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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, 2000 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:
OUTSTANDING AT
CLASS JULY 19, 2000
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Common Stock, par value $.01 ................... 279,663,126
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TABLE OF CONTENTS
PAGE NO.
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PART I FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2
1999 and June 30, 2000
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and June 30, 2000 3
Condensed Consolidated Statements of Cash Flows for the 4
Six Months Ended June 30, 1999 and June 30, 2000
Notes to Condensed Consolidated Financial Statements 5
ITEM 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
ITEM 3 -- Financial Risk Management 18
PART II OTHER INFORMATION
ITEM 1 -- Legal Proceedings 31
ITEM 2 -- Changes in Securities and Use of Proceeds 32
ITEM 3 -- Defaults upon Senior Securities 32
ITEM 4 -- Submission of Matters to a Vote of Security Holders 32
ITEM 5 -- Other Information 32
ITEM 6 -- Exhibits and Reports on Form 8-K 32
SIGNATURES 33
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PEOPLESOFT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, June 30,
1999 2000
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 414,019 $ 506,614
Short-term investments 290,122 130,061
Accounts receivable, net 331,104 378,246
Investments in corporate equity securities 260,664 121,479
Deferred income taxes -- 52,804
Other current assets 63,467 92,591
----------- -----------
Total current assets 1,359,376 1,281,795
Property and equipment, at cost 359,549 378,144
Less accumulated depreciation and amortization (187,056) (206,368)
----------- -----------
172,493 171,776
Investments 67,852 160,187
Deferred income taxes 18,774 28,628
Capitalized software, less accumulated amortization 27,286 20,134
Other assets 42,097 46,161
----------- -----------
Total assets $ 1,687,878 $ 1,708,681
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,555 $ 57,047
Accrued liabilities 121,434 106,802
Accrued compensation and related expenses 130,245 132,582
Income taxes payable 19,055 33,230
Deferred income taxes 23,945 --
Deferred revenues 429,929 436,643
----------- -----------
Total current liabilities 752,163 766,304
Long-term debt 69,000 69,000
Other long-term liabilities 14,050 8,960
Long-term deferred revenues 88,046 84,474
Commitments and contingencies (see notes)
Stockholders' equity:
Common stock 2,709 2,779
Additional paid-in capital 538,643 607,887
Accumulated other comprehensive income 143,298 56,575
Retained earnings 79,969 112,702
----------- -----------
Total stockholders' equity 764,619 779,943
----------- -----------
Total liabilities and stockholders' equity $ 1,687,878 $ 1,708,681
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1999 2000 1999 2000
--------- --------- --------- ---------
Revenues:
License fees $ 79,979 $ 109,833 $ 178,706 $ 200,068
Services 275,053 280,963 525,883 543,015
Development and other services 5,649 29,358 6,201 52,490
--------- --------- --------- ---------
Total revenues 360,681 420,154 710,790 795,573
Costs and Expenses:
Cost of license fees 9,637 7,828 22,144 18,261
Cost of services 147,312 149,435 286,162 292,722
Cost of development services 5,236 26,644 5,647 47,741
Sales and marketing 100,548 112,059 204,317 198,589
Product development 76,140 84,237 143,101 164,136
General and administrative 23,751 23,802 46,058 49,436
Restructuring charges 3,089 -- 7,444 --
Contribution to Momentum Business Applications -- -- 176,409 --
--------- --------- --------- ---------
Total costs and expenses 365,713 404,005 891,282 770,885
--------- --------- --------- ---------
Operating (loss) income (5,032) 16,149 (180,492) 24,688
Other income, net 4,525 8,187 11,973 25,864
--------- --------- --------- ---------
(Loss) income before income taxes (507) 24,336 (168,519) 50,552
Provision for income taxes 35 8,388 3,239 17,819
--------- --------- --------- ---------
Net (loss) income $ (542) $ 15,948 $(171,758) $ 32,733
========= ========= ========= =========
Basic (loss) income per share $ (0.00) $ 0.06 $ (0.66) $ 0.12
Shares used in basic per share computation 262,481 277,053 260,137 275,814
--------- --------- --------- ---------
Diluted (loss) income per share $ (0.00) $ 0.06 $ (0.66) $ 0.12
Shares used in diluted per share computation 262,481 280,609 260,137 281,574
--------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements.
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PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months Ended June 30, 1999 2000
--------- ---------
Operating activities:
Net (loss) income $(171,758) $ 32,733
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 45,606 41,013
Provision for doubtful accounts 3,242 247
Gain on sales of investments and loss on disposition of property and
equipment, net -- (8,587)
Restructuring charges and other non-cash items 2,228 (1,334)
Changes in operating assets and liabilities:
Accounts receivable 14,577 (54,014)
Cash received from sales of accounts receivable 22,931 22,617
Accounts payable and accrued liabilities (19,515) (1,919)
Accrued compensation and related expenses 19,492 2,337
Income taxes payable (21,150) 14,175
Deferred income taxes (7,727) (35,638)
Deferred revenues 20,925 3,142
Other assets and liabilities (22,028) (31,668)
--------- ---------
Net cash used in operating activities (113,177) (16,896)
Investing activities:
Purchase of investments available for sale (187,408) (200,172)
Proceeds from maturities and sales of investments available for sale 197,551 232,411
Proceeds from maturities of investments held to maturity 22,521 46,610
Purchase of property and equipment (23,724) (29,229)
Additions to capitalized software (1,926) --
Proceeds from sale of acquired software -- 5,592
Acquisitions -- (7,509)
--------- ---------
Net cash provided by investing activities 7,014 47,703
Financing activities:
Net proceeds from sale of common stock and exercise of stock options 36,752 55,866
Tax benefits from exercise of stock options 3,626 7,712
Distribution of Momentum Business Applications shares (78,622) --
Payments on capital leases (115) (101)
--------- ---------
Net cash (used in) provided by financing activities (38,359) 63,477
Effect of foreign exchange rate changes on cash (2,126) (1,689)
--------- ---------
Net (decrease) increase in cash and cash equivalents (146,648) 92,595
Cash and cash equivalents at beginning of period 531,722 414,019
--------- ---------
Cash and cash equivalents at end of period $ 385,074 $ 506,614
========= =========
Supplemental disclosures:
Cash paid for interest $ 1,893 $ 2,007
Cash paid for income taxes, net of refunds $ 28,736 $ 25,197
========= =========
See accompanying notes to condensed consolidated financial statements
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PEOPLESOFT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The information for the three- and six-month periods ended June 30, 1999
and 2000 is unaudited but includes all adjustments (consisting only of normal,
recurring adjustments) that 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 periods. Despite
management's best effort to establish good faith estimates and assumptions, and
to manage the achievement of the same, actual results may differ. Certain
prior-period amounts have been reclassified to conform to the current period
presentation.
The Company merged with The Vantive Corporation ("Vantive") on December
31, 1999. This merger was accounted for using the pooling of interests method of
accounting and therefore the condensed consolidated financial statements reflect
the combined financial position, operating results and cash flows of PeopleSoft
and Vantive as if they had been combined for all periods presented.
The results of operations of Momentum Business Applications, Inc.
("Momentum Business Applications") were consolidated with the results of
operations of the Company through March 15, 1999. The Condensed Consolidated
Statement of Operations for the six-month period ended June 30, 1999 includes
Momentum Business Application's results through March 15, 1999.
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 Stockholders (Form 10-K) for the year ended December
31, 1999. 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's rules and regulations. Interim results of operations
for the three- and six-month periods ended June 30, 2000 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 (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the period.
Diluted income per share is computed by dividing net income by the sum of
weighted average number of common shares outstanding and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the shares issuable upon the exercise of stock options, warrants and
convertible subordinated notes (using the treasury stock method).
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The following table sets forth the computation of basic and diluted
income (loss) per share.
(In thousands, except per share amounts) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1999 2000 1999 2000
--------- --------- --------- ---------
Numerator:
Net (loss) income $ (542) $ 15,948 $(171,758) $ 32,733
Denominator:
Denominator for basic (loss) income per share --
weighted average shares outstanding 262,481 277,053 260,137 275,814
Employee stock options -- 3,556 -- 5,760
Denominator for diluted (loss) income per share --
adjusted weighted average shares outstanding
assuming exercise of common equivalent shares 262,481 280,609 260,137 281,574
--------- --------- --------- ---------
Basic (loss) income per share $ (0.00) $ 0.06 $ (0.66) $ 0.12
--------- --------- --------- ---------
Diluted (loss) income per share $ (0.00) $ 0.06 $ (0.66) $ 0.12
========= ========= ========= =========
Approximately 20.0 million shares of weighted average common stock
equivalents at prices ranging from $15.00 to $46.50 and 8.9 million shares of
weighted average common stock equivalents at prices ranging from $19.17 to
$46.50 were excluded in the computation of diluted earnings per share during the
three- and six-month periods ended June 30, 2000 because the options' exercise
prices were greater than the average market price of the common shares during
the period. Common stock equivalents were not included in the calculation of
diluted loss per share during the three and six months ended June 30, 1999
because they would have a dilutive effect on the loss per share. Approximately
51.5 million and 47.1 million shares of weighted average common stock
equivalents at prices ranging from $0.001 and $46.50 were outstanding during the
three and six month periods ended June 30, 1999.
3. COMPREHENSIVE LOSS
The components of comprehensive loss, net of taxes, were as follows:
(in thousands) Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 2000 1999 2000
--------- --------- --------- ---------
Net (loss) income $ (542) $ 15,948 $(171,758) $ 32,733
Other comprehensive (loss) income:
Net change in unrealized gain on
investments available-for-sale -- (43,571) -- (85,034)
Foreign currency translation 401 (2,223) (2,124) (1,689)
--------- --------- --------- ---------
Comprehensive loss $ ( 141) $ (29,846) $(173,882) $ (53,990)
========= ========= ========= =========
4. INVESTMENTS IN CORPORATE EQUITY SECURITIES
The Company has classified certain investments in Internet start-up
companies as investments available for sale, included in "Investments in
corporate equity securities" in the accompanying condensed consolidated balance
sheets. Realized gains on the sale of these investments for the three- and
six-month periods ended June 30, 2000 were $0 and $9.5 million. The aggregate
fair value of corporate equity securities held at June 30, 2000, was $121.5
million. Gross unrealized gains were $102.3 million as of June 30, 2000, and are
included, net of deferred income taxes of $39.4 million, as a component of
"Accumulated other comprehensive income" in the accompanying condensed
consolidated balance sheets. The unrealized holding gains relate to one
investment in equity securities in a company that completed its public offering
in the third quarter of 1999. These securities are subject to lock-up
provisions, which expire in August 2000. Subsequent to June 30, 2000, the
Company sold a portion of these marketable equity securities, which generated
gross gains of more than $50 million.
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5. FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company enters into
forward foreign exchange contracts and interest rate contracts to manage certain
exposures to fluctuations in foreign exchange and interest rates. The Company
has written policies that place all foreign currency forward transactions under
the direction of corporate treasury and restrict all derivative transactions to
those intended for hedging purposes.
Forward Foreign Exchange Contracts
The Company has a foreign exchange hedging program designed to mitigate
the potential for future adverse impact on intercompany balances due to changes
in foreign currency exchange rates. The program uses forward foreign currency
exchange contracts as the vehicle for hedging these intercompany balances. The
Company uses two multinational banks for substantially all of these contracts.
In general, these contracts have terms of three months or less. Gains and losses
on the settled contracts are included in "Other income, net" and are recognized
in the current period, consistent with the period in which the gain or loss of
the underlying transaction is recognized. During the three-month periods ended
June 30, 1999 and 2000 the Company recorded net gains from these settled
contracts and underlying foreign currency exposures that were insignificant and
$1.3 million. During the six-month periods ended June 30, 1999 and 2000 the
Company recorded a net loss of approximately $(0.4) million and a gain of
approximately $2.4 million, from these settled contracts and underlying foreign
currency exposures. At June 30, 2000, the Company had outstanding forward
exchange contracts totaling $65.2 million, to exchange Euros ($56.5 million),
Singapore dollars ($7.7 million), South African rands ($0.1 million), Swiss
francs ($2.8 million), New Zealand dollars ($0.7 million), Hong Kong dollars
($0.4 million) and Canadian dollars ($1.7 million) for U.S. dollars, and to
exchange U.S. dollars for Australian dollars ($0.6 million) and British pounds
($4.1 million). Each of these contracts had maturity dates through July 2000 and
a book value that approximates fair value. The cost and the fair value of these
foreign currency exchange contracts was not material at June 30, 2000.
Interest Rate Contracts
Starting June 2000, the Company has entered into interest rate swap
agreements to reduce the impact of changes in interest rates on its $70.0
million floating rate synthetic lease obligation. The interest rate on the
synthetic lease obligation is a floating rate, currently LIBOR plus 1%, that at
the Company's election resets on a 1, 2, 3, or 6-month interval. At June 30,
2000, the Company had one outstanding interest rate swap agreement with a
commercial bank, having a total notional principal amount of $44.0 million. This
agreement effectively changes the Company's interest rate exposure on the $44.0
million due 2003 to a fixed 7.1225%. The interest rate contract matches the
underlying terms of the synthetic lease obligation.
Concentrations of Credit Risk
The Company does not have a concentration of credit or operating risk in
any one industry or any one geographic region within or outside of the United
States.
6. TRANSFER OF FINANCIAL ASSETS
The Company transfers accounts receivable under certain software license
agreements with customers to financial institutions. 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" ("SFAS 125").
As of June 30, 2000, the Company had servicing obligations related to
approximately $8.7 million of accounts receivable that had been sold under these
arrangements. In the event that these receivables are not fully repaid to the
financial institution, the Company could be obligated to pay up to ten percent
of the amount of the accounts receivable.
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7. RESTRUCTURING AND EXIT CHARGES
In the first quarter of 1999, the Company adopted a restructuring plan
and incurred a pretax restructuring charge of $4.4 million. PeopleSoft
eliminated approximately 430 redundant and unnecessary positions, primarily in
the U.S., in the administration, sales support, and marketing support areas. All
severance costs associated with this restructuring were paid in 1999 and were
funded through operating cash flow.
During the second and third quarters of 1999, Vantive, which
subsequently merged with the Company, adopted a restructuring plan and incurred
pretax charges of $4.3 million to implement a restructuring program aimed at
reducing its cost structure. The restructuring charges consisted primarily of
write-offs of operating assets associated with the termination of certain
projects and relationships that were inconsistent with changes in the
operational direction of Vantive. Additional charges were associated with
employee severance. As a result of these restructuring actions, five U.S.
employees separated from Vantive, including the former chief executive officer
and chief operating officer. Approximately $0.7 million of the restructuring
charges were cash charges, substantially paid in 1999 and funded through
operating cash flow. The remaining $3.7 million represented fixed asset
write-downs in the amount of $3.0 million, non-cash compensation expense in the
amount of $0.5 million and write-off of the remaining unamortized goodwill
attributable to the Wayfarer acquisition in the amount of $0.2 million.
In the fourth quarter of 1999, the Company incurred a pretax exit charge
of $34.1 million resulting from the merger of PeopleSoft and Vantive. The exit
charge included employee severance, write-off of duplicative equipment and other
fixed assets, costs associated with the elimination of excess facilities, and
costs to terminate contracts with third parties that provide redundant or
conflicting services. Approximately 44 redundant positions in the U.S.,
primarily in the management and administration areas, were eliminated. At June
30, 2000, a total of 43 employees had separated from the Company.
The following table sets forth the components of the Company's
restructuring reserves as of June 30, 2000, which are included in "Accrued
liabilities."
(In thousands) Employee Asset
Costs Write-Downs Leases Other Total
-------- ----------- -------- -------- --------
Balance December 31, 1999 $ 4,168 $ 1,536 $ 5,870 $ 11,535 $ 23,109
Cash payments (2,883) -- (702) (653) (4,238)
Non-cash items -- (840) -- -- (840)
-------- -------- -------- -------- --------
Balance June 30, 2000 $ 1,285 $ 696 $ 5,168 $ 10,882 $ 18,031
======== ======== ======== ======== ========
8. COMMITMENTS AND CONTINGENCIES
Beginning on January 29, 1999, a series of class action lawsuits were
filed in the United States District Court for the Northern District of
California against the Company and certain of its officers and directors,
alleging violations of Section 10(b) of the Securities Exchange Act of 1934. The
actions were consolidated in June 1999 under the name of the lead case Suttovia
v. Duffield, et al., C 99-0472. Following appointment of lead plaintiffs under
the provisions of the Private Securities Litigation Reform Act, a consolidated
amended complaint was filed on December 6, 1999 (the "Consolidated Complaint").
The Consolidated Complaint named the Company and David Duffield, Albert
Duffield, Ronald Codd, Kenneth Morris, Margaret Taylor, Aneel Bhusri, James
Bozzini, Cyril Yansouni and George Still as defendants.
The Consolidated Complaint purported to bring claims on behalf of all
purchasers of PeopleSoft common stock during the period April 22, 1997 to
January 28, 1999. The Consolidated Complaint alleged that PeopleSoft
misrepresented, inter alia, the degree of market acceptance of its products, the
technical capabilities of its products, the success of certain acquisitions it
had made, and the anticipated financial performance of the Company in fiscal
1999. The Consolidated Complaint abandoned all of the allegations in the
original complaints concerning alleged accounting improprieties, including
claims of improper
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accounting related to the Company's write-downs for "in process research and
development" in connection with various acquisitions, and improper accounting
related to the Company's spin-off of Momentum Business Applications, Inc.
(Momentum had been a named defendant in the original actions, but was eliminated
as a defendant when the Consolidated Complaint was filed).
On February 10, 2000, the defendants filed motions to dismiss the
Consolidated Complaint. The motions were heard on May 4, 2000. On May 26, 2000,
following post-hearing submissions, the Court entered an order: a) dismissing
all claims against defendants Albert Duffield, Kenneth Morris, Margaret Taylor,
Aneel Bhusri, James Bozzini, George Still and Cyril Yansouni, without leave to
amend; b) dismissing all claims relating to the time period prior to May 27,
1998; c) denying the motion to dismiss as to various forward-looking statements
allegedly made by the Company between May 27, 1998 and January 28, 1999; and d)
limiting the class period for which claims may be asserted to the same time
period. A First Amended Complaint was filed on June 12, 2000. The Court has set
a case management schedule pursuant to which the Company will be required to
provide discovery to plaintiffs prior to December 29, 2000. A final pre-trial
conference will be held on March 12, 2001. The Company believes it has valid
defenses to the claims that have not already been dismissed by the Court.
However, no assurance can be given that if there is an unfavorable resolution of
the litigation, there would not be a material adverse impact on the Company's
future financial position or results of operations or cash flows. However, the
Company has in place insurance that would be available in the event of an
adverse result to cover at least a portion of any amounts determined to be
payable, subject to a deductible.
On June 30, 2000, a stockholder derivative lawsuit was filed in the
California Superior Court, County of Alameda, entitled Marble v. Duffield, et
al., naming as defendants David Duffield, Kenneth Morris, Margaret Taylor,
Albert Duffield, Ronald Codd, Cyril Yansouni, Aneel Bhusri, George Still, James
Bozzini and George Battle. The action alleges that the defendants breached their
fiduciary duties and engaged in alleged acts of insider trading when they sold
stock while failing to disclose material adverse information allegedly in their
possession. The suit seeks unspecified damages, treble damages and attorneys
fees. The action is based on many of the same allegations that are the subject
of the securities class action litigation pending in federal district court,
including many allegations that already have been dismissed in the federal
action. The Company believes that the derivative claims are not proper due to
plaintiffs' failure to make pre-suit demand on the Company as required by law,
and intends to file a motion dismissing the litigation on those grounds.
The Company is party to various legal disputes and proceedings arising
from the ordinary course of general business activities. In the opinion of
management, resolution of these matters is not expected to have a material
adverse effect on the financial position, results of the operations and cash
flows of the Company. However, depending on the amount and the timing, an
unfavorable resolution of some or all of these matters could materially affect
the Company's future results of operations or cash flows in a particular period.
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9. SEGMENT AND GEOGRAPHIC AREAS
Based on the criteria of Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
("SFAS 131"), which establishes standards for the way in which public companies
disclose certain information about operating segments in the Company's financial
reports, the Company identified its chief executive officer ("CEO") as the chief
operating decision maker. During the six month period ended June 30, 2000, the
Company's CEO evaluated revenue performance based on two segments: North
America, which includes the U.S. and Canada, and International, which includes
all other geographic regions. Employee headcount and operating costs are managed
by functional areas, rather than by revenue segments, and are only reviewed by
the CEO on a company-wide basis. In addition, the Company does not account for
or report to the CEO its assets or capital expenditures by any other segment.
Thus, the Company is not required to disclose any additional information
pursuant to SFAS 131. The accounting policies for each of the reportable
segments shown below are the same as those described in the summary of
significant accounting policies.
The following table presents a summary of operating information and
certain balance sheet information by operating segment for the periods
presented.
(In thousands) Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
Revenues from unaffiliated customers
North America $ 281,240 $ 329,271 $ 577,539 $ 628,761
International 79,441 90,883 133,251 166,812
----------- ----------- ----------- -----------
Consolidated $ 360,681 $ 420,154 $ 710,790 $ 795,573
=========== =========== =========== ===========
Operating (loss) income
North America $ (17,400) $ (9,407) $ (198,441) $ (11,110)
International 12,368 25,556 17,949 35,798
----------- ----------- ----------- -----------
Consolidated $ (5,032) $ 16,149 $ (180,492) $ 24,688
=========== =========== =========== ===========
Identifiable assets
North America $ 1,285,693 $ 1,483,969 $ 1,285,693 $ 1,483,969
International 149,875 224,712 149,875 224,712
----------- ----------- ----------- -----------
Consolidated $ 1,435,568 $ 1,708,681 $ 1,435,568 $ 1,708,681
=========== =========== =========== ===========
Revenues from Europe represented 14% and 13% of total revenues for the
three-month periods ended June 30, 1999 and 2000. Revenues from Europe
represented 11% and 12% of total revenues for the six-month periods ending June
30, 1999 and June 30, 2000.
10. REVENUE RECOGNITION
PeopleSoft adopted Statement of Position ("SOP") 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions",
on January 1, 2000 and has changed certain business policies to meet the
requirements of this SOP.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") and amended it in March and June 2000 with respect to the effective
dates. PeopleSoft is required to adopt the provisions of SAB 101 in its fourth
fiscal quarter of 2000 and is currently in the process of assessing the impact
of its adoption. While SAB 101 does not supersede the software industry specific
revenue recognition guidance, which the Company believes it is in compliance
with, once complete guidance is disseminated, SAB 101 may change current
interpretations of software revenue recognition requirements, which could result
in PeopleSoft recording a cumulative effect of a change in accounting principles
in the fourth quarter of 2000, retroactive to January 1, 2000 and could require
PeopleSoft to defer revenue recognized during the first two quarters of 2000
into subsequent periods.
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of the Company's expectations regarding future
trends affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Future results are subject to risks and uncertainties, which could cause
actual results and performance to differ significantly from those contemplated
by the forward-looking statements. For a discussion of factors that could affect
future results, see " Factors That May Affect Future Results and Market Price of
Stock." Forward-looking statements contained throughout this Report include but
are not limited to those identified with a footnote (1) symbol. The Company
undertakes no obligation to update the information contained in this Item 2.
As more fully described in the "Merger" section of the Management's
Discussion and Analysis of financial condition and Results of Operations
included in the 1999 Annual Report on Form 10-K, PeopleSoft, Inc. ("PeopleSoft")
merged with The Vantive Corporation ("Vantive") on December 31, 1999. The
condensed consolidated financial statements for the three- and six-month periods
ended June 30, 1999 included in this report on Form 10-Q have been prepared
following the pooling of interests method of accounting and therefore reflect
the combined operating results and cash flows of PeopleSoft and Vantive as if
they had been combined for the prior-year periods presented. Certain prior
period amounts have been reclassified to conform to the current period
presentation. The management's discussion and analysis of financial condition
and results of operations that follows is also based on the assumption that
PeopleSoft and Vantive were combined for the three- and six-month periods ended
June 30, 1999.
RESULTS OF OPERATIONS
The following table sets forth, the percentage of dollar change period
over period and the percentage of total revenues represented by certain line
items in the Company's condensed consolidated statements of operations, for the
three- and six-month periods ended June 30, 1999 and 2000.
Three months ended June 30, Six months ended June 30,
------------------------------------- ----------------------------------------
Percentage of Percentage of Percentage of Percentage of
Dollar Change Total Revenues Dollar Change Total Revenues
2000/1999 1999 2000 2000/1999 1999 2000
-------------- ---- ---- ---------- ---- ----
Revenues:
License fees ............................. 37% 22% 26% 12% 25% 25%
Services ................................. 2 76 67 3 74 68
Development and other services ........... * 2 7 * 1 7
--- --- --- --- --- ---
Total revenues ................... 16 100 100 12 100 100
=== === === === === ===
Costs and expenses:
Cost of license fees ..................... (19)% 3% 2% (18)% 3% 2%
Cost of services ......................... 1 41 36 2 40 37
Cost of development services ............. * 1 6 * 1 6
Sales and marketing ...................... 11 28 27 (3) 29 25
Product development ...................... 11 21 20 15 20 21
General and administrative ............... 0 7 6 7 6 6
Restructuring charges .................... n/a 1 n/a n/a 1 n/a
Contribution to Momentum
Business Applications ............... n/a n/a n/a n/a 25 n/a
--- --- --- --- --- ---
Total costs and expenses ......... 10 101 96 (14) 125 97
=== === === === === ===
Operating (loss) income .................... * (1)% 4% (114)% (25)% 3%
--- --- --- --- --- ---
Other income, net .......................... 81 1 2 116 2 3
--- --- --- --- --- ---
Provision for income taxes ................. * 0 2 * 0 2
=== === === === === ===
*Not meaningful
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REVENUES
Revenue from license fees increased by 37%, from $80.0 million in the
second quarter of 1999 to $109.8 million in the second quarter of 2000. The
increase in revenue from license fees was primarily the result of increased
license fees from the Company's Enterprise Resource Planning ("ERP") back office
products and an increase in license fees of the Company's CRM and supply chain
management products. During the second quarter of 1999, due to uncertainties
arising from product related issues, the Company deferred revenue totaling
approximately $10.0 million for two business units. For the year-to-date period,
revenue from license fees increased by 12% from $178.7 million during the
six-month period ended June 30, 1999 to $200.1 million during the six-month
period ended June 30, 2000. The increase in revenue from license fees during the
year-to-date period was primarily the result of an increase in license fees from
the Company's supply chain management products and an increase in license fees
for the Company's ERP back office products.
At December 31, 1999 and June 30, 2000, the Company had deferred license
revenue in the amount of $70.8 million and $57.6 million. The deferred license
revenue balances do not include items which are both deferred and unbilled. The
Company's practice is to net such deferred items against the related receivable
balances. As of December 31, 1999 and June 30, 2000, $37.0 million and $58.9
million in unbilled receivables was netted against deferred license revenue.
Revenue from services increased by 2% from $275.1 million in the second
quarter of 1999 to $281.0 million in the second quarter of 2000. The change in
services revenue during the second quarter of 2000 when compared to the second
quarter of 1999 resulted primarily from an increase in maintenance revenue in
the amount of $21.4 million, partially offset by decreases in training revenue
of $11.9 million and consulting revenue of $3.5 million. On a sequential basis,
revenue from training services was essentially flat; revenue from consulting
services increased by 11%. Due to factors such as changes in deferred revenue
balances, we cannot give you assurance that revenue from consulting services
will continue to increase. Revenue from services as a percentage of total
revenues was 76% and 67% for the quarters ended June 30, 1999 and 2000. The
decrease in service revenue as a percentage of total revenues during the second
quarter of 2000 reflects primarily the change in revenue mix during the quarter,
which includes revenue from development services in the amount of $29.4 million
compared to $5.6 million in the prior-year quarter and 37% increase in license
revenue. Excluding revenues from development services, revenue from services
would have been 72% of total revenues. For the year-to-date period, revenue from
services increased by 3% from $525.9 million, or 74% of total revenues, in the
prior year period to $543.0 million, or 68% of total revenues, in the current
year-to-date period. An increase in revenue from maintenance services in the
amount of $40.3 million was partially offset by decreases in revenue from
training services in the amount of $20.7 million and consulting services in the
amount of $2.5 million. If PeopleSoft is not successful in expanding its
consulting and training services, total revenues for the Company could be
adversely impacted in the future(1).
Revenue from development services increased from $5.6 million during the
second quarter of 1999 to $29.4 million during the second quarter of 2000. Per
the terms of the development agreement with Momentum Business Applications, Inc.
("Momentum"), the Company performs development services on behalf of Momentum;
Momentum pays one hundred and ten percent (110%) of the Company's fully burdened
costs relating to the research and development provided by the Company. Cost of
development services increased from $5.2 million during the second quarter of
1999 to $26.6 million during the second quarter of 2000. The first quarter of
1999 was the first quarter of Momentum's existence and since then, many more
projects have been undertaken by Momentum. The Company also charges Momentum a
quarterly administrative fee of $0.1 million. For the year-to-date period,
revenue from development services increased from $6.2 million during the six
months ended June 30, 1999 to $52.5 million during the
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(1) Forward-Looking Statement
12
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six months ended June 30, 2000; cost of development services increased from $5.6
million during the six-month period ended June 30, 1999 to $47.7 million during
the same period in the current year. Cost of development services for the six
months ended June 30, 2000 includes approximately $2.3 million of third-party
royalty costs for technology that will be incorporated into products developed
by Momentum. During the third quarter of 2000, the Company expects revenues from
development services to increase; but in the fourth quarter of 2000, with the
anticipated general availability of PeopleSoft 8, the Company expects revenues
from development services to decrease from the third quarter of 2000.
Total revenues increased by 16% from $360.7 million in the second
quarter of 1999 to $420.2 million in the second quarter of 2000. The increase in
total revenues during the quarter is primarily attributable to the $29.9 million
increase in revenue from license fees and the $23.7 million increase in revenue
from development services. For the year-to-date period, total revenues increased
by 12% from $710.8 million during the six months ended June 30, 1999 to $795.6
million during the six months ended June 30, 2000. The year-to-date increase is
attributable to an increase of $46.3 million in revenue from development
services, an increase in revenue from license fees of $21.4 million and an
increase in revenue from services of $17.1 million.
Revenues by Segment
At June 30, 2000, the Company is organized by geographic areas, in two
operating segments: North America, which includes operations in the U.S. and
Canada, and International, which includes operations in all other regions.
During the second quarter of 2000, revenues from the North America
segment increased by 17% from $281.2 million, or 78% of total revenues, in the
second quarter of 1999 to $329.3 million, or 78% of total revenues, in the
second quarter of 2000. The quarter-over-quarter increase was primarily
attributable to an increase in revenues from development services in the amount
of $23.7 million and an increase in license revenues in the amount of $22.2
million. For the year-to-date period, revenues from the North America segment
increased by 9% from $577.5 million, or 81% of total revenues, to $628.8
million, or 79% of total revenues. The year-to-date increase in revenues from
the North America segment is primarily the result of the increase in revenues
from development services, which increased by $46.3 million.
Revenues from the International segment increased by 14% from $79.4
million, or 22% of total revenues, in the second quarter of 1999 to $90.9
million, or 22% of total revenues, in the second quarter of 2000. Within the
International segment, revenues from Europe represented 14% and 13% of total
revenues during the second quarter of 1999 and the second quarter of 2000, where
the Company experienced growth in revenues from services compared to the
prior-year quarter. For the year-to-date period, revenues from the International
segment increased by 25% from $133.3 million, or 19% of total revenues, during
the six months ended June 30, 1999 to $166.8 million, or 21% of total revenues,
during the same period in the current year. Revenues from Europe represented 11%
and 12% of total revenues during the year-to-date period. The year-to-date
increase in revenues from the International segment is primarily due to
increases in revenues from the Europe and Latin America regions.
COSTS AND EXPENSES
Cost of license fees consists principally of royalties, technology
access fees for certain third-party software products and amortization of
capitalized software costs. Cost of license fees decreased from $9.6 million in
the second quarter of 1999 to $7.8 million in the second quarter of 2000,
representing 3% and 2% of total revenues. Cost of license fees represented 12%
of license fee revenues in the second quarter of 1999 and 7% of license fee
revenues in the second quarter of 2000. During the six months ended June 30,
1999 and 2000, cost of license fees decreased from $22.1 million to $18.3
million, representing 3% and 2% or total revenues and 12% and 9% of license
revenues. The quarter-to-date and year-to-date decrease in cost of license fees
was due in part to resolution of a royalty liability of $2.4 million, where
payment was no longer required. Royalties associated with certain software
products currently under development by joint business arrangements and charges
associated with software products and technologies acquired from
- ---------------------------------
(1) Forward-Looking Statement
13
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various third-party vendors may cause the cost of license fees to increase in
future periods in dollar amount and as a percentage of license fee revenues(1).
The Company's products are based on a combination of internally developed
technology and application products, as well as bundled third-party products and
technology. Cost of license fees as a percentage of license fee revenues will
likely 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(1).
Cost of services consists primarily of employee-related costs and other
expenses incurred to provide consulting and installation services, customer care
center administrative support, account management field support, training, and
product support. These costs increased from $147.3 million in the second quarter
of 1999 to $149.4 million in the second quarter of 2000, representing 41% and
36% of total revenues and 54% and 53% of service revenues. Cost of services for
the year-to-date period increased from $286.2 million during the six months
ended June 30, 1999 to $292.7 million during the six months ended June 30, 2000,
representing 40% and 37% of total revenues and 54% of service revenues in each
of those periods. The dollar increase in cost of services during the quarter and
year-to-date periods is consistent with the increase in services revenue. The
Company anticipates cost of services will increase in dollar amount, and may
increase as a percentage of service revenues and total revenues in future
periods(1).
Sales and marketing expenses increased from $100.5 million in the second
quarter of 1999 to $112.1 million in the second quarter of 2000, representing
28% and 27% of total revenues in each of those quarters. The increase was
primarily attributable to an increase in advertising expenses and sales
compensation costs during the quarter. For the year-to-date period, sales and
marketing expense decreased from $204.3 million for the six months ended June
30, 1999 to $198.6 million during the six months ended June 30, 2000. The
increase in advertising expenses during the second quarter of 2000 partially
offset the decrease in sales and marketing expenses during the first quarter of
2000, which resulted in part from a decrease in consulting services related to
sales support. Sales and marketing expenses may increase in dollar amount and as
a percentage of total revenues in future periods as the Company increases its
sales force and marketing and advertising expenses in support of the anticipated
general availability of PeopleSoft 8 and the recently acquired CRM product
line(1).
Software product development expenditures consist of costs related to
the Company's staff of software developers and outside consultants, and the
associated infrastructure costs required to support software product development
initiatives. Software product development expenses increased from $76.1 million
in the second quarter of 1999 to $84.2 million in the second quarter of 2000,
representing 21% and 20% of total revenues in each of those quarters. The
Company's research and development staff consisted of 1,624 and 2,006 employees
as of June 30, 1999 and June 30, 2000. For the year-to-date period, product
development expenses increased from $143.1 million during the six months ended
June 30, 1999 to $164.1 million for the six months ended June 30, 2000. The
Company's current focus in application development is to complete its next major
release, PeopleSoft 8, which is expected to be the first pure HTML internet
client offering from the Company, and includes internet technologies, such as
XML, publish-subscribe and business interlink(1). In addition to this major
technology shift, the Company expects to deliver enhanced functionality in its
core products and a number of new applications, mostly focused on eCommerce and
Internet collaboration(1). The Company expects that the dollar amount invested
in software product development expenses will continue to increase during the
third quarter of 2000 as the Company continues to invest in expanded
functionality across all of its software product offerings, including global
product requirements and industry specific requirements(1). There can be no
assurance that such development efforts will result in products, features or
functionality or that software products, features or functionality that are
developed will be accepted by the market.
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(1) Forward-Looking Statement
14
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General and administrative expenses were $23.8 million during the second
quarter of 1999 and second quarter of 2000, representing 7% and 6% of total
revenues. An increase in amortization of goodwill and value of workforce of
approximately $1.9 million was offset by various decreases in other areas,
including the favorable resolution of a contract liability with a business
partner. For the year-to-date period, general and administrative expenses were
$46.1 million for the six months ended June 30, 1999 and $49.4 million for the
six months ended June 30, 2000. The year to date dollar increase is primarily
due to an increase in amortization of goodwill and value of workforce of $3.9
million resulting from the TriMark and Distinction acquisitions in May and
August of 1999.
RESTRUCTURING AND EXIT CHARGES
During the first quarter of 1999, the Company adopted a restructuring
plan and incurred a pretax restructuring charge of $4.4 million. PeopleSoft
eliminated approximately 430 redundant and unnecessary positions, primarily in
the U.S. in the administration, sales support, and marketing support areas. All
severance costs associated with this restructuring were paid in 1999 and were
funded through operating cash flow.
During the second and third quarters of 1999, Vantive, which
subsequently merged with the Company, adopted a restructuring plan and incurred
pretax charges of $4.3 million to implement a restructuring program aimed at
reducing its cost structure. The restructuring charges consisted primarily of
write-offs of operating assets associated with the termination of certain
projects and relationships that were inconsistent with changes in the
operational direction of Vantive. Additional charges were associated with
employee severance. As a result of these restructuring actions, five U.S.
employees separated from Vantive, including the former chief executive officer
and chief operating officer. Approximately $0.7 million of the restructuring
charges were cash charges, substantially paid in 1999 and funded through
operating cash flow. The remaining $3.7 million represented fixed asset
write-downs in the amount of $3.0 million, non-cash compensation expense in the
amount of $0.5 million and write-off of the remaining unamortized goodwill
attributable to the Wayfarer acquisition in the amount of $0.2 million.
In the fourth quarter of 1999, the Company incurred a pretax exit charge
of $34.1 million resulting from the merger of PeopleSoft and Vantive. The exit
charge included employee severance, write-off of duplicative equipment and other
fixed assets, costs associated with the elimination of excess facilities, and
costs to terminate contracts with third parties that provide redundant or
conflicting services. Approximately 44 redundant positions in the U.S.,
primarily in the management and administration areas, were eliminated. At June
30, 2000, a total of 43 employees had separated from the Company.
The following table sets forth the components of the Company's
restructuring reserves as of June 30, 2000, which are included in "Accrued
liabilities" in the accompanying condensed consolidated balance sheets.
(in millions) Employee Asset
Costs Write-Downs Leases Other Total
-------- ----------- ----- ----- -----
Balance December 31, 1999 ......... $ 4.2 $ 1.5 $ 5.9 $11.5 $23.1
Cash payments .................. (2.9) -- (0.7) (0.6) (4.2)
Non-cash items ................. -- (0.8) -- -- (0.8)
----- ----- ----- ----- -----
Balance June 30, 2000 ............. $ 1.3 $ 0.7 $ 5.2 $10.9 $18.1
===== ===== ===== ===== =====
CONTRIBUTION TO MOMENTUM BUSINESS APPLICATIONS
During 1998, PeopleSoft formed Momentum Business Applications, Inc.
("Momentum"), a research and development company designed to develop eBusiness,
analytic applications and industry-specific software products. All of the
outstanding shares of Momentum Class A Common Stock were transferred to a
custodian on December 31, 1998 and distributed as a dividend to holders of
PeopleSoft Common Stock during January 1999. Prior to the distribution,
PeopleSoft contributed $250.0 million to Momentum. PeopleSoft consolidated
Momentum into its financial statements for the fourth quarter of 1998. However,
during the first quarter of 1999, Momentum no longer met the requirements for
consolidation. As a result, the Company incurred a charge of $176.4 million,
which represents the $250.0 million contribution less a $78.6 million dividend
recorded as of December 31, 1998, investment banker fees of $2.9 million, other
expenses related to the formation of Momentum, and expenses incurred by Momentum
while consolidated with the Company.
15
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OTHER INCOME, NET
"Other income, net," which includes interest income, interest expense
and other, increased from $4.5 million in the second quarter of 1999 to $8.2
million in the second quarter of 2000, and from $12.0 million in the six months
ended June 30, 1999 to $25.9 million during the six months ended June 30, 2000.
The increase during the quarter was primarily the result of an increase in
interest income. The year-to-date increase was primarily the result of $9.5
million in gains on the sale of corporate equity securities during the first
quarter of 2000 and an increase in interest income. See also "Investments in
Corporate Equity Securities and Unrealized Gains."
PROVISION FOR INCOME TAXES
The Company's income tax provision increased from an insignificant
amount in the three-month period ended June 30, 1999 to $8.4 million for the
same period in 2000 and increased from $3.2 million in the six-month period
ended June 30, 1999 to $17.8 million for the same period in 2000. The effective
tax rate was 38.1% and 34.5% for the six months ended June 30, 1999 and June 30,
2000, excluding the impact of the charges related to Momentum and the
restructuring charges occurring in the first half of 1999 as well as the impact
of the gain on sale of marketable equity securities in the first quarter of
2000. The 2000 rate is lower than the 1999 rate mainly due to the statutory
extension of the research and development credit. The net deferred tax assets at
June 30, 2000 were $81.4 million. The valuation of these net deferred tax assets
is based on historical tax positions and expectations about future taxable
income.
NET INCOME (LOSS) PER SHARE
Diluted net income (loss) per share increased from an insignificant loss
per share in the second quarter of 1999 to net income of $0.06 per share in the
second quarter of 2000. Weighted average shares outstanding used in the
calculation of diluted net income (loss) per share were 262.5 million for the
second quarter of 1999 compared to 280.6 million for the second quarter of 2000.
Net loss for the second quarter of 1999 included $3.1 million for restructuring
charges. Diluted net income (loss) per share for the year-to-date period
increased from a net loss of $(0.66) for the six months ended June 30, 1999 to
$0.12 for the six months ended June 30, 2000. Net loss for the six months ended
June 30, 1999 included pretax charges of $176.4 million for the contribution to
Momentum Business Applications and $7.4 million for restructuring charges. Net
income for the six months ended June 30, 2000 included a pretax gain on the sale
of corporate equity securities in the amount of $9.5 million. Weighted average
shares outstanding, used in the calculation of diluted net income (loss) per
share, were 260.1 million for the six months ended June 30, 1999 compared to
281.6 million for the six months ended June 30, 2000. Shares outstanding during
2000 might be impacted by the following factors: (i) 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; (ii) the issuance of
common stock associated with stock option exercises and the employee stock
purchase plan; (iii) the issuance of common stock to effect business
combinations, should the Company enter into such transactions; and (iv)
potential conversion of subordinated notes into common stock of the Company(1).
INVESTMENTS IN CORPORATE EQUITY SECURITIES AND UNREALIZED GAINS
The Company has classified certain investments in Internet start-up
companies as investments available for sale, included in "Investments in
corporate equity securities" in the accompanying condensed consolidated balance
sheets. Realized gains on the sale of these investments for the three- and
six-month periods ended June 30, 2000 were $0 and $9.5 million. The aggregate
fair value of corporate equity securities held at June 30, 2000, was $121.5
million. Gross unrealized gains were $102.3 million as of June 30, 2000, and are
included, net of deferred income taxes of $39.4 million, as a component of
"Accumulated other comprehensive income" in the accompanying condensed
consolidated balance sheets. The unrealized
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(1) Forward-Looking Statement
16
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holding gains relate to one investment in equity securities in a company that
completed its public offering in the third quarter of 1999. These securities are
subject to lock-up provisions, which expire in August 2000. Subsequent to June
30, 2000, the Company sold a portion of these marketable equity securities,
which generated gross gains of more than $50 million. The stock market is highly
volatile, as a result, we cannot give you assurance that the additional
unrealized holding gains as of June 30, 2000 will be realized, and we may even
incur losses on our remaining holdings(1).
NEWLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") and amended it in March and June 2000 with respect to the effective
dates. PeopleSoft is required to adopt the provisions of SAB 101 in its fourth
fiscal quarter of 2000 and is currently in the process of assessing the impact
of its adoption. While SAB 101 does not supersede the software industry specific
revenue recognition guidance, which the Company believes it is in compliance
with, once complete guidance has been disseminated, SAB 101 may change current
interpretations of software revenue recognition requirements, which could result
in PeopleSoft recording a cumulative effect of a change in accounting principles
in the fourth quarter of 2000 retroactive to January 1, 2000 and could require
PeopleSoft to defer revenue recognized during the first two quarters of 2000
into subsequent periods.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had $515.5 million in working capital,
including $506.6 million in cash and cash equivalents and $130.1 million in
short-term investments, consisting principally of investments in
interest-bearing demand deposit accounts with various financial institutions,
tax-advantaged money market funds and highly liquid debt and equity securities
of corporations, municipalities and the U.S. Government. The Company believes
that the combination of cash and cash equivalents and short-term investment
balances, issuance of stock under the employee purchase plan and stock option
exercises, proceeds from sale of strategic equity security investments, and
potential cash flow from operations will be sufficient to satisfy its operating
cash requirements and expected purchases of property and equipment at least
through the next twelve months(1).
The following table summarizes the Company's cash flows from operating,
investing and financing activities.
Six Months Ended June 30, 1999 2000
(in millions) ------- -------
Net cash (used in) provided by:
Operating activities ................................................. $(113.2) $ (17.0)
Investing activities ................................................. 7.0 47.8
Financing activities ................................................. (38.4) 63.5
Effect of exchange rate changes on cash and cash equivalents ......... (2.1) (1.7)
------- -------
(Decrease) increase in cash and cash equivalents ......................... $(146.7) $ 92.6
======= =======
Net cash used in operating activities was $113.2 and $17.0 million
during the six-month periods ended June 30, 1999 and 2000. Cash used in
operating activities for the first six months of 1999 resulted primarily from
the net loss for the period, which included the $176.4 contribution to Momentum
Business Applications, plus a decrease in income taxes payable of approximately
$21.1 million and an increase in
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(1) Forward-Looking Statement
17
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other assets and liabilities of approximately $22.0 million, all of which were
partially offset by non-cash charges of approximately $51.1 million, including
amortization and depreciation, a decrease in accounts receivable of
approximately $37.5 million and an increase in deferred revenues of
approximately $20.9 million. Excluding the contribution to Momentum Business
Applications, operating activities provided cash of approximately $63.2 million.
The cash used in operating activities during the six months ended June 30, 2000
was primarily the result of net income of $32.7 million plus non-cash items
totaling approximately $31.3 million, including depreciation and amortization,
and an increase in income taxes payable of approximately $14.2 million, offset
by an increase in accounts receivable of approximately $31.4 million, a decrease
in deferred income taxes of approximately $35.6 million and an increase in other
assets and liabilities of approximately $31.7 million.
Net cash provided by investing activities was $7.0 million during the
six-month period ended June 30, 1999 and $47.7 million during the six-month
period ended June 30, 2000. The Company's principal source of cash from
investing activities in the six-month period ended June 30, 1999 included net
proceeds from maturities of investments in the amount of $32.7 million, which
were partially offset by purchases of property and equipment in the amount of
$23.7 million. The Company's principal source of cash from investing activities
during the six-month period ended June 30, 2000 was net proceeds from maturities
and sales of investments of $78.9 million, which were partially offset by
purchases of property and equipment in the amount of $29.2 million.
Net cash used in financing activities during the six-month period ended June 30,
1999 was $38.4 million compared to net cash provided by financing activities
during the six-month period ended June 30, 2000, in the amount of $63.5 million.
The principal use of cash for financing activities during the six months ended
June 30, 1999 was the Company's distribution of $78.6 million in Momentum
Business Applications shares to PeopleSoft stockholders, which was partially
offset by proceeds from the exercise of common stock options by employees and
issuance of stock under the employee stock purchase program in the amount of
$36.8 million. The principal source of cash provided by financing activities
during the six-month period ended June 30, 2000 was proceeds from the exercise
of common stock options by employees and issuance of stock under the employee
stock purchase program in the amount of $55.9 million .
ITEM 3 - FINANCIAL RISK MANAGEMENT
FOREIGN EXCHANGE RISK
During the six months ended June 30, 1999 and 2000, the Company's
revenue originating outside the United States was 23% and 24% of total revenues,
including revenues generated in Europe of 11% and 12% of total revenues during
the same periods. Revenues from all other geographic regions were less than 10%
of total revenues. 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 incur most of their
expenses in the local currency as well.
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, local
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company could experience a material adverse effect on its business and
results of operations arising from its foreign operations.
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The Company's exposure to foreign exchange rate fluctuations arises in
part from intercompany accounts in which the 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(1).
The Company has a foreign exchange hedging program designed to mitigate
the potential for future adverse impact on intercompany balances due to changes
in foreign currency exchange rates. The program uses forward foreign currency
exchange contracts as the vehicle for hedging these intercompany balances. The
Company uses two multinational banks for substantially all of these contracts.
In general, these contracts have terms of three months or less. Gains and losses
on the settled contracts are included in "Other income, net" and are recognized
in the current period, consistent with the period in which the gain or loss of
the underlying transaction is recognized. During the three-month periods ended
June 30, 1999 and 2000 the Company recorded net gains from these settled
contracts and underlying foreign currency exposures that were insignificant and
$1.3 million. During the six-month periods ended June 30, 1999 and 2000 the
Company recorded a net loss of approximately $(0.4) million and a gain of
approximately $2.4 million, respectively, from these settled contracts and
underlying foreign currency exposures. At June 30, 2000, the Company had
outstanding forward exchange contracts totaling $65.2 million, to exchange Euros
($56.5 million), Singapore dollars ($7.7 million), South African rands ($0.1
million), Swiss francs ($2.8 million), New Zealand dollars ($0.7 million), Hong
Kong dollars ($0.4 million) and Canadian dollars ($1.7 million) for U.S.
dollars, and to exchange U.S. dollars for Australian dollars ($0.6 million) and
British pounds ($4.1 million). Each of these contracts had maturity dates
through July 2000 and a book value that approximates fair value. The cost and
the fair value of these foreign currency exchange contracts was not material at
June 30, 2000.
The foreign exchange hedging program is managed in accordance with a
corporate policy approved by the Company's Board of Directors. In addition to
hedging existing transactional exposures, the Company's foreign exchange
management policy allows for the hedging of anticipated transactions, and
exposure resulting from the translation of foreign subsidiary financial results
into U.S. dollars. Such hedges can only be undertaken to the extent that the
exposures are highly certain, reasonably estimatable, and significant in amount.
No such hedges have been undertaken through June 30, 2000.
INTEREST RATE RISK
The Company invests its cash in a variety of financial instruments,
consisting principally of investments in interest-bearing demand deposit
accounts with financial institutions, tax-advantaged money market funds and
highly liquid debt and equity securities of corporations, municipalities and the
U.S. Government. 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.
The Company accounts for its cash equivalents and investments under
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). The Company classifies
debt and preferred equity securities based on management's intention on the date
of purchase and reevaluates such designation as of each balance sheet date. Debt
securities which management has the intent and ability to hold to maturity are
classified as held to maturity and reported at amortized cost. All other debt
and equity securities are classified as available for sale and carried at fair
value with net unrealized gains and losses included in "Accumulated other
comprehensive income", net of tax.
Investments in both fixed rate and floating rate interest earning
instruments carries a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
- ---------------------------------
(1) Forward-Looking Statement
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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 may suffer losses in principal if forced to sell securities
which have seen a decline in market value due to changes in interest rates(1).
The Company's investments are made in accordance with an investment
policy approved by the Board of Directors. At June 30, 2000, the average
maturity of the Company's investment securities was approximately eight months.
All investment securities had maturities of less than two years. The following
table presents certain information about the financial instruments held by the
Company at June 30, 2000 that are sensitive to changes in interest rates. These
instruments are not leveraged and are held for purposes other than trading. The
Company believes its investment 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. The
average interest rates below reflect a weighted average rate for both taxable
investments and tax-exempt investments. Below is a tabular presentation of the
maturity profile of the Company's investment securities held at June 30, 2000.
Expected Maturity
As of June 30, 2000 -------------------------
(in millions) One Year or More than Principal Fair
Less One year Amount Value
----------- --------- --------- -------
Available-for-sale securities .......... $ 272.9 $ 160.3 $ 433.3 $ 433.1
Weighted average interest rate ......... 4.52% 4.18%
======= =======
The Company enters into interest rate contracts to manage certain
exposures to fluctuations in interest rates. Starting June 2000, the Company has
entered into interest rate swap agreements to reduce the impact of changes in
interest rates on its $70.0 million floating rate synthetic lease obligation.
The interest rate on the synthetic lease obligation is a floating rate,
currently LIBOR plus 1%, that at the Company's election resets on a 1, 2, 3, or
6-month interval. At June 30, 2000, the Company had one outstanding interest
rate swap agreement with a commercial bank, having a total notional principal
amount of $44.0 million. That agreement effectively changes the Company's
interest rate exposure on the $44.0 million due 2003 to a fixed 7.1225%. The
interest rate contract matches the underlying terms of the synthetic lease
obligation.
In August 1997, the Company issued an aggregate of $69.0 million in
principal amount of convertible subordinated notes, due August 2002, to certain
investors. These notes bear interest at a rate of 4.75% per annum and are
convertible into the Company's common stock at the investor's option at any time
at a conversion price equal to $50.82 per share. Based on the traded yield to
maturity, the approximate fair market value of the convertible subordinated
notes was $59.3 million and $60.8 million as of December 31, 1999 and June 30,
2000.
EQUITY INVESTMENT RISK
The Company has classified certain investments in Internet start-up
companies as investments available for sale, included in "Investments in
corporate equity securities" in the accompanying condensed consolidated balance
sheets. Realized gains on the sale of these investments for the three- and
six-month periods ended June 30, 2000 were $0 and $9.5 million. The aggregate
fair value of corporate equity securities held at June 30, 2000, was $121.5
million. Gross unrealized gains were $102.3 million as of June 30, 2000, and are
included, net of deferred income taxes of $39.4 million, as a component of
"Accumulated other comprehensive income" in the accompanying condensed
consolidated balance sheets. The unrealized holding gains relate to one
investment in equity securities in a company that completed its public offering
in the third quarter of 1999. These securities are subject to lock-up
provisions, which expire in August 2000. Subsequent to June 30, 2000, the
Company sold a portion of these marketable equity securities, which generated
gross gains of approximately $53.0 million. The stock market is highly volatile,
as a result, we cannot give you assurance that the additional unrealized holding
gains as of June 30, 2000 will be realized, and we may even incur losses on our
remaining holdings(1).
- ---------------------------------
(1) Forward-Looking Statement
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FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
The Company has identified certain forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this Form 10-Q 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 included in this report on Form 10-Q
and Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1999 contained in the Company's 1999
Annual Report to Stockholders on Form 10-K.
GENERAL AVAILABILITY, MARKET ACCEPTANCE AND SUPPORT OF PEOPLESOFT 8 MAY NOT
OCCUR OR BE SUCCESSFUL
Over the past two years, PeopleSoft concentrated most of its product
development efforts on PeopleSoft 8, the Company's next release of its core
Enterprise Resource Planning ("ERP") applications. PeopleSoft 8 marks a
fundamental, generational change in architecture from a traditional
client-server architecture to PeopleSoft's new Internet Architecture, the first
pure HTML server-centric development platform delivered by a major enterprise
application company. If the Company's development efforts are not successful or
PeopleSoft 8 is released with significant undetected problems, PeopleSoft may
need to spend additional resources to complete the product or only have its
prior client server based ERP products available for sale. Even when
PeopleSoft completes development of PeopleSoft 8, we cannot give you assurance
that the market will accept 100 percent Internet based ERP applications. The
Company is at risk for low or slow acceptance of this new type of software. If
the marketplace does not accept PeopleSoft 8, PeopleSoft will only have its
prior client server based ERP products available for sale, and PeopleSoft's
revenues could be adversely impacted.
In additional to the significant resources utilized in the development of
PeopleSoft 8, PeopleSoft has spent and committed significant resources to plan
and implement programs to market, sell, install and support PeopleSoft 8. If
the general availability of PeopleSoft 8 is delayed versus the anticipated
release date, we can not give you assurance that the Company will not lose
certain license transactions to customers who are not willing to wait for the
completion of the products and PeopleSoft's revenues during the time it takes
to complete the products and after, could be adversely impacted. The Company is
training its services personnel and business partners to provide installation
and support services to new clients and clients who upgrade to PeopleSoft 8.
However, we cannot give you assurance that this training will be complete by
the time PeopleSoft 8 becomes available. If demand for PeopleSoft 8 is greater
than expected, we cannot give you assurance that our services organization will
be able to implement and support PeopleSoft 8 in a timely manner and as a
result, revenues could be adversely impacted.
PEOPLESOFT'S CONTINUED SUCCESS DEPENDS UPON ITS ABILITY TO RETAIN AND ATTRACT A
SUFFICIENT NUMBER OF QUALIFIED EMPLOYEES.
PeopleSoft believes that its future success will depend in large part
upon its ability to attract, train and retain highly skilled technical,
managerial, sales and marketing personnel. Although PeopleSoft invests
significant resources in recruiting and retaining employees, competition for
personnel in the software industry is intense, and, at times, PeopleSoft has had
difficulty locating highly qualified candidates within desired geographic
locations, or with certain industry-specific domain expertise. If PeopleSoft's
competitors increase their use of non-compete agreements, the pool of available
sales and technical personnel may further narrow in certain areas, even if the
non-compete agreements are ultimately unenforceable. PeopleSoft may grant large
numbers of options or other stock-based awards to attract and retain personnel,
which could be highly dilutive to PeopleSoft stockholders. The failure to
attract, train,
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retain and effectively manage employees could increase PeopleSoft's costs, hurt
PeopleSoft's development and sales efforts and cause a degradation of
PeopleSoft's customer service.
During the last two years, PeopleSoft has experienced turnover of
several senior executives. PeopleSoft has hired or promoted qualified candidates
to fill these positions. However, since the employees are new to the positions,
it is possible that the newly hired or promoted employees will not easily
transition into these leadership roles or be able to successfully lead
PeopleSoft in its efforts to grow the company. In addition, uncertainty created
by turnover of key employees could cause fluctuations in PeopleSoft's stock
price and further turnover of PeopleSoft employees.
PEOPLESOFT COULD EXPERIENCE FLUCTUATIONS IN QUARTERLY OPERATING RESULTS WHICH
COULD ADVERSELY IMPACT ITS STOCK PRICE.
PeopleSoft's revenues and results of operations are difficult to predict
and may fluctuate substantially from quarter to quarter. License revenues in any
quarter depend substantially upon PeopleSoft's total contracting activity and
its ability to recognize revenues in that quarter in accordance with its revenue
recognition policies.
PeopleSoft's contracting activity is difficult to forecast for a variety
of reasons, including the following:
- a significant portion of PeopleSoft's license agreements are
completed within the last few weeks of each quarter;
- PeopleSoft's sales cycle is relatively long and increasingly
variable since PeopleSoft has broadened its marketing emphasis
to include software product solutions for a customer's overall
business;
- the size of license transactions can vary significantly;
- the possibility of economic downturns that are characterized by
decreased product demand, price erosion, technological shifts,
work slowdowns and layoffs may substantially reduce contracting
activity;
- customers may unexpectedly postpone or cancel system replacement
or new system evaluations due to changes in their strategic
priorities, project objectives, budgetary constraints or company
management;
- customer evaluations and purchasing processes vary significantly
from company to company, and a customer's internal approval and
expenditure authorization process can be difficult and time
consuming, even after selection of a vendor;
- changes in PeopleSoft's sales incentive plans have had and may
continue to have an unpredictable impact on business patterns;
and
- the number, timing and significance of software product
enhancements and new software product announcements by
PeopleSoft and its competitors may affect purchase decisions.
Several factors may require PeopleSoft to defer recognition of license
revenue for a significant period of time after entering into a license
agreement, including:
- whether the license agreement relates partially or entirely to
then unavailable software products;
- whether enterprise transactions include both currently
deliverable software products and software products that are
under development or other undeliverable elements;
- whether the customer demands services that include significant
modifications, customizations or complex interfaces that could
delay product delivery or acceptance;
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- whether the transaction involves acceptance criteria that may
preclude revenue recognition or if there are identified
product-related issues, such as known defects; and
- whether the transaction involves payment terms or fees that
depend upon contingencies.
Because of the factors listed above and other specific requirements
under GAAP for software revenue recognition, PeopleSoft must have very precise
terms in its license agreements in order to recognize revenue when it initially
delivers software or performs services. Although PeopleSoft has a standard form
of license agreement that meets the criteria under GAAP for current revenue
recognition on delivered elements, it negotiates and revises these terms and
conditions in some transactions. Negotiation of mutually acceptable terms and
conditions can extend the sales cycle, and sometimes PeopleSoft does not obtain
terms and conditions that permit revenue recognition at the time of delivery or
even as work on the project is completed.
Variances or slowdowns in PeopleSoft's prior quarter contracting
activity may impact its consulting, training and maintenance service revenues
since these revenues typically follow license fee revenues. PeopleSoft's ability
to maintain or increase service revenue primarily depends on its ability to
increase the number of its licensing agreements. In particular, the significant
decrease in license revenues in 1999 versus the prior year may have a
significant impact on service revenues and earnings in fiscal 2000.
In addition, PeopleSoft's expense levels, operating costs and hiring
plans are based on projections of future revenues and are relatively fixed. If
PeopleSoft's actual revenues fall below expectations, its net income is likely
to be disproportionately adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS COULD ADVERSELY IMPACT PEOPLESOFT'S
PROFITABILITY BY DELAYING SOME REVENUE RECOGNITION INTO FUTURE PERIODS.
Over the past several years, the American Institute of Certified Public
Accountants issued Statement of Position, or SOP 97-2, "Software Revenue
Recognition," SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition," and SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." These
standards address software revenue recognition matters primarily from a
conceptual level and do not include specific implementation guidance. PeopleSoft
believes that it is currently in compliance with SOPs 97-2,98-4 and SOP 98-9.
PeopleSoft adopted SOP 98-9 on January 1, 2000 and has changed certain business
policies to meet the requirements of this SOP.
The American Institute of Certified Public Accountants has only issued
some implementation guidelines for these standards and the accounting profession
is still discussing a wide range of potential interpretations. These
implementation guidelines, once finalized, could lead to unanticipated changes
in PeopleSoft's current revenue accounting practices that could cause PeopleSoft
to recognize lower profits. As a result, PeopleSoft may change its business
practices significantly in order to continue to recognize a substantial portion
of its license revenues when it delivers its software products. These changes
may reduce demand, extend sales cycles, increase administrative costs and
otherwise adversely affect PeopleSoft.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") and amended it in March and June 2000 with respect to the effective
dates. PeopleSoft is required to adopt the provisions of SAB 101 in its fourth
fiscal quarter of 2000 and is currently in the process of assessing the impact
of its adoption. While SAB 101 does not supersede the software industry specific
revenue recognition guidance, which the Company believes it is in compliance
with, once complete guidance has been disseminated, SAB 101 may change current
interpretations of software revenue recognition requirements, which could result
in PeopleSoft, recording a cumulative effect of a change in accounting
principles in the fourth quarter of 2000 retroactive to January 1, 2000 and
could require PeopleSoft to defer revenue recognized during the first two
quarters of 2000 into subsequent periods.
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PEOPLESOFT HAS RECENTLY EXPANDED ITS TECHNOLOGY INTO SEVERAL NEW BUSINESS AREAS
AND CANNOT BE CERTAIN THAT ITS EXPANSION WILL BE SUCCESSFUL.
PeopleSoft's future success depends on the Internet being accepted and
widely used for commerce. PeopleSoft has recently expanded its technology into a
number of new business areas to foster long-term growth, including electronic
commerce, on-line business services and other products and services that can be
offered over the Internet. These areas are relatively new to PeopleSoft's
product development, sales and marketing personnel and PeopleSoft cannot be
assured that the markets for these products will develop or that it will be able
to compete effectively or will generate significant revenues in these new areas
making PeopleSoft's success in this area is difficult to predict.
PEOPLESOFT'S RECENT AND FUTURE ACQUISITIONS MAY NOT BE SUCCESSFUL.
PeopleSoft may acquire or invest in complementary companies, products
and technologies, and 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 risk that PeopleSoft may not be able to integrate the
acquired technologies or products with its current products and
technologies;
- the potential disruption of PeopleSoft's ongoing business;
- the inability to retain key technical and managerial personnel;
- the inability of management to maximize the financial and
strategic position of PeopleSoft through the successful
integration of acquired businesses;
- adverse impact on PeopleSoft's annual effective tax rate;
- dilution of existing equity holders caused by capital stock
issuances to the stockholders of acquired companies or to retain
employees of the acquired companies;
- difficulty in maintaining controls, procedures and policies;
- potential adverse impact on PeopleSoft's relationships with
partner companies or third-party providers of technology or
products;
- the impairment of relationships with employees and customers;
and
- issues with product quality, product architecture, legal
contingencies, product development issues, or other significant
issues that may not be detected through PeopleSoft's due
diligence process.
In addition, combinations with other companies may not qualify for
pooling of interests accounting, which would require PeopleSoft to use the
purchase method of accounting. The purchase method of accounting for business
combinations may require large write-offs of any in process research and
development costs related to companies being acquired, as well as ongoing
amortization costs for goodwill and other intangible assets valued in the
combinations with companies. Such write-offs and ongoing amortization charges
may have a significant negative impact on operating margins and net income in
the quarter of the combination and for several subsequent years. PeopleSoft may
not be successful in overcoming these risks or any other problems encountered in
connection with such transactions.
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PEOPLESOFT DEPENDS ON THIRD-PARTY TECHNOLOGY THAT COULD RESULT IN INCREASED
COSTS OR DELAYS IN THE PRODUCTION AND IMPROVEMENT OF PEOPLESOFT'S PRODUCTS.
PeopleSoft licenses numerous critical third-party software products that
it incorporates into its own software products. If any of the third-party
software vendors were to change their product offerings or terminate
PeopleSoft's licenses, PeopleSoft might need to incur additional development
costs to ensure continued performance of its products. In addition, if the cost
of licensing any of these third-party software products significantly increases,
PeopleSoft's gross margin levels could significantly decrease.
PeopleSoft relies on existing partnerships with certain other software
vendors who are also competitors. If these vendors change their business
practices in the future, PeopleSoft may be compelled to find alternative vendors
with complementary software, which may not be available on attractive terms, or
may not be as widely accepted or as effective as the software provided by
PeopleSoft's existing vendors.
THE RELATIONSHIP WITH MOMENTUM BUSINESS APPLICATIONS MAY NEGATIVELY IMPACT
PEOPLESOFT BECAUSE PEOPLESOFT GAVE UP SOME CONTROL OVER RESEARCH AND
DEVELOPMENT.
PeopleSoft faces a number of risks as a result of its relationship
with Momentum Business Applications and the distribution of the Momentum
Business Applications Class A Common Stock to PeopleSoft stockholders. These
include:
- PeopleSoft has less control over important research and
development projects. PeopleSoft and Momentum must agree on
project selection, budgets, timetables and specifications for
each project, and Momentum has oversight responsibilities for
the actual product development;
- PeopleSoft could face restrictions on the amount and timing of
its utilization of, or could lose, the tax benefits associated
with the research and development expenditures on the projects
pursued by Momentum; and
- if PeopleSoft chooses to acquire Momentum, it will likely be
required to record significant accounting charges relating to
acquisition of in-process research and development and
amortization of goodwill, which would decrease earnings.
THERE IS INTENSE COMPETITION IN THE INDUSTRY, WHICH REQUIRES THAT PEOPLESOFT
CONSTANTLY CREATE NEW PRODUCTS, IMPROVE ITS EXISTING PRODUCTS AND SELL ITS
PRODUCTS AT COMPETITIVE PRICES.
PeopleSoft competes with a variety of software vendors, including
Internet application vendors in the enterprise application software market
segment, vendors in the manufacturing software application market segment,
vendors in the emerging enterprise resource optimization software solutions
market segment, providers of human resource management system software products,
providers of financial management systems software products, and numerous small
firms that offer products with new or advanced features. As a result, the market
for business application software has been and continues to be intensely
competitive. Some competitors have become more aggressive with their payment
terms and/or issuance of contractual implementation terms or guarantees.
PeopleSoft may be unable to continue to compete successfully with new and
existing competitors without lowering prices or offering other favorable terms.
In addition, PeopleSoft believes it must differentiate itself through
different or more subtle architectural and technological factors.
Some of PeopleSoft's competitors may have an advantage over PeopleSoft
due to their significant worldwide presence, longer operating and product
development history, and substantially greater financial, technical and
marketing resources than PeopleSoft. At least one competitor has a larger
installed base. In addition, Oracle Corporation is a competitor whose relational
database management system underlies a significant portion of PeopleSoft's
installed applications.
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Furthermore, potential customers may consider outsourcing options,
including data center outsourcing and service bureaus, as viable alternatives to
licensing PeopleSoft's software products. PeopleSoft began an outsourcing
partner program in 1999 and began hosting its own service bureau in early 2000,
both of which the Company believes address the needs of the marketplace;
however, these programs may not be successful.
PEOPLESOFT MAY CHANGE PRICING PRACTICES WHICH COULD IMPACT OPERATING MARGINS OR
CUSTOMER ORDERING PATTERNS.
In the future, PeopleSoft may choose to make changes to its pricing
practices. For example, PeopleSoft may offer additional discounts to customers,
reduce transactions that involve a perpetual use license to its software
products, or change maintenance pricing. Such changes could reduce margins or
inhibit PeopleSoft's ability to sell its products.
SERVICES REVENUES CARRY LOWER GROSS MARGINS THAN LICENSE REVENUES AND AN OVERALL
INCREASE IN SERVICES REVENUE AS A PERCENTAGE OF TOTAL REVENUES COULD HAVE AN
ADVERSE IMPACT ON PEOPLESOFT'S BUSINESS.
Because service revenues have lower gross margins than license revenues,
a continued increase in the percentage of total revenue represented by service
revenues could have a detrimental impact on our overall gross margins and could
adversely affect operating results. In addition, PeopleSoft sub-contracts
certain consulting services to third parties which generally carry lower gross
margins than PeopleSoft's service business overall. As a result, PeopleSoft's
gross margins can be negatively impacted based on the percentage of service
revenues as a percentage of total revenue and the mix between services which are
provided by PeopleSoft employees versus services provided by third party
consultants.
IF AN INDUSTRY STANDARD DEVELOPMENT TOOL IS ESTABLISHED, CONFORMANCE TO THE
STANDARD COULD REQUIRE A COSTLY REDESIGN OF EXISTING SOFTWARE PRODUCTS.
PeopleSoft's software products include a suite of proprietary software
development tools, known as PeopleTools, which are fundamental to the effective
use of PeopleSoft's software products. While no industry standard exists for
software development tools, several companies have focused on providing software
development tools and each of them is attempting to establish its software
development tools as the accepted industry standard. If a software product other
than PeopleTools becomes the clearly established and widely accepted industry
standard, PeopleSoft may not be able to respond appropriately or rapidly to the
emergence of an industry standard or might be compelled to abandon or modify
PeopleTools in favor of such an established standard; be forced to redesign its
software products to operate with such third party's software development tools;
or face the potential sales obstacle of marketing a proprietary software product
against other vendors' software products that incorporate a standardized
software development toolset.
PEOPLESOFT'S SIGNIFICANT INTERNATIONAL OPERATIONS AND SALES SUBJECT IT TO RISKS
ASSOCIATED WITH RAPID AND UNEXPECTED GROWTH OUTSIDE OF THE UNITED STATES.
PeopleSoft continues to invest in an effort to enhance its international
operations. The global reach of PeopleSoft's business could cause it to be
subject to unexpected, uncontrollable and rapidly changing events and
circumstances in addition to those experienced in United States locations.
Changes in the following factors, among others, could have an adverse impact on
PeopleSoft's business and earnings:
- conducting business in currencies other than United States
dollars subjects PeopleSoft to factors such as currency controls
and fluctuations in currency exchange rates;
- PeopleSoft may be unable to hedge some transactions because of
uncertainty or the inability to reasonably estimate its foreign
exchange exposure;
- PeopleSoft may hedge some anticipated transactions and
transaction exposures, but could experience losses if exchange
rates move in the opposite direction;
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- differing foreign technical standards;
- increased cost and development time required to localize
PeopleSoft products;
- lack of experience in a particular geographic market;
- regulatory, social, political, labor or economic conditions in a
specific country or region;
- laws, policies and other regulatory requirements affecting trade
and investment including loss or modification of exemptions for
taxes and tariffs, and import and export license requirements;
- exposure to different legal standards; and
- operating costs in many countries are higher than in the United
States.
THE EURO CREATES UNCERTAINTY FOR PEOPLESOFT'S PRODUCT DEVELOPMENT AND AS A
RESULT COULD IMPACT SALES.
PeopleSoft's latest software release contains European Monetary Union,
or EMU, functionality that allows for dual currency reporting and information
management. However, since the Euro will not be the sole legally required
currency in any of the member nations until 2002, it is possible that all issues
related to conversion to EMU have not surfaced yet, and may not have been
adequately addressed. In addition, PeopleSoft's products may be used with
third-party products that may or may not be EMU compliant. Although PeopleSoft
continues to take steps to address the impact, if any, of EMU compliance for
such third-party products, failure of any critical technology components to
operate properly under EMU may adversely affect sales or require PeopleSoft to
incur unanticipated expenses to remedy any problems.
PEOPLESOFT'S CONTINUED GROWTH DEPENDS UPON ITS ABILITY TO BUILD AND MAINTAIN
RELATIONSHIPS WITH THIRD PARTIES.
A key aspect of PeopleSoft's sales and marketing strategy is to build
and maintain strong working relationships with businesses that PeopleSoft
believes play an important role in the successful marketing of its software
products. PeopleSoft's current and potential customers often rely on third-party
system integrators to develop, deploy and manage client/server applications.
PeopleSoft believes that its marketing and sales efforts are enhanced by the
worldwide presence of these companies. However, these companies, most of which
have significantly greater financial and marketing resources than PeopleSoft,
may start, or in some cases increase, the marketing of business application
software in competition with PeopleSoft, or may otherwise discontinue their
relationships with or support of PeopleSoft. If PeopleSoft's partners are unable
to recruit and adequately train a sufficient number of consulting personnel to
support the implementation of PeopleSoft's software products, PeopleSoft may
lose customers. In addition, integrators who generate consulting fees from
customers by providing implementation services may be less likely to recommend
PeopleSoft's software application architecture, including PeopleTools, if these
products are more difficult to install and maintain than competitors' similar
product offerings.
Also, PeopleSoft has in the past, and may in the future, enter into
various development or joint business arrangements to develop new software
products or extensions to its existing software products. Under these joint
business arrangements, PeopleSoft may distribute itself or jointly sell with its
business partners an integrated software product and pay a royalty to the
business partner based on end-user license fees. While PeopleSoft intends to
develop business applications that are integrated with its software products,
these software products may in fact not be integrated or brought to market or
the market may not accept the integrated enterprise solution. As a result,
PeopleSoft may not achieve the revenues that it anticipated at the time it
entered into the joint business arrangement.
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PEOPLESOFT'S SOFTWARE PRODUCTS AND PRODUCT DEVELOPMENT ARE COMPLEX, WHICH MAKES
IT INCREASINGLY DIFFICULT TO INNOVATE, EXTEND ITS PRODUCT OFFERINGS, AND TO
AVOID COSTS RELATED TO CORRECTION OF PROGRAM ERRORS.
The market for PeopleSoft's software products is characterized by rapid
technological change, evolving industry standards, changes in customer
requirements and frequent new product introductions and enhancements.
PeopleSoft's future success will depend in part upon its ability to:
- continue to enhance and expand its core applications;
- continue to provide enterprise solutions;
- continue to successfully integrate third-party products;
- enter new markets; and
- develop and introduce new products that keep pace with
technological developments, including developments related to
the Internet, satisfy increasingly sophisticated customer
requirements and achieve market acceptance. PeopleSoft may not
be able to enhance existing products or develop and introduce
new products in a timely manner.
PeopleSoft's software products can be licensed for use with a variety of
popular industry standard relational database management systems. There may be
future or existing relational database management system platforms that achieve
popularity within the business application marketplace and on which PeopleSoft
may desire to offer its applications. These future or existing relational
database management system products may or may not be architecturally compatible
with PeopleSoft's software product design. PeopleSoft may not be able to develop
software products on additional platforms with the specifications and within the
time frame necessary for market success.
Despite testing by PeopleSoft and by third parties, PeopleSoft's
software programs, like all software programs generally, may contain a number of
undetected errors when they are first introduced or as new releases are
subsequently released. This may result in increased costs to correct such errors
and reduced acceptance of PeopleSoft's software products in the marketplace. The
effort and expense of developing, testing and maintaining software product lines
will increase with the increasing number of possible combinations of:
- vendor hardware platforms;
- operating systems and updated versions;
- PeopleSoft application software products and updated versions;
and
- relational database management system platforms and updated
versions.
Developing consistent software product performance characteristics across all of
these combinations could place a significant strain on PeopleSoft's development
resources and software product release schedules.
PEOPLESOFT RELIES ON CLIENT INTERFACES WHICH COULD NEGATIVELY IMPACT PEOPLESOFT
IF CURRENT OR FUTURE CLIENT INTERFACES ARE NOT COMPATIBLE WITH PEOPLESOFT'S
CURRENT SOFTWARE PRODUCT DESIGN.
For releases prior to PeopleSoft 8, PeopleSoft supports client platforms
using browsers certified to run its Java-based Web client, or Microsoft's
Windows family of software products, including Windows 3.1 (for PeopleSoft
releases prior to Release 6 only), Windows NT, Windows 95, Windows 98 and
Windows 2000. If Microsoft fundamentally changes the architecture of its
software products so that users of PeopleSoft's software applications experience
significant performance degradation or PeopleSoft's software applications become
incompatible with future versions of Microsoft's Windows operating system, it
could cause PeopleSoft to expend significant resources to reconfigure its
products. With PeopleSoft 8 use of a Web browser as the
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user interface replaces the traditional desktop access through networked
Microsoft Windows-based personal computers. Web browser access via the Internet
or an intranet involves numerous risks inherent in using the Internet, including
security, availability and reliability. PeopleSoft may wish to offer its
applications on future or existing user interfaces that achieve popularity
within the business application marketplace. These future or existing user
interfaces may or may not be architecturally compatible with PeopleSoft's
current software product design. PeopleSoft may not be able to support new user
interfaces and achieve market acceptance of new user interfaces that it does
support.
PEOPLESOFT HAS LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS AND MAY POTENTIALLY INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS.
PeopleSoft considers certain aspects of its internal operations,
software and documentation to be proprietary, and relies on a combination of
contract, patent, copyright, trademark and trade secret laws and other measures
to protect this information. Outstanding applications may not result in issued
patents and, even if issued, the patents may not provide any meaningful
competitive advantage. Existing copyright laws afford only limited protection.
PeopleSoft believes that the rapid pace of technological change in the computer
software industry has made trade secret and copyright protection less
significant than factors such as:
- knowledge, ability and experience of PeopleSoft's employees;
- frequent software product enhancements; and
- timeliness and quality of support services.
PeopleSoft's competitors may independently develop technologies that are
substantially equivalent or superior to PeopleSoft's technology. Through an
escrow arrangement, PeopleSoft has granted many of its customers a contingent
future right to use PeopleSoft's source code solely for internal maintenance
services. This possible access to PeopleSoft's source code may increase the
likelihood of misappropriation or other misuse of PeopleSoft's intellectual
property. Finally, the laws of some countries in which PeopleSoft's software
products are or may be licensed do not protect PeopleSoft's software products
and intellectual property rights to the same extent as the laws of the United
States. Defending PeopleSoft's rights could be costly.
Third parties may assert infringement claims against PeopleSoft. These
assertions could distract management, require PeopleSoft to enter into royalty
arrangements, and could result in costly and time consuming litigation,
including damage awards.
PEOPLESOFT MAY EXPERIENCE LIABILITY CLAIMS ARISING OUT OF THE LICENSING OF ITS
SOFTWARE AND PROVISION OF SERVICES.
PeopleSoft's agreements contain provisions designed to limit its
exposure to potential liability claims. However, these provisions could be
invalidated by unfavorable judicial decisions or by federal, state, local or
foreign laws or ordinances. For example, PeopleSoft might not be able to avoid
or limit liability for disputes relating to product performance or the provision
of services. If a claim against PeopleSoft were successful, PeopleSoft might be
required to incur significant expense and pay substantial damages. Even if
PeopleSoft was to prevail, the accompanying publicity could adversely impact the
demand for PeopleSoft's software.
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PEOPLESOFT'S STOCK PRICE IS VOLATILE AND THERE IS A RISK OF LITIGATION.
The trading price of PeopleSoft common stock has in the past and may in
the future be subject to wide fluctuations in response to factors such as the
following:
- revenue or results of operations in any quarter failing to meet
the expectations, published or otherwise, of the investment
community;
- announcements of technological innovations by PeopleSoft or its
competitors;
- new products or the acquisition of significant customers by
PeopleSoft or its competitors;
- developments with respect to patents, copyrights or other
proprietary rights of PeopleSoft or its competitors;
- changes in recommendations or financial estimates by securities
analysts;
- changes in management;
- conditions and trends in the software industry generally;
- the announcement of acquisitions or other significant
transactions by PeopleSoft or its competitors;
- adoption of new accounting standards affecting the software
industry; and
- general market conditions and other factors.
Fluctuations in the price of PeopleSoft's common stock may expose
PeopleSoft to the risk of securities class action lawsuits. As a result of the
significant declines in the price of its common stock during the second half of
fiscal 1998 and the first half of fiscal 1999, several such lawsuits were filed
against PeopleSoft. Although PeopleSoft believes that these lawsuits are without
merit, defending against them could result in substantial costs and divert
management's attention and resources. In addition, any settlement or adverse
determination of these lawsuits could subject PeopleSoft to significant
liabilities. PeopleSoft cannot be assured that there will not be additional
lawsuits in the future.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Beginning on January 29, 1999, a series of class action lawsuits were
filed in the United States District Court for the Northern District of
California against the Company and certain of its officers and directors,
alleging violations of Section 10(b) of the Securities Exchange Act of 1934. The
actions were consolidated in June 1999 under the name of the lead case Suttovia
v. Duffield, et al., C 99-0472. Following appointment of lead plaintiffs under
the provisions of the Private Securities Litigation Reform Act, a consolidated
amended complaint was filed on December 6, 1999 (the "Consolidated Complaint").
The Consolidated Complaint named the Company and David Duffield, Albert
Duffield, Ronald Codd, Kenneth Morris, Margaret Taylor, Aneel Bhusri, James
Bozzini, Cyril Yansouni and George Still as defendants.
The Consolidated Complaint purported to bring claims on behalf of all
purchasers of PeopleSoft common stock during the period April 22, 1997 to
January 28, 1999. The Consolidated Complaint alleged that PeopleSoft
misrepresented, inter alia, the degree of market acceptance of its products, the
technical capabilities of its products, the success of certain acquisitions it
had made, and the anticipated financial performance of the Company in fiscal
1999. The Consolidated Complaint abandoned all of the allegations in the
original complaints concerning alleged accounting improprieties, including
claims of improper accounting related to the Company's write-downs for "in
process research and development" in connection with various acquisitions, and
improper accounting related to the Company's spin-off of Momentum Business
Applications, Inc. (Momentum had been a named defendant in the original actions,
but was eliminated as a defendant when the Consolidated Complaint was filed).
On February 10, 2000, the defendants filed motions to dismiss the
Consolidated Complaint. The motions were heard on May 4, 2000. On May 26, 2000,
following post-hearing submissions, the Court entered an order: a) dismissing
all claims against defendants Albert Duffield, Kenneth Morris, Margaret Taylor,
Aneel Bhusri, James Bozzini, George Still and Cyril Yansouni, without leave to
amend; b) dismissing all claims relating to the time period prior to May 27,
1998; c) denying the motion to dismiss as to various forward-looking statements
allegedly made by the Company between May 27, 1998 and January 28, 1999; and d)
limiting the class period for which claims may be asserted to the same time
period. A First Amended Complaint was filed on June 12, 2000. The Court has set
a case management schedule pursuant to which the Company will be required to
provide discovery to plaintiffs prior to December 29, 2000. A final pre-trial
conference will be held on March 12, 2001. The Company believes it has valid
defenses to the claims that have not already been dismissed by the Court.
However, no assurance can be given that if there is an unfavorable resolution of
the litigation, there would not be a material adverse impact on the Company's
future financial position or results of operations or cash flows. However, the
Company has in place insurance that would be available in the event of an
adverse result to cover at least a portion of any amounts determined to be
payable, subject to a deductible.
On June 30, 2000, a stockholder derivative lawsuit was filed in the
California Superior Court, County of Alameda, entitled Marble v. Duffield, et
al., naming as defendants David Duffield, Kenneth Morris, Margaret Taylor,
Albert Duffield, Ronald Codd, Cyril Yansouni, Aneel Bhusri, George Still, James
Bozzini and George Battle. The action alleges that the defendants breached their
fiduciary duties and engaged in alleged acts of insider trading when they sold
stock while failing to disclose material adverse information allegedly in their
possession. The suit seeks unspecified damages, treble damages and attorneys
fees. The action is based on many of the same allegations that are the subject
of the securities class action litigation pending in federal district court,
including many allegations that already have been dismissed in the federal
action. The Company believes that the derivative claims are not proper due to
plaintiffs' failure to make pre-suit demand on the Company as required by law,
and intends to file a motion dismissing the litigation on those grounds.
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The Company is party to various legal disputes and proceedings arising
from the ordinary course of general business activities. In the opinion of
management, resolution of these matters is not expected to have a material
adverse effect on the financial position, results of the operations and cash
flows of the Company. However, depending on the amount and the timing, an
unfavorable resolution of some or all of these matters could materially affect
the Company's future results of operations or cash flows in a particular period.
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 30, 2000.
(b) Pursuant to the election of the three directors listed
under Item 4(c)(i), Mr. Craig A. Conway, Mr. Cyril J.
Yansouni, and Mr. A. George "Skip" Battle were each
elected as Class II directors for a term of two years.
Mr. David A. Duffield, Mr. George J. Still, Jr., and Mr.
Aneel Bhusri were elected at the prior year's annual
meeting for a term of two years and still continue as
directors. Mr. Steven Goldby was appointed by the Board
of Directors as a Class I director on February 3, 2000.
(c) The Company's stockholders voted the following matters:
(i) Election of three directors. All directors
proposed by management were elected.
NUMBER OF VOTES NUMBER OF VOTES
NAME OF NOMINEE FOR AGAINST
---------------------- --------------- ---------------
Craig A. Conway 238,269,927 1,985,172
Cyril J. Yansouni 202,858,733 1,945,594
A. George "Skip" Battle 203,123,925 2,151,140
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8 - K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8 - K
The Company (the "Registrant") filed a current report on
Form 8-K on June 27, 2000 and reported a change
effective June 21, 2000 in registrant's certifying
accountants, from Ernst & Young LLP to Arthur Andersen
LLP.
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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, 2000
PEOPLESOFT, INC.
By: /s/ STEPHEN F. HILL
----------------------------------------------
Stephen F. Hill
Sr. Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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Index to Exhibits
27.1 Financial Data Schedule