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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, 1998 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)
4460 Hacienda Drive, Pleasanton, CA 94588
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code:
(925) 694-3000
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 JULY 15, 1998
----- ----------------------------
Common Stock, par value $.01 230,444,745
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PEOPLESOFT, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1997 3
and June 30, 1998
Condensed Consolidated Statements of Income for the Three Months
Ended June 30, 1997 and June 30, 1998; and Six Months Ended
June 30, 1997 and June 30, 1998 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and June 30, 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 28
ITEM 2 - Changes in Securities and Use of Proceeds 28
ITEM 3 - Defaults upon Senior Securities 28
ITEM 4 - Submission of Matters to a Vote of Security Holders 28
ITEM 5 - Other Information 29
ITEM 6 - Exhibits and Reports on Form 8 - K 29
SIGNATURES 30
</TABLE>
2
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PEOPLESOFT, INC.
----------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 267,897 $ 349,860
Short term investments 124,565 127,517
Accounts receivable, net 299,243 341,201
Deferred income taxes 25,320 33,526
Other current assets 9,021 24,345
----------- ------------
Total current assets 726,046 876,449
Property and equipment, at cost 195,667 229,541
Less accumulated depreciation and amortization (78,492) (100,746)
----------- ------------
117,175 128,795
Investments 26,783 91,933
Deferred income taxes 7,371 7,371
Capitalized software, less accumulated amortization 9,706 9,070
Other assets 11,255 13,209
----------- ------------
$ 898,336 $ 1,126,827
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 63,508 $ 76,525
Accrued compensation and related expenses 67,486 92,725
Income taxes payable 22,370 25,806
Deferred revenue 327,668 396,238
----------- ------------
Total current liabilities 481,032 591,294
Stockholders' equity:
Common stock 2,237 2,410
Additional paid-in capital 219,005 264,830
Accumulated foreign currency translation adjustment (1,292) (2,016)
Retained earnings 197,354 270,309
----------- ------------
417,304 535,533
----------- ------------
$ 898,336 $ 1,126,827
=========== ============
</TABLE>
See notes to condensed consolidated unaudited 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,
----------------------- -----------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 97,028 $ 148,525 $ 180,441 $ 285,459
Services 87,348 171,997 157,589 312,737
---------- ---------- ---------- ----------
Total revenues 184,376 320,522 338,030 598,196
Costs and expenses:
Cost of license fees 4,887 11,040 9,328 22,236
Cost of services 55,234 98,248 98,545 184,952
Sales and marketing 50,160 84,579 94,472 157,269
Product development 29,580 51,038 54,838 93,899
General and administrative 10,441 17,351 19,569 30,579
---------- ---------- ---------- ----------
Total costs and expenses 150,302 262,256 276,752 488,935
---------- ---------- ---------- ----------
Operating income 34,074 58,266 61,278 109,261
Other income, interest expense and other 2,436 4,922 4,475 8,408
---------- ---------- ---------- ----------
Income before income taxes 36,510 63,188 65,753 117,669
Provision for income taxes 14,239 23,987 25,643 44,714
---------- ---------- ---------- ----------
Net income $ 22,271 $ 39,201 $ 40,110 $ 72,955
========== ========== ========== ==========
Basic income per share $ 0.10 $ 0.17 $ 0.18 $ 0.32
========== ========== ========== ==========
Shares used in basic per share computation 218,713 228,001 217,745 226,748
========== ========== ========== ==========
Diluted income per share $ 0.09 $ 0.15 $ 0.16 $ 0.28
========== ========== ========== ==========
Shares used in diluted per share computation 249,208 258,969 248,790 257,635
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated unaudited 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,
----------------------------
1997 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 40,110 $ 72,955
Adjustments:
Depreciation and amortization 19,333 25,877
Provision for doubtful accounts 3,024 7,937
Provision for deferred income taxes (8,103) (8,206)
Changes in operating assets and liabilities:
Accounts receivable (39,611) (49,895)
Other current assets and noncurrent assets (9,915) (17,278)
Accounts payable and accrued liabilities (8,146) 13,017
Accrued compensation and related expenses 9,375 25,239
Deferred revenue 47,937 68,570
Income taxes payable 19,040 3,436
Tax benefits from employee stock transactions 4,087 8,813
---------- ----------
Net cash provided by operating activities 77,131 150,465
INVESTING ACTIVITIES
Purchase of investments (59,548) (72,995)
Sale of investments 12,966 4,893
Purchase of property and equipment (25,960) (35,554)
Proceeds from sale of property and equipment -- 167
Additions to capitalized software, net (1,076) (1,474)
---------- ----------
Net cash used in investing activities (73,618) (104,963)
FINANCING ACTIVITIES
Net proceeds from sale of common stock and exercise
of common stock options 16,286 37,185
---------- ----------
Net cash provided by financing activities 16,286 37,185
Effect of foreign exchange rate changes on cash (529) (724)
---------- ----------
Net increase in cash and cash equivalents 19,270 81,963
Cash and cash equivalents at beginning of period 169,875 267,897
---------- ----------
Cash and cash equivalents at end of period $ 189,145 $ 349,860
========== ==========
</TABLE>
See notes to condensed consolidated unaudited financial statements
5
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PEOPLESOFT, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at June 30, 1997 and 1998 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, 1997. 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 six
month period ended June 30, 1998 are not necessarily indicative of operating
results or performance levels that can be expected for the full fiscal year.
2. PER SHARE DATA
Basic income per share is computed using the weighted average number of
common shares outstanding during the period. Diluted income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the shares issuable upon the exercise of stock options and warrants
(using the treasury stock method). The following table sets forth the
computation of basic and diluted income per share (in thousands except per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 22,271 $ 39,201 $ 40,110 $ 72,955
========== ========== ========== ==========
Denominator:
Denominator for basic income per share -
weighted average shares 218,713 228,001 217,745 226,748
Employee stock options 27,928 26,861 28,480 26,940
Warrants 2,567 4,107 2,565 3,947
---------- ---------- ---------- ----------
Denominator for diluted income per share -
adjusted weighted average shares
and assumed conversions 249,208 258,969 248,790 257,635
========== ========== ========== ==========
Basic income per share $ 0.10 $ 0.17 $ 0.18 $ 0.32
========== ========== ========== ==========
Diluted income per share $ 0.09 $ 0.15 $ 0.16 $ 0.28
========== ========== ========== ==========
</TABLE>
6
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3. ACCOUNTS RECEIVABLE
Accounts receivable are comprised of billed receivables arising from
recognized and deferred revenues, and unbilled receivables, which include
accrued license fees for payments not yet due and accrued services. The
principal components of accounts receivable at December 31, 1997 and June 30,
1998 were as follows (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JUNE 30,
1997 1998
---------- ----------
<S> <C> <C>
Billed receivables $ 200,081 $ 241,623
Unbilled receivables 118,655 127,008
---------- ----------
318,736 368,631
Allowance for doubtful accounts (19,493) (27,430)
---------- ----------
$ 299,243 $ 341,201
========== ==========
</TABLE>
4. DEFERRED REVENUE
Deferred revenue is comprised of deferrals for license fees, maintenance,
training and other services. The principal components of deferred revenue at
December 31, 1997 and June 30, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
DEC. 31, JUNE 30,
1997 1998
---------- ----------
<S> <C> <C>
License fees $ 71,168 $ 76,019
Maintenance 184,171 220,679
Training 46,201 54,280
Other services 26,128 45,260
---------- ---------
$ 327,668 $ 396,238
========== =========
</TABLE>
5. TRANSFER OF FINANCIAL ASSETS
The Company finances certain software license and service agreements with
customers through the sale, assignment and transfer of the future payments under
those agreements to financing institutions, principally on a non-recourse basis.
The Company records such transfers as sales of the related accounts receivable
when it is considered to have surrendered control of such receivables under the
provisions of Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities."
6. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard (SFAS) No.
130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS 130 requires
disclosure of total non-stockholder changes in equity in interim periods and
additional disclosures of the components of non-stockholder changes in equity on
an annual basis. Total non-stockholder changes in equity include all changes in
equity during a period except those resulting from investments by and
distributions to stockholders. The Company has restated information for all
prior periods reported below to conform to this standard.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 22,271 $ 39,201 $ 40,110 $ 72,955
Foreign currency translation adjustments (341) 433 529 724
--------- --------- --------- ---------
Total comprehensive income $ 21,930 $ 39,634 $ 40,639 $ 73,679
========= ========= ========= =========
</TABLE>
7. HEDGING OF INTERCOMPANY BALANCES
In the first quarter of 1998, the Company initiated a hedging program
designed to mitigate the potential for future adverse impact on intercompany
balances due to changes in foreign exchange rates. The program uses forward
foreign exchange contracts as the vehicle for hedging these intercompany
balances. In general, these forward foreign exchange contracts have three months
or less to maturity. Gains and losses on hedges are recorded in Other income and
offset against losses and gains on the underlying exposures. Management of the
foreign exchange hedging program is done in accordance with a corporate policy
approved by the Company's Board of Directors.
7
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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. The following discussion sets forth certain factors the Company believes
could cause actual results to differ materially from those contemplated by the
forward-looking statements. Forward-looking statements 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.
STATEMENT OF FUTURE DIRECTION: THIS DOCUMENT CONTAINS STATEMENTS OF FUTURE
DIRECTION CONCERNING POSSIBLE FUNCTIONALITY FOR PEOPLESOFT'S SOFTWARE PRODUCTS
AND TECHNOLOGY. ALL FUNCTIONALITY AND SOFTWARE PRODUCTS WILL BE AVAILABLE FOR
LICENSE AND SHIPMENT FROM PEOPLESOFT ONLY IF AND WHEN GENERALLY COMMERCIALLY
AVAILABLE. PEOPLESOFT DISCLAIMS ANY EXPRESS OR IMPLIED COMMITMENT TO DELIVER
FUNCTIONALITY OR SOFTWARE UNLESS OR UNTIL ACTUAL SHIPMENT OF THE FUNCTIONALITY
OR SOFTWARE OCCURS. THE STATEMENTS OF POSSIBLE FUTURE DIRECTION ARE FOR
INFORMATIONAL PURPOSES ONLY AND PEOPLESOFT MAKES NO EXPRESS OR IMPLIED
COMMITMENTS OR REPRESENTATIONS CONCERNING THE TIMING AND CONTENT OF ANY FUTURE
FUNCTIONALITY OR RELEASES.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain line items in the Company's statements
of operations:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
- ------------------------------------------------------------------------------------------------
PERCENTAGE OF
TOTAL REVENUES PERCENTAGE
DOLLAR INCREASE
1997 1998 YEAR OVER YEAR
---- ---- ---------------
<S> <C> <C> <C>
Revenues:
53% 46% License fees 53%
47 54 Services 97
---- ---- ----
100 100 Total revenues 74
Costs and expenses:
3 3 Cost of license fees 126
30 31 Cost of services 78
27 26 Sales and marketing 69
16 16 Product development 73
6 6 General and administrative 66
---- ---- ----
82 82 Total costs and expenses 74
---- ---- ----
18 18 Operating income 71
1 2 Other income 102
---- ---- ----
19 20 Income before income taxes 73
7 8 Provision for income taxes 68
---- ---- ----
12% 12% Net income 76%
==== ==== ====
</TABLE>
8
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<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
- ------------------------------------------------------------------------------------------------
PERCENTAGE OF
TOTAL REVENUES PERCENTAGE
DOLLAR INCREASE
1997 1998 YEAR OVER YEAR
---- ---- ---------------
<S> <C> <C> <C>
Revenues:
53% 48% License fees 58%
47 52 Services 98
---- ---- ----
100 100 Total revenues 77
Costs and expenses:
3 4 Cost of license fees 138
29 31 Cost of services 88
28 26 Sales and marketing 66
16 16 Product development 71
6 5 General and administrative 56
---- ---- ----
82 82 Total costs and expenses 77
---- ---- ----
18 18 Operating income 78
1 1 Other income 88
---- ---- ----
19 19 Income before income taxes 79
7 7 Provision for income taxes 74
---- ---- ----
12% 12% Net income 82%
==== ==== ====
</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
EMPLOYEE COUNT TOTAL EMPLOYEES PERCENTAGE
INCREASE
12/31/97 6/30/98 12/31/97 6/30/98 SINCE 12/31/97
- -------- ------- -------- ------- --------------
<S> <C> <C> <C> <C> <C>
2,114 2,841 Services 47% 49% 34%
1,006 1,377 Sales and marketing 23 23 37
918 1,087 Product development 21 19 18
414 522 General and administrative 9 9 26
- ------ ------ ---- ---- ----
4,452 5,827 Total 100% 100% 31%
====== ====== ==== ==== ====
</TABLE>
REVENUES
The Company generally recognizes revenue when a non-cancelable license
agreement has been signed, the software product has been shipped, there are no
uncertainties surrounding product acceptance, there are no significant vendor
obligations, the fees are fixed and determinable, and collection is considered
probable. For customer license agreements that meet the Company's revenue
recognition policy, 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 total dollar amount of customer license
agreements executed ("contracting activity") for software license fees and
services increased from $146.4 million in the quarter ended June 30, 1997 to
$219.8 million for the same period in 1998 and from $292.0 million for the six
month period ended June 30, 1997 to $437.8 million for the same period in 1998.
Contracting activity with new customers numbered 177 and comprised approximately
71% of the total contracting activity executed for the quarter ended June 30,
1998, compared with 130 new customers and 65% for the same period in the prior
year. Average contract size, computed by dividing the number of new customers
into total contracting activity, increased to approximately $1.2 million in the
second quarter of 1998, reflecting the ongoing emphasis the Company is placing
on achieving more selective and larger, enterprise-oriented transactions through
its industry focused sales and marketing efforts.
Revenues from licensing fees increased by 53% from $97.0 million in the
three month period ended June 30, 1997 to $148.5 million for the same period in
1998. Year to date, licensing fees increased 58% from $180.4 million in 1997 to
$285.5 million in 1998. The increase in license fee revenues was attributable to
continued increased market acceptance of, and expanded 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.
9
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Revenues from services increased by 97% from $87.3 million in the three
month period ended June 30, 1997 to $172.0 million for the same period in 1998.
Year to date, service revenues increased by 98% from $157.6 million in 1997 to
$312.7 million in the same period in 1998. The Company's customer license
agreements provide for initial maintenance, training, and installation services
for specified periods or amounts. Therefore increases in customer licensing
agreements have resulted in increases in revenues from these services. Service
revenues as a percentage of total revenues were 47% and 54% for the quarters
ended June 30, 1997 and 1998, respectively and 47% and 52% for the six months
ended June 30, 1997 and 1998, respectively. The increase in the relative
percentage of service revenues to total revenues in these periods was
attributable to two primary factors: increases in the installed base of
customers receiving ongoing maintenance, training and other support services;
and a significant increase in consulting revenue as a result of expanded demand
for PeopleSoft's consulting services in enterprise implementation projects. In
response to strong industry demand, the Company continues to rapidly expand its
service delivery capacity, particularly for consulting services.
Total revenues increased from $184.4 million in the three month period
ended June 30, 1997 to $320.5 million for the same period in 1998. Total revenue
growth quarter over quarter of 74% exceeded the Company's previously forecasted
growth of 65%, and on a sequential basis, increased approximately 15% over the
total revenues recorded in the first quarter of 1998. Year to date, total
revenues increased 77% from $338.0 million in 1997 to $598.2 million in 1998.
The higher than forecasted growth rate over the prior year was due primarily to
service revenues. During the quarters ended June 30, 1997 and 1998, the
Company's international revenues were approximately 13% and 14% of total
revenues, respectively. Revenues from international operations increased 100%
from $23.2 million in the three month period ended June 30, 1997 to $46.4
million in the same quarter in 1998. The dollar increase in international
revenues resulted from expanded international operations and the introduction of
Release 6 in December 1996 which incorporated additional global features and
functionality. The Company expects international revenues to continue to grow in
absolute dollars during 1998, and accordingly, continues to invest heavily in
international infrastructure, global product functionality and translated
versions of financial and other products(1). PeopleSoft 7.5 provides stronger
international functionality for European businesses, including both new country
specific functionality and support for the European monetary unit. In the event
international expansion and/or product globalization are not successful, the
Company's business operating results and financial condition may be adversely
affected.
COSTS AND EXPENSES
Cost of license fees increased 126% from $4.9 million in the three month
period ended June 30, 1997 to $11.0 million for the same period in 1998,
representing 3% of total revenues in each quarter and 5% and 7% of license fee
revenues in each quarter, respectively. Cost of license fees in the six month
period ended June 30, 1997 and 1998 were $9.3 million and $22.2 million,
respectively and represented 3% and 4% of total revenues and 5% and 8% of
license fee revenues in the six month period ended June 30, 1997 and 1998,
respectively. Royalty costs in the first quarter of 1998 included a one time
$2.5 million buy out of royalty fees related to providing certain technology
embedded in Release 7.5 to its existing customer installed base. In addition,
cost of license fees has grown as a percentage of revenues due to royalty
agreements related to OLAP tools embedded within the Company's products and
royalties owed on the Student Administration and Treasury products. The
Company's system solutions are based on a combination of internally developed
technology and application software 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 (1).
Cost of services consists principally of account management field support,
training, consulting and product support. These costs increased 78% from $55.2
million in the three month period ended June 30, 1997 to $98.2 million for the
same period in 1998, representing 30% and 31% of total revenues in each quarter,
respectively, and 63% and 57% of service revenues in those quarters. Costs
increased by 88% from $98.5 million in the six month
- ------------
(1) Forward-Looking Statement
10
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period ended June 30, 1997 to $185.0 million for the same period in 1998,
representing 29% and 31% of total revenues and 63% and 59% of service revenues
in those periods, respectively. The increase in cost of services is due to
significant expansion of the Company's customer service resources across all
categories, including consulting, telephone support, training and account
management staff. In particular, the Company has made a significant investment
in its professional consulting services organization which has grown
substantially over the past two years in response to customer demand. The
Company anticipates cost of services will increase in dollar amount, and may
increase as a percentage of total revenues, in future periods (1).
Sales and marketing expenses increased by 69% from $50.2 million in the
three month period ended June 30, 1997 to $84.6 million for the same period in
1998, representing 27% and 26% of total revenues in each period, respectively.
These expenses increased by 66% from $94.5 million in the six month period ended
June 30, 1997 to $157.3 million for the same period in 1998, representing 28%
and 26% 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,
continued investment in building an international direct sales force and
increased marketing expenses for the Company's expanded software product
offerings. The Company continues to increase its direct sales and marketing
expenditures to address certain international markets, grow its 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 73% from $29.6 million
in the three month period ended June 30, 1997 to $51.0 million for the same
period in 1998, representing 16% of total revenues in each quarter. These
expenses increased by 71% from $54.8 million in the six month period ended June
30, 1997 to $93.9 million for the same period in 1998, representing 16% of total
revenues in each period. 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
software product development initiatives in the following areas: (i) expansion
and enhancement of the Company's core software product offerings in the areas of
HRMS, Financial Management Systems, and Distribution/Materials Management
Systems and Supply Chain Management software; (ii) the enhancement of the
Company's platform development, certification, software 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 industry market products and versions of its core
products suitable to the unique needs of customers within certain industries. In
particular, the Company's development expenditure increases during the first
half of 1998 were driven by expenditures associated with the release of
PeopleSoft 7.5. The Company intends to continue to invest significant resources
in upcoming releases, and 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).
General and administrative expenses increased 66% from $10.4 million in the
three month period ended June 30, 1997 to $17.4 million for the same period in
1998, representing 6% of total revenues in each quarter. These expenses
increased by 56% from $19.6 million in the six month period ended June 30, 1997
to $30.6 million for the same period in 1998, representing 6% and 5% of total
revenues in each period, respectively. The dollar increase in general and
administrative expenses resulted primarily from increases in staffing and
related infrastructure to support the Company's growth, and increases in
administrative expenses associated with the operation of foreign subsidiaries.
These expenses include a one-time charge of $3.4 million during the second
quarter of 1998 related to a contractual dispute.
Operating margins for the three month period ended June 30, 1998 decreased
to 18.2% compared to 18.5% for the same period last year and 18.4% for the first
quarter of 1998, respectively. Operating margins for the six month period ended
June 30, 1998 increased slightly to 18.3% compared to 18.1% for the same period
in 1997.
- ------------
(1) Forward-Looking Statement
11
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Other income, consisting primarily of interest, increased from $2.4 million
in the three month period ended June 30, 1997 to $4.9 million for the same
quarter in 1998, and increased from $4.5 million in the six month period ended
June 30, 1997 to $8.4 million for the same period in 1998. The increase was due
to higher cash balances based upon improved cash collections and higher return
on investments based on a shift into higher yield taxable securities. In January
1998, the Company initiated a foreign currency transaction hedging program. The
hedging transactions were effective in offsetting foreign currency transaction
gains and losses in the quarter.
PROVISION FOR INCOME TAXES
The Company's income tax provision increased from $14.2 million in the
three month period ended June 30, 1997 to $24.0 million for the same quarter in
1998 and increased from $25.6 million in the six month period ended June 30,
1997 to $44.7 million for the same period in 1998. The provision for income
taxes was 38% of income before taxes for the six months ended June 30, 1998,
which represents a .5% decline from the 1997 annual effective income tax rate of
38.5%. The effective tax rate is based on management's current estimates and
forecasts of the Company's taxable income in multiple domestic and foreign
taxing jurisdictions. The estimated annual effective tax rate is relatively
sensitive to the results of operations in various jurisdictions, and because
such projections may change in future periods, the actual effective tax rate
could differ from this estimate. As permitted by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", the Company has
recorded $40.9 million in net deferred tax assets as of June 30, 1998.
EARNINGS PER SHARE
The Company's earnings per share are calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
consistent with reporting for the fourth quarter of 1997. The new method
requires calculation of both a basic earnings per share and a diluted earnings
per share. The basic earnings per share excludes the dilutive effect of common
stock equivalents such as stock options and warrants, while the diluted earnings
per share includes such dilutive effects. Diluted earnings per share increased
from $0.09 in the three month period ended June 30, 1997 to $ 0.15 for the same
period in 1998 and from $0.16 for the six month period ended June 30, 1997 to
$0.28 for the same period in 1998. Earnings per share for the six months ended
June 30, 1998 increased as a result of the 82% increase in net income from $40.1
million for the six month period ended June 30, 1997 to $73 million for the same
period of 1998, partially offset by a 4% increase in the number of shares used
in the diluted per share computation from 248.8 million shares for the six month
period ended June 30, 1997 to 257.6 million shares for the same period in 1998.
The increase in weighted average shares outstanding was due to the exercise of
stock options, the exercise of warrants in the fourth quarter of 1997, and the
issuance of shares under the employee stock purchase plan. Shares outstanding
during 1998 will be impacted by the following factors: (i) the ongoing issuance
of common stock associated with stock option exercises; (ii) the anticipated
exercise during 1998 of warrants for approximately 3.2 million shares; (iii) the
issuance of common shares associated with the Company's employee stock purchase
program; (iv) any fluctuations in the Company's stock price, which could cause
changes in the number of common stock equivalents included in the earnings per
share computation; and, (v) the issuance of common stock to affect business
combinations should the Company enter into such transactions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $150.4 million during
the six month period ended June 30, 1998, compared to $77.1 million in the same
period in 1997. In both periods, cash provided by operating activities was due
principally to earnings and increases in deferred revenues and non-cash expenses
that were partially offset by increases in other assets and receivables, tax
benefits related to employee stock transactions, and continued increases in
non-cash expenses. In the first half of 1998, cash from operations was also
provided by increases in accounts payable and other accrued liabilities. From
December 31, 1997 to June 30, 1998, net accounts receivable increased from
$299.2 million to $341.2 million, respectively, and deferred revenues increased
from $327.7 million to $396.2 million over the same period. The increase in net
accounts receivable resulted from the growth in customer licensing and service
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. In addition, the
Company's expanded installed base has resulted in increased deferred revenues
related to ongoing maintenance and other services. Increases in payables and
other assets were due to general growth in the Company's operations.
The Company calculates accounts receivable days sales outstanding ("DSO")
as the ratio of a quarter-end accounts receivable to the sum of quarterly
revenues and the net change in quarter-end deferred revenues, multiplied
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<PAGE> 13
by 90. The Company believes this calculation is appropriate because license fees
are typically billable regardless of whether revenue has been recognized or
deferred. Under this method, DSO was 86 days as of June 30, 1997, 88 days as of
December 31, 1997 and 86 days as of June 30, 1998. Since billing terms of the
Company's agreements typically are spread out over a sequence of events
(including contract execution through standard acceptance) or dates that
generally span four to nine months, and contracting activity 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 1997 and 1998, the Company's principal use
of cash for investing activities included purchases of investments and property
and equipment, comprised of computer and network equipment, to accommodate
employee and facility expansions and to support the Company's growing training
capacity requirements.
Financing activity for the first six months of 1997 and 1998 related to the
proceeds from the exercise of common stock options by employees and stock
issuances under the employee stock purchase program. The Company believes
granting stock options is essential in attracting and retaining key employees
who are critical to the Company's success. The Company anticipates that it will
continue to grant a significant number of options each year. The actual number
of options granted each year is based on a variety of factors including the
Company's historical and anticipated employee count, the level of hiring
activity, competitive factors associated with the labor market, and comparison
of the Company's compensation philosophy and practice to other similar
technology companies. There can be no assurance that employee stock activity
will continue to generate substantial funds in the future.
As of June 30, 1998, the Company had $285.2 million in working capital,
including $349.9 million in cash and cash equivalents, and $127.5 million in
short term investments, consisting primarily of high quality municipal bonds and
money market funds. The Company believes that existing cash and short term
investment balances, proceeds from sales 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 1999(1).
SALE-LEASE BACK TRANSACTION
During the third quarter of 1998, the Company entered agreements to sell
one of its Pleasanton, California office buildings and related land, and lease
back the site. The initial lease term is for 10 years with PeopleSoft options to
terminate as early as 4 years or incrementally extend the term of the lease up
to 20 years. The transaction is expected to close prior to the end of the third
quarter. The sales price of approximately $50.0 million will result in a book
gain of approximately $20.0 million. The monthly lease charge over the term is
equivalent to prevailing market rates for similar office space in the area and
thus the gain will be amortized over the lease period. The Company holds a first
right of refusal to additional space within the site as non-PeopleSoft tenant's
leases expire.
ACQUISITIONS
PeopleSoft entered into a definitive agreement to acquire all outstanding
equity interest of Intrepid Systems, Inc., ("Intrepid") a leading provider of
retail management solutions. PeopleSoft will issue up to 1,372,745 shares of
common stock and options to purchase common stock in a transaction that will be
accounted for as a pooling of interests provided that requisite shareholder
approval and other conditions are satisfied. In the event that such conditions
are not satisfied and, as a result, the transaction is not accounted for as a
pooling of interests, PeopleSoft will issue 1,145,239 shares of common stock and
options to purchase common stock. In either case, the total number of shares
that PeopleSoft will issue will be reduced by 30,713 share if Intrepid's
agreement with Andersen Consulting is not amended to the satisfaction of
PeopleSoft. The transaction is anticipated to close by the end of the third
quarter 1998, subject to requisite shareholder approval and the satisfaction of
customary closing conditions.
PeopleSoft entered into a definitive agreement to acquire all outstanding
equity interest of TriMark Technologies, Inc., a leading provider of software
solutions for the life insurance industry. PeopleSoft and TriMark are taking
initial steps toward the life insurance industry's first single-source,
integrated enterprise solution.
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(1) Forward-Looking Statement
13
<PAGE> 14
PeopleSoft will issue shares of common stock and options for all of the
outstanding equity interests of TriMark in a transaction that will be accounted
for as a pooling of interests. The transaction is expected to close prior to the
end of the first half of 1999. Prior to closing the transaction, PeopleSoft and
TriMark will operate independently within a development, marketing, sales and
support relationship that will streamline the eventual merging of the two
companies.
FINANCIAL RISK MANAGEMENT
Foreign Exchange
PeopleSoft's revenue originating outside the United States was 15% of total
revenues in the first half of 1998, the same as 1997. International sales are
made mostly from the Company's foreign sales subsidiaries in the local countries
and are typically denominated in the local currency of each country. These
subsidiaries also incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their functional
currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors.
The Company's exposure to foreign exchange rate fluctuations arise in part
from intercompany accounts in which cost of software, including certain
development costs, incurred in the United States is charged to the Company's
foreign sales subsidiaries. These intercompany accounts are typically
denominated in the functional currency of the foreign subsidiary in order to
centralize foreign exchange risk with the parent company in the United States.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact overall expected profitability.
In the first quarter of 1998, the Company initiated a hedging program
designed to mitigate the potential for future adverse impact on intercompany
balances due to changes in foreign exchange rates. The program uses forward
foreign exchange contracts as the vehicle for hedging these intercompany
balances. In general, these forward foreign exchange contracts have three months
or less to maturity. Gains and losses on hedges are recorded in Other income and
offset against losses and gains on the underlying exposures. Management of the
foreign exchange hedging program is done in accordance with a corporate policy
approved by the Company's Board of Directors.
At June 30, 1998, hedge positions totaled U.S. Dollar 11.4 Million
equivalent. All hedge positions are carried at fair value and all hedge
positions had maturity dates within three months.
Interest Rates
The Company invests its cash in a variety of financial instruments,
including bank time deposits, and taxable and tax-advantaged variable rate and
fixed rate obligations of corporations, municipalities, and local, state and
national governmental entities and agencies. These investments are denominated
in U.S. Dollars. Cash balances in foreign currencies overseas are operating
balances and are only invested in short term time deposits of the local
operating bank.
Interest income on the Company's investments is recorded in Other income.
The Company accounts for its investment instruments in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). All of the cash equivalent, short
term, and long term investments are treated as "available-for-sale" under SFAS
115.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
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<PAGE> 15
may suffer losses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates.
The Company's investments are made in accordance with an investment policy
approved by the Board of Directors. At June 30, 1998, the average maturity of
the Company's investment securities was roughly five months. No investment
securities had maturities exceeding two years. The following table presents
certain information about the Company's financial instruments at June 30, 1998
that are sensitive to changes in interest rates. These instruments are not
leveraged and are held for purposes other than trading. For available-for-sale
investment securities, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. The Company believes
its available-for-sale securities, comprised of highly liquid debt securities of
corporations, municipalities, and the U.S. Government, are similar enough to
aggregate. Because of the Company's effective tax rate, the Company finds it
advantageous to invest largely in tax-advantaged securities, therefore the
average interest rates below are most comparable to tax-exempt interest rates.
Below is a tabular presentation of the maturity profile of the
available-for-sale investment securities held by the Company at June 30, 1998:
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
<TABLE>
<CAPTION>
1 YEAR MORE THAN FAIR VALUE
(DOLLARS IN MILLIONS) OR LESS 1 YEAR TOTAL 6/30/98
------- --------- ------ ----------
<S> <C> <C> <C> <C>
Available-for-sale securities $243.1 $91.9 $335.0 $335.2
Weighted average interest rate 4.0% 4.0%
</TABLE>
The Company is not an issuer of any corporate debt nor does it have any
bank borrowings outstanding.
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<PAGE> 16
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". 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. 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.
o Based on management's 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 1998 to increase approximately 60% over total
revenues recorded in the same quarter of the prior year(1). For the 1998
calendar year, the Company expects total revenues to increase between 60%
and 65% over the total revenues recorded for the prior full 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 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; timing and acceptance of software products
and product development; and the ability to execute hiring and facility
expansion plans.
o The Company's operating model is based on a rolling four quarter target
operating margin of between 18% and 20%. The Company expects that the 1998
full year results will fall within this range (1). Due to the significant
operating leverage which is characteristic of the software 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 and intellectual property, preservation
of its proprietary rights and product liability protections; and continued
success in hiring, training and retaining key personnel and completing
expansion of facilities.
o Based on projected cash and investment balances, constant interest rates
and no unusual items of other income or expense, the Company expects other
income for the third quarter of 1998 to be flat to slightly up compared to
the level of other income recorded in the second quarter of 1998(1). The
achievement of forecasted other income targets is dependent on: (i) stable
financial markets which preclude a significant overall decline in
investment yields, or a significant fluctuation in foreign currency
exchange rates, and (ii) avoidance of default
- ------------
(1) Forward-Looking Statement
16
<PAGE> 17
on any individual significant investment. Should the Company decide to
utilize a significant portion of its current cash and investments to
acquire complementary businesses, products, technologies, additional
facilities through purchase of land and/or buildings, repurchase shares of
stock, or pay dividends, interest income may decline significantly causing
other income to deviate from forecasted amounts.
o Based on current tax law and the Company's present forecast of operating
results by country, the Company expects its effective tax rate in 1998 to
be 38%(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 that 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, 1997, contained in the
Company's 1997 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 aggregate contracting activity and the Company's ability to recognize
revenue in that quarter in accordance with its revenue recognition policies.
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 each customer's overall business, 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,
customer 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 after selection of a vendor; (vi) the number,
timing and significance of software product enhancements and new software
product announcements by the Company and its competitors; (vii) potential
customer evaluations of their legacy systems and their decisions whether to
repair or replace existing applications which have Year 2000 operability issues;
(viii) changes in the Company's sales incentive plans have had and may continue
to have an unpredictable impact on seasonal business patterns; and (ix) changes
in economic, political and market conditions can adversely impact business
opportunities without reasonable notice. With respect to potential customer
evaluations of their Year 2000 operability issues, while the Company believes
that such evaluations to date have, on balance, increased 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.
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(1) Forward-Looking Statement
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<PAGE> 18
The Company's recognition of license fee revenue can be deferred for a
significant period of time after execution of the related license agreements as
a result of several factors, including the following: (i) the license agreement
may be entirely related to then currently undeliverable software products; and
(ii) enterprise transactions may include software products that are then
currently deliverable, as well as software products that are still under
development. To the extent that Company enters into a license agreement for the
provision of both software product categories, the Company must have established
separate values for all elements under the license agreement, and the license
agreement and supporting schedules to the license agreement must contain very
precise contractual provisions consistent with generally accepted accounting
principles to permit any revenue recognition under the license agreement. Other
factors in determining the Company's recognition of license fee revenue include
the following: (i) whether the customer demands services that include
significant modifications, customizations or complex interfaces; (ii) whether
the license agreement includes non-standard acceptance criteria which may
preclude revenue recognition prior to customer acceptance; and (iii) whether the
license agreement includes fees with extended payment terms or fees that are
dependent upon acceptance of services or other contingencies. All of the above
factors, as well as other specific requirements under recently published
generally accepted accounting standards for software revenue recognition, create
circumstances under which the Company must have very precise contractual
agreements in order to recognize revenue upon initial software product delivery.
Although the Company has a standard form of 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
allow the recognition of revenue using percentage of completion contract
accounting.
Service revenues may vary from quarter to quarter due to variances in prior
quarter contracting activity because service revenue typically lags license fee
revenue. The Company's ability to increase services revenue is dependent on its
ability to increase the number of its licensing agreements that provide
opportunities for consulting, training, and subsequent maintenance revenues.
Additionally the Company may not be able to recruit, hire, and train sufficient
numbers of qualified consultants to perform such services.
POSSIBLE ADVERSE IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was
issued by the American Institute of Certified Public Accountants in October 1997
and addresses software revenue recognition matters. The SOP supersedes SOP 91-1
and is effective for transactions entered into for fiscal years beginning after
December 15, 1997. The Company believes its current revenue recognition policies
and practices are materially consistent with the SOP. However, implementation
guidelines for this standard have not yet been issued and a wide range of
potential interpretations is being discussed within the accounting profession.
Once available, such implementation guidance could lead to unanticipated changes
in the Company's current revenue accounting practices, and such changes could
materially adversely affect the Company's future revenue and net income.
In addition, such implementation guidance may necessitate substantial
changes in the Company's business practices in order for the Company to continue
to recognize a substantial portion of its license fee revenue upon delivery of
its software products. Such changes may reduce demand, extend sales cycles,
increase administrative costs and otherwise adversely affect operations. In
addition, the Company could become competitively disadvantaged relative to
foreign-based competitors not subject to U.S. generally accepted accounting
principles.
OPERATING LEVERAGE
Like many of its competitors, 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 over the short term are relatively fixed. In addition, the
Company's expense levels and hiring plans are based, in significant part, on the
Company's projections of future revenue. If revenue levels fall below
expectations, net income is likely to be disproportionately adversely affected.
There can be no assurance that the Company will be able to increase or even
maintain its current level of profitability on a quarterly or annual basis in
the future.
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
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<PAGE> 19
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 any one or more of
such factors will not have a materially adverse effect on the Company's
business, operating results, financial condition, or business prospects.
Although the Company's 1998 operating budget is based on projections of a
material increase in total revenues over the corresponding actual results for
1997, 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. The Company's seasonal revenue patterns, which are typically
characterized by relatively weak first and second quarters and relatively strong
third and fourth quarters, can be caused by a variety of factors, including
sales incentives, customer demand based on available capital budgets and release
of new technologies. However, there can be no assurance that the third and
fourth quarters of the current fiscal year will produce stronger revenues or
earnings than those recorded in the first and second quarters.
INTERNATIONAL OPERATIONS
The Company has committed, and will continue to commit substantial
resources and funding to build its international service and support
infrastructure. Operating costs in many countries, including many of those in
which the Company operates, are higher than in the United States. In order to
increase international sales in 1998 and subsequent periods, the Company must
continue to globalize its software product lines, expand existing and 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. If the
Company's international expansion and/or product globalization is not
successful, it is likely to have a negative impact on the Company's operating
results.
The Company's sales through its foreign operations are generally
denominated in the functional currency of each of its foreign subsidiaries.
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 January 1998, the Company
implemented a hedging program designed to mitigate the potential impact of
exchange rate fluctuations. In addition to hedging existing transaction
exposures, the Company's foreign exchange management policy allows for the
hedging of anticipated transactions, and exposure resulting from the translation
of foreign financial results into U.S. Dollars. Such hedges can only be
undertaken to the extent that the exposures are highly certain, reasonably
estimable, and significant in amount. These hedges will only be undertaken
should the Company deem them necessary to protect the U.S. Dollar value of the
underlying exposure. The Company began hedges of existing foreign currency
transaction exposures in the first quarter of 1998. However, if the Company is
unable to hedge potential significant exposures due to lack of certainty or
ability to reasonably estimate its foreign exchange exposure, there could be a
material adverse impact to the Company's operating results.
COMPETITION
The market for business application software has been intensely competitive
for the past three years and is currently intensifying. 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 systems
and HRMS application software vendors and software tools vendors. Although the
Company 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, such as web enablement, enterprise software product
breadth and individual product features, service reputation, product
flexibility, ease of implementation, international software product version
availability and support, and price.
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 in turn, could
materially adversely affect the Company's business, operating results, financial
condition, and business prospects.
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In recent quarters, the Company has observed increasingly aggressive
pricing practices on the part of its competitors. 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 all new competitors that may enter
into the enterprise application software market, PeopleSoft faces significant
competition from SAP AG and Oracle Corporation, 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 software 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.
The Company entered the manufacturing software application markets in 1996.
In these markets, PeopleSoft faces competition from several of its existing
competitors including those listed immediately above and others such as Baan
Company N.V., QAD, Ross Systems, J.D. Edwards and a large number of niche
competitors already in the manufacturing market.
In addition, since its acquisition of Red Pepper Software in the fourth
quarter of 1996, the Company has competed in the emerging enterprise resource
optimization software solutions market. PeopleSoft faces several current and
potential competitors in this market 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,
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 (such as SAP's recently
announced initiatives in this area), 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.
PeopleSoft also faces competition from providers of HRMS software products
including Cyborg Systems, Lawson Associates, Integral Systems, Inc., InPower,
Inc. and Ceridian, and from providers of financial management systems software
products including Computron Software, Inc., Flexiware International, Hyperion
Software, Lawson Associates and other smaller companies. In addition, Shared
Medical Systems, Inc. ("SMS") has the right to sublicense selected PeopleSoft
software products in competition with PeopleSoft's marketing efforts in selected
markets. Pursuant to the terms of the SMS agreement, PeopleSoft provided a
notice of default and termination to SMS on March 19, 1998. SMS contested the
notice of termination and, pursuant to the agreement, the parties tendered the
dispute to an arbitration panel. On July 17, 1998, the arbitration panel
rendered its final decision, determining that PeopleSoft's interpretation of the
disputed royalty provision was correct and certain disputed sums were to be paid
to PeopleSoft, but that PeopleSoft's notice of termination was ineffective.
In addition, as the year 2000 approaches, potential customers may consider
outsourcing options, including data center outsourcing and service bureaus, as
viable alternatives to purchasing the Company's software products which in turn
may result in increased competition from outsource services such as Computer
Science Corporation (CSC), Electronic Data Systems Corporation (EDS), IBM, ADP,
Ceridian, and other smaller companies.
CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS
As part of its overall strategy, the Company plans to continue to acquire
or invest in complementary companies, products, or technologies and to enter
into joint ventures and strategic alliances with other companies. Risks commonly
encountered in such transactions include the difficulty of assimilating the
operations and personnel of the combined companies, the potential disruption of
the Company's ongoing business, the inability to retain key technical and
managerial personnel, the inability of management to maximize the financial and
strategic position of the Company through the successful integration of acquired
businesses, decreases in reported earnings as a result of charges for in-process
research and development and amortization of acquired intangible assets, adverse
impact on the Company's annual effective tax rate, dilution of existing equity
holders, difficulty in maintaining controls,
20
<PAGE> 21
procedures, and policies, and the impairment of relationships with employees and
customers as a result of any integration of new personnel. There can be no
assurance that the Company would be successful in overcoming these risks or any
other problems encountered in connection with such business combinations,
investments, or joint ventures, or that such transactions will not materially
adversely affect the Company's business, financial condition, or operating
results.
During the second quarter, the Company announced its intention to acquire
Intrepid. This transaction is anticipated to close by the end of the third
quarter of the current year, subject to obtaining the requisite shareholder
approval from Intrepid's shareholders and the satisfaction of customary closing
conditions. The accounting treatment will not be finalized until closing. Should
this transaction be accounted for as a purchase transaction, there may be a
significant charge to income for in process research and development which would
have a material impact on the results of operations for both the quarter and the
year.
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 have focused on providing software
development tools and are attempting to establish their software development
tools as accepted industry standard. In the event that a software product other
than PeopleTools 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 AND MARKETING
A key aspect of the sales and marketing strategy for the Company is to
build and maintain strong working relationships with businesses the Company
believes play an important role in the successful marketing of its software
products. The Company's customers and potential customers often rely on third
party system integrators to develop, deploy and manage client/server
applications. These include: (i) RDBMS software vendors; (ii) hardware vendors
which offer both hardware platforms and, in the case of IBM, proprietary RDBMS
products on which the Company's software products run; (iii) technology
consulting firms and systems integrators, some of which are active in the
selection and implementation of large information systems for the
information-intensive organizations that comprise the Company's principal
customer base; and (iv) benefits consulting firms that are active in the
implementation of HRMS. The Company believes that its marketing and sales
efforts are enhanced by the worldwide presence of these companies. However,
there can be no assurance that these companies, most of which have significantly
greater financial and marketing resources than PeopleSoft, will not start, or in
some cases increase, the marketing of business application software in
competition with PeopleSoft, or will not otherwise discontinue their
relationships with or support of PeopleSoft. If the Company or its partners are
unable to recruit and adequately train a sufficient number of consulting
personnel to support the implementation of the Company's software products,
demand for these software products could subsequently be materially adversely
affected. In addition, PeopleSoft's software application architecture, including
PeopleTools, may facilitate reduced implementation efforts for customers
compared to the competitive alternatives. Consequently, PeopleSoft's software
products may be a less desirable recommendation alternative for integrators who
both provide selection advice and generate consulting fees from customers by
providing implementation services. Due to the foregoing factors, the Company's
results of operations could be materially adversely affected.
DEPENDENCE ON THIRD PARTY TECHNOLOGY
PeopleSoft incorporates numerous critical third party software products
into its software product offerings under reseller license agreements with third
parties. In the event that any of PeopleSoft's licenses to such software are
terminated, there could be a material adverse effect to PeopleSoft including its
products becoming inoperable or their performance being materially reduced. If
any of the third party software vendors change their product offerings,
PeopleSoft may need to incur additional engineering costs to ensure continued
performance of its products. In addition, material increases in the cost to
license any of these third party software products could result in a material
adverse change from PeopleSoft's historical gross margin levels.
21
<PAGE> 22
PeopleSoft relies on existing partnerships with certain other software
vendors who are also competitors. For example, PeopleSoft partners with Oracle
when PeopleSoft customers select an Oracle database to run in conjunction with
PeopleSoft's financial package. However, Oracle is a competitor of PeopleSoft in
the financial data management area. These partners/competitors may change their
business practices in the future resulting in PeopleSoft's need to find
alternative vendors of complementary software.
COMPLEXITY OF SOFTWARE PRODUCTS AND PRODUCT DEVELOPMENT
The market for the Company's software products is characterized by rapid
technological change, evolving industry standards, changes in customer
requirements and frequent new product introductions and enhancements. The
Company's future success will depend in part upon its ability to continue to
enhance and expand its core applications, to continue to provide enterprise
solutions, to enter new markets and to develop and introduce new products that
keep pace with technological developments, satisfy increasingly sophisticated
customer requirements and achieve market acceptance. If the Company is unable to
enhance existing products or develop and introduce new products in a timely
manner, the Company's business and results of operations could be materially
adversely affected.
PeopleSoft's software products can be licensed for use with a variety of
popular industry standard RDBMSs. There may be future or existing RDBMS
platforms which achieve popularity within the business application marketplace
and on which PeopleSoft may desire to offer its applications. 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 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.
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. Cognos' Powerplay product
and Arbor's Essbase product will be bundled to incorporate desktop on-line
analytical processing ("OLAP") capabilities. Such enhancements may be critical
to the competitiveness of the Company's software 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 software 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 software product performance
characteristics across all of these combinations could place a significant
strain on the Company's development resources and software product release
schedules.
RELIANCE ON CLIENT PLATFORMS
At the present time, the Company supports client platforms utilizing
browsers certified to run Java based Web client, or 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
affected. The use of a Web browser (running on either a PC or network computer)
to access client/server systems is emerging as an alternative client to the
traditional desktop access through Microsoft Windows based personal computers.
Such client access via the Internet will be subject to numerous risks inherent
in utilizing the Internet including security, availability and reliability.
There may be future or existing client platforms which achieve popularity within
the business application marketplace and on which PeopleSoft may desire to offer
its applications. Such future or existing client platforms may or may not be
architecturally compatible with PeopleSoft's software product design. No
assurance can be given
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<PAGE> 23
concerning the Company's successful support for new client platforms, the
specific timing of their availability or their acceptance in the marketplace.
RELIANCE ON JOINT BUSINESS ARRANGEMENTS
The Company has entered, and may in the future enter, into various
development or joint business arrangements for the purpose of developing new
software products or extensions to existing software products. Under these
development arrangements, the Company is generally the exclusive remarketer of
the developed software products and pays a royalty to the funding entities based
on license fees received from end user licenses of these software products.
Under joint business arrangements, the Company may distribute or jointly sell
with its business partner an integrated software product. While the intent of
such arrangements is to develop business applications that are integrated with
the Company'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 such arrangements require
additional investments from third parties or business partners to complete
development or enhance the software product, there can be no assurance that
investments will be available on terms mutually acceptable to the Company and
the business partner, or 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 of the
following accounting treatments: (i) 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 (ii) 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.
Should either of these scenarios occur, the results of operations of one or more
future periods could be materially adversely impacted. For example, in
connection with its acquisition of PMI in 1996, the Company incurred a charge to
earnings of $22.5 million for in-process research and development.
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 aspects of its internal operations, software
and documentation as proprietary, and relies on a combination of contract,
patent, copyright, trademark and trade secret laws and other measures to protect
its proprietary information. The Company received its first patent in June 1995
and its second patent in August 1995. In July 1996, the Company received title
to a third patent as part of a teaming and development agreement. In May and
June of 1998, the Company received title to its fourth and fifth patents
emanating from the Red Pepper Software technology. The Company also has two
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, patent,
trade secret and copyright protection are less significant than factors such as
the knowledge, ability and experience of the Company's employees, frequent
software 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
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<PAGE> 24
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, software products
acquired form acquisitions, 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 contain provisions designed to limit the
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, a significant expansion in the number of its
employees, increased pressure on the viability and scope of its operating and
financial systems and expansion in the geographic scope of its operations. This
growth has resulted in new and increased responsibilities for management
personnel and has placed a significant strain upon the Company's management,
operating and financial controls and resources, including its services and
development organizations. To accommodate recent growth, compete effectively and
manage potential future growth, the Company must continue to implement and
improve the speed and quality of its information decision support systems,
management decisions, reporting systems, procedures and controls. There can be
no assurance that the Company's personnel, procedures, systems and controls will
be adequate to support the Company's future operations.
KEY PERSONNEL
PeopleSoft believes that its continued success will depend in large part
upon its ability to attract, train and retain highly skilled technical,
managerial and marketing personnel. The Company continues to hire a significant
number of additional sales, services 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 within various desired geographic locations, or with
certain industry specific domain expertise. Growth in contracting activity could
be impacted by the Company's ability to attract, train, retain and manage
productive sales and sales support 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 has historically experienced a very low
attrition rate amongst all of its employees, especially those in critical
positions. The Company has several retention programs in place to retain such
key personnel including granting of stock with annual vesting periods over five
years. A number of key employees have vested stock options that have a
relatively low price when compared to the Company's current stock price. These
potential gains provide these employees the economic freedom to explore personal
objectives both within and outside the Company which may result in the loss of
one or more key employees during the coming years.
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, sell and support new or existing software or to continue to
grow. In addition, the Company's
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<PAGE> 25
success in penetrating key vertical markets is dependent upon its ability to
attract, train and retain personnel with industry specific domain expertise.
YEAR 2000 COMPLIANCE
The Company's internal business information systems are primarily comprised
of the same commercial application software products generally offered for
license by the Company to end user customers. These applications have been
tested for Year 2000 compliance and are certified by the Information Technology
Association of America (ITAA) as Year 2000 compliant, therefore the Company does
not expect any Year 2000 compliance issues to arise related to its primary
internal business information systems. PeopleSoft is not aware of any material
operational issues or costs associated with preparing internal systems for the
Year 2000. However, the Company utilizes other third party vendor network
equipment, telecommunication products, and other third party software products
that may or may not be Year 2000 compliant. Although the Company is currently
taking steps to address the impact, if any, of the Year 2000 issue surrounding
such third party products, failure of any critical technology components to
operate properly in the Year 2000 may have an adverse impact on business
operations or require the Company to incur unanticipated expenses to remedy any
problems.
EUROPEAN MONETARY UNION (EMU)
The Company's internal business information systems are primarily comprised
of the same commercial application software products generally offered for
license by the Company to end user customers. PeopleSoft's latest software
release contains EMU functionality that allows for dual currency reporting and
information management. PeopleSoft is not aware of any material operational
issues or costs associated with preparing internal systems for the EMU. However,
the Company utilizes other third party vendor network equipment, and other third
party software products that may or may not be EMU compliant. Although the
Company is currently taking steps to address the impact, if any, of EMU
compliance for such third party products, failure of any critical technology
components to operate properly post EMU may have an adverse impact on business
operations or require the Company to incur unanticipated expenses to remedy any
problems.
Furthermore, the company's foreign exchange exposures to legacy sovereign
currencies of the participating countries in the EMU will become foreign
exchange exposures to the euro upon its introduction. Currently, the Company has
no derivative foreign exchange contracts denominated in legacy sovereign
currencies with maturity of January 1, 1999 or later. To the extent hedging
transactions are entered for exposures after January 1, 1999, they will be
denominated in euros as applicable. Although the Company is not aware of any
material adverse financial risk consequences of the change from legacy sovereign
currencies to the euro, conversion may result in problems which may have an
adverse impact on the Company's business because the Company may be required to
incur unanticipated expenses to remedy these problems.
EXPANSION OF FACILITIES
The Company has experienced an extended period of growth that has resulted
in a significant expansion in the number of its employees. Commercial building
vacancy rates have significantly dropped in many of the markets where the
Company has significant operations. As a consequence, the Company expects to
experience increasing difficulty in obtaining additional space within which to
expand its operations. Failure to either obtain space, or obtain it on
reasonably attractive commercial terms, may inhibit the Company's ability to
grow, or otherwise adversely affect the Company's operations and financial
results.
Additionally, the Company may commit to real estate projects in order to
expand its operations to accommodate expected growth. Such real estate projects
typically have a lead time of over one year from commitment date to occupancy.
There can be no assurance that the anticipated growth projections will be
realized, and therefore, the Company may be subject to increased fixed costs
which cannot be recovered from operations, resulting in material reductions to
net income and cash flows.
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 software
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<PAGE> 26
products by PeopleSoft or its competitors, and macroeconomic conditions in the
computer hardware and software industries generally, may have a significant
impact on the market price of the stock of PeopleSoft. If revenue or earnings in
any quarter fail to meet the expectations (published or otherwise) of the
investment community, there could be an immediate impact on PeopleSoft's stock
price. In addition, as described in the Possible Adverse Effects of Recent
Securities Issuances section below, the Company has issued shares, stock options
and warrants which, if sold directly or exercised and sold on the open market in
large numbers, could cause the Company's stock price to decline in the short
term. The Company can provide 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 that 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.
Any such broad market fluctuations may materially adversely affect the market
price of PeopleSoft stock
POSSIBLE ADVERSE EFFECTS OF OUTSTANDING WARRANTS AND OPTIONS
The Company has outstanding warrants to purchase 6,400,000 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
could adversely affect the market price of the Company's common stock. At June
30, 1998 the Company had 14,272,848 outstanding exercisable options to purchase
common stock issued pursuant to employee stock plans which could have exercise
prices below the current market price of the common stock. The exercise of such
stock options and sale of a significant number of the underlying shares could
adversely affect the market price of the Company's common stock.
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 funds. Despite favorable credit
ratings on these investments, there can be no assurance the issuers will not
default on their obligations, and any such default may result in the loss of
principal and accrued interest by PeopleSoft. While operating activities may
provide cash in certain periods, to the extent the Company experiences growth in
the future, operating and investing activities may use cash, and, consequently,
such growth may require the Company to obtain additional sources of financing.
In addition, material acquisitions of complementary businesses, products or
technologies and capital expenditures may require additional sources of
financing. There can be no assurance that the Company would be able to obtain
additional sources of financing or additional financing at terms favorable to
the Company.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a 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 financial position, results of operations and cash flows
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 and Use of Proceeds
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 26, 1998.
(b) Pursuant to the election of the three directors listed under Item
4(c)(i), Mr. Albert W. Duffield, Mr. Cyril J. Yansouni, and Mr. A.
George "Skip" Battle were each elected for a two year term. Mr. David
A. Duffield, Mr. Edgar F. Codd, and Mr. George J. Still Jr. 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>
Number of Number of Number of Number of Number of Broker
Name of Nominee Votes For Votes Against Votes Withheld Abstentions Non Votes
--------------- --------- ------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Albert W. Duffield 127,372,528 144,020 - - -
Cyril J. Yansouni 127,399,565 116,983 - - -
A. George "Skip" Battle 127,399,051 117,497 - - -
</TABLE>
(ii) Approval of an amendment to the Restated Certificate of
Incorporation to increase the authorized number of Common Stock
of the Company to 700,000,000 shares. 123,910,672 votes were cast
in favor of the amendment, 3,540,709 votes were cast against,
zero votes were withheld, there were 65,167 abstentions, and zero
broker non votes.
(iii) Approval of an amendment to the 1989 Stock Option Plan to
increase the term of the Option Plan from September 1999 to March
17, 2008 and increase the number of shares of Common Stock
reserved for issuance under the Option Plan 1) in 1998 by
5,000,000 shares of Common Stock, and 2) in each subsequent year
during the term of the Option Plan by a number of shares of
Common Stock equal to the lesser of 20,000,000 shares of Common
Stock (with such number adjusted appropriately for any stock
split or similar transaction) or 5% of the number of shares of
Common Stock issued and outstanding on the last day of the
immediately preceding fiscal year. 115,948,269 votes were cast in
favor of the amendment, 11,403,911 votes were cast against, zero
votes were withheld, there were 164,368 abstentions, and zero
broker non votes.
(iv) Approval of an amendment to the 1992 Employee Stock Purchase Plan
to increase the number of shares reserved for issuance under the
Purchase Plan 1) in 1998 by 700,000 shares of Common Stock, and
2) in each subsequent year during the term of the Purchase Plan
by 1.5% of the shares of Common Stock issued and outstanding on
the last day of the immediately preceding fiscal year.
126,167,266 votes were cast in favor of the amendment, 1,207,131
votes were cast against, zero votes were withheld, there were
142,151 abstentions, and zero broker non votes.
(v) Ratification of independent public auditors. The Stockholders
ratified the appointment of Ernst & Young LLP as the Company's
independent public auditors for the fiscal year ended December
31, 1998. 127,292,993 votes were cast in favor of the
appointment, 134,666 votes were cast against, zero votes were
withheld, there were 88,889 abstentions, and zero broker non
votes.
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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, 1998
(b) Reports on Form 8 - K
No reports on Form 8 - K were filed during the quarter ended June 30, 1998.
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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 14, 1998
PEOPLESOFT, INC.
By: /s/ ALFRED J. CASTINO
-------------------------------
Alfred J. Castino
Vice President of Finance,
Chief Accounting Officer and
Corporate Controller
(Principal Accounting Officer)
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<PAGE> 30
PEOPLESOFT, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT TITLE PAGE
- --------- ------------- ----
<S> <C> <C>
27.1 Financial Data Schedule - June 30, 1998
</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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 349,860
<SECURITIES> 127,517
<RECEIVABLES> 368,631
<ALLOWANCES> 27,430
<INVENTORY> 0
<CURRENT-ASSETS> 876,449
<PP&E> 229,541
<DEPRECIATION> 100,746
<TOTAL-ASSETS> 1,126,827
<CURRENT-LIABILITIES> 591,294
<BONDS> 0
0
0
<COMMON> 2,410
<OTHER-SE> 533,123
<TOTAL-LIABILITY-AND-EQUITY> 1,126,827
<SALES> 0
<TOTAL-REVENUES> 598,196
<CGS> 0
<TOTAL-COSTS> 488,935
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,937
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 117,669
<INCOME-TAX> 44,714
<INCOME-CONTINUING> 72,955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,955
<EPS-PRIMARY> .32
<EPS-DILUTED> .28
</TABLE>
