-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CzqnZQUqs6DVZHKsx6llqwnuHcKWHnX2LXCFZZ+2adzuo2TMCUGrDpdRc6BaiDi9 0XVMy1tKZ0NUmvUKgDCZVQ== 0000891618-01-500732.txt : 20010516 0000891618-01-500732.hdr.sgml : 20010516 ACCESSION NUMBER: 0000891618-01-500732 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLESOFT INC CENTRAL INDEX KEY: 0000875570 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 680137069 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20710 FILM NUMBER: 1636603 BUSINESS ADDRESS: STREET 1: 4460 HACIENDA DR POST OFFICE BOX 8015 CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5102253000 MAIL ADDRESS: STREET 1: 4440 ROSEWOOD DRIVE CITY: PLEASANTON STATE: CA ZIP: 94588-3031 10-Q 1 f72075e10-q.txt FORM 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______. Commission File Number: 0-20710 PEOPLESOFT, INC. (Exact name of registrant as specified in its charter) DELAWARE 68-0137069 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 4460 HACIENDA DRIVE, PLEASANTON, CA 94588 (Address of principal executive officers) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 694-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT MAY 08, 2001 ----- --------------------------- Common Stock, par value $0.01........ 293,985,008
================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION ITEM 1 -- Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000........................... 2 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and March 31, 2000........... 3 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and March 31, 2000........... 4 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...................................... 16 PART II OTHER INFORMATION ITEM 1 -- Legal Proceedings.............................................. 28 ITEM 2 -- Changes in Securities and Use of Proceeds...................... 28 ITEM 3 -- Defaults upon Senior Securities................................ 28 ITEM 4 -- Submission of Matters to a Vote of Security Holders............ 28 ITEM 5 -- Other Information.............................................. 28 ITEM 6 -- Exhibits and Reports on Form 8-K............................... 28 SIGNATURES............................................................... 29
1 3 PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS PEOPLESOFT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
MARCH 31, 2001 DECEMBER 31, 2000 (UNAUDITED) ------------ ------------ ASSETS Current assets: Cash and cash equivalents .................................... $ 337,078 $ 646,605 Short-term investments ....................................... 718,842 354,074 Accounts receivable, net ..................................... 429,651 449,036 Investment in corporate equity securities .................... 7,969 8,241 Income taxes receivable ...................................... 20,083 31,652 Deferred tax assets .......................................... 63,913 59,214 Other current assets ......................................... 73,938 67,109 ------------ ------------ Total current assets ..................................... 1,651,474 1,615,931 Property and equipment, at cost ................................... 459,945 443,629 Less accumulated depreciation and amortization ........... (248,281) (234,443) ------------ ------------ 211,664 209,186 Investments ....................................................... 99,223 95,650 Non-current deferred tax assets ................................... 19,043 19,121 Capitalized software, less accumulated amortization ............... 6,528 7,369 Other assets ...................................................... 35,600 37,893 ------------ ------------ Total assets ............................................. $ 2,023,532 $ 1,985,150 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................. $ 36,910 $ 35,163 Accrued liabilities .......................................... 160,955 141,743 Accrued compensation and related expenses .................... 135,465 158,623 Income taxes payable ......................................... 6,709 5,059 Deferred revenues ............................................ 415,198 429,554 ------------ ------------ Total current liabilities ................................ 755,237 770,142 Long-term deferred revenues ....................................... 103,005 100,858 Long-term debt .................................................... 57,000 68,000 Other liabilities ................................................. 21,203 21,795 Commitments and contingencies (see notes) Stockholders' equity: Common stock ................................................. 2,912 2,880 Additional paid-in capital ................................... 857,334 813,551 Treasury stock ............................................... (15,000) (15,000) Retained earnings ............................................ 261,718 225,660 Accumulated other comprehensive loss ......................... (19,877) (2,736) ------------ ------------ Total stockholders' equity ............................... 1,087,087 1,024,355 ------------ ------------ Total liabilities and stockholders' equity ............... $ 2,023,532 $ 1,985,150 ============ ============
See accompanying notes to condensed consolidated financial statements. 2 4 PEOPLESOFT, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
THREE MONTHS ENDED MARCH 31, 2001 2000 ---------------------------- ------------ ------------ REVENUES: License fees ................................ $ 153,278 $ 90,235 Services .................................... 319,089 262,052 Development and other services .............. 30,721 23,132 ------------ ------------ Total revenues ......................... 503,088 375,419 COSTS AND EXPENSES: Cost of license fees ........................ 16,268 10,433 Cost of services ............................ 173,692 143,287 Cost of development and other services ...... 27,894 21,097 Sales and marketing expense ................. 126,184 86,530 Product development expense ................. 79,040 79,899 General and administrative expense .......... 33,879 25,634 ------------ ------------ Total costs and expenses ............... 456,957 366,880 ------------ ------------ Operating income ................................. 46,131 8,539 Other income, net ................................ 8,920 17,677 ------------ ------------ Income before provision for income taxes .... 55,051 26,216 Provision for income taxes ....................... 18,993 9,431 ------------ ------------ Net income ....................................... $ 36,058 $ 16,785 ============ ============ Basic income per share ........................... $ 0.12 $ 0.06 Shares used in basic per share computation ....... 290,187 273,661 ============ ============ Diluted income per share ......................... $ 0.11 $ 0.06 Shares used in diluted per share computation ..... 315,011 291,953 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 5 PEOPLESOFT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
THREE MONTHS ENDED MARCH 31, 2001 2000 ---------------------------- ------------ ------------ OPERATING ACTIVITIES: Net income .............................................................. $ 36,058 $ 16,785 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ..................................... 19,735 23,150 Provision for doubtful accounts ................................... 9,396 247 Benefit for deferred income taxes ................................. (5,003) (24,537) Gain on sales of investments and disposition of property and ...... (1,835) (8,016) equipment, net Non-cash stock compensation ....................................... 705 - Changes in operating assets and liabilities: Accounts receivable ............................................. 2,186 (8,467) Cash received from sales of accounts receivable ................. - 13,920 Accounts payable and accrued liabilities ........................ 15,256 13,765 Accrued compensation and related expenses ....................... (21,388) (1,621) Income taxes receivable, net .................................... 13,315 3,166 Tax benefits from exercise of stock options ..................... 2,801 4,274 Deferred revenues ............................................... (7,465) 5,788 Other current and noncurrent assets and liabilities ............. (6,912) (16,718) ------------ ------------ Net cash provided by operating activities ......................... 56,849 21,736 INVESTING ACTIVITIES: Purchase of available-for-sale investments .............................. (1,669,407) (84,784) Proceeds from maturities and sales of available-for-sale investments .... 1,299,505 103,587 Proceeds from maturities of held-to-maturity investments ................ - 37,836 Purchase of property and equipment ...................................... (20,371) (9,703) Acquisitions, net of cash acquired ...................................... (296) - ------------ ------------ Net cash (used in) provided by investing activities ............... (390,569) 46,936 FINANCING ACTIVITIES: Net proceeds from sale of common stock and exercise of stock options .... 40,309 37,550 Repurchase of long-term debt ............................................ (10,542) - ------------ ------------ Net cash provided by financing activities ......................... 29,767 37,550 Effect of foreign exchange rate changes on cash and cash equivalents .... (5,574) 534 ------------ ------------ Net (decrease) increase in cash and cash equivalents .................... (309,527) 106,756 Cash and cash equivalents at beginning of period ........................ 646,605 414,019 ------------ ------------ Cash and cash equivalents at end of period .............................. $ 337,078 $ 520,775 ============ ============ SUPPLEMENTAL DISCLOSURES: Cash paid for interest ............................................... $ 1,774 $ 852 Cash paid for income taxes ........................................... $ 5,349 $ 21,468 ============ ============
See accompanying notes to condensed consolidated financial statements. 4 6 PEOPLESOFT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The information for the three months ended March 31, 2001 and March 31, 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 accompanying interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2000. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. Interim results of operations for the three months ended March 31, 2001 are not necessarily indicative of operating results or performance levels that can be expected for the full fiscal year. 2. PER SHARE DATA Basic income per share is computed by dividing net income 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, convertible subordinated notes and from withholdings associated with our employee stock purchase plan, using the treasury stock method. The following table sets forth the computation of basic and diluted income per share.
THREE MONTHS ENDED MARCH 31, 2001 2000 ------------ ------------ (In thousands, except per share amounts) NUMERATOR: Net income ............................................. $ 36,058 $ 16,785 DENOMINATOR: Denominator for basic income per share - weighted average shares outstanding .............. 290,187 273,661 Employee stock options ................................ 24,640 18,274 Other ................................................. 184 18 ------------ ------------ Denominator for diluted income per share - Adjusted weighted average shares outstanding assuming exercise of common equivalent shares .. 315,011 291,953 ============ ============ Basic income per share ..................................... $ 0.12 $ 0.06 Diluted income per share ................................... $ 0.11 $ 0.06 ============ ============
5 7 Approximately 1.2 million shares of weighted average common stock equivalents at prices ranging from $37.19 to $46.50 were excluded from the computation of diluted earnings per share for the three months ended March 31, 2001 because the options' exercise prices were greater than the average market price of the common shares during the period. 3. FINANCIAL INSTRUMENTS Derivative financial instruments are utilized by the Company to reduce foreign currency exchange and interest rate risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not hold any derivative financial instruments for trading or speculative purposes. Derivative transactions are restricted to those intended for hedging purposes. Change in Accounting Effective January 1, 2001, the Company adopted the Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in "Accumulated other comprehensive loss." 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 exchange contracts as the vehicle for hedging significant intercompany balances. The Company uses two multinational banks for substantially all of these contracts. The Company has not designated the derivatives used in the foreign exchange hedging program as cash flow or fair value hedges under SFAS 133. In general, these contracts have terms of three months or less. These contracts are recorded on the balance sheet at fair value. Changes in fair value of the contracts and the intercompany balances being hedged are included in "Other income, net." To the extent these contracts do not completely hedge the intercompany balances, the net impact is recognized in "Other income, net." The foreign currency hedging program is managed in accordance with a corporate policy approved by the Company's Board of Directors. During the three months ended March 31, 2001 and March 31, 2000 the Company recorded net losses of $0.7 million and $1.1 million from these settled contracts and underlying foreign currency exposures. At March 31, 2001, the Company had outstanding forward exchange contracts to exchange Euros ($2.0 million), Singapore dollars ($1.2 million), Chilean pesos ($0.5 million), Japanese yen ($0.3 million), and Hong Kong dollars ($1.4 million) for U.S. dollars and to exchange U.S. dollars for Swiss francs ($0.7 million), South African rand ($0.7 million), Australian dollars ($0.5 million) and British pounds ($3.6 million). Each of these contracts had maturity dates of April 30, 2001 and a book value that approximates fair value. Both the cost and the fair value of these forward exchange contracts were not material at March 31, 2001. Interest Rate Swap Transactions In June 2000, the Company entered into interest rate swap transactions to manage its exposure to interest rate changes on facility lease obligations. The swaps involve the exchange of fixed and variable interest rate payments without exchanging the notional principal amount. The swaps have an aggregate notional amount of $175.0 million and mature at various dates in 2003, consistent with the maturity dates of the facility leases. Under these agreements, the Company 6 8 receives a variable rate based on the 3 month LIBOR set on the last day of the previous quarter and pays a weighted average fixed rate of 6.80%. These swaps are considered to be a hedge against changes in amount of future cash flows, therefore the $7.5 million unrealized loss as of March 31, 2001 resulted in a $7.5 million increase in "Accumulated other comprehensive loss." Derivative losses included in "Accumulated other comprehensive loss" of $3.9 million are estimated to be reclassified into earnings during the next twelve months based upon a 12 month forward LIBOR rate. Concentrations of Credit Risk The Company believes it does not have a concentration of credit or operating risk in any one investment, industry or geographic region within or outside of the United States. 4. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss), net of tax, were as follows:
THREE MONTHS ENDED MARCH 31, 2001 2000 ------------ ------------ (In thousands) Net income ............................................ $ 36,058 $ 16,785 ============ ============ Other comprehensive income (loss): Net change in unrealized gain on available-for-sale investments ........... (1,183) (41,463) Foreign currency translation .................... (8,467) 534 Interest rate swap transactions: Cumulative effect of accounting change ..... (2,648) - Net unrealized loss on cash flow hedges .... (5,002) - Reclassification adjustment for earnings recognized during the quarter ............ 159 - ------------ ------------ Comprehensive income (loss) ........................... $ 18,917 $ (24,144) ============ ============
5. RESTRUCTURING AND EXIT CHARGES The following table sets forth the Company's restructuring reserves as of March 31, 2001, which are included in "Accrued liabilities."
(In thousands) LEASES OTHER TOTAL ------------ ------------ ------------ Balance December 31, 2000 ......... $ 4,520 $ 5,884 $ 10,404 Cash payments ............... (641) - (641) ------------ ------------ ------------ Balance March 31, 2001 ............ $ 3,879 $ 5,884 $ 9,763 ============ ============ ============
6. 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 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 7 9 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, and George Still, 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 set a case management schedule pursuant to which the Company was required to provide discovery to plaintiffs prior to May 11, 2001. On February 16, 2001, PeopleSoft agreed to a tentative settlement of the litigation, which would result in the dismissal of all claims against the defendants in exchange for a payment of $15.0 million, all of which will be funded by the Company's Directors and Officers Liability Insurance. The Company executed a final Stipulation of Settlement on April 20, 2001, and a motion for preliminary approval of the proposed action settlement was submitted to the Court on May 4, 2001. A hearing on final approval is expected to be scheduled for August 2001. An insurance receivable and a settlement accrual of $15.0 million has been included in "Other current assets" and "Accrued liabilities," respectively, in the accompanying condensed consolidated balance sheets. On June 30, 2000, a shareholder 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 filed a motion to dismiss the litigation on those grounds. The motion was set for hearing in February 2001, but has been continued indefinitely. On February 16, 2001, the defendants in the derivative suit agreed to a settlement, pursuant to which certain limited corporate therapeutics will be offered, and in exchange for which all claims will be dismissed with prejudice. The attorneys' fees for plaintiffs' counsel will be paid out of the $15.0 million settlement fund established for settlement of the related class action litigation. Beginning on July 6, 1999, a series of similar securities class action lawsuits were filed alleging that Vantive and certain current and former directors and officers violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. The original complaints alleged that from April 23, 1997 to July 6, 1998, Vantive misled the investing public as to Vantive's future prospects and failed to disclose facts which it knew would result in decreased demand for its products or decreased operating margins. The original complaints further alleged that various officers and directors intended to profit thereby by artificially inflating the price of Vantive's stock so that they could sell significant amounts of their stock at inflated prices. The allegations appear to have been triggered by Vantive's announcement of preliminary results for the second quarter of 1998, released on July 6, 1998. On November 15, 1999, plaintiffs filed a First Consolidated Amended Complaint. The First Consolidated Amended Complaint added to the previous complaints, among other things, allegations of accounting improprieties. The Company filed a motion to strike and a motion to dismiss the First Consolidated Amended Complaint. The court heard argument on the motions on February 24, 2000. On March 21, 2000, the Company received an order from the court granting the Company's motion to dismiss with prejudice. On June 19, 2000, plaintiffs 8 10 filed an appeal from the district court's ruling in the Ninth Circuit Court of Appeals. The case is now fully briefed on appeal and the parties are awaiting a date for oral argument. The Company believes the complaints are without merit and intends to vigorously defend the action. However, there can be no assurance that if there is an unfavorable resolution of the appeal, there would not be a potential material adverse impact on the company's future financial position or results of operations or cash flows. 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 or 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. 7. SEGMENT INFORMATION Statement of Financial Accounting No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131") establishes standards for the way in which public companies disclose certain information about operating segments in the Company's financial reports. Based on the criteria of SFAS 131, the Company identified its chief executive officer ("CEO") as the chief operating decision maker. The Company's CEO evaluated revenue performance based on two segments: North America, which includes operations in the U.S. and Canada, and International, which includes operations in all other geographic regions. Data for the two segments is presented below. 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 segment other than the segments disclosed below. The following table presents a summary of operating information and certain quarter-end balance sheet information by operating segment for the quarters ended March 31, 2001 and March 31, 2000:
THREE MONTHS ENDED MARCH 31, 2001 2000 ------------ ------------ (In thousands) REVENUES FROM UNAFFILIATED CUSTOMERS: North America ........................... $ 391,434 $ 299,490 International ........................... 111,654 75,929 ------------ ------------ Consolidated ............................ $ 503,088 $ 375,419 ============ ============ OPERATING INCOME (LOSS): North America ........................... $ 22,443 $ (9,998) International ........................... 23,688 18,537 ------------ ------------ Consolidated ............................ $ 46,131 $ 8,539 ============ ============ IDENTIFIABLE ASSETS: North America ........................... $ 1,746,206 $ 1,530,149 International ........................... 277,326 183,114 ------------ ------------ Consolidated ............................ $ 2,023,532 $ 1,713,263 ============ ============
Revenues from the Europe-Middle-East-Africa region represented 13% and 12% of total revenues during the quarters ended March 31, 2001 and March 31, 2000. No other international region had revenues equal to or greater than 10% of total revenues for the three months ended March 31, 2001 or March 31, 2000. Revenues originated in each individual foreign country were less than 5% of total revenues for the three months ended March 31, 2001 and March 31, 2000. 8. SUBSEQUENT EVENT On May 1, 2001, the Company announced its intention to acquire SkillsVillage, Inc. a privately held software company which provides services procurement solutions, for approximately $32.0 million in cash and common stock. The transaction is expected to be completed in the Company's second quarter and will be accounted for under the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the net assets acquired, including in-process research and development, based on their fair values. Any portion of the purchase price allocated to in-process research and development will 9 11 be charged to expense during the second quarter, the period in which the transaction is expected to close. The valuation to determine the fair value of the net assets acquired has not been completed. Accordingly, the Company cannot estimate the amount of the in-process research and development charge, but believes it could be a significant portion of the purchase price. 10 12 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 Our Future Results or The Market Price of Our 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. 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 months ended March 31, 2001 and March 31, 2000.
PERCENTAGE OF DOLLAR CHANGE QUARTER OVER PERCENTAGE OF QUARTER TOTAL REVENUES ------------ ------------------------------- 2001/2000 2001 2000 ------------ ------------ ------------ REVENUES: License fees .................................. 70% 31% 24% Services ...................................... 22 63 70 Development and other services ................ 33 6 6 ------------ ------------ ------------ Total revenues ............................. 34 100 100 ============ ============ ============ COSTS AND EXPENSES: Cost of license fees .......................... 56 3 3 Cost of services .............................. 21 34 38 Cost of development and other services ........ 32 6 6 Sales and marketing expense ................... 46 25 23 Product development expense ................... (1) 16 21 General and administrative expense ............ 32 7 7 ------------ ------------ ------------ Total costs and expenses ................... 25 91 98 Operating income ..................................... 440 9 2 Other income, net .................................... (50) 2 5 ------------ ------------ ------------ Provision for income taxes ........................... 101% 4% 3% ============ ============ ============
REVENUES The Company licenses software under non-cancelable license agreements and provides services including consulting, training, development and maintenance, consisting of product support services and periodic updates. Total revenues increased by 34% to $503.1 million in the first quarter of 2001 from $375.4 million in the first quarter of 2000. The increase in total revenues is attributable to the $63.0 million increase in license revenue, the $57.0 million increase in service revenue and the $7.6 million increase in development and other services revenue. Revenues from license fees increased by 70% to $153.3 million in the first quarter of 2001 from $90.2 million in the first quarter of 2000, primarily the result of the general availability of PeopleSoft 8 11 13 applications in September 2000. The Company does not expect to sustain this level of growth throughout 2001.(1) Revenues from services increased by 22% to $319.1 million in the first quarter of 2001 from $262.1 million in the first quarter of 2000. The growth in services revenue during the first quarter of 2001 when compared to the first quarter of 2000 resulted from an increase in consulting revenue of $27.6 million, an increase in maintenance revenue in the amount of $24.6 million and an increase in training revenue of $4.8 million. The increase in services revenue is attributable to the growth of license fee revenues in previous quarters. The Company does not expect to sustain this level of growth throughout 2001.(1) Revenue from services as a percentage of total revenues was 63% and 70% for the quarters ended March 31, 2001 and March 31, 2000. The decrease in service revenue as a percentage of total revenues during the first quarter of 2001 reflects primarily the change in revenue mix resulting from the increase in license fees. Variances in the Company's license contracting activity during a given quarter may impact its future consulting, training and maintenance service revenues since these revenues typically follow license fee revenues. With the general availability of PeopleSoft 8 in September 2000, the Company expects that demand from its installed base and new customers for consulting, training and maintenance services will increase over the next several quarters.(1) However, the Company cannot give assurance that it will be successful in expanding its consulting and training services. Revenue from development and other services increased by 33% to $30.7 million in the first quarter of 2001 from $23.1 million in the first 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 the Company 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 and other services increased by 32% to $27.9 million in the first quarter of 2001 from $21.1 million in the first quarter of 2000. As of March 31, 2001, most of the initial development projects undertaken by Momentum have been completed or are expected to be completed in the near future. As a result, the Company expects revenues from development and other services, and the related costs, to decrease over the next several quarters.(1) Revenues by Segment At March 31, 2001, 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. Revenues from the North America segment increased by 31% to $391.4 million in the first quarter of 2001 from $299.5 million in the first quarter of 2000. Revenues from the North America segment as a percentage of total revenues decreased to 78% in the first quarter of 2001 from 80% in the first quarter of 2000. Revenues from the International segment increased by 47% to $111.7 million in the first quarter of 2001 from $75.9 million in the first quarter of 2000. Revenues from the International segment as a percentage of total revenues increased to 22% in the first quarter of 2001 from 20% in the first quarter of 2000. The increase in revenues, for both segments, in 2001 is primarily attributable to the general availability of PeopleSoft 8 applications in September 2000. Within the International segment, revenues from the Europe-Middle-East-Africa region represented 13% and 12% of total revenues during the first quarter of 2001 and the first quarter of 2000. Deferred Revenues The Company had total deferred revenues of $518.2 million as of March 31, 2001 and $530.4 million as of December 31, 2000. The Company had deferred license revenue in the amount of $39.7 million as of March 31, 2001 and $57.9 million as of December 31, 2000. This decrease in deferred license revenue is a result of the Company's continued focus on business and contracting practices designed to maximize the current period revenue recognition. The Company expects to continue these practices, which may result in additional decreases in deferred license revenues in the future.(1) The deferred 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. - -------- (1) Forward-Looking Statement 12 14 COSTS AND EXPENSES Cost of license fees consists principally of royalties, product warranty costs, technology access fees for certain third-party software products and amortization of capitalized software costs. Cost of license fees increased to $16.3 million in the first quarter of 2001 from $10.4 million in the first quarter of 2000, representing 3% of total revenues for both of those quarters. Cost of license fees represented 11% of license fee revenues in the first quarter of 2001 and 12% of license fee revenues in the first quarter of 2000. The increase in absolute dollars in the first quarter of 2001 is attributable to an increase in royalties of $4.0 million resulting primarily from the increase in license revenue activity during the quarter. Product warranty costs for the first quarter of 2001 of $4.6 million were offset by a decrease in software amortization expense of $2.2 million of products acquired via acquisition. 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 may fluctuate from period to period due principally to the mix of sales of royalty-bearing software products in each period and fluctuations in revenues contrasted with certain fixed expenses such as the amortization of capitalized software. Cost of services consists primarily of employee-related costs and the related infrastructure costs incurred to provide installation and consulting services, customer care center administrative support, training, and product support. Cost of services increased to $173.7 million in the first quarter of 2001 from $143.3 million in the first quarter of 2000, representing 34% and 38% of total revenues and 54% and 55% of service revenues in each of those quarters. The dollar increase in cost of services is primarily the result of a 14% increase in headcount in the services organization, from the first quarter of 2000, in anticipation of increased demand for consulting and installation services related to PeopleSoft 8. With the shipment of PeopleSoft 8 in September 2000, the Company expects that demand from its installed base and new customers for consulting and training services will increase over the next several quarters and consequently, cost of services may increase in dollar amount, and may increase as a percentage of total revenues in future periods.(1) Sales and marketing expenses increased to $126.2 million in the first quarter of 2001 from $86.5 million in the first quarter of 2000, representing 25% and 23% of total revenues in each of those quarters. The increase in 2001 is primarily attributable to costs associated with growth in the sales and marketing organizations. Sales and marketing headcount increased 32% from the first quarter of 2000. In addition, marketing and advertising expenses increased by $12.5 million primarily due to the marketing campaign for PeopleSoft 8. 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 related to PeopleSoft 8.(1) The Company expects to incur additional sales and marketing expenses in future quarters related to PeopleSoft CRM which is anticipated to be released in the second quarter of 2001.(1) Product development expenses 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. Product development expenses decreased to $79.0 million in the first quarter of 2001 from $79.9 million in the first quarter of 2000, representing 16% and 21% of total revenues in each of those quarters. The Company's current focus in application development is to extend PeopleSoft 8 by delivering enhanced functionality and develop a number of new applications, mostly focused on customer relationship management, eCommerce, and internet collaboration.(1) In addition, the Company anticipates continuing to invest in additional functionality across all of its software product offerings, including global product requirements and industry specific requirements.(1) However, the Company cannot give assurance that such development efforts will result in products, features or functionality or that the market will accept the software products, features or functionality developed. The Company expects that the dollar amounts invested in software product development expenses during the remaining quarters in 2001 will be consistent with amounts invested during the three months ended March 31, 2001.(1) General and administrative expenses increased to $33.9 million in the first quarter of 2001 from $25.6 million in the first quarter of 2000, representing 7% of total revenues in both of those quarters. The dollar - -------- (1) Forward-Looking Statement 13 15 increase is primarily due to increases in employee compensation and benefits costs, due in part to a 20% increase in general and administrative headcount from the first quarter of 2000. OTHER INCOME, NET Other income, net, which includes interest income, interest expense and other, decreased to $8.9 million in the first quarter of 2001 from $17.7 million in the first quarter of 2000. The decrease was primarily a result of a $9.5 million realized gain on the sale of corporate equity securities during the first quarter of 2000. PROVISION FOR INCOME TAXES The Company's income tax provision increased to $19.0 million in the first quarter of 2001 from $9.4 million in the first quarter of 2000. The effective tax rate for the first quarter of 2001 is 34.5%. Excluding the impact of the gain on marketable equity securities, the effective tax rate for the first quarter of 2000 was 34.5%. The net deferred tax assets at March 31, 2001 were $83.0 million. The valuation of these net deferred tax assets is based on historical tax positions and expectations about future taxable income. EARNINGS PER SHARE Diluted net income per share increased to $0.11 per share in the first quarter of 2001 from $0.06 per share in the first quarter of 2000. Weighted average shares outstanding, used in the calculation of diluted net income per share were 315.0 million for the first quarter of 2001 compared to 292.0 million for the first quarter of 2000. Net income for the first quarter of 2000 included a pretax gain on the sale of corporate equity securities in the amount of $9.5 million. Excluding the impact of the gain on corporate equity securities, diluted net income per share would have been $0.04 for the first quarter of 2000. The increase in diluted net income per share is due to the increase in operating income of $37.6 million which is partially offset by the $9.6 million increase in the provision for income taxes and an 8% increase in the number of shares used in the per share calculation. Diluted earnings per share could be negatively affected if shares outstanding during 2001 increase as a result of any of the following factors: (i) the issuance of common stock associated with stock option and employee stock purchase plans; (ii) 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; (iii) potential conversion of subordinated notes into common stock of the Company; and (iv) the issuance of common stock to effect business combinations, should the Company enter into such transactions.(1) NEWLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a Replacement of FASB Statement No. 125" ("SFAS 140") in September 2000. SFAS 140 revises the criteria for accounting for securitizations and other transfers of financial assets and collateral. In addition, SFAS 140 requires certain additional disclosures. Except for the new disclosure provisions, which are effective for the year ended December 31, 2000, SFAS 140 is effective for the transfer of financial assets occurring after March 31, 2001. PeopleSoft will apply the new rules prospectively to transactions beginning in the second quarter of 2001. Application of the new rules is not expected to have a material impact on PeopleSoft's financial position or results of operations. ACQUISITIONS On May 1, 2001, the Company announced its intention to acquire SkillsVillage, Inc. a privately held software company which provides services procurement solutions, for approximately $32.0 million in cash and common stock. The transaction is expected to be completed in the Company's second quarter and will be accounted for under the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the net assets acquired, including in-process research and development, based - -------- (1) Forward-Looking Statement 14 16 on their fair values. Any portion of the purchase price allocated to in-process research and development will be charged to expense during the second quarter, the period in which the transaction is expected to close. The valuation to determine the fair value of the net assets acquired has not been completed. Accordingly, the Company cannot estimate the amount of the in-process research and development charge, but believes it could be a significant portion of the purchase price. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company had $896.2 million in working capital, including $337.1 million in cash and cash equivalents and $718.8 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, potential cash flow from operations and issuance of stock under the employee purchase plan and stock option exercises 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.
THREE MONTHS ENDED MARCH 31, 2001 2000 (In millions) ------------ ------------ Net cash provided by (used in): Operating activities ............................... $ 56.9 $ 21.7 Investing activities ............................... (390.6) 46.9 Financing activities ............................... 29.8 37.6 Effect of foreign exchange rate changes on cash and cash equivalents ........................... (5.6) 0.6 ------------ ------------ (Decrease) increase in cash and cash equivalents ...... $ (309.5) $ 106.8 ============ ============
Net cash provided by operating activities during the three months ended March 31, 2001 was $56.9 million compared to $21.7 million during the three months ended March 31, 2000. This increase is due primarily to the increase in net income, the decrease in the benefit for deferred income taxes, the decrease in accounts receivable and the net change in other current and noncurrent assets and liabilities partially offset by the decrease in cash from factoring of receivables, the decrease in deferred revenues and the decrease in accrued compensation and related expenses. Net cash used for investing activities during the three months ended March 31, 2001 was $390.6 million compared to net cash provided by investing activities during the three months ended March 31, 2000 in the amount of $46.9 million. The Company's principal use of cash for investing activities in the three months ended March 31, 2001 included net purchases of investments in the amount of $369.9 million and purchases of property and equipment in the amount of $20.4 million. The Company's principal source of cash from investing activities during the three months ended March 31, 2000 was net proceeds from maturities and sales of investments of $56.6 million, which were partially offset by purchases of property and equipment in the amount of $9.7 million. Net cash provided by financing activities during the three months ended March 31, 2001 was $29.8 million compared to $37.6 million during the three months ended March 31, 2000. Proceeds from the exercise of common stock options by employees and issuance of stock under the employee stock purchase program were $40.3 million and $37.6 million during the three months ended March 31, 2001 and March 31, 2000. The Company used cash to repurchase $10.5 million of convertible subordinated long-term notes during the three months ended March 31, 2001 offsetting the cash provided by stock transactions. - -------- (1) Forward-Looking Statement 15 17 ITEM 3 - FINANCIAL RISK MANAGEMENT Effective January 1, 2001, the Company adopted the Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in "Accumulated other comprehensive loss." The Company used derivative instruments to manage exposures to foreign currency and interest rate risks. The Company's objectives to holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures. FOREIGN EXCHANGE RISK During the three months ended March 31, 2001 and March 31, 2000, the Company's revenue originating outside the United States was 26% and 24% of total revenues. Revenues generated in the Europe-Middle-East-Africa region were 13% and 12% of total revenues during the same periods. Revenues from all other geographic regions were less than 10% of total revenues for the same periods. 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, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely impacted by changes in these or other factors. The Company's exposure to foreign exchange rate fluctuations 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. 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 exchange contracts as the vehicle for hedging significant intercompany balances. The Company uses two multinational banks for substantially all of these contracts. The Company has not designated the derivatives used in the foreign exchange hedging program as cash flow or fair value hedges under SFAS 133. In general, these contracts have terms of three months or less. These contracts are recorded on the balance sheet at fair value. Changes in fair value of the contracts and the intercompany balances being hedged are included in "Other income, net." To the extent these contracts do not completely hedge the intercompany balances, the net impact is recognized in "Other income, net." The foreign currency hedging program is managed in accordance with a corporate policy approved by the Company's Board of Directors. 16 18 At March 31, 2001, the Company had the following outstanding forward foreign exchange contracts to exchange foreign currency for U.S. dollars:
NOTIONAL WEIGHTED FUNCTIONAL CURRENCY NOTIONAL AMOUNT AVERAGE EXCHANGE RATE ------------------- --------------- --------------------- Euros $2.0 million 1.127 Hong Kong dollars 1.4 million 7.800 Singapore dollars 1.2 million 1.797 Chilean pesos 0.5 million 592.490 Japanese yen 0.3 million 122.430 ------------- $5.4 million =============
At March 31, 2001, the Company had the following outstanding forward foreign exchange contracts to exchange U.S. dollars for foreign currency:
NOTIONAL WEIGHTED FUNCTIONAL CURRENCY NOTIONAL AMOUNT AVERAGE EXCHANGE RATE ------------------- --------------- --------------------- British pounds $3.6 million 0.696 Swiss francs 0.7 million 1.724 South African rand 0.7 million 7.995 Australian dollars 0.5 million 0.493 ------------- $5.5 million =============
At March 31, 2001, each of these contracts matured within 30 days and had a book value that approximates fair value. Neither the cost nor the fair value of these contracts was material at March 31, 2001. During the three months ended March 31, 2001 and March 31, 2000 the Company recorded net losses from these settled contracts and underlying foreign currency exposures of approximately $0.7 million and $1.1 million. 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 estimable, and significant in amount. No such hedges have been undertaken through March 31, 2001. INTEREST RATE RISK Investments in Debt Securities 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 classifies debt and marketable 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 loss," 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 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 17 19 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 March 31, 2001, the average maturity of the Company's investment securities was approximately three months. All investment securities had maturities of less than eighteen months. The following table presents certain information about the financial instruments held by the Company at March 31, 2001 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.
AS OF MARCH 31, 2001 EXPECTED MATURITY (In millions) ------------------------------- ONE YEAR OR MORE THAN PRINCIPAL FAIR LESS ONE YEAR AMOUNT VALUE ------------ ------------ ------------ ------------ Available-for-sale securities ..... $ 808.7 $ 100.8 $ 909.5 $ 909.9 Weighted average interest rate .... 5.34% 5.99% ------------ ------------ ------------ ------------
Interest rate swap transactions In June 2000, the Company entered into interest rate swap transactions to manage its exposure to interest rate changes on facility lease obligations. The swaps involve the exchange of fixed and variable interest rate payments without exchanging the notional principal amount. The swaps have an aggregate notional amount of $175.0 million and mature at various dates in 2003, consistent with the maturity dates of the facility leases. Under these agreements, the Company receives a variable rate based on the 3 month LIBOR set on the last day of the previous quarter and pays a weighted average fixed rate of 6.80%. These swaps are considered to be a hedge against changes in amount of future cash flows, therefore the $7.5 million unrealized loss as of March 31, 2001 resulted in a $7.5 million increase in "Accumulated other comprehensive loss." Derivative losses included in "Accumulated other comprehensive loss" of $3.9 million are estimated to be reclassified into earnings during the next twelve months based upon a 12 month forward LIBOR rate. EQUITY SECURITIES RISK Investments in equity securities The Company has classified its investments in new publicly traded start-up companies as available-for-sale investments, which are included in "Investment in corporate equity securities" in the accompanying condensed consolidated balance sheets. At March 31, 2001, the aggregate cost of these investments was $2.9 million; the aggregate fair market value was $2.7 million. In addition, the Company has investments in privately held start-up companies. These nonmarketable investments are accounted for using the cost method as the Company does not have the ability to exercise significant influence and are included in "Investment in corporate equity securities" in the accompanying condensed consolidated balance sheets. At March 31, 2001, the aggregate cost of these investments was $5.3 million. At March 31, 2001, the aggregate cost approximates fair value. Convertible Subordinated Long-Term Notes In August 1997, the Company issued an aggregate of $69.0 million in principal amount of convertible subordinated notes, due August 2002. 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. The Company has repurchased $12.0 million of the convertible subordinated notes as of March 31, 2001. Based on the traded yield to maturity, the approximate fair market value of the - --------- (1) Forward-Looking Statement 18 20 convertible subordinated notes was $56.6 million and $66.5 million as of March 31, 2001 and December 31, 2000. FACTORS THAT MAY AFFECT OUR FUTURE RESULTS OR THE MARKET PRICE OF OUR 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 other forward-looking statements from time to time, both written and oral. The 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 many risks and uncertainties. The following section describes some, but not all, of the risks and uncertainties that we believe may adversely affect the Company's business, financial condition or results of operations. This section should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations 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, 2000 contained in the Company's Annual Report to Stockholders on Form 10-K. THE CURRENT DOWNTURNS IN GENERAL ECONOMIC AND MARKET CONDITIONS COULD CAUSE DECREASES IN DEMAND FOR OUR SOFTWARE AND RELATED SERVICES WHICH COULD NEGATIVELY AFFECT OUR REVENUE AND OPERATING RESULTS AND THE MARKET PRICE OF OUR STOCK. The revenue and profitability of PeopleSoft depends on the overall demand for PeopleSoft software and related services. Downturns in general economic and market conditions could result in customers postponing or canceling purchasing decisions. Some of PeopleSoft's competitors have recently announced that the current economic conditions have negatively impacted their financial results. If demand for PeopleSoft software and related services decreased, its revenues may decrease and its operating results would be negatively impacted. In addition, PeopleSoft's inability to license its software products to new customers may have a negative impact on the market price of its stock. OUR QUARTERLY OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY FLUCTUATE SUBSTANTIALLY, WHICH MAY ADVERSELY AFFECT OUR BUSINESS AND OUR STOCK'S MARKET PRICE. PeopleSoft's revenues and results of operations are difficult to predict and may fluctuate substantially from quarter to quarter. These fluctuations can adversely affect PeopleSoft's business and the market price of its stock. 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 typically completed within the last few weeks of the quarter; - PeopleSoft's sales cycle is relatively long and varies as a result of PeopleSoft's expanding its product line and broadening its software product applications to cover a customer's overall business; - the size of license transactions can vary significantly; - the possibility that economic downturns are characterized by decreased product demand, price erosion, technological shifts, work slowdowns and layoffs may substantially reduce contracting activity; 19 21 - customers may unexpectedly postpone or cancel anticipated 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 pricing policies and discount plans may affect customer purchasing patterns; and - the number, timing and significance of PeopleSoft's and its competitors' software product enhancements and new software product announcements may affect purchase decisions. 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. WE MAY BE REQUIRED TO DEFER RECOGNITION OF LICENSE REVENUE FOR A SIGNIFICANT PERIOD OF TIME AFTER ENTERING INTO A LICENSE AGREEMENT, WHICH COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS. PeopleSoft may be required to defer recognition of license revenue for a significant period of time after entering into a license agreement for a variety of transactions, including: - transactions that include both currently deliverable software products and software products that are under development or other undeliverable elements; - transactions where the customer demands services that include significant modifications, customizations or complex interfaces that could delay product delivery or acceptance; - transactions that involve acceptance criteria that may preclude revenue recognition or if there are identified product-related issues, such as performance issues; and - transactions that involve 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. ANY REDUCTION IN OUR CONTRACTING ACTIVITY IS LIKELY TO RESULT IN REDUCED SERVICES REVENUES IN FUTURE PERIODS. 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. OUR FUTURE REVENUE IS SUBSTANTIALLY DEPENDENT UPON OUR INSTALLED CUSTOMER BASE CONTINUING TO LICENSE OUR PRODUCTS AND RENEW OUR SERVICE AGREEMENTS. 20 22 We have traditionally depended on our installed customer base for additional future revenue from services and licenses of other products. Also, if our customers fail to renew their maintenance agreements, our revenue could decrease. The maintenance agreements are generally renewable annually at the option of the customers and there are no mandatory payment obligations or obligations to license additional software. Therefore, current customers may not necessarily generate significant maintenance revenue in future periods. In addition, customers may not necessarily purchase additional products or services. Our services revenue and maintenance revenue also depend upon the use of these services by our installed customer base. Any downturn in software license revenue could result in lower services revenue in future quarters. OVERALL INCREASES IN SERVICES REVENUES AS A PERCENTAGE OF TOTAL REVENUES COULD ADVERSELY AFFECT OUR OPERATING RESULTS BECAUSE OUR SERVICES REVENUES BRING LOWER GROSS MARGINS THAN OUR LICENSE REVENUES. Because service revenues have lower gross margins than license revenues, an 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 subcontracts certain consulting services to third parties which generally carry lower gross margins than PeopleSoft's service business overall. As a result, if service revenues increase as a percentage of total revenue and the services provided by third-party consultants increases, PeopleSoft's gross margins will be lower. IF ACCOUNTING INTERPRETATIONS RELATING TO REVENUE RECOGNITION CHANGE, OUR REPORTED REVENUES COULD DECLINE OR WE COULD BE FORCED TO MAKE CHANGES IN OUR BUSINESS PRACTICES. Over the past several years, the American Institute of Certified Public Accountants issued Statement of Position, or 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 SOP's 97-2 and SOP 98-9. In addition, in December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or SAB 101, which explains how the SEC staff believes existing revenue recognition rules should be applied or analogized to for transactions not addressed by existing rules. The accounting profession continues to discuss certain provisions of SOP 97-2 and SAB 101 with the objective of providing additional guidance on potential interpretations. These discussions and the issuance of interpretations, once finalized, could lead to unanticipated changes in PeopleSoft's current revenue accounting practices, which could cause PeopleSoft to recognize lower revenues. As a result, PeopleSoft may need to change its business practices significantly in order to continue to recognize a substantial portion of its license revenues. These changes may extend sales cycles, increase administrative costs and otherwise adversely affect PeopleSoft's business. OUR MARGINS MAY BE REDUCED IF WE NEED TO LOWER PRICES OR OFFER OTHER FAVORABLE TERMS ON OUR PRODUCTS AND SERVICES TO MEET COMPETITIVE PRESSURES IN OUR INDUSTRY. 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 CRM application 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. Some of PeopleSoft's competitors may have advantages over PeopleSoft due to their significant worldwide presence, longer operating and product development history, and substantially greater financial, technical and marketing resources. At least one competitor has a larger installed base than PeopleSoft. In addition, Oracle Corporation is a competitor whose relational database management system underlies a significant portion of PeopleSoft's installed applications. If competitors offer more favorable payment terms and/or more favorable contractual implementation terms or guarantees, PeopleSoft may need to lower prices or offer other favorable terms in order to compete successfully. Any such changes would be likely to reduce margins. 21 23 IF OUR INTERNATIONAL BUSINESS GROWS, WE WILL BECOME INCREASING SUBJECT TO CURRENCY RISKS AND OTHER COSTS AND CONTINGENCIES THAT COULD ADVERSELY AFFECT OUR RESULTS. 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. The following factors, among others, present risks that could have an adverse impact on PeopleSoft's business and earnings: - conducting business in currencies other than United States dollars subjects PeopleSoft to currency controls and fluctuations in currency exchange rates; - PeopleSoft may be unable to hedge the currency risk in some transactions because of uncertainty or the inability to reasonably estimate its foreign exchange exposure; - increased cost and development time required to adapt PeopleSoft products to local markets; - lack of experience in a particular geographic market; - legal, regulatory, social, political, labor or economic conditions in a specific country or region, including loss or modification of exemptions for taxes and tariffs, and import and export license requirements; and - operating costs in many countries are higher than in the United States. OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT QUALIFIED EMPLOYEES IN A HIGHLY COMPETITIVE LABOR MARKET. PeopleSoft believes that its future success will depend upon its ability to attract, train and retain highly skilled technical, managerial, sales and marketing personnel. If PeopleSoft does not attract, train, retain and effectively manage employees, PeopleSoft's costs may increase, its development and sales efforts may be hurt and its customer service may be degraded. Although PeopleSoft invests significant resources in recruiting and retaining employees, there is intense competition for personnel in the software industry. At times, PeopleSoft has had difficulty locating enough highly qualified candidates in desired geographic locations, or with required industry-specific expertise. Industry wide use of non-compete agreements by competitors of PeopleSoft may further decrease the pool of available sales and technical personnel. THE LOSS OF KEY EMPLOYEES COULD HAVE AN ADVERSE EFFECT ON OUR OPERATIONS AND STOCK PRICE PeopleSoft believes there are certain key employees within the organization, primarily in the senior management team, who are necessary for the company to meets its short-term objectives. Due to the competitive employment nature of the software industry, there is a risk that PeopleSoft will not be able to retain these key employees. The loss of one or more key employees could adversely affect the continued growth of PeopleSoft. In addition, uncertainty created by turnover of key employees could cause fluctuations in PeopleSoft's stock price and further turnover of PeopleSoft employees. IF WE FAIL TO CONTINUALLY IMPROVE OUR SOFTWARE PRODUCTS AND INTRODUCE NEW PRODUCTS OR SERVICE OFFERINGS, OUR COMPETITIVE POSITION COULD ERODE AND OUR BUSINESS AND STOCK PRICE MAY SUFFER. 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. The market for business application software has been and continues to be intensely competitive, which requires that PeopleSoft constantly improve its existing products and create new products. PeopleSoft's future success will depend in part upon its ability to: - continue to enhance and expand its core applications; 22 24 - continue to provide enterprise and customer relationship management applications or service offerings; - continue to successfully integrate third-party products; - enter new markets; and - develop new products or improve our existing products to 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. In addition, to the extent that PeopleSoft uses third parties to do some or all of the product development work, PeopleSoft may be affected by their non-performance. 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. In addition, 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. AS OUR SOFTWARE OFFERINGS INCREASE IN SCOPE AND COMPLEXITY, OUR NEED TO AVOID AND CORRECT UNDETECTED ERRORS MAY INCREASE OUR COSTS AND SLOW THE INTRODUCTION OF NEW PRODUCTS AND WE MAY BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS WHICH COULD BE COSTLY TO RESOLVE AND RESULT IN NEGATIVE PUBLICITY. Despite PeopleSoft's and third parties' testing, PeopleSoft's software programs, like all software programs generally, may contain a number of undetected errors. This may result in increased costs to correct such errors and reduced acceptance of PeopleSoft's software products in the marketplace. Product software errors could subject PeopleSoft to product liability claims. Although PeopleSoft's agreements contain provisions designed to limit its exposure to potential liability claims, these provisions could be invalidated by unfavorable judicial decisions or by federal, state, local or foreign laws or regulations. If a claim against PeopleSoft were successful, PeopleSoft might be required to incur significant expense and pay substantial damages. Even if PeopleSoft were to prevail, the accompanying publicity could adversely impact the demand for PeopleSoft's products. IF WE LOSE ACCESS TO CRITICAL THIRD-PARTY TECHNOLOGY, OUR COSTS COULD INCREASE AND THE INTRODUCTION OF NEW PRODUCTS AND PRODUCT ENHANCEMENTS COULD BE DELAYED, THUS HURTING OUR COMPETITIVE POSITION. 23 25 PeopleSoft licenses numerous critical software products from third parties, some of whom are also competitors, and PeopleSoft incorporates some of their products 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 seek alternative vendors and incur additional internal or external development costs to ensure continued performance of its products. Such alternatives 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. In addition, if the cost of licensing any of these third-party software products significantly increases, PeopleSoft's gross margin levels could significantly decrease. IF WE FAIL TO MAKE OUR PRODUCTS COMPATIBLE WITH AND SUPPORT CURRENT OR FUTURE CLIENT INTERFACES DESIGNED BY THIRD PARTIES, OUR FINANCIAL RESULTS MAY SUFFER. With PeopleSoft 8, use of a web browser as the 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. There is a risk that customers will not be willing or able to implement internet-based applications. 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 and failure to do so may result in lower revenues. WE ARE DEPENDENT ON RELATIONSHIPS WITH THIRD-PARTY SYSTEMS INTEGRATORS FOR THE MARKETING AND DEPLOYMENT OF OUR PRODUCTS, AND ANY DISRUPTION OF THESE RELATIONSHIPS COULD DAMAGE OUR BUSINESS. PeopleSoft builds and maintains strong working relationships with businesses that it 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 relationship with these companies enhances its marketing and sales efforts. 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. Furthermore, 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 if these products are more difficult to install and maintain than competitors' similar product offerings. OUR RELATIONSHIP WITH MOMENTUM HAS REDUCED OUR CONTROL OVER IMPORTANT RESEARCH AND DEVELOPMENT PROJECTS AND CREATES OTHER RISKS. PeopleSoft faces a number of risks as a result of its relationship with Momentum. These risks include: - In order to obtain funding for a development project, 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 Momentum pursues; 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. 24 26 WE MAY BE REQUIRED TO UNDERTAKE A COSTLY REDESIGN OF OUR PRODUCTS IF THIRD-PARTY SOFTWARE DEVELOPMENT TOOLS BECOME AN INDUSTRY STANDARD. 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. 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 if a software product other than PeopleTools becomes the clearly established and widely accepted industry standard. In addition, PeopleSoft may 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. WE MAY BE UNABLE TO ACHIEVE THE BENEFITS WE ANTICIPATE FROM JOINT SOFTWARE DEVELOPMENT OR MARKETING ARRANGEMENTS WITH OUR BUSINESS PARTNERS. PeopleSoft enters into various development or joint business arrangements to develop new software products or extensions to its existing software products. 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 under these joint business arrangements. 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. OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS MAY OFFER ONLY LIMITED PROTECTION. OUR PRODUCTS MAY INFRINGE ON THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT IN MATERIAL COSTS. PeopleSoft considers certain aspects of the way it conducts its internal operations, and its 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. Pending patent applications may not result in issued patents and, even if issued, the patents may not provide any meaningful competitive advantage. PeopleSoft also relies on contractual restrictions in its agreements with customers, employees and others to protect its intellectual property rights. However, there can be no assurances that these agreements will not be breached, that PeopleSoft would have adequate remedies for any breach or that PeopleSoft's trade secrets will not otherwise become known. 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. If PeopleSoft's source code is accessed through the escrow, the likelihood of misappropriation or other misuse of PeopleSoft's intellectual property may increase. 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. PeopleSoft's competitors may independently develop technologies that are substantially equivalent or superior to PeopleSoft's technology. Third parties may assert infringement claims against PeopleSoft. These assertions could result in PeopleSoft entering into royalty arrangements, and could result in costly and time-consuming litigation, including damage awards. ACQUISITIONS PRESENT MANY RISKS, AND WE MAY BE UNABLE TO ACHIEVE THE FINANCIAL AND STRATEGIC GOALS INTENDED AT THE TIME OF ANY ACQUISITION. PeopleSoft may from time to time acquire or invest in complementary companies, products or technologies, and enter into joint ventures and strategic alliances with other companies. The risks PeopleSoft commonly encounters in such transactions include: 25 27 - PeopleSoft may have difficulty of assimilating the operations and personnel of the acquired company; - PeopleSoft may have difficulty effectively integrating the acquired technologies or products with its current products and technologies; - PeopleSoft's ongoing business may be disrupted by transition and integration issues; - PeopleSoft may not be able to retain key technical and managerial personnel from the acquired entity; - PeopleSoft's management may be unable to achieve the financial and strategic goals for the acquired and combined businesses; - PeopleSoft may have difficulty in maintaining controls, procedures and policies during the transition and integration; - PeopleSoft's relationships with partner companies or third-party providers of technology or products could be adversely affected; - potential impairment of relationships with employees and customers; - PeopleSoft's due diligence process may fail to identify significant issues with product quality, product architecture, legal contingencies, and product development among other things; and - PeopleSoft may be required to take significant product exit charges if products acquired in business combinations are unsuccessful. THE INTRODUCTION OF THE EURO CREATES UNCERTAINTY THAT COULD ADVERSELY AFFECT OUR SALES. PeopleSoft 8 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. POWER OUTAGES IN CALIFORNIA MAY ADVERSELY AFFECT US. PeopleSoft has significant operations in the state of California and is dependent on a continuous power supply. California's current energy crisis could substantially disrupt PeopleSoft's operations and increase PeopleSoft's expenses. California has recently implemented, and may in the future continue to implement, rolling blackouts throughout the state. Although state lawmakers are working to minimize the impact, if blackouts interrupt PeopleSoft's power supply, PeopleSoft may be temporarily unable to continue operations at its California facilities. Any such interruption in PeopleSoft's ability to continue operations at its facilities could delay the development of PeopleSoft's products and disrupt communications with its customers or other third parties on whom PeopleSoft relies, such as system integrators. Future interruptions could damage PeopleSoft's reputation and could result in lost revenue, either of which could substantially harm PeopleSoft's business and results of operations. Furthermore, shortages in wholesale electricity supplies have caused power prices to increase. If energy prices continue to increase, PeopleSoft's operating expenses will likely increase which could have a negative effect on PeopleSoft's operating results. OUR STOCK PRICE HAS BEEN AND IS EXPECTED TO REMAIN VOLATILE, WHICH EXPOSES US TO THE RISK OF SECURITIES LITIGATION. 26 28 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; - PeopleSoft's or its competitors' announcements of technological innovations; - PeopleSoft's or its competitors' acquisition of new products or significant customers; - 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; - PeopleSoft's or its competitors' announcement of acquisitions or other significant transactions; - adoption of new accounting standards affecting the software industry; and - general market conditions. Fluctuations in the price of PeopleSoft's common stock may expose PeopleSoft to the risk of securities class action lawsuits. Defending against such lawsuits 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. 27 29 PART II - OTHER INFORMATION Item 1. Legal Proceedings On February 16, 2001, PeopleSoft agreed to a tentative settlement of a litigation (Suttovia v. Duffield, et al.), which would result in the dismissal of all claims against the defendants in exchange for a payment of $15.0 million, all of which will be funded by the Company's Directors and Officers Liability Insurance. The Company executed a final Stipulation of Settlement on April 20, 2001, and a motion for preliminary approval of the proposed action settlement was submitted to the Court on May 4, 2001. A hearing on final approval is expected to be scheduled for August 2001. An insurance receivable and a settlement accrual of $15.0 million has been included in "Other current assets" and "Accrued liabilities," respectively, in the accompanying condensed consolidated balance sheets. On February 16, 2001, the defendants in a shareholder derivative suit (Marble v. Duffield, et al.) agreed to a settlement, pursuant to which certain limited corporate therapeutics will be offered, and in exchange for which all claims will be dismissed with prejudice. The attorneys' fees for plaintiffs' counsel will be paid out of the $15.0 million settlement fund established for settlement of the related class action litigation. 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 None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 28 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 15, 2001 PEOPLESOFT, INC. By: /s/ Kevin T. Parker ---------------------------------------------- Kevin T. Parker Sr. Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 29 -----END PRIVACY-ENHANCED MESSAGE-----