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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the quarterly period ended March 31, 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:
<TABLE>
<CAPTION>
Class Outstanding at March 31, 1997
----- -----------------------------
<S> <C>
Common Stock, $.01 par value 108,731,610
</TABLE>
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PEOPLESOFT, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1996 and
March 31, 1997 3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 1996 and March 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1996 and March 31, 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 23
ITEM 2 - Changes in Securities 23
ITEM 3 - Defaults upon Senior Securities 23
ITEM 4 - Submission of Matters to a Vote of Security Holders 23
ITEM 5 - Other Information 23
ITEM 6 - Exhibits and Reports on Form 8 - K 23
SIGNATURES 24
</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, March 31,
1996 1997
------------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 169,875 $ 189,569
Short-term investments 27,138 52,154
Accounts receivable, net 163,676 164,093
Deferred income taxes 28,246 31,976
Other current assets 7,703 12,194
--------- ---------
Total current assets 396,638 449,986
Property and equipment, at cost 140,279 149,100
less accumulated depreciation and amortization (43,581) (51,714)
--------- ---------
96,698 97,386
Investments 18,270 11,393
Deferred income taxes 13,302 13,302
Capitalized software, less accumulated amortization 11,173 10,534
Other assets 3,999 4,019
--------- ---------
$ 540,080 $ 586,620
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 47,128 $ 38,767
Accrued compensation and related expenses 37,681 37,816
Income taxes payable 18,771 26,554
Deferred revenue 183,252 204,893
--------- ---------
Total current liabilities 286,832 308,030
Stockholders' equity:
Common stock 1,076 1,087
Additional paid-capital 162,691 171,054
Accumulated foreign currency translation adjustment (89) (959)
Retained earnings 89,570 107,408
--------- ---------
253,248 278,590
--------- ---------
$ 540,080 $ 586,620
========= =========
</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
March 31,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Revenues:
License fees $ 43,576 $ 83,413
Services 38,706 70,241
-------- --------
Total revenues 82,282 153,654
Costs and expenses:
Cost of license fees 2,532 4,441
Cost of services 21,354 43,609
Sales and marketing 25,343 44,418
Product development 13,791 25,258
General and administrative 5,106 8,724
-------- --------
Total costs and expenses 68,126 126,450
-------- --------
Operating income 14,156 27,204
Other income, principally interest 1,610 2,039
-------- --------
Income before taxes 15,766 29,243
Provision for income taxes 6,307 11,405
-------- --------
Net income $ 9,459 $ 17,838
======== ========
Net income per share $ 0.08 $ 0.14
======== ========
Shares used in per share computation 117,179 123,846
======== ========
</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>
Three Months Ended
March 31,
-------------------------
1996 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,459 $ 17,838
Adjustments:
Depreciation and amortization 5,030 9,181
Provision for doubtful accounts 382 160
Provision for deferred income taxes (1,785) (3,730)
Changes in operating assets and liabilities:
Accounts receivable (2,048) (577)
Other current assets and
non-current assets (2,268) (4,513)
Accounts payable and accrued liabilities 2,245 (8,361)
Accrued compensation and related expenses (1,887) 135
Deferred revenue 13,158 21,641
Income taxes payable 131 7,783
Tax benefits of employee stock transactions 1,146 866
--------- ---------
Net cash provided by operating activities 23,563 40,423
INVESTING ACTIVITIES
Purchase of short-term investments (3,765) (22,214)
Sale of short-term investments 9,331 4,078
Purchase of property and equipment (11,278) (8,821)
Additions to capitalized software, net (247) (410)
--------- ---------
Net cash used in investing activities (5,959) (27,367)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 4,817 7,508
--------- ---------
Net cash provided by financing activities 4,817 7,508
Effect of foreign exchange rate changes on cash 74 (870)
--------- ---------
Net increase in cash and cash equivalents 22,495 19,694
Cash and cash equivalents at beginning of period 90,682 169,875
--------- ---------
Cash and cash equivalents at end of period $ 113,177 $ 189,569
========= =========
</TABLE>
See notes to condensed consolidated financial statements
5
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PEOPLESOFT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at March 31, 1996 and 1997 and for the three month
period then ended is unaudited, but includes all adjustments (consisting only of
normal, recurring adjustments) which the Company's management believes to be
necessary for the fair presentation of the financial position, results of
operations, and changes in cash flows for the periods presented. The preparation
of financial statements in conformity with generally accepted accounting
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 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 month period ended March 31, 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 month period ended
March 31, 1996 and 1997 follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Weighted average shares:
Common stock 103,961 107,639
Common stock equivalents 13,218 16,207
------- -------
117,179 123,846
======= =======
</TABLE>
6
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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. At that time, 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. 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 March 31 1996
and 1997 by $.01 and $.02, 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 March 31, 1997 were
as follows (in thousands):
<TABLE>
<CAPTION>
Dec. 31, March 31,
1996 1997
--------- ---------
<S> <C> <C>
Billed receivables $ 94,343 $ 100,851
Unbilled receivables 76,756 70,825
--------- ---------
171,099 171,676
Allowance for doubtful accounts (7,423) (7,583)
--------- ---------
$ 163,676 $ 164,093
========= =========
</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 March 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Dec. 31, March 31,
1996 1997
-------- --------
<S> <C> <C>
License fees $ 34,224 $ 40,791
Maintenance 104,257 114,684
Training 30,607 35,265
Other services 14,164 14,153
-------- --------
$183,252 $204,893
======== ========
</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 $445,000 and $1,049,000 for the three months ended March 31, 1996
and 1997, respectively. Capitalized software costs and accumulated amortization
at December 31, 1996 and March 31, 1997 were as follows (in thousands):
7
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<TABLE>
<CAPTION>
Dec. 31, March 31,
1996 1997
-------- --------
<S> <C> <C>
Capitalized software:
Internal development costs $ 10,737 $ 11,147
Purchased from third parties 6,832 6,832
-------- --------
17,569 17,979
Accumulated amortization (6,396) (7,445)
-------- --------
$ 11,173 $ 10,534
======== ========
</TABLE>
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of the Company's expectations regarding future
trends affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Please read the section below titled "Factors The 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 footnote (1) symbol. The Company undertakes no
obligation to update the information contained herein.
9
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RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During October of 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 MARCH 31,
- --------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
TOTAL REVENUES DOLLAR INCREASE
1996 1997 YEAR OVER YEAR
---- ---- --------------
<S> <C> <C> <C>
Revenues:
53% 54% License fees 91%
47 46 Services 81
---- ---- ----
100 100 Total revenues 87
Costs and expenses:
3 3 Cost of license fees 75
26 28 Cost of services 104
31 29 Sales and marketing 75
17 16 Product development 83
6 6 General and administrative 71
---- ---- ----
83 82 Total costs and expenses 86
---- ---- ----
17 18 Operating income 92
2 1 Other income 27
---- ---- ----
19 19 Income before taxes 85
8 7 Provision for income taxes 81
---- ---- ----
11% 12% Net income 89%
==== ==== ====
</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 the percentage of completion
method of contract accounting. The amount of customer license agreements
("contracting activity") signed for software license fees and services increased
from $74.1 million in the quarter ended March 31, 1996 to $145.6 million for the
same period in 1997.
Revenues from licensing fees increased by 91% from $43.6 million in
three month period ended March 31, 1996 to $83.4 million for the same period in
1997. The increase in license fee revenues was attributable to increased market
acceptance of, and breadth of, the Company's software product offerings and the
increased capacity created by continued growth in the Company's sales,
marketing and customer service organizations.
Revenues from services increased by 81% from $38.7 million in the three
month period ended March 31, 1996 to $70.2 million for the same period in 1997.
Service revenues as a percentage of total revenues were 47% and 46% for the
quarters ended March 31, 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
10
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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
periods in 1996 as a result of increased customer demand for the Company's
direct assistance during enterprise implementation projects.
Total revenues increased by 87% from $82.3 million in the three month
period ended March 31, 1996 to $153.7 million for the same period in 1997.
During the quarters ended March 31, 1996 and 1997, the Company's international
revenues were approximately 17% of total revenues. 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 and/or growth prospects.
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 75% from $2.5
million in the three month period ended March 31, 1996 to $ 4.4 million for the
same period in 1997, representing 3% of total revenues for each quarter and 6%
and 5% of license fee revenues in those quarters, respectively. The Company's
system solutions 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. These costs increased by 104%
from $21.4 million in the three month period ended March 31, 1996 to $43.6
million for the same period in 1997, representing 26% and 28%, of total revenues
and 55% and 62% of service revenues in those quarters, 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. The
Company anticipates these expenditures will increase in dollar amount, and may
increase as a percentage of total revenues in future periods. During the first
quarter of 1997, the Company upgraded its training room environments across
North America causing the training classrooms to be unavailable for a portion of
the quarter. Costs of services as a percentage of services revenues increased
principally due to reduced training revenue growth rates in the first quarter of
1997 caused by this temporary decline in training room capacity.
Sales and marketing expenses increased by 75% from $25.3 million in the
three month period ended March 31, 1996 to $44.4 million for the same period in
1997, representing 31% and 29%, respectively, of total revenues. The increase in
sales and marketing expenses is attributable to the Company's expansion of its
direct sales force, increased commission expenses 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 is in the process of significantly 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.
Software product development expenses increased by 83% from $13.8
million in the three month period ended March 31, 1996 to $25.3 million for the
same period in 1997 representing 17% and 16% of total revenues, 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
- ----------
(1) Forward looking statement
11
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Systems, Distribution/Materials Management Systems and PeopleSoft's Red Pepper
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, particularly during the second quarter of 1997. In
particular, the Company's development expenditure increases are being driven by
i) the recent acquisition of PeopleSoft Manufacturing, Inc. 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 planned release in the first half of 1997 of a kanji based version of its
HRMS and Financial software products for the Japanese marketplace, and iv) the
planned release of multi-language translations of a portion of its Release 6
software products in the first half of 1997.(1) The Company recently announced
that Release 7, a new release of its enterprise product suite, is now planned
for general availability in September, 1997, and this change in the development
schedule is also expected to increase overall development spending during the
ensuing six months.(1)
General and administrative expenses increased by 71% from $5.1
million in the three month period ended March 31, 1996 to $8.7 million for the
same period in 1997, representing 6% of total revenues in each quarter. 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 $1.6
million in the three month period ended March 31, 1996 to $2.0 million for the
same period in 1997, primarily due to increased cash balances available for
investment.
PROVISION FOR INCOME TAXES
The Company's income tax provision increased from $6.3 million in the
three month period ended March 31, 1996 to $11.4 million for the same period in
1997. The provision for income taxes was 39% of income before income taxes for
the three months ended March 31, 1997, which represents a 1% 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 $45.3 million in net deferred tax assets at
March 31, 1997.
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 March 31, 1997.
The Company's operating activities provided cash of $40.4 million
during the quarter ended March 31, 1997, compared to $23.6 million in the
quarter ended March 31, 1996. Operating cash flows increased primarily due to
increases in income before non-cash items, non-cash expenses, deferred revenue
and income taxes payable, which were
- ----------
(1) Forward looking statement
12
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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 March 31, 1997, net accounts receivable increased
slightly from $163.7 million to $ 164.1 million and deferred revenues increased
from $183.3 million to $204.9 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 and 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, accounts receivable days outstanding was 83 days as
of December 31, 1996 as compared to 84 days as of March 31, 1997. Since billing
terms of the Company's agreements typically are spread out over a sequence of
events (including contract execution through acceptance) or dates that generally
span four to nine months, and revenue generation is concentrated at the end of
each quarter, the Company anticipates that its DSO will continue to be
substantial in future periods.
During the first three 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 March 31, 1997, the Company had $142.0 million in working
capital, including $241.7 million in cash and cash equivalents, and $11.4
million in long 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 at
least through 1997(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, the Company
expects total revenues for the second quarter of 1997 to increase
approximately 14% over total revenues recorded in the first quarter of
1997(1). For the 1997 calendar year, the Company expects total revenues to
increase approximately 70% 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. The key assumptions on
which this forecast is based include, but are not limited to, the
following: i) the actual total available market opportunities reasonably
consistent with those forecasted by the 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) the continued increase in the company's direct sales
capacity through the successful recruitment, hiring, training and retention
of additional sales and sales support personnel; and iv) no significant
adverse changes in the competitive landscape. In addition, the achievement
of expected 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; 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.
- ----------
(1) Forward looking statement
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- 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, but, consistent with prior seasonal
patterns, the Company expects the operating margin for the second quarter
to be slightly under this range.(1) Due to the significant operating
leverage which is characteristic of the software publishing industry, any
deviation in the above expected revenues could and would 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 product liability protections; and continued
success in hiring, training and retaining key personnel and completing
expansion of facilities.
- Based on achievement of constant interest rates and no unusual items of
other income or expense, the Company expects other income on a quarterly
basis to remain relatively constant in absolute dollars compared to the
first 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 or 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 That 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.
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 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).
- ----------
(1) Forward looking statement
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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 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 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, 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 platform performance, 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 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 had 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.
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OPERATING LEVERAGE.
Consistent with many companies in the software industry, the Company's
business model is characterized by a very high degree of operating leverage.
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,
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.
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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
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.
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, 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 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 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 "PepperTools", which face similar risks relative to its
proprietary nature.
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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 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 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, 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. 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
- ----------
(1) Forward looking statement
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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 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. 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 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 entered into a separate development arrangement
("Development Arrangement") for the purpose of developing a line of student
administration software applications (See Note 7 of the Notes to Consolidated
Financial Statements in the Company's Annual Report to Shareholders (Form 10
K)). 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.
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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.
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
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, 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
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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 will complete the reorganization of
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 may
be reassigned to another sales representative. This reassignment may cause
confusion in account assignments and the associated management of the sales
cycle, which may result in lost sales opportunities or otherwise lengthen 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
customer reference 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 effectively execute
this organizational transition or 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 obtain it at
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 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 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
21
<PAGE> 22
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.
22
<PAGE> 23
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8 - K
(a) Exhibits
27.1 Financial Data Schedule - March 31,1997
27.2 Restated Financial Data Schedule - March 31,1996
(b) Reports on Form 8 - K
No reports on Form 8 - K were filed during the quarter ended
March 31, 1997.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 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)
24
<PAGE> 25
PEOPLESOFT, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT TITLE PAGE
- --------- ------------- ----
<S> <C> <C>
27.1 Financial Data Schedule - March 31, 1997 26
27.2 Restated Financial Data Schedule - March 31, 1996 27
</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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 189,569
<SECURITIES> 0
<RECEIVABLES> 171,676
<ALLOWANCES> 7,583
<INVENTORY> 0
<CURRENT-ASSETS> 449,986
<PP&E> 149,100
<DEPRECIATION> 51,714
<TOTAL-ASSETS> 586,620
<CURRENT-LIABILITIES> 308,030
<BONDS> 0
0
0
<COMMON> 1,087
<OTHER-SE> 171,054
<TOTAL-LIABILITY-AND-EQUITY> 586,620
<SALES> 83,413
<TOTAL-REVENUES> 153,654
<CGS> 4,441
<TOTAL-COSTS> 122,009
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 160
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> 29,243
<INCOME-TAX> 11,405
<INCOME-CONTINUING> 17,838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,838
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 113,175
<SECURITIES> 0
<RECEIVABLES> 106,970
<ALLOWANCES> 5,153
<INVENTORY> 0
<CURRENT-ASSETS> 273,184
<PP&E> 94,068
<DEPRECIATION> 23,059
<TOTAL-ASSETS> 351,385
<CURRENT-LIABILITIES> 174,793
<BONDS> 0
0
0
<COMMON> 1,052
<OTHER-SE> 112,561
<TOTAL-LIABILITY-AND-EQUITY> 351,385
<SALES> 43,576
<TOTAL-REVENUES> 82,282
<CGS> 2,532
<TOTAL-COSTS> 65,594
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 383
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> 15,766
<INCOME-TAX> 6,307
<INCOME-CONTINUING> 9,459
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,459
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
