchase
8,000 were exercisable and options for 928,000 shares were available for grant.
STOCK-BASED COMPENSATION
As permitted under SFAS 123, the Company has elected to continue to
follow APB 25 in accounting for stock-based awards to employees. Under APB 25,
the Company generally recognizes no compensation expense with respect to such
awards, since the exercise price of the stock options awarded are equal to the
fair market value of the underlying security on the grant date.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under the fair
value method of SFAS 123. The fair value of the Company's stock-based awards
to employees was estimated as of the date of the grant using a Black-Scholes
option pricing model. Limitations on the effectiveness of the Black-Scholes
option valuation model are that it was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable and that the model requires the use of highly subjective
assumptions
F-11
<PAGE> 56
including expected stock price volatility. Because the Company's stock-based
awards to employees have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock-based awards to employees. The Company has plans which award
employees stock including: Stock options ("Options") generally granted during
the annual review and salary adjustment cycle, and the ESPP. Both of these
plans are discussed in this Note above. The fair value of the Company's
stock-based awards to employees was estimated assuming no expected dividends and
the following weighted-average assumptions:
<TABLE>
<CAPTION>
Options ESPP
--------------------- ---------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expected life (in years) 3.55 3.51 0.49 0.49
Expected volatility 0.40 0.38 0.45 0.40
Risk free interest rate 6.80% 5.71% 6.09% 5.23%
</TABLE>
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the vesting period for
options and the six-month purchase period for stock purchases under the ESPP.
The Company's pro forma information follows (in thousands except for income per
share information):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C> <C>
Net income As reported $ 27,338 $ 35,861
========= =========
Pro forma $ 20,476 $ 16,072
========= =========
Primary income per share As reported $ .24 $ 0.30
========= =========
Pro forma $ .19 $ 0.14
========= =========
</TABLE>
Because SFAS 123 is applicable only to stock based awards granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until approximately 1999.
The weighted-average fair value of options granted during 1995 and
1996 was $ 3.88 and $ 9.54 per share, respectively. The weighted-average fair
value of the ESPP during 1995 and 1996 was $ 3.10 and $ 7.12 per share,
respectively.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ------------------------------
Weighted
Average
Remaining Weighted
Range of Exercise Number of Contractual Average Weighted Average
Prices Shares Life (years) Exercise Price Number Exercise Price
- ----------------- --------- ------------ -------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.01 - 3.97 6,092,711 5.16 $ 0.99 4,081,639 $ 0.87
4.03 - 9.56 4,940,880 7.55 5.40 1,976,352 5.36
11.06 3,174,934 8.25 11.06 634,988 11.06
12.38 - 23.75 1,093,842 8.81 18.81 176,768 20.37
26.13 - 28.75 3,851,000 9.25 28.73 - -
31.50 - 45.75 598,948 9.70 33.74 - -
---------- ---------
19,752,315 6,869,747
========== =========
</TABLE>
F-12
<PAGE> 57
WARRANTS
In November 1995, the Company received $21.8 million in cash through
the private placement of warrants to purchase an aggregate of 4,000,000 shares
of the Company's common stock. Upon notice of exercise by the holders of the
warrants, the Company, at its option, may settle such exercise by either
issuing the full amount of shares and receiving cash proceeds, issuing a net
amount of shares with no cash proceeds, or purchasing the warrants for an
amount equal to the difference between the common stock's then fair market
value of the common stock and the warrant exercise price. The warrants are
exercisable by the holders at any time at the following prices and expire in
October or November of the following years:
<TABLE>
<CAPTION>
Year of Expiration Number of Shares Exercise Price
----------------- ---------------- --------------
<S> <C> <C>
1997 800,000 $27.50
1998 800,000 $27.50
1998 800,000 $33.75
1999 800,000 $33.75
1999 800,000 $38.75
</TABLE>
5. INCOME TAXES
The provision for income taxes consisted of the following components
for the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal $10,986 $20,964 $37,396
State 2,050 5,387 10,545
Foreign 382 1,417 3,338
------- ------- -------
13,418 27,768 51,279
------- ------- -------
Deferred:
Federal (3,278) (7,546) (20,240)
State (832) (1,423) (5,188)
------- ------- -------
(4,110) (8,969) (25,428)
------- ------- -------
Total provision for income tax $ 9,308 $18,799 $ 25,851
======= ======= =======
</TABLE>
The provision for income taxes differs from the amount computed by
applying the federal statutory income tax rate to the Company's income before
taxes as follows for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- ----------
<S> <C> <C> <C>
Income tax provision at federal statutory rate $ 7,837 $ 16,148 $ 21,599
State income tax, net of federal tax effect 1,229 2,577 3,323
Income from tax advantaged investments (622) (914) (1,425)
Research and development tax credit (510) (550) (1,031)
Non-deductible merger costs - - 1,015
Other 1,374 1,538 2,370
---------- ---------- ----------
Provision for income taxes $ 9,308 $ 18,799 $ 25,851
========== ========== ==========
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes consisted of the following at
December 31 (in thousands):
F-13
<PAGE> 58
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Deferred revenue, net $ 8,426 $ 18,202
Depreciation 59 2,403
Research and development costs - 8,766
Accrued compensation 2,346 2,880
Allowance for doubtful accounts 1,985 3,585
Self insured claims accruals 1,007 1,215
Net operating losses and tax credits 1,950 3,744
Other 2,255 4,898
---------- ----------
Total deferred tax assets 18,028 45,693
---------- ----------
Deferred tax liabilities:
Capitalized software development costs (1,481) (2,152)
State Taxes - (1,155)
Other ( 427) (838)
---------- ----------
Total deferred tax liabilities (1,908) (4,145)
---------- ----------
Total net deferred tax asset $ 16,120 $ 41,548
========== ==========
</TABLE>
Deferred tax assets and liabilities are classified in the consolidated
balance sheet based on the classification of the related asset or liability.
Management has concluded that no valuation allowance is required based on its
assessment that current and historical levels of taxable income are sufficient
to realize the tax asset.
Due to the Company's acquisition of Red Pepper Software Company in
1996, the Company has net operating loss carryforwards of approximately $6.0
million which will expire at various dates from 2007 through the year 2011.
6. RETIREMENT PLAN
The Company has two defined contribution savings plans, a qualified
plan (401k Plan) under the provisions of Section 401(k) of the Internal Revenue
Code that covers all full-time employees and a non-qualified plan which covers
employees with earnings over $100,000 per year. Under the terms of the 401k
Plan, member employees may contribute varying amounts of their annual
compensation (to a maximum of $9,500). The Company matches a portion of
qualified employee contributions based upon years of service, up to a maximum
of 10% of the employee's compensation, subject to certain vesting provisions
based on length of employee service. Company contributions to the 401k Plan
totaled $494,000 in 1995 and $704,000 in 1996.
Under the terms of the non-qualified plan, member employees may
contribute varying amounts of their annual compensation up to 100%. The Company
matches a portion of employee contributions based upon years of service, up to a
maximum of $9,500, subject to certain vesting provisions based on length of
employee service. Company contributions to the non-qualified plan totaled
$118,000 in 1995 and $291,000 in 1996.
F-14
<PAGE> 59
7. JOINT BUSINESS ARRANGEMENT
The Company and a limited liability company ("LLC") entered into
agreements in 1995, whereby the LLC will provide up to $6 million to fund the
development of a suite of student information and administration system
applications ("SIS Software") and the Company is the exclusive distributor of
the SIS Software. Substantially all of the LLC's funds were provided equally
by the Company's founder and principal stockholder and the Student Loan
Marketing Association ("Sallie Mae"), an independent strategic business
partner. The Company has no contractual obligation to provide funds to the
LLC and does not have a right to acquire any of the LLC's equity interests.
The Company will pay the LLC a royalty based on fees received from the
licensing of the SIS Software until the later of four years from the commercial
release of the SIS Software or $12 million in cumulative royalties. The
royalty rate was determined based on negotiations between the Company and
Sallie Mae. All ownership rights and interests in the SIS software will
transfer to the Company, upon the later of four years from the commercial
release of the SIS software or when $12 million in cumulative royalties have
been paid to the LLC. The software products are not yet generally available
for sale and no royalties have been paid through December 31, 1996. The LLC
reimbursed the Company $2.0 million in 1995 and $2.4 million in 1996 for
development funding advanced by the Company during the year and the Company was
reimbursed $98,000 in 1995 and $65,700 in 1996 for interest on such advances.
In 1997, the Company may, at its option, require the LLC to fund
certain further development of the SIS Software and/or the development of two
new software products ("New SIS Software"). Should the Company exercise its
option with respect to the SIS Software, the royalty term would be extended an
additional year or until $17.0 million in cumulative royalties had been paid.
Should the Company exercise its option with respect to the New SIS Software,
the Company would pay the LLC a royalty based on fees received from the
licensing of the New SIS Software until the later of four years from the
commercial release of the New SIS Software or when $10.8 million in
cumulative royalties have been paid to the LLC.
8. SEGMENT AND GEOGRAPHIC AREAS
The Company operates in one industry segment, the design, development,
marketing, licensing and support of a family of client/server enterprise
application software products, and markets its products and services through
the Company's branches, subsidiaries and distributors in Canada, Europe,
Asia/Pacific and Latin America. Intercompany revenues are generally based on a
percentage of the subsidiaries' revenue from unaffiliated customers.
International revenues from each geographic region was less than 10% of total
revenues. The following table presents a summary of operating information and
certain year end balance sheet information by geographic region (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Revenues from unaffiliated customers
Domestic operations $ 99,896 $ 196,083 $ 377,782
International operations 13,187 36,056 72,270
---------- ---------- -----------
Consolidated $ 113,083 $ 232,139 $ 450,052
========== ========== ===========
Operating income
Domestic operations $ 19,800 $ 39,537 $ 48,313
International operations 397 2,451 7,511
---------- ---------- -----------
Consolidated $ 20,197 $ 41,988 $ 55,824
========== ========== ===========
Identifiable assets
Domestic operations $ 157,033 $ 284,403 $ 488,206
International operations 16,954 37,838 51,874
---------- ---------- -----------
Consolidated $ 173,987 $ 322,241 $ 540,080
========== ========== ===========
</TABLE>
9. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is detailed below, except for
non-cash activities related to the acquisition of PMI which are as discussed in
Note 10 below (in thousands):
F-15
<PAGE> 60
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1994 1995 1996
------ -------- ---------
<S> <C> <C> <C>
Cash paid for interest $ 6 $ 24 $ 264
====== ======- =======
Cash paid for income taxes $4,100 $13,902 $25,306
====== ======= =======
</TABLE>
10. BUSINESS COMBINATIONS
MERGER WITH RED PEPPER SOFTWARE COMPANY
On October 16, 1996 PeopleSoft merged with Red Pepper. PeopleSoft
issued 5,420,760 shares of its common stock for all outstanding common stock of
Red Pepper (based on the common exchange ratio of 0.20589 shares of PeopleSoft
for each share of Red Pepper common stock) and assumed under its stock option
plan, all outstanding rights to purchase Red Pepper common stock for 540,847
shares of PeopleSoft stock. Ten percent of the shares issued in the merger are
being held in escrow until October 15, 1997, to serve as security for any
losses incurred by PeopleSoft in the event there are breaches of certain
representations, warranties and covenants contained in the merger agreement.
The merger was accounted for as a pooling-of-interests and the historical
consolidated financial statements of PeopleSoft for the periods prior to the
merger have been restated in the accompanying consolidated financial statements
to include the financial position, results of operations and cash flows of Red
Pepper. Components of the restated consolidated results of operations of
PeopleSoft and Red Pepper are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
PeopleSoft $112,895 $227,568 $440,220
Red Pepper 188 4,571 9,832
-------- -------- --------
Total $113,083 $232,139 $450,052
======== ======== ========
Net income (loss):
PeopleSoft $14,545 $ 29,359 $38,570
Red Pepper (1,464) (2,021) (2,709)
-------- -------- --------
Total $13,081 $ 27,338 $35,861
======== ======== ========
Net income per share:
PeopleSoft $ 0.14 $ 0.27 $ 0.32
Red Pepper (0.02) (0.03) (0.02)
-------- -------- --------
Total $ 0.12 $ 0.24 $ 0.30
======== ======== ========
</TABLE>
Increases in stockholders' equity from common stock issued under stock
option plans and stock purchase plans and related tax benefits:
<TABLE>
<S> <C> <C> <C>
PeopleSoft $6,838 $12,332 $33,894
Red Pepper - 100 178
------ ------- -------
Total $6,838 $12,432 $34,072
====== ======= =======
</TABLE>
Merger costs of $2,884,000 were charged to operations in the fourth
quarter of 1996. Historical intercompany transactions between PeopleSoft and
Red Pepper were not material.
ACQUISITION OF PMI
F-16
<PAGE> 61
During 1994, the Company licensed certain technology to PMI, a joint
venture engaged in developing new applications to meet the demands of discrete
manufacturers, in exchange for a 49.9% interest in PMI and exclusive
distribution rights to products developed by PMI. Funding for PMI was provided
by Norwest Equity Partners IV, L.P. ("Norwest") in exchange for the remaining
interests in PMI. A director of the Company is also a general partner, without
management responsibility, of Norwest. During 1995, the Company's interest in
PMI was reduced by 8.9% to 41% by the addition of another partner, Andersen
Consulting, who contributed certain development services and technologies to
PMI. The Company had no obligation to provide funds to PMI, and had an option
to acquire a portion or all of the outstanding interests in PMI in 1997 or 1999
at pre-determined prices.
Effective November 1, 1996, the Company negotiated an early exercise of
its option and acquired all of the remaining interests in PMI. This
transaction, involving a purchase price of $30.1 million, has been accounted for
under the purchase method and resulted in a one-time charge to earnings of $22.5
million for in-process research and development. Significant components of the
$30.1 million purchase price include the issuance of common stock with a fair
value of $14.4 million, issuance of common stock options to PMI employees with a
fair value of $7.6 million, issuance of a note payable (included in accrued
liabilities) of $4.7 million, and forgiveness of debt and other consideration of
$3.4 million. The purchase price was allocated, based upon an independent
valuation, to in-process research and development costs with a fair value of
$22.5 million, capitalized software of $6.5 million and cash and other assets of
$1.1 million. The results of the operations of PMI have been included in the
Company's consolidated financial statements since November 1, 1996. The results
of operations of PMI for periods prior to the November 1, 1996, were not
material to the consolidated financial statements. Accordingly, pro forma
financial disclosures are not presented.
F-17
<PAGE> 62
PEOPLESOFT, INC.
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly supplemental consolidated financial information
for 1995 and 1996 are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarter Ended
March 31, June 30, September 30, December 31,
<S> <C> <C> <C> <C>
1995
Total revenues $ 40,588 $ 52,251 $ 61,144 $ 78,156
Operating income 6,305 8,260 10,214 17,209
Net income 4,166 5,433 6,707 11,032
Net income per share $ 0.04 $ 0.05 $ 0.06 $ 0.09
Shares used in per share computation 110,294 113,282 115,824 116,848
1996
Total revenues $ 82,282 $102,721 $117,382 $147,667
Operating income 14,156 17,668 20,713 3,287
Net income 9,459 11,480 13,179 1,743
Net income per share $ 0.08 $ 0.10 $ 0.11 $ 0.01
Shares used in per share computation 117,179 119,231 120,689 123,028
</TABLE>
F-18
<PAGE> 1
EXHIBIT 10.33
PURCHASE AGREEMENT
This Agreement is made and entered into as of October 22, 1996, by and
between Norwest Equity Partners IV, a Minnesota limited partnership ("Seller")
and PeopleSoft, Inc., a Delaware corporation ("Purchaser") with respect to
Seller's limited partnership interest in PeopleMan, L.P. (the "Partnership")
and Seller's shares of PeopleMan, Inc., a Delaware corporation (the
"Corporation").
WHEREAS, immediately prior to the sale of its limited Partnership
interest in the Partnership, Seller shall receive a distribution from the
Partnership of shares of common stock of Purchaser with a value of $4,000,000
based on the closing trading price of such shares on October 22, 1996 (the
"Distribution Shares");
WHEREAS, Seller wishes to transfer its entire remaining limited
partnership interest in the Partnership and all of its capital stock of the
Corporation to Purchaser: and
WHEREAS, Purchaser wishes to acquire such interests on the terms set
forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements, covenants
and conditions contained herein, and other good and valuable consideration,
Seller and Purchaser agree as follows:
1. In exchange for the consideration described in paragraph 3,
Seller hereby conveys, assigns and transfers to Purchaser, all of Seller's
limited partnership interest in the Partnership ("the Purchased Interest"), and
Purchaser hereby accepts the Purchased Interest and assumes all of Seller's
obligations and duties with respect to such Purchased Interest. By virtue of
the preceding sentence, Seller intends to, and does hereby, transfer to
Purchaser its entire interest in the Purchased Interest, including, without
limitation, its capital account balance and all rights of Seller to receive a
return of capital contributions or distributions of profit made on or after the
date of this Agreement with respect to the Purchased Interest, whether or not
such profit distributions related to profit that was realized by the
Partnership prior to the date of this Agreement (but excluding the Distribution
Shares which shall be made to Seller immediately prior to the sale of the
Purchased Interest).
2. In exchange for the consideration designated in paragraph 4,
Seller hereby conveys, assigns and transfers to Purchaser Seller's 4,950 shares
of common stock of the Corporation (the "PeopleMan Shares") and Purchaser
hereby accepts the PeopleMan Shares.
3. In exchange for the Purchased Interest, Purchaser agrees to
deliver to Seller upon execution of this Agreement the number of shares of
Purchaser's common stock equal to $10,282,264 divided by the closing trading
price of the Purchaser's common stock on October 22, l996.
4. In exchange for the PeopleMan Shares, Purchaser agrees to
deliver to Seller upon execution of this Agreement that number of shares of
Purchaser's common stock equal to $144,265 divided by the closing trading price
of Purchaser's common stock on October 22, 1996. The shares of Purchaser's
common stock deliverable under paragraphs 3 and 4 of this Agreement are
hereinafter referred to as the "PeopleSoft Shares."
5. Seller hereby represents and warrants to Purchaser as follows:
1
<PAGE> 2
a. Each of the Purchased Interest and the PeopleMan
Shares is owned beneficially and of record by Seller, free and clear of all
liens, encumbrances, security interests, options and claims of any kind.
b. Seller has the power and authority to enter into this
Agreement and the execution, delivery and performance of this Agreement has
been duly authorized by all necessary action.
c. Seller understands that the PeopleSoft Shares have
not been registered under the Securities Act of 1933. Seller also understands
that the Shares are being offered and sold pursuant to an exemption from
registration contained in the Securities Act based in part upon Seller's
representations contained in this Agreement.
d. Seller has substantial experience in evaluating and
investing in securities in companies similar to Purchaser so that it is capable
of evaluating the merits and risks of its investment in Purchaser and has the
capacity to protect its own interests. Seller must bear the economic risk of
this investment indefinitely unless the PeopleSoft Shares are registered
pursuant to the Securities Act of 1933, or an exemption from registration is
available. Seller also understands that there is no assurance that any
exemption from registration under the Securities Act of 1933 will be available
and that, even if available, such exemption may not allow Seller to transfer
all or any portion of the PeopleSoft Shares under the circumstances, in the
amounts or at the times Seller might propose.
e. Seller is acquiring the PeopleSoft Shares for
Purchaser's own account for investment only, and not with a view towards
distribution.
f. Seller represents that by reason of its, or of its
management's business or financial experience, Seller has the capacity to
protect its own interests in connection with the transactions contemplated in
this Agreement.
6. Purchaser hereby represents and warrants to Seller that
Purchaser as follows:
a. Purchaser has delivered to Seller accurate and
complete copies (excluding copies of exhibits) of each report, registration
statement (on a form other than Form S-8) and definitive proxy statement filed
by Purchaser with the Securities and Exchange Commission (the "SEC") between
January 1, 1996 and the date of this Agreement (the "Purchaser SEC Documents").
As of the time it was filed with the SEC (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing:
(i) each of the Purchaser SEC Documents compiled in all material respects with
the applicable requirements of the Securities Act of 1933 or the Securities
Exchange Act of 1934 (as the case may be); and (ii) none of the Purchaser SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
b. The consolidated financial statements contained in
the Purchaser SEC Documents: (i) compiled as to form in all material respects
with the published rules and regulations of the SEC applicable thereto; (ii)
were prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods covered, except as may be
indicated in the notes to such financial statements and (in the case of
unaudited statements) as permitted by Form 10-Q of the SEC, and except that
unaudited financial statements may not contain footnotes and are subject to
year-end audit adjustments; and (iii) fairly present the consolidated financial
position of Purchaser and its subsidiaries as of the respective dates thereof
and the consolidated results of operations of Purchaser and its subsidiaries
for the periods covered thereby.
2
<PAGE> 3
c. Purchaser has the absolute and unrestricted right,
power and authority to perform its obligations under this Agreement and under
the Registration Rights Agreement; and the execution, delivery and performance
by Purchaser of this Agreement (including the issuance of the PeopleSoft Shares
as contemplated by this Agreement) have been duly authorized by all necessary
action on the part of Purchaser and the Partnership. This Agreement
constitutes the legal, valid and biding obligation of Purchaser, enforceable
against it in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
7. Concurrently with the execution of this Agreement, Purchaser
and Seller shall execute and deliver the Registration Rights Agreement covering
the PeopleSoft Shares in the form attached hereto as Exhibit A.
8. This Agreement may be executed in more than one counterpart
with the same effect as if the parties executing the several counterparts had
all executed one counterpart.
9. This Agreement shall be governed by and construed in
accordance with the laws of the State of California as applied to agreements
among the residents of such state made and to be performed entirely within such
state.
10. The representations, warranties, covenants and agreements made
herein shall survive any investigation made by any Purchaser and the closing of
the transactions contemplated hereby.
11. Except as otherwise expressly provided herein, the provisions
hereof shall inure the benefit of, and be binding upon, the successors.
assigns, heirs, executors and administrators of the parties hereto and shall
inure to the benefit of and be enforceable by each person who shall be a holder
of the PeopleSoft Shares from time to time.
12. This Agreement, the Registration Rights Agreement and the
other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and no party shall be liable or bound to any other in any manner by any
representations, warranties, covenants and agreements except as specifically
set forth herein and therein.
13. It is agreed that no delay or omission to exercise any right,
power or remedy accruing to any party, upon any breach, default or
noncompliance by another party under this Agreement or the Registration Rights
Agreement shall impair any such right, power or remedy, nor shall it be
construed to be a waiver of any such breach, default or noncompliance or any
acquiescence therein, or of or in any similar breach, default or noncompliance
thereafter occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character on Purchaser's part of any breach, default or
noncompliance under this Agreement or the Registration Rights Agreement or any
waiver on such party's part of any provisions or conditions of the Agreement or
the Registration Rights Agreement must be in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies,
either under this Agreement and the Registration Rights Agreement, by law, or
otherwise afforded to any party, shall be cumulative and not alternative.
14. Purchaser shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of the
Agreement. The Purchaser shall reimburse the reasonable fees of and expenses
of counsel for the Purchaser and shall reimburse such counsel for reasonable
3
<PAGE> 4
expenses incurred in connection with the negotiation, execution, delivery and
performance of this Agreement.
15. In the event that any dispute among the parties to this
Agreement shall result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first above written.
SELLER: PURCHASER:
Norwest Equity Partners IV, L.P. PeopleSoft, Inc.
By: ITNCA Partners
its general partner
By: ____________________________ By:_____________________________
George J. Still, Jr. Authorized Officer
general partner
4
<PAGE> 1
Exhibit 11.1
Computation of Per Share Earnings(1)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1994 1995 1996
---------- -------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Weighted Average Shares
Common stock outstanding 96,962 101,943 105,301
Common stock equivalents, treasury
stock method 9,480 12,119 14,731
------- ------- -------
106,442 114,062 120,032
======= ======= =======
Net Income Per Common Share
Net income applicable to common stockholders $ 13,081 $ 27,338 $ 35,861
Shares used in per common share computation 106,442 114,062 120,032
Net income per common share $ 0.12 $ 0.24 $ 0.30
</TABLE>
(1) In November 1996, the Company effected a two-for-one split of its Common
Stock. All shares, Common Stock equivalents and per share data applicable
to prior periods have been restated to reflect the split. On October 16,
1996 PeopleSoft merged with Red Pepper Software Company. This merger was
accounted for as a pooling-of-interests and the historical consolidated
financial statements including share and per share information of
PeopleSoft for prior periods have been restated to include Red Pepper.
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
- ------------------ -----------------------------
<S> <C>
PeopleSoft Argentina S.A. Argentina
PeopleSoft Properties, Inc. California
PeopleSoft Credit Corporation California
PeopleSoft Canada Ltd. Canada
PeopleSoft FSC, Inc. Barbados
PeopleSoft Do Brasil Ltda Brazil
PeopleSoft Australia Pty. Limited Australia
PeopleSoft France, S.A. France
PeopleSoft GmbH Germany
PeopleSoft Japan, K.K. Japan
PeopleSoft Mexico, S.A. de C.V. Mexico
PeopleSoft B.V. Netherlands
PeopleSoft New Zealand Ltd New Zealand
PeopleSoft Asia Pte Limited Singapore
PeopleSoft UK Limited United Kingdom
PeopleSoft Iberica, S.L. Spain
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-80755, and Form S-3 No. 333-20555) of PeopleSoft, Inc. and in
the related Prospectuses and in the Registration Statement (Forms S-8)
pertaining to the 1989 Stock Option Plan, the 1992 Directors' Stock Option Plan
and the 1992 Employee Stock Purchase Plan of PeopleSoft, Inc. and the Red Pepper
Software Company 1993 stock option plan, of our report dated January 31, 1997
with respect to the consolidated financial statements of PeopleSoft, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1996
filed with the Securities and Exchange Commission.
ERNST & YOUNG
Walnut Creek, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 169,875
<SECURITIES> 45,408
<RECEIVABLES> 171,099
<ALLOWANCES> 7,423
<INVENTORY> 0
<CURRENT-ASSETS> 396,638
<PP&E> 140,279
<DEPRECIATION> 43,581
<TOTAL-ASSETS> 540,080
<CURRENT-LIABILITIES> 286,832
<BONDS> 0
0
0
<COMMON> 1,076
<OTHER-SE> 252,172
<TOTAL-LIABILITY-AND-EQUITY> 540,080
<SALES> 0
<TOTAL-REVENUES> 450,052
<CGS> 0
<TOTAL-COSTS> 394,228
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,461
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 61,712
<INCOME-TAX> 28,851
<INCOME-CONTINUING> 35,861
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,861
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
