<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
-------- Exchange Act of 1934 for the quarterly period ended June 30, 1997 or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
-------- Exchange Act of 1934 for the transition period from ______ to ______.
Commission File Number: 0-20710
PEOPLESOFT, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0137069
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4440 Rosewood Drive, Pleasanton, CA 94588-3031
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code:
510/225-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at June 30, 1997
----- ----------------------------
Common Stock, $.01 par value 109,981,692
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PEOPLESOFT, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31,
1996 and June 30, 1997 3
Condensed Consolidated Statements of Income for the
Three Months Ended June 30, 1996 and June 30, 1997;
and Six Months Ended June 30, 1996 and June 30, 1997 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and June 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 24
ITEM 2 - Changes in Securities 24
ITEM 3 - Defaults upon Senior Securities 24
ITEM 4 - Submission of Matters to a Vote of Security Holders 24
ITEM 5 - Other Information 24
ITEM 6 - Exhibits and Reports on Form 8 - K 24
SIGNATURES 25
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PEOPLESOFT, INC.
--------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 169,875 $ 189,145
Short-term investments 27,138 69,515
Accounts receivable, net 163,676 200,263
Deferred income taxes 28,246 36,349
Other current assets 7,703 16,587
--------- ---------
Total current assets 396,638 511,859
Property and equipment, at cost 140,279 166,239
less accumulated depreciation and amortization (43,581) (60,872)
--------- ---------
96,698 105,367
Investments 18,270 22,477
Deferred income taxes 13,302 13,302
Capitalized software, less accumulated amortization 11,173 10,207
Other assets 3,999 5,030
--------- ---------
$ 540,080 $ 668,242
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 47,128 $ 38,982
Accrued compensation and related expenses 37,681 47,056
Income taxes payable 18,771 37,811
Deferred revenue 183,252 231,189
--------- ---------
Total current liabilities 286,832 355,038
Stockholders' equity:
Common stock 1,076 1,099
Additional paid-capital 162,691 183,043
Accumulated foreign currency translation adjustment (89) (618)
Retained earnings 89,570 129,680
--------- ---------
253,248 313,204
--------- ---------
$ 540,080 $ 668,242
========= =========
</TABLE>
See notes to condensed consolidated financial statements
3
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PEOPLESOFT, INC.
--------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 56,990 $ 97,028 $100,566 $180,441
Services 45,731 87,348 84,437 157,589
-------- -------- -------- --------
Total revenues 102,721 184,376 185,003 338,030
Costs and expenses:
Cost of license fees 3,015 4,887 5,547 9,328
Cost of services 26,561 55,234 47,915 98,545
Sales and marketing 32,834 50,160 58,177 94,472
Product development 16,870 29,580 30,661 54,838
General and administrative 5,773 10,441 10,879 19,569
-------- -------- -------- --------
Total costs and expenses 85,053 150,302 153,179 276,752
-------- -------- -------- --------
Operating income 17,668 34,074 31,824 61,278
Other income, principally interest 1,465 2,436 3,075 4,475
-------- -------- -------- --------
Income before taxes 19,133 36,510 34,899 65,753
Provision for income taxes 7,653 14,239 13,960 25,643
-------- -------- ======== ========
Net income $ 11,480 $ 22,271 $ 20,939 $ 40,110
======== ======== ======== ========
Net income per share $ 0.10 $ 0.18 $ 0.18 $ 0.32
======== ======== ======== ========
Shares used in per share computation 119,231 124,604 118,205 124,225
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
4
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PEOPLESOFT, INC.
--------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1996 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 20,939 $ 40,110
Adjustments:
Depreciation and amortization 11,674 19,333
Provision for allowances 972 3,024
Provision for deferred income taxes (4,074) (8,103)
Changes in operating assets and liabilities:
Accounts receivable (33,045) (39,611)
Other current assets and non-current assets (1,725) (9,915)
Accounts payable and accrued liabilities 6,576 (8,146)
Accrued compensation and related expenses 5,314 9,375
Deferred revenue 28,498 47,937
Income taxes payable 5,161 19,040
Tax benefits of employee stock transactions 4,011 4,087
--------- ---------
Net cash provided by operating activities 44,301 77,131
INVESTING ACTIVITIES
Purchase of investments (6,942) (59,548)
Sale of investments 13,991 12,966
Purchase of property and equipment (25,327) (25,960)
Additions to capitalized software, net (1,005) (1,076)
--------- ---------
Net cash used in investing activities (19,283) (73,618)
FINANCING ACTIVITIES
Net proceeds from issuance of common
stock, primarily from stock options 8,893 16,286
--------- ---------
Net cash provided by financing activities 8,893 16,286
Effect of foreign exchange rate changes on cash 52 (529)
--------- ---------
Net increase in cash and cash equivalents 33,963 19,270
Cash and cash equivalents at beginning of period 90,682 169,875
--------- ---------
Cash and cash equivalents at end of period $ 124,645 $ 189,145
========= =========
</TABLE>
See notes to condensed consolidated financial statements
5
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PEOPLESOFT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at June 30, 1996 and 1997 and for the three and six
month periods then ended is unaudited, but includes all adjustments (consisting
only of normal, recurring adjustments) which the Company's management believes
to be necessary for the fair presentation of the financial position, results of
operations, and changes in cash flows for the periods presented. 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 revenues and expenses during the reported
period. Despite management's best effort to establish good faith estimates and
assumptions, and to manage the achievement of the same, actual results may
differ.
The accompanying interim financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report to Shareholders (Form 10-K) for the year ended December
31, 1996. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission rules and regulations. Interim results of operations for
the three and six month periods ended June 30, 1997 are not necessarily
indicative of operating results for the full fiscal year.
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 the Company for prior
periods have been restated to include the financial position, results of
operations and cash flows of Red Pepper. See Note 10, "Business Combinations",
in the Notes to the Consolidated Financial Statements in the Company's Annual
Report to Shareholders (Form 10-K) for the year ended December 31, 1996.
2. EARNINGS PER SHARE
Net income per share is computed on the basis of weighted average number
of shares outstanding plus common stock equivalents, consisting of outstanding
dilutive stock options and warrants (using the treasury stock method). Fully
diluted per share amounts are not presented, as the effect is not material. In
November 1996, the Company's common stock was split two-for-one. All shares,
common stock equivalents, and per share amounts applicable to prior periods have
been restated to reflect the stock split. The computation of the weighted
average number of shares outstanding for the three and six month periods ended
June 30, 1996 and 1997 follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares:
Common stock 104,642 109,357 104,066 108,802
Common stock equivalents 14,589 15,247 14,139 15,423
------- ------- ------- -------
119,231 124,604 118,205 124,225
======= ======= ======= =======
</TABLE>
In February 1997, the Statement of Financial Accounting Standards No.
128 "Earnings per Share", (FAS 128) was issued and is effective for the year
ending December 31, 1997. The Company will change its method for computing
earnings per share and restate all periods to reflect the change in its
consolidated statements of income, effective with the issuance of the Company's
fourth quarter and annual report for 1997. The new method requires calculation
of earnings per share excluding the dilutive effect of common stock equivalents
such as stock options and warrants. The impact of the new requirements is
expected to increase earnings per share for the quarters ending June 30, 1996
and 1997 by $.01
6
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and $.02, respectively, and $.02 and $.05 for the six months ended June 30, 1996
and 1997, respectively. The impact of FAS 128 on fully diluted earnings per
share is not expected to be material.
3. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of billed receivables arising from
recognized and deferred revenues, and unbilled receivables, which include
accrued license fees, accrued services, and deferred services. The principle
components of accounts receivable at December 31, 1996 and June 30, 1997 were as
follows (in thousands):
<TABLE>
<CAPTION>
Dec. 31, June 30,
1996 1997
--------- ---------
<S> <C> <C>
Billed receivables $ 94,343 $ 120,085
Unbilled receivables 76,756 90,625
--------- ---------
171,099 210,710
Allowances (7,423) (10,447)
--------- ---------
$ 163,676 $ 200,263
========= =========
</TABLE>
4. DEFERRED REVENUE
Deferred revenue is comprised of deferrals for license fees,
maintenance, training and other services. The principle components of deferred
revenue at December 31, 1996 and June 30, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Dec. 31, June 30,
1996 1997
-------- --------
<S> <C> <C>
License fees $ 34,224 $ 47,442
Maintenance 104,257 126,921
Training 30,607 36,326
Other services 14,164 20,500
-------- --------
$183,252 $231,189
======== ========
</TABLE>
5. CAPITALIZED SOFTWARE
The Company capitalizes certain software acquired from third parties and
certain costs incurred internally in developing its software products. As
discussed in Note 1 of the Notes to the Consolidated Financial Statements in the
Company's Annual Report to Shareholders (Form 10-K) for the year ended December
31, 1996, the establishment of technological feasibility and ongoing assessment
of recoverability of capitalized software development costs and the cost of
purchased software 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. Software amortization charges related to capitalized software
amounted to $965,000 and $2,043,000 for the six months ended June 30, 1996 and
1997, respectively. Capitalized software costs and accumulated amortization at
December 31, 1996 and June 30, 1997 were as follows (in thousands):
7
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<TABLE>
<CAPTION>
Dec. 31, June 30,
1996 1997
-------- --------
<S> <C> <C>
Capitalized software:
Internal development costs $ 10,737 $ 11,813
Purchased from third parties 6,832 6,832
-------- --------
17,569 18,645
Accumulated amortization (6,396) (8,438)
-------- --------
$ 11,173 $ 10,207
======== ========
</TABLE>
6. BUSINESS COMBINATIONS
In July 1997 the Company announced its intent to acquire all of the
outstanding shares of Campus Solutions, Inc. in exchange for 210,000 shares of
its common stock. The acquisition is anticipated to close during the third
quarter and is to be accounted for as a pooling-of-interests. In addition, the
Company does not expect to incur any material transaction charges in connection
with this acquisition.
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The 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. Please read the section below titled "Factors That May Affect Future
Results" to review conditions which the Company believes could cause actual
results to differ materially from those contemplated by the forward-looking
statements. Forward-looking statements include, but are not limited to, those
items identified with a bold footnote 1 symbol. The Company undertakes no
obligation to update the information contained herein.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During October 1996, PeopleSoft completed a merger with Red Pepper Software
("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. 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>
FOR THE THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
TOTAL REVENUES DOLLAR INCREASE
1996 1997 YEAR OVER YEAR
---- ---- --------------
<S> <C> <C> <C>
Revenues:
55% 53% License fees 70%
45 47 Services 91
---- ---- ---
100 100 Total revenues 79
Costs and expenses:
3 3 Cost of license fees 62
26 30 Cost of services 108
32 27 Sales and marketing 53
16 16 Product development 75
6 6 General and administrative 81
---- ---- ---
83 82 Total costs and expenses 77
---- ---- ---
17 18 Operating income 93
2 1 Other income 66
---- ---- ---
19 19 Income before taxes 91
8 7 Provision for income taxes 86
==== ==== ====
11% 12% Net income 94%
==== ==== ====
</TABLE>
9
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<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
TOTAL REVENUES DOLLAR INCREASE
1996 1997 YEAR OVER YEAR
---- ---- --------------
<S> <C> <C> <C>
Revenues:
54% 53% License fees 79%
46 47 Services 87
- ---- ---- ---
100 100 Total revenues 83
Costs and expenses:
3 3 Cost of license fees 68
26 29 Cost of services 106
31 28 Sales and marketing 62
17 16 Product development 79
6 6 General and administrative 80
- ---- ---- ---
83 82 Total costs and expenses 81
- ---- ---- ---
17 18 Operating income 93
2 1 Other income 46
- ---- ---- ---
19 19 Income before taxes 88
8 7 Provision for income taxes 84
==== ==== ====
11% 12% Net income 92%
==== ==== ====
</TABLE>
A substantial portion of the Company's cost structure is
employee-related. The breakdown of employees by functional area is as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
EMPLOYEE COUNT TOTAL EMPLOYEES INCREASE
12/31/96 6/30/97 12/31/96 6/30/97 SINCE 12/31/96
-------- ------- -------- ------- --------------
<S> <C> <C> <C> <C> <C>
1,072 1,486 Services 43% 45% 39%
665 855 Sales and marketing 27 26 29
517 676 Product development 21 20 31
236 301 General and administrative 9 9 28
----- ----- --- --- --
2,490 3,318 Total 100% 100% 33%
===== ===== === === ==
</TABLE>
REVENUES
The Company recognizes license fee revenues 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 contract accounting. The
aggregate amount of customer license agreements ("contracting activity") signed
for software license fees and bundled services increased from $83.9 million in
the quarter ended June 30, 1996 to $146.4 million for the same period in 1997
and from $158.0 million in the six month
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period ended June 30, 1996 to $292.0 million for the same period in 1997.
Contracting activity with new customers comprised approximately 65% of the total
customer license agreements signed with 130 new customers compared to 65% and
132 new customers in the quarter ending March 31, 1997. Average transaction
size, computed by dividing the number of new customers into contracting
activity, increased to approximately $1.1 million in the quarter ended June 30,
1997.
Revenues from licensing fees increased by 70% from $57.0 million in the
three month period ended June 30, 1996 to $97.0 million for the same period in
1997. Year-to-date, licensing fees increased 79% from $100.6 million in 1996 to
$180.4 million in the same period in 1997. The increase in license fee revenues
was attributable to continued increased market acceptance of, and breadth of,
the Company's software product offerings and the increased capacity created by
continued growth in the Company's sales, marketing and customer service
organizations. Factors which caused the rate of increase in license fees to
decrease from the 91% growth rate for the quarter ending March 31, 1997
included: (i) a significant reorganization of the North American sales force
from a geographic based structure to an industry based focus occurred during the
quarter; and (ii) contracting performance in the second calendar quarter of 1996
did not follow historical patterns and was unusually strong, presenting a
difficult year to year comparison.
Revenues from services increased by 91% from $45.7 million in the three
month period ended June 30, 1996 to $87.3 million for the same period in 1997.
Year-to-date, service revenues increased 87% from $84.4 million in 1996 to
$157.6 million in the same period in 1997. Service revenues as a percentage of
total revenues were 45% and 47% for the quarters ended June 30, 1996 and 1997,
respectively and 46% and 47% for the six months ended June 30, 1996 and 1997,
respectively. 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. In addition, the increase in
services revenues was attributable to two other primary factors: increases in
the installed base of customers receiving ongoing maintenance, training and
other support services; and a significant increase in consulting revenues
generated by the Company's professional services staff. The Company has
aggressively invested in expansion of the worldwide professional services staff,
which grew substantially over the comparable period in 1996 as a result of
increased customer demand for the Company's direct assistance during enterprise
implementation projects.
Total revenues increased by 79% from $102.7 million in the three month
period ended June 30, 1996 to $184.4 million for the same period in 1997.
Year-to-date, total revenues increased 83% from $185.0 million in 1996 to $338.0
million in the same period in 1997. Total revenue grew 16% from the previous
quarter which was slightly higher than the Company's forecast of 14% revenue
growth. License fees increased at a rate comparable to this overall revenue
forecast, while services revenue grew faster than expected in all areas
(maintenance, training and consulting services) in response to general industry
demand for higher levels of service. In response to this demand, the Company
continues to rapidly expand its service delivery capacity, particularly in the
professional services (consulting) area and in general, expects some lag between
the addition of resources and the production of revenue from those incremental
resources which increases the complexity of forecasting revenue levels.(1)
During the quarters ended June 30, 1996 and 1997, the Company's
international revenues were approximately 15% and 13% of total revenues,
respectively. Revenues from international operations increased 56% from $14.9
million in the three month period ended June 30, 1996 to $23.2 million in the
same quarter in 1997. Increased international contracting activity was largely
due to a significant transaction in France and, to a lesser degree, sales of
newly released Japanese versions of Financial products. While contracting
activity continues to grow sequentially, international revenues as a percentage
of total revenues fluctuate due to contract terms which determine revenue
recognition. The multi-language availability of Release 6 occurred toward the
end of the second quarter however it did not have any significant impact on
international performance during the quarter. The Company expects international
revenues to grow substantially during 1997, however, it is unlikely that the
percentage of international revenues in comparison to total revenues will change
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 and/or
growth prospects.
- ------------------------------
(1) Forward looking statement
11
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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 by 63% from $3.0
million in the three month period ended June 30, 1996 to $ 4.9 million for the
same period in 1997, representing 3% of total revenues for each quarter and 5%
of license fee revenues in each quarter. Cost of license fees in the six month
period ended June 30, 1996 and 1997 were $5.5 million and $9.3 million,
respectively representing 3% of total revenues for each six month period and 6%
and 5% of license fee revenues in each six month period, respectively. The
Company's software products are based on a combination of internally developed
technology and application products, as well as bundled third party software
products and technology. 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 consists principally of account management field
support, training, consulting and product support costs. These costs increased
by 108% from $26.6 million in the three month period ended June 30, 1996 to
$55.2 million for the same period in 1997, representing 26% and 30% of total
revenues and 58% and 63% of service revenues in those quarters, respectively.
Costs increased by 106% from $47.9 million in the six month period ended June
30, 1996 to $98.5 million for the same period in 1997, representing 26% and 29%,
of total revenues and 57% and 63% of service revenues in those periods,
respectively. The increase in cost of services is due to the significant
expansion of the Company's customer service resources across all categories,
including consulting, telephone support, training and account management staff.
Sales and marketing expenses increased by 53% from $32.8 million in the
three month period ended June 30, 1996 to $50.2 million for the same period in
1997, representing 32% and 27% of total revenues respectively. These expenses
increased by 62% from $58.2 million in the six month period ended June 30, 1996
to $94.5 million for the same period in 1997, representing 31% and 28% of total
revenues, respectively. The increase in sales and marketing expenses is
attributable to the Company's continued expansion of its direct sales force,
increased commission expense associated with higher revenue, increased
depreciation from related equipment and facility expenditures, continued
investment in building an international direct sales force and increased
marketing expenses for the Company's expanded software product line. The Company
continues the process of increasing its direct sales and marketing expenditures
to address certain international markets, establish an industry focused
enterprise sales force structure and fund both cross industry and industry
specific marketing and sales activities. Consequently, such expenses may
increase as a percentage of total revenues in future periods.(1)
Software product development expenses increased by 75% from $16.9
million in the three month period ended June 30, 1996 to $29.6 million for the
same period in 1997 representing 16% of total revenues, in each quarter. These
expenses increased by 79% from $30.7 million in the six month period ended June
30, 1996 to $54.8 million for the same period in 1997, representing 17% and 16%
of total revenues, in each period, respectively. Software product development
expenditure increases are directly attributable to increases in the Company's
staff of software engineers and consultants, and the associated infrastructure
costs required to support product development initiatives in the following
areas: i) expansion and enhancement of the Company's core product offerings in
the areas of HRMS, Financial Management Systems, Distribution/Materials
Management Systems and PeopleSoft's Enterprise Resource Optimization 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 software products for specific foreign
markets; and v) the development of certain vertical market software products and
versions of its core software 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 areas, and overall development
expenditures may increase as a percentage of revenues(1). In particular, the
Company's development expenditure increases during 1997 are being driven by i)
the acquisition of PeopleSoft Manufacturing, Inc.
- ------------------------------
(1) Forward looking statement
12
<PAGE> 13
and PeopleMan L.P. (collectively referred to as PMI) and the ongoing associated
expansion of the Company's manufacturing application development activities; ii)
the investment in a new line of human resource management system products for
the public sector (PeopleSoft HRMS for the Public Sector) which was released in
April, 1997; iii) the release in the second quarter of 1997 of Release 6
Financials for Public Sector; iv) the release in the second quarter of 1997 of a
kanji based version of its HRMS and Financial software products for the Japanese
marketplace, v) the release of multi-language translations of a portion of its
Release 6 software products in the second quarter of 1997 and vi) the beta
release of Student Administration products for the Higher Education marketplace
in April 1997, and the associated general release of these products, scheduled
for the fourth quarter of 1997.(1) The Company continues to invest significant
resources in Release 7, a new release of its enterprise product suite planned
for general availability in September 1997.(1)
General and administrative expenses increased by 81% from $5.8 million
in the three month period ended June 30, 1996 to $10.4 million for the same
period in 1997, representing 6% of total revenues in each quarter. These
expenses increased by 80% from $10.9 million in the six month period ended June
30, 1996 to $19.6 million for the same period in 1997, representing 6% of total
revenues in each period. The 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.
Operating margins for the three month period ended June 30, 1997
increased to 18.5% compared to 17.2% for the same period from last year and
17.7% for the first quarter of 1997. Operating margins for the six month period
ended June 30, 1997 increased to 18.1% compared to 17.2% for the same period
from last year. The June 30, 1997 quarter margin percentage was slightly higher
than the Company's forecast primarily due to higher than expected revenues as
discussed above.
Other income, consisting primarily of interest, increased from $1.5
million in the three month period ended June 30, 1996 to $2.4 million for the
same period in 1997, and increased from $3.1 million in the six month period
ended June 30, 1996 to $4.5 million for the same period in 1997 primarily due to
a higher balance of cash and short and long term investments, and a higher
concentration of such balances in higher interest bearing instruments. Other
income exceeded the Company's forecast due to increases in the holdings of
taxable securities and a general increase in short-term interest rates.
Provision for Income Taxes
The Company's income tax provision increased from $7.7 million in the
three month period ended June 30, 1996 to $14.2 million for the same period in
1997, and increased from $14.0 million in the six month period ended June 30,
1996 to $25.6 million for the same period in 1997. The provision for income
taxes was 39% of income before taxes for the quarter and six month period ended
June 30, 1997, which represents a one percentage point decline from the 1996
annual effective income tax rate. The reduction in the estimated effective tax
rate from 1996 to 1997 was primarily attributable to the following two items: i)
recent favorable changes in the State of California's research and development
tax credit rules, and ii) a shift in the mix of worldwide operating results
based on the Company's current projection of operating income by country. The
estimated annual effective tax rate is relatively sensitive to the results of
operations in various foreign legal entities, and because such projections may
change in future periods, the actual effective tax rate could differ from this
estimate. As permitted by SFAS No. 109, "Accounting for Income Taxes", the
Company has recorded $49.7 million in net deferred tax assets at June 30, 1997.
EARNINGS PER SHARE
Earnings per share increased from $ .10 in the three month period ended
June 30, 1996 to $ .18 for the same period in 1997, and increased from $ .18 in
the six month period ended June 30, 1996 to $ .32 for the same period in 1997.
Earnings per share exceeded the Company's forecast by $ .02 due primarily to
higher than forecasted services revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $77.1 million during
the six month period ended June 30, 1997, compared to $44.3 million in the same
period in 1996. Operating cash flows increased primarily due to increases
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(1) Forward looking statement
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in income before non-cash items, non-cash expenses, deferred revenue and income
taxes payable, which were partially offset by increases in accounts receivable
and other assets and decreases in accounts payable and accrued liabilities and
deferred income taxes. From December 31, 1996 to June 30, 1997, net accounts
receivable increased from $163.7 million to $200.3 million and deferred revenues
increased from $183.3 million to $231.2 million. The increase in net accounts
receivable resulted from the growth in customer licensing activity offset by
cash collections. Deferred revenue has increased as a result of the growth in
customer licensing activity and the associated deferrals of revenues related to
services to be 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 plus the net change in deferred revenues, multiplied by 90. The Company
believes this calculation is appropriate because contracting activity may impact
accounts receivable regardless of whether revenue has been recognized or
deferred. Under this method, DSO was, 100 days as of June 30, 1996, 83 days as
of December 31, 1996, and 86 days as of June 30, 1997. Since billing terms of
the Company's agreements typically are spread out over a sequence of events
(including contract execution) or dates that generally span four to nine months,
and revenue generation is concentrated at the end of each quarter, the Company
anticipates that its DSO will continue to be substantial in future periods.
During the first six months of 1996 and 1997, the Company's principal
use of cash for investing activities was for purchases of short term investments
and computer and networking equipment to accommodate employee and facility
expansions and to support the Company's growing training capacity requirements.
As of June 30, 1997, the Company had $156.8 million in working capital,
including $189.1 million in cash and cash equivalents, and $69.5 million in
short term investments, consisting primarily of high quality municipal bonds,
federal government and government agency bonds, and tax-advantaged money market
instruments. The Company believes that existing cash and short-term investment
balances, 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, at least through June 1998(1).
BUSINESS OUTLOOK
The following forward looking statements are based on current expectations which
are subject to material change due to a variety of factors including but not
limited to, those which are listed below and in the section titled "Factors That
May Affect Future Results" .
- Based on its current expectations of contracting activity, and an analysis
of the Company's service delivery capacity and the expected customer
utilization of such services, the Company expects total revenues for the
third quarter of 1997 to increase approximately 13% over total revenues
recorded in the second quarter of 1997(1). For the 1997 calendar year, the
Company expects total revenues to increase approximately 75% over the total
revenues recorded in the 1996 calendar year(1). As with any forecast, actual
results could vary within a few percentage points on either side of these
estimates even if there are no material changes to the underlying
assumptions, and longer term forecasts can be expected to have relatively
higher variability. The key assumptions on which this forecast is based
include, but are not limited to, the following: i) total actual available
market opportunities must be reasonably consistent with those forecasted by
certain major information technology market research firms; ii) the
preservation of the Company's ability to generate a sufficient number of
qualified leads through its ongoing marketing programs; iii) an increase in
the Company's direct sales capacity through the successful recruitment,
hiring, training and retention of additional sales and sales support
personnel; iv) no significant adverse changes in the competitive landscape;
and v) the continued demand for the Company's applications as an alternative
to modification of legacy systems where prospects have issues relating to
data processing in the year 2000. In addition, the achievement of expected
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(1) Forward looking statement
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contracting activity and total revenues is highly dependent upon the
Company's ability to successfully manage the potential risks detailed below
in the section titled "Factors That May Affect Future Results" including,
but not limited to, fluctuations in quarterly operating results; changes in
customer demand; the timing and complexity of large transactions including
the bundling of significant amounts of professional services; ability to
recognize contracting activity in the current quarter under revenue
recognition accounting rules; success of international operations; reliance
on third parties for sales, marketing and implementation assistance;
successful completion of sales force reorganization plans; timing and
acceptance of software products and product development; and the ability to
execute hiring and facility expansion plans.
- The Company's operating model is based on a rolling four quarter target
operating margin between 18% and 20%. The Company expects 1997's full year
results to be within this range, and expects the operating margin for the
third quarter to be at or slightly below the midpoint of this range(1). Due
to the significant operating leverage which is characteristic of the
software publishing industry, any deviation in the expected revenues could
significantly impact the Company's ability to meet the target operating
margins. Achievement of forecasted operating margins is highly dependent
upon the Company's ability to successfully manage the potential risks
detailed below in the section titled "Factors That May Affect Future
Results" including, but not limited to, achievement of revenue forecasts as
discussed above; continued introduction and marketing of new and enhanced
versions of software products; successful penetration of international
markets; continued acceptance of the Company's software products,
particularly its proprietary software development tools; successful porting
and acceptance of its software products on a variety of platforms; continued
acceptance of its application security architecture, intellectual property,
proprietary rights, and its product liability protections; and continued
success in hiring, training and retaining key personnel and completing
expansion of facilities.
- Based on an assumption of constant interest rates and no unusual items of
other income or expense, the Company expects other income on a quarterly
basis to remain flat to slightly higher in absolute dollars compared to the
second quarter of 1997(1). Achievement of forecasted other income targets is
dependent on stable financial markets in order to prevent the Company from
experiencing a default on any of its significant investments, a significant
decline in investment yield rates or a significant fluctuation in foreign
currency exchange rates which could cause a significant translation gain or
loss. Should the Company decide to utilize a significant portion of its
current cash and investments to acquire complementary businesses, products,
technologies or to acquire additional facilities through purchase of land
and/or buildings, interest income may decline significantly causing other
income to deviate from forecasted amounts.
- Based on current tax law and the Company's present forecast of operating
results by country, the effective tax rate in 1997 is expected to remain at
approximately 39%(1). The estimated annual effective tax rate is relatively
sensitive to the results of operations in various foreign legal entities,
and because such projections may change in future periods, the actual
effective tax rate could differ from this estimate.
Please read the section below titled "Factors The May Affect Future
Results" for additional information and discussion of conditions which the
Company believes could cause actual results to differ materially from those
contemplated by forward looking statements.
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(1) Forward looking statement
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<PAGE> 16
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company has identified certain forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations (which includes the Business Outlook Section) with a bold footnote(1)
symbol. 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-Q.
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 unaudited Condensed
Consolidated Financial Statements and Notes thereto included in Part I -- Item 1
of this Quarterly Report and the audited Consolidated Financial Statements and
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations for the year ended December 31, 1996, contained in the
Company's 1996 Annual Report to Stockholders (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; (vii) as the Year 2000 approaches, many potential customers are
evaluating their legacy systems and must decide whether to repair or replace
existing applications which have Year 2000 operability issues. While the Company
believes that such evaluations are favorably impacting demand for its
applications, such demand is subject to change as the Year 2000 draws closer
since lead times required to complete systems implementations preclude system
replacement as a timely solution to the Year 2000 issue. Given the lack of
precedent for an issue of this magnitude, the Company's ability to accurately
forecast the impact of the issue on quarter to quarter revenue achievement is
limited; and (viii) changes in economic, political and market conditions can
adversely impact business opportunities without any notice. In addition, certain
license agreements executed during a quarter may not meet the Company's revenue
recognition criteria. Consequently, a situation could occur in which the Company
meets or exceeds its forecast of aggregate contracting activity, but is not able
to meet its forecast for license revenues.
In addition to factors impacting contracting activity, license revenues
are difficult to forecast because: (i) the timing of new software product
availability to fulfill delivery obligations under both new and existing license
agreements is difficult to predict because of the increasing complexity of the
Company's 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 principles 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, but not limited to, differences in relational database product
performance across wide area networks, differences in speed of various
communication links and differences in hardware
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(1) Forward looking statement
16
<PAGE> 17
platform performance, there is a limited ability to accurately predict
product performance in some 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 such as increased use of
contract accounting when certain types of professional services and/or payment
terms are included in license transactions 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 the percentage of completion
method under contract accounting rules.
Services revenues have varied from quarter to quarter due to changes in
levels of consulting activity and seasonality in training revenues which tend to
lag license revenues by approximately one quarter. In order to continue the
growth of service revenues, particularly those related to professional services,
the Company must continue to recruit, hire and train growing numbers of
consultants.
POSSIBLE ADVERSE EFFECTS OF RECENT SECURITIES ISSUANCES
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. Warrants to purchase 800,000 shares
of common stock at an exercise price of $27.50 per share expire in the fourth
quarter of 1997. At December 31, 1996 the Company had 6,869,747 exercisable
options outstanding to purchase common stock which have exercise prices below
the current market price of the common stock. The exercise and sale of a
significant number of such stock options for the underlying shares could
adversely affect the market price of the Company's common stock.
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(1), 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 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,
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(1) Forward looking statement
17
<PAGE> 18
develop and market new and enhanced versions of its software products, although
there can be no assurance that such ability can be maintained.
INTERNATIONAL OPERATIONS
The Company has 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, enterprise resource optimization application software vendors,
financial management system and HRMS (human resource management systems)
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
technological 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 AG, Oracle Corporation and Baan Company N. V.
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 (relational database
management system) is a supported platform underlying a significant share of
PeopleSoft's installed applications.
In the manufacturing software application markets, in which PeopleSoft
recently began 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.
PeopleSoft also faces competition from providers of HRMS software
products including Cyborg, Lawson, Integral Systems, Inc., InPower and Ceridian,
and from providers of financial management systems software products including
Hyperion, Computron Software, Inc., Lawson Associates and other smaller
companies. In addition, ADP, Inc. and Shared Medical Systems, Inc. have the
right to sublicense selected PeopleSoft products in competition with
PeopleSoft's marketing efforts in selected markets.
In the emerging enterprise resource optimization software solutions
market, in which the Company now competes since its acquisition of Red Pepper
Software during the fourth quarter of 1996, 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 (material requirements planning) solutions; (ii) other
companies that provide specialized planning and
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scheduling software for niche markets, including Chesapeake Systems,
Waterloo Manufacturing Software, MAPICS, Inc. (formerly Marcam Corporation),
Marcam Solutions, Inc. 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 acquisitions 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.
RELIANCE ON THIRD PARTIES FOR SALES, MARKETING AND SOFTWARE PRODUCT
IMPLEMENTATIONS
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 in 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 who
provide both 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 RDBMS's 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, 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 planning to introduce client support for Apple's
Macintosh family of computers using Sun Microsystem's Java platform running on
the Macintosh
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client in its next release of PeopleTools(1). 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. 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(1). Cognos'
Powerplay product will be also bundled to incorporate desktop on-line analytical
processing ("OLAP") capabilities(1). Such enhancements may be critical to the
competitiveness of the Company's products in the future. 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 the use of Apple's Macintosh platform for client
machines to access PeopleSoft software products could adversely effect
PeopleSoft's ability to compete in the higher education market. The Company
intends to provide an alternative to the Windows interface using Sun
Microsystem's Java platform in its Release 7 version(1). While this interface
will not replace the Windows interface, it will provide additional user
capability to interface with PeopleSoft applications. No assurance can be
made regarding successful integration of Java into Release 7.
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 through the use of one of several 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. The Company presently
intends to provide this capability with Release 7 which is expected to be
available in the third quarter of 1997(1). A delay in the release of this
product could have an adverse effect on the stock price, and
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(1) Forward looking statement
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could reduce the market acceptance of the Company's products. In addition,
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, or intends to enter into various development
arrangements for the purpose of developing new products or extensions to
existing products (See Note 7 of the Notes to Consolidated Financial Statements
in the Company's Annual Report to Shareholders (Form 10 K)). Under these
development arrangements, PeopleSoft is the exclusive remarketer of the
developed software products and pays a royalty to the development entity and/or
funding entities based on license fees received from end user licenses of these
software products. While the intent of the development arrangements are 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 any of the development arrangements require
additional funds to complete development or enhance the software product, there
can be no assurance that funds will be available on terms acceptable to the
existing or other potential third party funding source(s). Should PeopleSoft
acquire title to the software products or technology from the third party
entity, such an 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 intangible assets. Such
intangible assets would be amortized in future periods as a cost of operations.
APPLICATION SECURITY ARCHITECTURE
The Company's application software products incorporate extensive
security features designed to protect certain sensitive data managed by these
applications from unauthorized retrieval or modification. 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, 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.
Also, the Company 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 of
21
<PAGE> 22
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 and 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 mergers and
acquisitions, a significant increase 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, retain 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, train 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, training and retaining the personnel
it requires to develop, market and support new or existing software.
REORGANIZATION OF THE COMPANY'S SALES FORCE
Effective April 1, 1997, the Company reorganized its North American
sales operations around industry based territories and major account assignments
from a geographic based business unit organization structure. As part of this
reorganization, a substantial number of accounts, prospects and opportunities
previously assigned to one sales representative were reassigned to another sales
representative. This reassignment has caused delays in account assignments and
the associated management of the sales cycle, which may have resulted in lost
sales opportunities or otherwise lengthened the sales cycle. In addition, each
of the industry territories will require validation from one or more key
customer reference accounts. Such accounts are a critical factor for sales
success since sales prospects frequently require validation prior to entering
into a license agreement. However, limited referencable accounts exist in
certain target industries at this time. There can be no assurance that the
Company will develop a sufficient number of referencable customer accounts
across all industry segments without significant adverse impact on near term
sales results or that this sales operations reorganization will sustain or
improve long term sales results.
EXPANSION OF FACILITIES
Recently, commercial building vacancy rates have significantly dropped
in many of the major metropolitan 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.
In addition, the increased demand for office space has caused commercial rental
rates to increase substantially. Failure to either obtain space, or
22
<PAGE> 23
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.
VOLATILITY OF STOCK PRICE
As is frequently the case with stock of high technology companies, the
market price of the Company'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 the Company 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 the Company'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, U.S. 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, 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.
23
<PAGE> 24
PART II - OTHER INFORMATION
Item 1. 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 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.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of stockholders on May 27, 1997.
(b) Pursuant to the election of the three directors listed under Item 4(c)
(i), Mr. David A. Duffield, Mr. Edgar F. Codd, and Mr. George J.
Still Jr. were each elected for a two year term. Mr. Albert W.
Duffield, Mr. A. George "Skip" Battle, and Mr. Cyril J. Yansouni still
continue as directors and were elected at the prior year's annual
meeting for a term of two years.
(c) The Company's stock holders voted the following matters: (i) Election
of three directors. All directors proposed by management were elected.
<TABLE>
<CAPTION>
Name of Number of # of Votes # of Votes Number of # of Broker
Nominee Votes For Against Withheld Abstentions Non Votes
------- --------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
David A. Duffield 61,523,788 139,633 -- -- --
Edgar F. Codd 61,510,055 153,366 -- -- --
George J. Still 61,522,887 140,534 -- -- --
</TABLE>
(ii) Approval of an amendment to the Restated Certificate of
Incorporation to increase the authorized number of Common Stock
of the Company to 320,000,000. 57,576,419 votes were cast in
favor of the amendment, 4,031,527 votes were cast against, zero
votes were withheld, there were 55,575 abstentions, and zero
broker non votes.
(iii) Ratification of independent public auditors. The Stockholders
ratified the appointment of Ernst & Young as the Company's
independent public auditors for the fiscal year ended December
31, 1997. 61,573,230 votes were cast in favor of the appointment,
41,634 votes were cast against, zero votes were withheld, there
were zero abstentions, and zero broker non votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8 - K
(a) Exhibits
27.1 Financial Data Schedule - Six months ended June 30,1997
27.2 Restated Financial Data Schedule - Six months ended
June 30,1996
(b) Reports on Form 8 - K
No reports on Form 8 - K were filed during the quarter ended
June 30, 1997.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 12, 1997
PEOPLESOFT, INC.
By: /s/ RONALD E. F. CODD
------------------------------------------
Ronald E. F. Codd
Senior Vice President of Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
<PAGE> 26
PEOPLESOFT, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT TITLE ------------- ----
<S> <C>
27.1 Financial Data Schedule - June 30,1997
27.2 Restated Financial Data Schedule - June 30, 1996
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS AND RELATED NOTES
CONTAINED IN THIS FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 189,145
<SECURITIES> 0
<RECEIVABLES> 210,710
<ALLOWANCES> 10,447
<INVENTORY> 0
<CURRENT-ASSETS> 511,859
<PP&E> 166,239
<DEPRECIATION> 60,872
<TOTAL-ASSETS> 668,242
<CURRENT-LIABILITIES> 355,038
<BONDS> 0
0
0
<COMMON> 1,099
<OTHER-SE> 312,105
<TOTAL-LIABILITY-AND-EQUITY> 668,242
<SALES> 180,441
<TOTAL-REVENUES> 338,030
<CGS> 9,328
<TOTAL-COSTS> 107,873
<OTHER-EXPENSES> 168,879
<LOSS-PROVISION> 3,024
<INTEREST-EXPENSE> 151
<INCOME-PRETAX> 65,753
<INCOME-TAX> 25,643
<INCOME-CONTINUING> 40,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,110
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS AND RELATED NOTES
CONTAINED IN THIS FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION, AS DISCUSSED IN NOTE 1. IN NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS, ALL AMOUNTS HAVE BEEN RESTATED TO REFLECT THE
MERGER WITH RED PEPPER EFFECTIVE OCTOBER 16, 1996 AND ACCOUNTED FOR AS A POOLING
OF INTERESTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 124,644
<SECURITIES> 0
<RECEIVABLES> 137,960
<ALLOWANCES> 5,735
<INVENTORY> 0
<CURRENT-ASSETS> 314,143
<PP&E> 108,116
<DEPRECIATION> 29,183
<TOTAL-ASSETS> 400,508
<CURRENT-LIABILITIES> 205,518
<BONDS> 0
0
0
<COMMON> 1,047
<OTHER-SE> 189,984
<TOTAL-LIABILITY-AND-EQUITY> 400,508
<SALES> 100,566
<TOTAL-REVENUES> 185,003
<CGS> 5,547
<TOTAL-COSTS> 53,462
<OTHER-EXPENSES> 99,717
<LOSS-PROVISION> 898
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 34,899
<INCOME-TAX> 13,960
<INCOME-CONTINUING> 20,939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,939
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
