-----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, HOJdxB8PClG/1h9+td3GwKAEg8hhLLely1SuNQHCEq3kH/Iil71NrruJk1ulxE1i j2xkN0M9QyV63RC05L3KiQ== 0000891618-98-001396.txt : 19980331 0000891618-98-001396.hdr.sgml : 19980331 ACCESSION NUMBER: 0000891618-98-001396 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD 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-K405 SEC ACT: SEC FILE NUMBER: 000-20710 FILM NUMBER: 98578252 BUSINESS ADDRESS: STREET 1: 4305 HACIENDA DR POST OFFICE BOX 8015 CITY: PLEASANTON STATE: CA ZIP: 945833-861 BUSINESS PHONE: 5102253000 MAIL ADDRESS: STREET 1: 4440 ROSEWOOD DRIVE CITY: PLEASANTON STATE: CA ZIP: 94588-3031 10-K405 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1997 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-20710 PEOPLESOFT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 68-0137069 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 4440 Rosewood Drive, Pleasanton, CA 94588 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (925) 694-3000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange Title of each class on which registered None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE (Title of Class) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, based upon the closing sale price of common stock on March 20, 1998 as reported on the Nasdaq National Market, was approximately $7.5 billion. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 20, 1998, Registrant had 226,330,688 outstanding shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of Stockholders to be held May 26, 1998 are incorporated by reference in Part III of this Form 10-K Report. ================================================================================ 2 References in this Report to the "Company" or "PeopleSoft" refer to PeopleSoft, Inc. which was incorporated in Delaware in 1987 and its subsidiaries. PeopleSoft, the PeopleSoft logo, PeopleTools, PS/nVision, PeopleCode, ResponseAgent, and PeopleBooks are registered trademarks, and Red Pepper, PeopleTalk, and "We work in your world." are trademarks of PeopleSoft, Inc. All other company and product names may be trademarks of their respective owners. References to beta versions of software products refer to software products delivered to select customers for testing or evaluation prior to the general commercial release of such software products. 3 PART I ITEM 1. BUSINESS This Business section and other parts of this Form 10K contain forward-looking statements that involve risk and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." GENERAL PeopleSoft designs, develops, markets and supports a family of enterprise client/server application software products for use throughout large and medium sized organizations, including corporations worldwide, and higher education institutions, and federal, state, provincial and local government agencies primarily in North America. The Company designed its software products specifically for the client/server model of computing and believes that its architecture is among the most advanced and flexible available for enterprise level applications software. The Company's strategy is to offer comprehensive enterprise application software solutions to a variety of industries that desire back office administrative applications integrated with core operational applications. The Company's software products utilize the Microsoft Windows family of operating systems on the desktop as well as Java based web clients, and a wide variety of popular relational database management system ("RDBMS"), operating system and hardware platform choices on the server, making its software solutions among the most flexible, scaleable and portable in the application software industry. Application software products have been developed using PeopleTools, the Company's integrated rapid application development toolset which is delivered to customers along with the application software products to facilitate end user modification and customization. PeopleSoft was incorporated in Delaware in August 1987 and initially shipped its first software product suite, a Human Resource Management System ("HRMS") in December 1988. In 1992, PeopleSoft introduced the first of a series of Financial Management and Accounting System software products, and in 1994, introduced the first of a series of Distribution and Materials Management products, rounding out a complete family of cross industry software products. Since that time, PeopleSoft has introduced several industry specific software product suites, including a suite of Manufacturing products for discrete manufacturers, a suite of Public Sector Financial Management products, a suite of Public Sector HRMS products, a suite of Student Administration products for the higher education market, and a suite of HRMS products for the U.S. Federal Government marketplace, and has introduced additional Human Resource and Financial Management software products. In addition, in October 1996, the Company acquired Red Pepper Software Company ("Red Pepper"), a leader in the emerging supply chain management systems market. The acquisition furthers PeopleSoft's best-in-class strategy by adding significant expertise in the area of supply chain management, a key differentiator in the market for enterprise manufacturing and distribution solutions. SOFTWARE PRODUCT ARCHITECTURE PeopleSoft's software products are based on a scaleable, multi-tiered, client/server architecture. The Company believes that its architecture provides the system performance required for intensive record keeping and high volume OLTP business applications, and facilitates faster, easier and less expensive implementations of the initial system as well as subsequent upgrades. In addition to the advantage of a pure client/server architecture, the PeopleSoft solution offers a number of other important features. PeopleSoft applications are designed for ease of use, are integrated with the Microsoft Windows family of products and are compatible with personal productivity applications such as word processors and spreadsheets. PeopleSoft applications also operate over the web using a Java client. PeopleSoft software products are designed specifically for use with RDBMSs, which offer power and functionality superior to flat files, hierarchical, or other non-relational databases that are generally used with legacy software applications. The Company's software products are also scaleable, permitting changes in network size, server platforms and other architectural components with minimal disruption. Further, PeopleSoft software products are portable across major RDBMS software and server hardware platforms. The Company believes that the intuitive design of its software products reduce end-user training requirements and allow end-users and decision makers increased access to critical data not always readily available to them with legacy systems. 4 CLIENT/SERVER ARCHITECTURE With the general availability of Release 7 the Company's application software products support online transaction management in any of three different modes. In two-tier transaction processing the presentation logic and interactive application logic are performed on a Windows client, while data intensive application logic and data management functions are carried out on the database server. In three-tier transaction processing the presentation logic and selected interactive application logic operate on a Windows client, while the balance of interactive application logic and data intensive application logic operates on an application server and data management functions are carried out on a database server. In "three-tier for the Web" transaction processing, the presentation logic operates on a Java based client in a browser ("Web client"), while interactive application logic and data intensive application logic operates on an application server. With the availability of Release 7 and three-tier transaction processing, the Company's application software products now take advantage of messaging using remote procedure calls which facilitate real-time initiation of certain application logic routines on an application server or database server machine. Customers may implement Release 7 application software products using a single or any combination of the above processing options in a single local area or wide area network environment. PEOPLETOOLS Today's users are demanding system solutions that address specific business needs, facilitate the automation of workflow, are quickly adaptable to changing information requirements and provide for ease of access to information. PeopleSoft addresses this need by providing PeopleTools, a set of integrated development and reporting tools including: (i) Development tools for use by business process or system analysts to rapidly design and deploy custom modifications; (ii) Administration tools for use by systems managers and support staff to improve the efficiency of implementing, operating and upgrading PeopleSoft's applications; (iii) Reporting and Analysis tools for use by application users to easily access, summarize and analyze information; and (iv) PeopleSoft Workflow for use by business process or system analysts and application users to automate business processes in a paperless environment. PeopleTools continues to be used by the Company to develop most of its application software products, and is a runtime environment. Powerful features and functions which PeopleTools supports include effective date capabilities, extensive security at both a user and object level, and a tree editor for managing hierarchical relationships among data elements. PeopleTools is used to build and modify data tables, design and customize user interface windows, modify user pull-down menus, define security privileges of individual users and operator access to system objects, define and build workflow based processes, process online transactions, and facilitate data importation from other systems into PeopleSoft applications. PeopleTools simplifies system customization and implementation and can help reduce the time and cost of implementing the system. Upgrades to new releases are simplified with a tool which provides an automated comparison of the customer's customized systems to base level systems, and helps define how to install new releases. In addition, PeopleTools provides customers with significant ongoing flexibility to modify their systems quickly and inexpensively, so that internal maintenance costs can be reduced significantly. RELATIONAL DATABASE MANAGEMENT SYSTEMS By utilizing relational databases and designing the system from the ground up, the Company has been able to develop integrated software products with fully normalized data structures. A fully integrated system provides convenient access to shared data such as department tables, tax rates and organization charts, without requiring users to maintain this information redundantly. Collecting and capturing information once ensures that all data is consistent, readily available and easier to maintain. Through adherence to ANSI Structured Query Language ("SQL"), the industry standard data manipulation language for RDBMSs, and other relational database standards, the Company's software products are available in a range of environments. PeopleSoft's software products can be licensed for use with the following RDBMSs: IBM's DB2 (MVS/ESA using DDCS connectivity products from IBM, and separately on AIX and OS/400), Informix Corporation's ("Informix") INFORMIX-OnLine Dynamic Server (NT and multiple versions of Unix), Microsoft Corporation's ("Microsoft") SQL Server, Oracle Corporation's ("Oracle") Oracle 8 (NT and over 10 versions of Unix), and Sybase, Inc.'s ("Sybase") System 11 (on multiple versions of Unix). If the customer decides to switch to other PeopleSoft supported RDBMS or hardware platforms, user disruption is usually minimized because only the "back-end" database changes, while the "front-end" application remains the same. No assurance can be given concerning the successful development of PeopleSoft software products on additional platforms, the specific timing of the releases of any future software 2 5 products, the performance characteristics of PeopleSoft applications on additional platforms or their acceptance in the marketplace. Not all software products or release versions of the Company's software products are currently available on all of the above platforms. Presently, releases or new software products are initially introduced on Oracle with a subsequent release supporting other RDBMS versions. As a result of the complexities inherent in the DB2 environment and the performance demanded by customers in the DB2 environment, the DB2 version requires more lengthy development and testing periods to achieve market acceptance. In addition, there may be future or existing RDBMS platforms which achieve popularity within the business application marketplace and which PeopleSoft may desire to offer its applications thereon. Such future or existing RDBMS products may or may not be architecturally compatible with PeopleSoft's software product design. No assurance can be given concerning the successful porting to new platforms, the specific timing of completion of any such ports or their acceptance in the marketplace. GRAPHICAL USER INTERFACE All PeopleSoft software products share a common graphical user interface ("GUI") based on Microsoft's Windows family of products, which provides a consistent "look and feel" to the Company's applications, including similar pull-down menus, error handling, system navigation and point-and-click mouse-driven functionality. PeopleSoft Release 7 operates either in a 32-bit architecture on Windows 95 and NT or on browsers certified to run the Company's Web client. The intuitive nature of GUI-based systems increases productivity and reduces user training requirements. The GUI's ease of use encourages non-technical users to utilize the information system capabilities more fully. In addition, the GUI allows users to integrate enterprise applications and data with other Microsoft Windows-based desktop applications. For example, customers can easily query the system and download data into either a word processing document or a spreadsheet. By leveraging the public's widespread familiarity with personal computers ("PC"), previously difficult access to enterprise information is readily available to the casual employee user, resulting in potentially significant improvements in employee productivity. Web clients, in particular, will enable widespread casual usage throughout organizations to update information, initiate transactions, or obtain information. The Company has introduced certain application functionality specifically designed for access via its Java based Web client by the casual user. APPLICATION SECURITY ARCHITECTURE The Company's application software products incorporate extensive security features designed to protect certain sensitive data managed by these applications from unauthorized retrieval or modification. The Company has developed a security architecture utilizing the capabilities of its own applications, the client operating system software, some of the security features contained in the RDBMS platforms on which the applications run, as well as certain third party security products. To date, the Company is not aware of any violations of its application security architecture within its installed base. ELECTRONIC COMMERCE PeopleSoft's Web client runs applications over the World Wide Web, the Internet, extranets and intranets. Electronic Data Interchange ("EDI") is supported by the EDI Manager feature to handle transactions based on EDI documents utilizing standard X-12 and EDIFACT formats. The transactions can be passed over the Internet or private extranets. The Message Agent application programming interface allows initiation of PeopleSoft transactions from sources such as electronic forms, electronic mail, touch screen information kiosks and Web browsers. APPLICATION SOFTWARE PRODUCTS At December 31, 1997, PeopleSoft's commercially available application software products include PeopleSoft HRMS 7, PeopleSoft HRMS for Public Sector 7, PeopleSoft Financials 7, PeopleSoft Financials for Public Sector 6, PeopleSoft Distribution 7, PeopleSoft Manufacturing 7, PeopleSoft HRMS for the Federal Government 6 and PeopleTools 7. Listed below are the commercially available and beta software products for the following software product lines: 3 6 Cross Industry Application Software Products HRMS FINANCIALS DISTRIBUTION - ---------------------------- ----------------------- ---------------------- Human Resources General Ledger Purchasing Benefits Administration Receivables Inventory FSA Administration Payables Order Management Payroll Asset Management Billing Payroll Interface Projects Product Configurator Pension Administration Budgets Time and Labor Treasury * European Payroll* Expenses * Industry specific Application Software Products
MANUFACTURING SUPPLY CHAIN PLANNING OPTIMIZATION HIGHER EDUCATION/STUDENT ADMINISTRATION - ------------------------- ---------------------------------------- --------------------------------------- Bills and Routings Production Planning Campus Community Production Management Enterprise Planning Student Records Cost Management Order Promising Academic Advisement Engineering Financial Aid Quality* Admissions and Recruitment Student Financials
* in beta release STATEMENT OF FUTURE DIRECTION: THIS DOCUMENT CONTAINS STATEMENTS OF FUTURE DIRECTION CONCERNING POSSIBLE FUNCTIONALITY FOR PEOPLESOFT'S SOFTWARE PRODUCTS AND TECHNOLOGY. ALL FUNCTIONALITY AND SOFTWARE PRODUCTS WILL BE AVAILABLE FOR LICENSE AND SHIPMENT FROM PEOPLESOFT ONLY IF AND WHEN GENERALLY COMMERCIALLY AVAILABLE. PEOPLESOFT DISCLAIMS ANY EXPRESS OR IMPLIED COMMITMENT TO DELIVER FUNCTIONALITY OR SOFTWARE UNLESS OR UNTIL ACTUAL SHIPMENT OF THE FUNCTIONALITY OR SOFTWARE OCCURS. THE STATEMENTS OF POSSIBLE FUTURE DIRECTION ARE FOR INFORMATIONAL PURPOSES ONLY AND PEOPLESOFT MAKES NO EXPRESS OR IMPLIED COMMITMENTS OR REPRESENTATIONS CONCERNING THE TIMING AND CONTENT OF ANY FUTURE FUNCTIONALITY OR RELEASES. Release 7 software products have been enhanced to include many global features and functions and are commercially available in English, French, German, Spanish, and Canadian French. The HRMS applications are also available in Japanese. Release 7.5 will include translations into the above languages as well as the following additional languages: Dutch, Portuguese (for the Brazilian marketplace) and Japanese. The Company intends to continue to enhance its software products through new releases, including extending global functionality throughout its core software products and updating current country-specific and non-English language releases of its applications. Application software products currently under development and planned for future release include Performance Measurement, an application suite which helps organizations measure performance and support decision making throughout the enterprise with activity-based costing, economic value-added calculations, and the capability to determine profitability by customer, product and channel. The following new enterprise software products are currently in beta release: European Payroll, Expenses, Treasury and Quality. No assurance can be given concerning the successful development of enhancements or new modules, the specific timing of completing new releases or new features of software products or the level of their acceptance in the marketplace. The Company's software products are generally licensed to end-user customers under non-exclusive, non-transferable, perpetual license agreements. In most cases, the Company licenses its software products solely for the customer's internal operations. License fees for the Company's software products are a function of the particular combination of PeopleSoft software products chosen and, the number of employees for HRMS software products, the number of enrolled students for Higher Education software products or revenues of the licensing entity for Financial, Distribution and Manufacturing software products and the number of named users for third party workstation based software tools. All RDBMS platforms are priced the same except for DB2 mainframe versions, which have a higher price. The following range of individual software product license fees includes a single copy of the software, system and user documentation, one year of software product maintenance which includes a one-year software product warranty, limited installation support and limited software product training. Current list prices for license fees for a company with 1,500 employees and revenues of $375 million, can range as follows: 4 7
(IN THOUSANDS) HRMS FINANCIALS DISTRIBUTION MANUFACTURING STUDENT ---- ---------- ------------ ------------- ------- Mainframe $99-330 $123-568 $270-1,084 $103-627 $77-420 Other servers $90-300 $112-516 $245-985 $94-570 $70-280
These prices are subject to upward adjustments on an annual basis in the event the licensee's employee base or revenue base increase beyond certain ranges. Prices for PeopleSoft's Supply Chain Planning software products are based on the revenues of the licensing entity, beginning at $485,000 for the first server with additional servers priced at 30% of the first server. The Company also offers PeopleTools to PeopleSoft customers who are interested in developing their own custom, internal client/server business applications. License fees for PeopleTools are a function of the number of licensed users, and such fees start at $45,000. The contractual terms of PeopleTools licenses are similar to those for other PeopleSoft applications and generally do not restrict the customer's internal use of PeopleTools. PEOPLESOFT APPLICATION PRODUCTS -- HUMAN RESOURCE MANAGEMENT SYSTEM (HRMS) PeopleSoft HRMS 7 is a family of fully integrated human resource management application software products available for a variety of industries. Release 7 HRMS software products which are currently commercially available include: Human Resources, Benefits Administration, FSA Administration, Payroll, Payroll Interface, Time and Labor and Pension Administration. European Payroll is in beta release. A brief summary of each software product follows: PEOPLESOFT HUMAN RESOURCES. The base human resources software product provides support for the human resource and certain base benefit functions, including workforce administration (employee biographical and job-related information), recruitment, position management, training and development, health and safety monitoring, skills inventory, career and succession. This software product also contains capabilities to perform discrimination testing, EEO and ADA regulatory reporting, benefit plan setup and enrollment, COBRA administration, benefits billing, Family Medical Leave Act administration, multiple job eligibility and coverage calculations, and retroactive benefit/deduction calculations. Additional features include: globalization for managing operations and requirements specific to a country or region, tracking and administering of temporary global assignments, salary planning and budgets, competency management for identifying and analyzing job skills or competencies associated with individuals, jobs, teams and positions, and variable compensation to align the workforce with strategic business objectives, including the administration and tracking of various types of incentive compensation plans. This software product also includes the capability to set up online review by employees of their own selected human resource and benefits information. With this foundation as a building block, the following software products can be added to expand the range of system capabilities. PEOPLESOFT BENEFITS ADMINISTRATION. The benefits administration software product provides companies with the capability to automate certain of their more sophisticated benefits management processes, including flexible and non-flexible benefits programs that require complex eligibility checking, open enrollment processing, and other automatic enrollment processing capabilities. This application provides for user-defined benefit eligibility criteria, enrollment rules and flexible credit calculations. Companies also have the capability to set up online review by employees of certain of their own benefits information as well as voice-activated open enrollment and event maintenance. PEOPLESOFT FSA ADMINISTRATION. The flexible spending account administration ("FSA") software product provides the capability for companies to manage employee flexible spending accounts for healthcare and dependent care benefits plans. The FSA software product includes capabilities to track and process FSA claims tracking and processing, verify that flexible spending account funds are available and that duplicate claims are not processed, as well as support check preparation for reimbursements. PEOPLESOFT PAYROLL. The payroll software product provides a full in-house payroll administration and production facility. This application includes processes for payroll calculations, check printing, tax reporting, deduction and benefit calculations, and has comprehensive audit trail and reporting capabilities. Features include: Fair 5 8 Labor Standards Act overtime calculations, retroactive pay calculations, garnishment processing, online-interactive manual checks, prior period rates, company transfers and complete payroll tax processing information. PEOPLESOFT PAYROLL INTERFACE. The payroll interface software product provides a bridge between the PeopleSoft HRMS data and third party payroll systems for those companies that use their own payroll system or a payroll service bureau. This interface provides a subset of the capabilities of PeopleSoft Payroll along with enhanced with import facilities. PEOPLESOFT PENSION ADMINISTRATION. The pension administration software product provides the capability to automate pension administration functions for qualified, non-qualified, contributory, final pay, career average and cash balance defined benefit plans. This application also provides for flexible, user-defined plan rules and implementation processes, comprehensive calculations, and extensive retiree administration and tracking processes. PEOPLESOFT TIME AND LABOR. The time and labor software product provides a single repository for workforce time and labor tracking and reporting, including exception-only and positive time tracking. This software product supports a variety of time-related business processes, including earnings and tasks, and labor distribution. It also enables recording of information relating to an individual employee that can be expressed in hours. EUROPEAN PAYROLL (BETA RELEASE). This software product provides complete control over all aspects of the payroll operation in a multinational environment. Features include unique rules-based processing (used to set up many common payroll processes such as earnings, deductions, overrides, retroactivity, and prorations), complete multi-language and multi-currency capabilities, and comprehensive absence time tracking. Countries currently targeted for support include the United Kingdom, France, and Germany. No assurance can be given concerning the successful development of enhancements or new software products, the specific timing of completing new releases or new software products or the level of their acceptance in the marketplace. See Statement of Future Direction above. In addition to the above software products, the Company has extended the functionality of PeopleSoft HRMS through the integration of numerous third party software products including a resume reader from Restrac, tax reporting and filing from Federal Liaison Services and interactive voice processing of benefit, time and personal payroll-related information from TALX Corporation. PEOPLESOFT APPLICATION PRODUCTS -- FINANCIAL MANAGEMENT SYSTEMS PeopleSoft Financials is a family of fully integrated financial management system products available for a variety of industries. Release 7 Financials software products which are currently commercially available include: General Ledger, Receivables, Payables, Asset Management, Projects and Budgets. Treasury and Expenses are currently in beta release. No assurance can be given concerning the successful development of enhancements or new software products, the specific timing of completing new releases or new software products or the level of their acceptance in the marketplace. A brief summary of each software product follows: PEOPLESOFT GENERAL LEDGER. The general ledger software product provides financial analysis, flexible management reporting, general ledger accounting and consolidations that enable the user to collect and report financial information based on the organization's unique requirements. Features include: unlimited charts of account (ChartFields) with alternate account codes available to support multinational statutory requirements, unlimited ledger versions (multibooks) allowing transaction level data capture in an unlimited number of currencies, gross and net debit and credit balances, currency precision to 15.3 digits, automatic generation of cross-currency exchange rates, customer-defined ledgers, graphical "tree" maintenance of ChartField elements, flexible calendars, dynamic budgeting, automated journal entry, multi-currency capabilities, automated allocations processing and intercompany journal entries. PEOPLESOFT RECEIVABLES. The receivables software product manages the receipt of customer payments, and is designed to improve the organization's ability to collect payments in a timely fashion. Features include: automatic assessment of a customer's payment habits, generation of dunning letters, value-added tax ("VAT") processing, automatic tape lock box processing for electronic processing of high-volume transactions and cash position projections. PEOPLESOFT PAYABLES. The payables software product provides comprehensive accounts payable and cash management functions. Features include: the support of multiple currencies, flexible payment policies, VAT and 6 9 Goods and Services Tax ("GST") processing, automated three-way matching of receiving including evaluated receipt settlement ("ERS"), integration with PeopleSoft Asset Management and Purchasing to track asset acquisitions, invoice and purchase order data, recurring vendor contracts, express checks, workflow approval for vouchers and cash requirements analysis and planning. PEOPLESOFT ASSET MANAGEMENT. The asset management software product manages the acquisition, maintenance, transfer, depreciation and retirement of fixed assets and tax compliance. Features include: asset tracking, maintenance and insurance tracking, flexible depreciation accounting for book and tax purposes, what-if depreciation modeling, and integration with PeopleSoft Payables and Purchasing. PEOPLESOFT PROJECTS. The projects software product integrates operational and financial functions, allowing users to perform a variety of tasks, from managing complex capital projects to calculating revenue for billable projects. This software product was developed with input from experts from a wide range of industries including utilities, aerospace, health care, education, mining and engineering. PEOPLESOFT BUDGETS. The budgeting software product integrates all aspects of the budgeting process, combining spreadsheets, workflow processing and PeopleSoft reporting and query tools into a centralized budgeting solution. Features include automatic routing, flexible levels of budget detail, access to data from other applications, access to historical data, flexible time spans, status monitoring and reports tailored to user requirements. PEOPLESOFT TREASURY (BETA RELEASE). The treasury software product provides a comprehensive and flexible toolset for control over corporate treasury functions. Features include: flexible cash management and front office functions such as deal capture, deal modeling, market monitoring and management reporting, position management, and in-house bank administration. No assurance can be given concerning the successful development of enhancements or new software products, the specific timing of completing new releases or new software products or the level of their acceptance in the marketplace. See Statement of Future Direction above. PEOPLESOFT EXPENSES (BETA RELEASE). The expenses software product integrates all aspects of the travel and entertainment reimbursement process providing tight control over expense management processing while enabling timely and efficient employee reimbursement. Features include: the flexibility to enable travelers to use their own PCs to enter expense reports outside of the network and then submit them for approval and processing later, direct input from credit card companies, or centralized input of employee receipts submitted by travelers. This software can be integrated with the General Ledger and Payables for reporting and disbursements and will contain workflow capabilities for review and approval. No assurance can be given concerning the successful development of enhancements or new software products, the specific timing of completing new releases or new software products or the level of their acceptance in the marketplace. See Statement of Future Direction above. PEOPLESOFT APPLICATION PRODUCTS -- DISTRIBUTION PeopleSoft Distribution is a family of fully integrated distribution software products providing optimum materials and supply chain management. From materials procurement through complex outbound logistics, PeopleSoft Distribution uses the latest technology for the supply chain and to streamline business processes. Release 7 Distribution software products which are currently commercially available for the commercial sector are: Purchasing, Inventory, Billing, Order Management, Enterprise Planning, and Product Configurator. A brief summary of each software product follows: PEOPLESOFT PURCHASING. The purchasing software product automates requisitioning, purchasing and receiving of raw materials, supplies, services, products and assets, streamlines purchasing functions through on-line requisitioning, automated sourcing, and application integration and enables buyers to manage vendor selection and ongoing contracts more efficiently and cost effectively. Features include: simplified paperless receiving which also supports advanced shipment notifications ("ASN") via EDI, payment generation without invoices using evaluated receipt settlement, and automatic receipt requisitions from third party form providers. PEOPLESOFT INVENTORY. The inventory software product provides the ability to efficiently store and issue stock in response to changing demands, accurately track the movement of stock on a real-time basis, and automatically replenish stock as needed. Features include inventory set up based on organizational structures, costing and valuation management, warehousing space and stock management, schedule replenishment and distribution, inventory time levels 7 10 maintenance, material put away management, fulfillment of orders, item identification, lot and serial number tracking, local planning and reporting on inventory data. PEOPLESOFT BILLING. The billing software product offers a flexible, modular approach for managing billing and adjustments, processing sales taxes, generating invoices, and creating account distributions. Organizations can create an enterprise-wide billing information repository, streamline the billing process, and customize billing requirements. The unique modular approach opens PeopleSoft Billing to allow the billing process to be driven by any number of PeopleSoft and non-PeopleSoft billing sources. Features include: integration with PeopleSoft General Ledger and Order Management, ChartField combination edits, support of Canadian sales and use taxes and automated RMA credit generation. PEOPLESOFT ORDER MANAGEMENT. The order management software product handles the complete range of order processing requirements. Features include: rapid online order entry, alternative order entry methods, workflow, EDI, electronic forms, multimedia attachments, online ATP, quotation processing, alternate product lists, credit card enabling that is integrated with PeopleSoft Billing, flexible pricing and commissions, and contract management. PEOPLESOFT PRODUCT CONFIGURATOR. The configurator software product is a highly efficient solution to selling, producing, and tracking individually configured products in a make-to-order or assemble-to-order environment. Features include: built-in rules types to prompt and validate order entry, price and cost items based on order data, calculation of ship dates, sales order to workorder tracking, and creation and tracking inventory lots of configured products. PEOPLESOFT APPLICATION PRODUCTS - MANUFACTURING PeopleSoft Manufacturing is a family of fully integrated software products designed for discrete manufacturers. Release 7 Manufacturing software products which are commercially available include: Bills and Routings, Production Management, Cost Management and Engineering. PeopleSoft Quality is currently in beta release. No assurance can be given concerning the successful development of enhancements or new software products, the specific timing of completing new releases or new software products or the level of their acceptance in the marketplace. A brief summary of each software product follows: PEOPLESOFT BILLS AND ROUTINGS. The bills and routings software product provides all the features and functionality required to dynamically maintain complex bills of material ("BOM"), resources, work centers and routings. Features include: tight integration with PeopleSoft Engineering enabling BOM transfers, integration with engineering change orders ("ECO") as well as interfaces to PeopleSoft Production Planning and Enterprise Planning software products. PEOPLESOFT PRODUCTION MANAGEMENT. The production management software product synchronizes planning and execution throughout the enterprise. Features include: ability to manage production using discrete orders or production schedules, automatic conversion of planning orders to production, multiple methods of issuing material to production, including automatic replenishing using workflow, flexibility in recording assembly completions by operation or at production completion, along with assignment of serial and lot numbers and full support of configured production. Full production documentation includes component lists, operation lists, and dispatch reports. PEOPLESOFT COST MANAGEMENT. The Cost Management software product provides control and flexibility to manage costs throughout the supply chain. This software product focuses on determining, analyzing, and managing product costs and on accounting transactions that affect inventory balances. Features include: the ability to perform cost simulations, update production costs with a corresponding revaluation of inventory, and flexible overhead applications methods. An unlimited number of user-defined cost elements provide the option to maintain item costs at a very detailed or summarized level. Once costs are determined, they can be compared against actual performance for variance analysis. All inventory transactions are captured and posted to the general ledger as transactions occur, or at selected intervals, such as hourly, daily, weekly or monthly. PEOPLESOFT ENGINEERING. The engineering software product provides the ability to manage product introduction and change processes throughout the enterprise. Features include: creation of engineering change requests ("ECRs") and ECOs with change process support, seamless document management integration, integration with PeopleSoft Cost Management and Bills and Routings, and what-if modeling in a non-production environment. 8 11 PEOPLESOFT QUALITY (BETA RELEASE). The Quality software product, currently in beta release, provides a structured quality environment, combining online Statistical Process Control ("SPC") data collection with the power of a relational database for unparalleled quality analysis and reporting. Features include: easy-to-use interface for the collection of process and control data, real-time feedback to analyze quality data using charts, graphs and statistics, and fully customizable control chart formulas and tests. No assurance can be given concerning the successful development of enhancements or new software products, the specific timing of completing new releases or new software products or the level of their acceptance in the marketplace. See Statement of Future Direction above. PEOPLESOFT APPLICATION PRODUCTS -- SUPPLY CHAIN PLANNING PeopleSoft Supply Chain is a family of intelligent planning and optimization solutions, powered by Red Pepper technology, for supply chain planning, sales order promising and plant level operations. Supply Chain optimization technology is embedded in certain PeopleSoft Manufacturing and Distribution software products and is also sold separately for integration into customer environments that incorporate enterprise resource planning ("ERP"), material requirement planning ("MRP") and distribution requirement planning ("DRP") products from other vendors. The Supply Chain software products which are commercially available include: Production Planning, Enterprise Planning, and Order Promising. A brief summary of each software product follows: PEOPLESOFT PRODUCTION PLANNING. This interactive factory planning system enables planners to optimize their manufacturing operations. The in-memory model considers material and capacity constraints. It can also create multiple plans for investigation of alternative scenarios, support real-time planning using capable-to-promise functionality, and display material and capacity information at both a summary and detailed level. Interactive Gantt charts provide the ability to manually adjust schedules or have the system automatically repair material and capacity problems. PEOPLESOFT ENTERPRISE PLANNING. This intelligent supply chain optimization application creates a total view of the enterprise. Beyond just manufacturing planning, it includes true constraint-based replenishment planning, featuring sourcing rules, inventory stocking policies, transfer options, and plan requirements for each location in the supply chain. Enterprise Planning uses in-memory models and simultaneous constraint-based optimization technology and automatically recommends replenishment via make, buy, or transfer and alerts the user to any problems. Multiple what-if scenarios may be created to assist the planner in effectively selecting the best plan to execute. PEOPLESOFT ORDER PROMISING. This event-driven, real-time order promising application works in concert with an ERP system to evaluate production capability to meet customer demand. It evaluates both material and capacity at multiple levels of the enterprise. Order Promising maintains connectivity with ERP order management systems for real-time confirmation of promise dates. PEOPLESOFT HIGHER EDUCATION/STUDENT ADMINISTRATION PeopleSoft's Higher Education/Student Administration is a suite of six software applications tailored to meet the specific needs of higher education institutions and includes the advanced technology and features available in PeopleSoft 7. PeopleSoft Student Administration software products which are currently commercially available include: Campus Community, Student Records, Academic Advisement, Financial Aid, Admissions and Recruitment, and Student Financials. A brief summary of each software product follows: CAMPUS COMMUNITY. The campus community application captures and unifies prospect, applicant, student, alumni and employee records by allowing for a common database across the institution. This application streamlines internal communications management and provides complex global searches and tracking of all individuals and organizations associated with the college or university. STUDENT RECORDS. The student records application expedites complex academic administrative tasks such as catalog and class schedule maintenance, enrollment requisite and conflict checking, multiple grading systems, multiple concurrent academic careers and academic programs, wait list management and tracking, and automated transfer credit evaluation. ACADEMIC ADVISEMENT. The academic advisement application provides automated analysis of student progress toward completion of academic requirements. This application allows students and advisors to easily understand, navigate and track degree progress. The academic advisement application also provides what-if analysis and tailored academic programs for each student. 9 12 FINANCIAL AID. The financial aid application integrates workflow to streamline applications processing, assignment of student budgets, needs analysis, fund disbursement, and compliance with federal regulations and grant applications. This application also allows automated Direct and FFELP Loan processing and automated aid packaging. ADMISSIONS AND RECRUITMENT. The admissions and recruitment application captures all information relating to specific candidates, admitted students, recruiter management, event management, concurrent prospect and applications records, and automated admissions decisions. STUDENT FINANCIALS. The student financials application unifies all the rules a college or university has regarding fees and tuition, making possible innovative tuition calculation, cashiering, third party processing, collections and profitability tracking. PEOPLESOFT APPLICATION DEVELOPMENT AND PRODUCTIVITY TOOLS -- PEOPLETOOLS The Company includes a restricted use license to PeopleTools with each PeopleSoft application software product licensed. PeopleTools 7 includes the following application development tools: DEVELOPMENT TOOLS: Business process analysts use the following tools to design, prototype and deliver custom modifications and system extensions: APPLICATION DESIGNER. Application Designer is an integrated development environment which allows users to view and edit a list of applications objects through an MDI interface. It also allows modified objects to be moved into production through PeopleSoft's upgrade process. The Application Designer integrates the following tools: DATA DESIGNER. Data Designer is used to build new table definitions, to add, drop or modify fields in existing tables and to facilitate field editing. In addition, Data Designer includes PeopleCode, a programming language similar to Visual Basic which is used for custom field-level calculations, edits, defaults and programming routines which minimizes complex coding inherent with standard computer languages. PANEL DESIGNER. Panel Designer is used to build or modify GUI-based query and data entry screens. MENU DESIGNER. Menu Designer is used to build or modify application windows and pull-down menus in a graphical user interface environment. BUSINESS PROCESS DESIGNER. Business Process Designer comprises the tools used to design and build business processes, including workflow rules and routings. APPLICATION UPGRADER. Application Upgrader facilitates customer upgrades to successive releases of the applications with retention of the function and feature modifications made by the customer. OBJECT SECURITY. Object Security allows read or modification access to individual objects and groups of objects, including tables, panels, menus or tree structures. APPLICATION REVIEWER. Application Reviewer works as a debugger to help systems analysts perform problem identification and resolution prior to placing a modified system into production. APPLICATION PROCESSOR. Application Processor builds panels from stored application objects. An image of the objects in memory is written to local storage for reuse, but is automatically updated if changed on the server. EDI MANAGER. EDI Manager is used to define the data mappings for electronic data interchange. ADMINISTRATION TOOLS: Information systems managers and support staff use the following tools to improve the efficiency of implementing and operating PeopleSoft's software applications: APPLICATION INSTALLER. Application Installer automates the application installation process in various client/server network environments, facilitating easier navigation through the many hardware, database, and connectivity variables that affect PeopleSoft applications. DATA MOVER. Data Mover archives and retrieves archived data stored in PeopleSoft application databases. 10 13 OPERATOR SECURITY. Operator Security controls the scope and level of data accessibility provided to individuals and classes of users. MASS CHANGE. Mass Change is a SQL generator used to develop and perform custom applications. Through Mass Change, a developer can set up a series of insert, update or delete SQL statements that the end user can execute to perform business functions. IMPORT MANAGER. Import Manager speeds the loading of data generated by other systems into the RDBMS server for access by the Company's application software products. PROCESS SCHEDULER. Process Scheduler streamlines the execution of routine tasks and controls time-based events from distributed clients by running, on the client or server, batch processes or programs such as journal creation, payroll processing, voucher posting and other reports without requiring additional user interaction. REPORTING AND ANALYSIS TOOLS: The following tools are used by application users to easily access, analyze and report information: PS/nVISION. PS/nVision integrates PeopleSoft applications with Microsoft Excel in the production of financial statements, responsibility reports and other ad hoc financial reports and analyses. TREE MANAGER. Tree Manager builds hierarchical relationships between different data elements within a given table, such as among departments or accounts. PEOPLESOFT QUERY. PeopleSoft Query builds SQL queries which extract and summarize information from an application's database. QUERY LINK. Query Link provides a PeopleSoft Query interface to Crystal Reports Pro, a versatile report designer and formatter from Crystal Services. Through Query Link, data can be quickly and easily formatted with a variety of fonts, borders and other special effects or imported into a spreadsheet such as Microsoft Excel for further analysis. CUBE MANAGER. Cube Manager is used to map data between PeopleSoft databases and hyperdimensional cubes using online analytical processing ("OLAP"). PEOPLESOFT WORKFLOW TOOLS: PeopleSoft Workflow is a suite of tools that significantly extends the range of business tasks that can be automated. The following are PeopleSoft Workflow tools: WORKFLOW PROCESSOR. Workflow Processor is a suite of online agents that run and control the workflow in business processes. Once business processes are defined, agents are created which perform the business process tasks. PEOPLESOFT NAVIGATOR. The Navigator is a graphical browser which provides application users with a graphical map of the business processes they participate in and enables them to navigate, or select, application panels by clicking on activities they need to perform. DATABASE AGENT. The Database Agent monitors the PeopleSoft database to identify items that need to enter workflow for processing. MESSAGE AGENT. The Message Agent processes messages sent to PeopleSoft by external systems such as IVR, E-mail such as Lotus Notes or Microsoft CC-Mail, Internet, intranet, extranet and kiosks. It provides an Application Program Interface ("API") that enables third party systems to integrate with PeopleSoft. WORKLISTS. Worklists are ordered lists of work a person or department has to process. The list is sent to the correct person in priority order as defined using the Business Process Designer. WORKFLOW ADMINISTRATOR. The Workflow Administrator provides capability to access, monitor, analyze and control workflow applications. SALES AND MARKETING 11 14 The Company markets and licenses its software products in most major world markets primarily through a direct sales organization of 1,006 employees as of December 31, 1997. The direct sales organization is based over 20 field sales offices located in major metropolitan areas throughout the United States with international sales activities performed out of the Company's offices in Toronto, Vancouver, Ottawa, and Montreal, Canada; Amsterdam, the Netherlands; Paris, France; Reading, England; Munich, Germany; Mexico City, Mexico; Sydney, Perth and Melbourne, Australia; Auckland, New Zealand; Buenos Aires, Argentina; Sao Paulo, Brazil; Tokyo, Japan; Madrid, Spain; Johannesburg, South Africa; and Singapore. Most of the Company's licenses for PeopleSoft software products to date have been in the U.S. and Canada, and a significant portion of international sales have been to overseas affiliates of a customer's U.S. based enterprise. To augment its direct sales channel, the Company has or had: (i) a teaming agreement with Andersen Consulting to address the PeopleSoft HRMS and PeopleSoft Financials requirements of state and local government agencies; (ii) entered into a systems integration agreement with Shared Medical Systems Corporation ("SMS"); and (iii) utilized third party distributors and system integrators in various countries where it does not have a direct sales force. Further details concerning the Anderson Consulting agreement and the SMS agreement are set forth below. In support of its sales force, the Company conducts comprehensive marketing programs which include telemarketing, direct mail, public relations, advertising, seminars, trade shows and ongoing customer communication programs. The sales cycle begins with the generation of a sales lead, or often the receipt of a request for proposal ("RFP") from a prospect, which is followed by qualification of the lead, an analysis of the customer's needs, response to an RFP (if solicited by the customer), one or more presentations to the customer, customer internal sign-off activities, and contract negotiation and finalization. While the sales cycle from customer to customer varies substantially, the sales cycle has historically required six to twelve months. Generally, customers obtain separate licenses for the underlying database management systems directly from the RDBMS vendors, however, the Company may also sublicense runtime versions of Oracle's, Sybase's or Informix's RDBMSs and certain connectivity software products to its customers, and in come cases, has made royalty prepayments under these agreements. In addition, the Company incorporates SQRIBE Technology Corporations's ("SQRIBE") SQR, ReportMate, Seagate's Crystal Report Writer, BEA's Tuxedo and Jolt Middleware, Cognos' Powerplay, Select Software's data modeling and process modeling tools, and Rational's SQA Robot with all of its software products. The Company has sublicensing arrangements with Microsoft, Oracle, Informix, SQRIBE, Seagate, BEA, Cognos, Select Software, Folio Corporation and Rational and accordingly, the Company must rely on the strength of such companies' trademarks, trade secrets, contractual arrangements, copyrights and patents for protection and continued usage of such intellectual property by the Company. Termination of the relationship with any of these companies could adversely effect the Company's software product offerings and ability to generate revenue software application license sales. A key aspect of the Company's sales and marketing strategy is to build and maintain strong working relationships with businesses the Company believes play an important role in the successful marketing of its software products. The Company's customers and potential customers often rely on third party system integrators to develop, deploy and manage client/server applications. These include: (i) RDBMS software vendors (such as Informix, Microsoft, Oracle and Sybase); (ii) hardware vendors (such as Digital Equipment Corporation, Compaq Computer Corporation, Hewlett Packard Corporation, IBM, Sequent Computer Systems, Inc. and Sun Microsystems, Inc.) which offer both hardware platforms and, in the case of IBM, proprietary RDBMS products on which the Company's software products run; (iii) technology consulting firms and systems integrators (such as Andersen Consulting, IBM's ISSC, Deloitte and Touche LLP, Coopers and Lybrand LLP, KPMG Peat Marwick LLP, and Price Waterhouse LLP) some of which are active in the selection and implementation of large information systems for the information-intensive organizations that comprise the Company's principal customer base; and (iv) benefits consulting firms (such as Towers Perrin, Wyatt Co. and William M. Mercer & Co.) that are active in the implementation of human resource management systems. The Company believes that its marketing and sales efforts are enhanced by the worldwide presence of these companies. PeopleSoft has conducted several joint marketing and sales programs with these vendors and other technology and software partners, including seminars, 12 15 direct mail campaigns and trade show appearances. However, there can be no assurance that these companies, most of which have significantly greater financial and marketing resources than PeopleSoft, will not start, or in some cases increase, the marketing of business application software in competition with PeopleSoft, or will not otherwise discontinue their relationships with or support of PeopleSoft. If the Company or its partners are unable to adequately train a sufficient number of consulting personnel to support the implementation of the Company's software products, demand for these products could be adversely affected. In addition, PeopleSoft's software application architecture, including PeopleTools, may facilitate reduced implementation costs for customers compared to the competitive alternatives from Oracle and SAP. Therefore, systems integrators may actually generate lower integration fees when implementing PeopleSoft applications when compared to competitive offerings. Due to the foregoing factors, it is possible that in a future quarter or quarters, the Company's operating results could not meet the published expectations of certain public market financial analysts. In such an event, the price of the Company's common stock would very likely be materially adversely affected. RELATIONSHIP WITH ADP In order to broaden the overall distribution of its PeopleSoft HRMS software products and PeopleTools technology, in 1992 the Company signed a Software License and Support Agreement with ADP Inc. ("ADP"). This agreement provides ADP with a perpetual license to use internally, to modify and to sublicense to its clients and prospects Release 3 of PeopleSoft HRMS and PeopleTools on the Centura SQLBase (OS/2) and Oracle database environments. ADP does, however, have the option to sublicense PeopleSoft HRMS for operation with several other RDBMS platforms under certain circumstances. This license also permits ADP to provide service bureau functions to its clients and prospects using these software products. The service bureau and sublicense rights are limited to: (i) ADP clients and prospects which have a majority of their employees located in the United States, Canada, Mexico, the United Kingdom, Belgium, the Netherlands and Luxembourg (for such clients' and prospects' employees wherever located) ("ADP Marketing Area"); and (ii) ADP clients and prospects for such clients' and prospects' employees who are located in the ADP Marketing Area, even if such clients and prospects have a majority of their employees outside of such countries. Under the agreement, the Company provided ADP with certain training, consulting and support services and product modifications. The agreement was amended in 1995 to provide ADP with license rights to use and distribute PeopleSoft Workflow Release 5 and the Company agreed to provide ADP with defined product maintenance services for all updates, improvements, additions, modifications and/or enhancements to such PeopleSoft Workflow licensed only up to but not including Release 6 of PeopleSoft Workflow. The Company also agreed that, prior to 1998, it would not act as a service bureau or grant a license to use or modify PeopleSoft HRMS to parties in the United States, Canada and Mexico that could be considered "remarketers" of the PeopleSoft HRMS software product (excluding PeopleTools), such as consulting and facility management firms and payroll service bureaus. On September 21, 1995, the Company and ADP amended the agreement to permit their properly licensed customers to have a broad right to implement and enter into outsourcing arrangements with third parties. Pursuant to the agreement, as of December 31, 1997 certain provisions of the agreement expired. 13 16 Through December 31, 1997, the Company has received payments from ADP totaling $4.1 million for license fees and the fulfillment of certain customization and training obligations, and $18.3 million in minimum royalties for sublicenses granted by ADP including $4.2 million in minimum royalties in 1997. As of December 31, 1997, ADP has fulfilled all of its minimum royalty obligations under this agreement, as amended, and the Company may receive $0.5 million upon completion of certain customization obligations. RELATIONSHIP WITH ANDERSEN CONSULTING Under an exclusive five year teaming agreement executed in October 1993, PeopleSoft and Andersen Consulting are developing extensions to PeopleSoft's software products and jointly marketing and delivering financial and human resource client/server enterprise software solutions to state and local government and public sector organizations in North America. Under the terms of the agreement, PeopleSoft licenses its software application products directly to the customer, refers consulting services exceeding certain amounts to Andersen Consulting, and, will pay Andersen Consulting a royalty based on the amount of the license fee. PeopleSoft's 1996 and 1997 contracting activity included approximately $32.7 million and $111.9 million respectively in contracts which were subject to this agreement. In June 1997, PeopleSoft and Andersen Consulting announced a new strategic alliance to develop an integrated financial management system designed specifically to address the unique needs of the U.S. Federal Government. Under the terms of the agreement, Andersen Consulting will contribute certain resources to the joint development effort, both parties will team together on certain sales opportunities, PeopleSoft will license its software application products directly to the customer, and PeopleSoft will pay Andersen Consulting a royalty based on the amount of the license fee. As of December 31, 1997, the software product was under development and there were no license agreements which would be subject to this agreement. Subsequent to completing the development of the initial version of this software product suite, the Company will be required to obtain General Services Administration ("GSA") certification that the software products meet certain minimal functional requirements in order to market these products to agencies of the U.S. Federal Government. No assurance can be given that this software product development effort will be successfully completed or such certification will be obtained. RELATIONSHIP WITH SMS In August 1995, PeopleSoft and SMS entered into a systems integrator agreement whereby PeopleSoft appointed SMS as a distributor of certain PeopleSoft HRMS and Financials software products. The term of the agreement is ten years, with the possibility of annual renewals thereafter. SMS has the right to market/sublicense such software products in the United States and Puerto Rico to a defined base of SMS existing end users, and in conjunction with the distribution of SMS' software products, to other entities in the health care industry. Except in certain situations, SMS has exclusive distribution rights to SMS' end users. SMS also obtained the right to use certain software products of PeopleSoft HRMS and Financials software products and PeopleTools for general development in support of SMS' internal operations. Pursuant to the terms of the agreement, PeopleSoft has provided termination notice to SMS on March 19, 1998. As of March 27, 1998, SMS has contested the notice of termination. 14 17 INTERNATIONAL OPERATIONS During the years ended December 31, 1995, 1996 and 1997, the Company's international revenues were approximately 16%, 16% and 15% of total revenues, respectively. International revenues from each geographic region were less than 10% of total revenues. The Company operates in one industry segment, the development and marketing of computer software products and related services, and markets certain of its software products to a variety of industries through branches and foreign subsidiaries located in Canada, the United Kingdom, the Netherlands, Germany, France, Spain, South Africa, Mexico, Argentina, Brazil, Australia, Singapore, Japan and New Zealand. The Company established the sales office in South Africa during 1997. In addition, the Company also markets through distributors in the Asia/Pacific region. The international revenue percentages above understate the relative size of the Company's international installed base because U.S. based companies frequently acquire the rights to utilize the Company's software products in locations outside of the United States, although the Company does not generally report any portion of the revenues associated with these agreements as international revenues. SERVICES AND CUSTOMER SUPPORT The Company believes that a high level of customer service is required to be successful in the client/server marketplace due to the number of different hardware and software vendors involved in an implementation and the inherent complexity of the architecture. The Company also believes that the opportunity exists to differentiate itself from competitors on a service level due to the demanding service requirements of this market. The Company's customer service staff consisted of 2,114 employees as of December 31, 1997. Service revenue consists primarily of software support (maintenance) fees, customer training fees, consulting fees, and other miscellaneous fees. Services revenues constituted 41%, 44% and 47% of the Company's total revenues during the years ended December 31, 1995, 1996 and 1997, respectively. Service revenue may fluctuate due to, but not limited to, changes in levels of consulting activity, the related satisfaction of significant agreement milestones, and satisfaction of the Company's revenue recognition criteria. In addition, seasonality impacts training and installation revenue, both of which tend to follow license fees by approximately one quarter. The Company's service and support for each customer is coordinated by at least one account manager. The account manager is responsible for working with the customer in areas such as implementation and upgrade project 15 18 planning and management, and providing information and advice on PeopleSoft software products, services and partnerships. Additionally, the account manager coordinates ongoing training, consulting and support services. Such services include the following categories: SOFTWARE MAINTENANCE AND SUPPORT The Company provides 24-hour hot-line telephone support, staffed with a group of experienced professionals and supported by a computerized call tracking and problem reporting system. PeopleSoft has provided internet access to this hotline as an alternative to telephone bound service since August of 1995. The Company supports worldwide operations with hubs in North America, Europe and the Asia/Pacific region. This service provides subscribing customers with company news, direct access to other PeopleSoft subscribing customers, the ability to download and apply software product fixes and access to an online troubleshooting database. Initial software product license fees include the first year of maintenance support. Thereafter, ongoing maintenance contracts are offered to customers, and are renewable on an annual basis. The maintenance agreement entitles the customer to software product enhancements or upgrades released during the term of the maintenance agreement, an assigned account manager, and 24-hour hot-line telephone support. Annual maintenance fees are generally based on 17% of the then current list price of the software products under license by a customer. To date, well over 90% of all customers have renewed their maintenance contracts. CUSTOMER EDUCATION AND TRAINING The Company offers comprehensive education for key groups affected by the implementation of PeopleSoft technology (executives, the project team and application users) with the goal of ensuring each customer's success with the Company's software products. Training is also available for third party consultants. The Company's educational programs include instructor-led classes, computer-based training, and extensive end user training that also serves as an electronic performance support system. Instructor-led training is provided in training facilities leased by the Company in several major metropolitan areas around the world and can also be delivered on the customer's site for a fee plus travel expenses. The Company's fees for instructor-led, project team training are generally priced at $450 per training unit (representing one student day of training). The Company offers price reductions for volume advanced purchases of training units. The Company's pricing for end user training varies based on the number of employees at the customer company and the number of training modules purchased. CONSULTING SERVICES The Company offers a variety of consulting services to its customers including system product implementation assistance and planning, project planning and strategy, upgrade implementation, electronic commerce, workflow or OLAP deployment, and minor software product enhancements. The Company has several technology labs which currently concentrate on upgrading customers from one PeopleSoft release to the next. Additionally, the Company has a Year 2000 lab which specializes in rapid customer implementations and the development of tools, templates and methodologies to assist our customers and partners in similar efforts. The Company frequently works closely with third party consulting and systems integration firms such as Andersen Consulting, Deloitte and Touche LLP, KPMG Peat Marwick LLP and Price Waterhouse LLP who provide the customer with a full range of reengineering, customization and project management services. These third party consulting firms have also licensed PeopleSoft applications to develop programs to support customers implementing the Company's software products. During the past year PeopleSoft significantly expanded its consulting services group to meet growing customer demands for such services. There can be no assurance that PeopleSoft will be successful in further expanding its consulting services group, or that revenues from consulting services will in fact increase, or be profitable. COMPETITION The market for business application software is intensely competitive. The Company faces competition from a variety of vendors who provide products in one or more of the following areas: enterprise application software, financial management and accounting application software, HRMS application software, supply chain management application software, manufacturing application software, higher education application software, other industry specific software, and application development software tools. In addition to existing competitors, other 16 19 software vendors may broaden their product offerings by internally developing, or by acquiring or partnering with independent developers of, products that compete with the Company's products; and most of the customers in the Company's market could internally develop their own solutions using third party consultants or their own corporate information technology departments. Although PeopleSoft believes its success has been due in part to its early emphasis on the client/server architecture, virtually all of the Company's competitors now offer software products based on a client/server architecture. Consequently, competitive differentiators now include more subtle architectural and technological factors, such as Web enablement, enterprise product breadth and individual software product features, service reputation, software product flexibility, ease of implementation, international software product version availability and support, and price. In the enterprise application software market, PeopleSoft faces significant competition from SAP, Oracle and Baan and to a lesser degree, Dun & Bradstreet Software (now operating as two separate divisions of Geac Computer Systems, Inc.), Computer Associates International, Inc. and other companies such as System Software Associates who previously focused primarily on the AS/400 marketplace. In this market, the chief competitive factors include the breadth and completeness of the enterprise solution offered by each vendor, the extent of product integration across the enterprise solution and the availability of localized software products and technical support in key markets outside the United States. Primarily due to their significant worldwide presence and longer operating and product development history, both SAP and Oracle have certain competitive advantages over PeopleSoft in each of these areas. In addition, both SAP and Oracle have substantially greater financial, technical and marketing resources, and a larger installed base than PeopleSoft. Furthermore, Oracle's RDBMS is a supported platform underlying a significant share of PeopleSoft's installed applications, and Oracle has in the past demonstrated significant account control over many of these RDBMS customers PeopleSoft also faces competition from providers of HRMS software products including Cyborg Systems ("Cyborg"), Lawson Associates ("Lawson"), Integral Systems, Inc. ("Integral"), InPower, Inc. ("InPower") and Ceridian ("Ceridian"), and from providers of financial management systems software products including Computron Software, Inc., Flexiware International ("Flexiware"), Hyperion Software ("Hyperion"), Lawson, and other smaller companies. In addition, SMS has the right to sublicense selected PeopleSoft software products in competition with PeopleSoft's marketing efforts in selected markets. As the Company increases its offerings of industry specific applications, the Company expects to encounter additional competitors who have traditionally focused only on specific vertical markets. In addition to the specific markets mentioned below, the Company expects to compete with vendors offering application software products specifically in the Higher Education market, Healthcare market, Financial Services market, Utilities market and possibly others. In the manufacturing software application markets, in which PeopleSoft recently began competing, PeopleSoft faces competition from several of its existing competitors including those listed immediately above and others such as QAD, Ross Systems and J.D. Edwards, and a large number of niche competitors already in the manufacturing markets. In the emerging supply chain planning and optimization software solutions market, in which the Company now competes since its acquisition of Red Pepper Software Company in 1996, PeopleSoft faces several current and potential competitors including: (i) companies such as i2 Technologies, Manugistics, and Numetrix Software which have developed or are attempting to develop advanced planning and scheduling software products which complement or compete with MRP solutions; (ii) other companies that provide specialized planning and scheduling software for niche markets, including Chesapeake Systems, Waterloo Manufacturing Software, MAPICS, Inc. (formerly Marcam Corporation), Marcam Solutions, Inc. and Cap Logistics; and (iii) other enterprise application software vendors such as SAP and Baan. In addition, as the Year 2000 approaches, enterprises may consider outsourcing options including data center outsourcing and service bureaus as viable alternatives to purchasing the Company's software products which may result in increased competition from outsource services including Computer Science Corporation, Electronic Data Systems Corporation, IBM, ADP, Ceridian, and other smaller companies. 17 20 Intense competition could potentially lead to increased price competition in the market, forcing the Company to reduce prices which may result in reduced gross margins and loss of market share by the Company which therefore, could materially adversely affect the Company's business, operating results and financial condition. In recent quarters, the Company has observed increasingly aggressive pricing practices on the part of its major competitors, in particular SAP and Oracle. There can be no assurance that the Company will continue to compete successfully with its existing competitors or will be able to compete successfully with new competitors. SOFTWARE PRODUCT DEVELOPMENT Since inception, the Company has made substantial investments in research and software product development. Through the end of 1994, substantially all of the Company's software products have been developed by its internal development staff. Beginning in 1995, the Company increased the purchasing and licensing of third party software products. The Company believes that timely development of new software products, enhancements to existing software products and the acquisition of rights to sell or incorporate complimentary technologies and products into its software product offerings, is essential to maintain its competitive position in the market. The applications software market is characterized by rapid technological change, frequent introductions of new products, changes in customer demands and rapidly evolving industry standards. For example, in order to gain broad market acceptance, the Company maintains product availability across a number of RDBMS platforms. The Company believes that software product development is most effectively and expeditiously accomplished by small teams comprised of relatively senior people who are focused on certain software product areas. Accordingly, the Company's development organization is comprised of small, focused development groups assigned to each of the software products within the primary software product areas: PeopleSoft HRMS, PeopleSoft Financials, PeopleSoft Financials for the Public Sector, PeopleSoft Human Resources for the Federal Government, PeopleSoft Distribution, PeopleSoft Manufacturing, Supply Chain Planning, PeopleSoft Student Administration and PeopleTools. This development is typically undertaken in a single RDBMS environment on a workstation-based LAN. In addition, the Company utilizes a platforms group which is responsible for porting and testing the Company's software products on other RDBMS and hardware server environments. The Company's documentation group develops the user and system administration documentation for each software product. The Company utilizes a common technology and technical approach in the development of all application products. Significant application development is performed using PeopleTools. The Company released version 7 of PeopleSoft HRMS, PeopleSoft Financials, PeopleSoft Distribution and PeopleSoft Manufacturing in the third quarter of 1997, with each including significant technological enhancements to the existing software products. Version 7 of PeopleSoft's Student Administration/Higher Education software applications became generally available in December 1997. The Company's current focus in application development is to expand the functionality and breadth of the Company's software product offerings by (i) enhancing workflow capabilities; (ii) developing new software products and adding new functionality to existing software products including global product requirements and translated releases of global products, and industry specific functionality; (iii) supporting joint development arrangements under which certain vertical market applications may be developed; and (iv) adding certain architectural extensions. PeopleTools development activities have emphasized the continued evolution of a distributed processing architecture, graphical user interface and navigation enhancements, increased OLAP and electronic commerce capabilities, and functionality and utilities to support the application development activities in PeopleTools. There can be no assurance that such development efforts will result in its products, features or functionality or that software products, features or functionality that are developed will be accepted by the market. The Company's research and development staff consisted of 918 employees as of December 31, 1997. The Company's total research and development expenses were approximately $38.6 million, $70.7 million, and $129.6 million for the years ended December 31, 1995, 1996 and 1997, respectively. In addition, the Company capitalized software development costs of $2.4 million, $3.7 million and $2.5 million for the years ended December 31, 1995, 1996 and 1997, respectively. Capitalized software development costs are amortized over the estimated useful life of the software product beginning with general availability for a period not to exceed five years. Total capitalized software development amortization, which is charged to cost of license fees, amounted to $1.7 million in 1995, $1.6 million in 1996 and $4.0 million in 1997. In addition, in November 1996, the Company recorded a one time charge of $22.5 million for in-process research and development related to the purchase of PeopleSoft Manufacturing, Inc. ("PMI"). 18 21 PeopleSoft entered into development arrangements in 1995 and 1997 for the purpose of developing the Student Administration software applications which were commercially released in December 1997 (See Note 6 of the Notes to Consolidated Financial Statements). Under these agreements, PeopleSoft is the exclusive remarketer of the Student Administration software products, and pays a royalty to the third parties based on license fees received from end user licenses of these software products. All ownership rights and interests in the software will transfer to the Company, upon the later of five years from the commercial release of the applications or when $17 million in cumulative royalties have been paid to the third parties. In January 1997, PeopleSoft entered into a development and marketing agreement with Intrepid Systems, Inc. ("Intrepid") a leading supplier of integrated software solutions for retailers. Under the arrangement, Intrepid will port its merchandise management system software product suite for retail management ("Evolution") to PeopleTools and integrate these applications with PeopleSoft's general ledger and accounts payable software products. The companies will jointly market a retail enterprise solution including PeopleSoft HRMS and Financial software applications and Intrepid's Evolution and decision support software product suites. Concurrent with the execution of the agreement, PeopleSoft separately acquired a minority equity interest in Intrepid. While the intent of the agreement is to develop business applications which are integrated with PeopleSoft's software products, there can be no assurance that such software products will in fact be integrated or that an integrated enterprise solution will be accepted by the retail industry. INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, LICENSES AND PRODUCT LIABILITY The Company regards certain aspects of its internal operations, software and documentation as proprietary, and relies on a combination of contract, patent, copyright, trademark and trade secret laws and other measures to protect its proprietary information. The Company received its first patent in June 1995 and its second patent in August 1995. In July 1995, the Company received title to a third patent as part of a teaming and development agreement. The Company also has four additional patent applications pending. There can be no assurance that any issued patents will result from such applications or that, if issued, such patents will provide any meaningful competitive advantage. Existing copyright laws afford only limited protection. The Company believes that, because of the rapid pace of technological change in the computer software industry, patent, trade secret and copyright protection are less significant than factors such as the knowledge, ability and experience of the Company's employees, frequent software product enhancements and the timeliness and quality of support services. There can be no assurance that these protections will be adequate or that PeopleSoft's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. Many customers of PeopleSoft are beneficiaries of a source code escrow account arrangement to enable the customer to acquire a future limited right to use the Company's source code solely for their internal provision of maintenance services. This possible access to the Company's source code may increase the likelihood of misappropriation or other misuse of the Company's intellectual property. In addition, the laws of certain countries in which the Company's software products are or may be licensed do not protect the Company's software products and intellectual property rights to the same extent as the laws of the United States. The Company does not believe its software products, third party software products the Company offers under sublicense agreements, Company trademarks or other Company proprietary rights infringe the property rights of third parties. However, there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future software products or that any such assertion may not require the Company to enter into royalty arrangements or result in costly litigation. The Company's license agreements with its customers contain provisions designed to limit the exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in such license agreements may not be valid as a result of future federal, state or local laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any product liability claims to date, the license and support of its software for use in mission critical applications creates the risk of a claim being successfully pursued against the Company. Damage or injunctive relief resulting under such a successful claim could cause a materially adverse impact on the Company's business, operating results and financial condition. In addition, as PeopleSoft begins to compete in the manufacturing software application market, the mission critical nature of such software products may increase PeopleSoft's exposure to product liability claims against the Company. 19 22 PERSONNEL As of December 31, 1997, the Company employed 4,452 people, including 1,006 in sales and marketing, 918 in product development, 2,114 in customer services, and 414 in administration. None of the Company's employees in the United States are represented by a labor union or are subject to a collective bargaining agreement. Certain of the international employees are covered by the customary employment contracts and agreements of the countries in which they are employed. The Company believes that relations with its employees are good. The executive officers of the Company as of December 31, 1997, are as follows:
NAME AGE POSITION ---- --- -------- David A. Duffield 57 Chairman of the Board, Chief Executive Officer, and President Albert W. Duffield 54 Senior Vice President of Worldwide Operations, and Director Kenneth R. Morris 47 Senior Vice President and Chief Technology Officer Ronald E. F. Codd 42 Senior Vice President of Finance and Administration, Chief Financial Officer, and Secretary Margaret L. Taylor 46 Senior Vice President of Corporate Operations Aneel Bhusri 32 Senior Vice President of Product Strategy, Business Development and Marketing James J. Bozzini 31 Senior Vice President of Service Operations
Mr. David A. Duffield is a founder of the Company and has served as Chairman of the Board, Chief Executive Officer and President since the Company's incorporation in August 1987. Prior to that time, he was a founder and Chairman of the Board of Integral, a vendor of human resource and financial applications software, from April 1972 through April 1987. During a portion of that time, Mr. Duffield also served as Integral's Chief Executive Officer. Mr. Duffield is also the co-founder of Information Associates (now a subsidiary of Systems and Computer Technology), where he was employed between 1968 and 1972. From 1964 to 1968, Mr. Duffield worked at IBM as a marketing representative and systems engineer. He holds a B.Sc. in Electrical Engineering and an M.B.A. from Cornell University. Mr. Albert W. Duffield joined the Company in June 1990 as Vice President of Sales. Mr. Duffield was appointed Vice President of Operations in September 1991, and was appointed Vice President of Sales and Marketing in February 1993. In November 1993, he was appointed Senior Vice President of Sales and Marketing, and, effective January 1994, he was appointed Senior Vice President of Worldwide Operations. He was elected to the Board of Directors in April 1991. Prior to joining the Company, Mr. Duffield served as Chief Operating Officer of Data Design Associates, a division of Integral Systems, from June 1989 through June 1990. Prior to the acquisition of Data Design Associates by Integral Systems in September 1989, he served as its Senior Vice President of Sales and Marketing from October 1981 through June 1989. From 1970 to 1981, Mr. Duffield worked at IBM in various sales, sales management and staff management positions. He holds a B.Sc. in Hotel/Business Administration from Cornell University and an M.B.A. from Rutgers University. Mr. David Duffield and Mr. Albert Duffield are brothers. Mr. Kenneth R. Morris is a founder of the Company and was appointed Vice President of Product Development at the Company's incorporation in August 1987. In November 1993, he was appointed Senior Vice President of Product Development, and, effective January 1994, he was appointed Senior Vice President and Chief Technology Officer. From March 1982 to July 1987, Mr. Morris held various product development and customer service positions with Integral. Prior to March 1982, Mr. Morris held various positions, including as a Principal, with American Management Systems, Inc., a supplier of application software. He holds a B.B.A. from Southern Methodist University and an M.B.A. from Harvard University. Mr. Ronald E. F. Codd joined the Company in September 1991 as Vice President of Finance and Chief Financial Officer. In November 1993, he was appointed Senior Vice President of Finance and Administration and Chief Financial Officer. He was appointed Secretary of the Company in March 1992. Prior to joining the Company, Mr. Codd was Corporate Controller of MIPS Computer Systems, Inc., a microprocessor designer and 20 23 computer manufacturer, from March 1989 through September 1991. From March 1984 through March 1989, he was Corporate Controller and Chief Accounting Officer for Wyse Technology, Inc., a computer and peripheral manufacturer. Mr. Codd is a Certified Public Accountant, a Certified Managerial Accountant, and holds a Certified Production and Inventory Management credential. He received a B.Sc. in Business Administration from the University of California, Berkeley and an M.M. degree from the J.L. Kellogg Graduate School of Management (Northwestern University). Mr. Codd's father, Dr. Edgar F. Codd, is a director of the Company. Ms. Margaret L. Taylor joined the Company in January 1989 as Vice President of Customer Services, and was appointed Vice President of Customer Services and International in February 1993. In November 1993, she was appointed Senior Vice President of Customer Services, and, effective January 1994, she was appointed Senior Vice President of Application Development and Customer Services. In the third quarter of 1995, Ms. Taylor also assumed responsibility for PeopleTools development. In January 1998, she was appointed Senior Vice President of Corporate Operations and assumed responsibility for MIS and Facilities in addition to her existing responsibilities. From May 1986 to October 1988, Ms. Taylor was Vice President of Trust and Investment Management at The Hibernia Bank. From August 1978 to August 1985, she held various positions with the Bank of California, N.A., including Vice President and Director of Human Resources. Ms. Taylor holds a B.A. in Psychology and Communications from Lone Mountain College. Mr. Aneel Bhusri joined PeopleSoft in August 1993 as Director of Strategic Planning. In April of 1995, he was appointed Vice President of Product Strategy. In November of 1995, Mr. Bhusri was appointed Senior Vice President of Product Strategy. In April 1997, he was appointed Senior Vice President of Product Strategy, Business Development and Marketing. Prior to joining PeopleSoft, Mr. Bhusri was an associate at Norwest Venture Capital from June 1992 to March 1993. From 1988 to 1991 he was a financial analyst in Morgan Stanley's Corporate Finance Department. Mr. Bhusri holds an M.B.A. from Stanford University and a B.Sc. in Electrical Engineering with a B.A. in Economics from Brown University. Mr. James J. Bozzini joined the Company in August 1991 as an account manager, and was appointed Director of European Operations in December 1992. In January 1994, he was appointed Director of International Services and in February 1994 assumed responsibility for the Professional Services group in North America, in addition to his international responsibilities. In January 1995, he was appointed Vice President of Professional Services, and in January 1997 he was appointed Vice President of Customer Service Operations and assumed responsibility for Education Services, Product Support, and Customer Service Strategy, in addition to Professional Services. In January 1998, Mr. Bozzini was appointed Senior Vice President of Service Operations and his responsibilities increased to include MIS, Facilities, and Communication Services. From August 1988 to July 1991, he held various positions at Andersen Consulting. Mr. Bozzini holds a B.S. in Business from California State University, Chico. The Company has experienced an extended period of significant revenue growth, a significant expansion in the number of its employees, increased pressure on the viability and scope of its operating and financial systems and expansion in the geographic scope of its operations. This growth has resulted in new and increased responsibilities for management personnel and has placed a significant strain upon the Company's management, operating and financial controls and resources. To accommodate recent growth, compete effectively and manage potential future growth, the Company must continue to implement and improve the speed and quality of its information decision systems, business processes, reporting systems, procedures and controls and further expand, train and motivate its workforce. There can be no assurance that the Company's personnel, procedures, systems and controls will be adequate to support the Company's future operations. PeopleSoft believes that its continued success will depend in large part upon its ability to attract and retain highly-skilled technical, managerial and marketing personnel. The loss of services of one or more of the Company's key employees could have a materially adverse effect on the Company's business, operating results and financial condition. The Company intends to hire a significant number of additional sales, service and technical personnel in 1998. Competition for the hiring of such personnel in the software industry is intense, and the Company from time to time experiences difficulty in locating candidates with appropriate qualifications, particularly within the desired geographic location. It is widely believed that the technology sector is at or over a state of full employment. There can be no assurance that the Company will be successful in attracting and retaining the personnel it requires to develop, market and support new or existing software. The growth in the Company's 21 24 customer base and expansion of its product lines and supported platforms have placed, and are expected to continue to place, a significant strain on the Company's management and operations, including its services and development organizations. Any failure to implement and improve the Company's operational, control, reporting, and management systems or to retain, expand, train, motivate or manage employees could have a materially adverse effect on the Company's business, operating results and financial condition. ITEM 2. PROPERTIES FACILITIES As of December 31, 1997, the Company leased the majority of its facilities and its principal locations are in or near the following cities:
Approximate Lease Location Square Feet Expiration Date Principal Activities - -------- ----------- --------------- -------------------- Irvine, CA 11,000 November 2000 Sales, Marketing and Customer Mission Hills, CA 6,000 January 1998 Development Pleasanton, CA 216,000 February 2002 Corporate HQ, Development and Technical Support Pleasanton, CA 35,000 January 1999 Corporate HQ, Development and Technical Support Pleasanton, CA 66,000 July 2006 Sales, Marketing and Customer Service San Mateo, CA 29,000 July 2000 Development, Sales, Marketing and Customer Service Coral Gables, FL 10,000 July 2002 Sales, Marketing and Customer Service Atlanta, GA 59,000 June 2000 Sales, Marketing and Customer Service Chicago, IL 53,000 December 2001 Sales, Marketing and Customer Service Boston, MA 21,000 November 1999 Sales, Marketing and Customer Service Bethesda, MD 46,000 August 2000 Sales, Marketing and Customer Service Detroit, MI 14,000 June 2003 Sales, Marketing and Customer Service Minneapolis, MN 13,000 July 2002 Sales, Marketing and Customer Service Teaneck, NJ 47,000 May 2003 Sales, Marketing and Customer Service Philadelphia, PA 13,000 September 2001 Sales, Marketing and Customer Service Dallas, TX 18,000 July 2000 Sales, Marketing and Customer Service Melbourne, Australia 10,000 February 1999 Sales, Marketing and Customer Service Sydney, Australia 21,000 September 2001 Sales, Marketing and Customer Service Montreal, Canada 9,000 July 2002 Sales, Marketing and Customer Service Toronto, Canada 12,000 September 1999 Sales, Marketing and Customer Service Vancouver, Canada 16,000 April 2002 Sales, Marketing and Customer Service Reading, England 15,000 March 1998 Sales, Marketing, Customer Service and Administration Paris, France 22,000 March 1999 Sales, Marketing and Customer Service Munich, Germany 9,000 June 1999 Sales, Marketing and Customer Service Amsterdam, the Netherlands 18,000 June 2001 Sales, Marketing, Customer Service and Administration Madrid, Spain 7,000 June 1999 Sales, Marketing and Customer Service Singapore 13,000 December 2001 Sales, Marketing and Customer Service Johannesburg, South Africa 2,000 November 1998 Sales, Marketing and Customer Service
The Company also leases smaller facilities (generally under execusuite arrangements) for sales, marketing and customer service activities in or near Phoenix, Arizona; Sacramento, California; Denver, Colorado; Orlando, Florida; Indianapolis, Indiana; St. Louis, Missouri; Cincinnati and Columbus, Ohio; Pittsburgh, Pennsylvania; Austin and Houston Texas; Bellevue, Washington; Milwaukee, Wisconsin; and outside of the United States in 22 25 Calgary, Ottawa and Edmonton, Canada; Mexico City and Monterey, Mexico; Buenos Aires, Argentina; Rio De Janeiro and Sao Paulo, Brazil; Adelaide, Brisbane, Canberra and Perth, Australia; Tokyo, Japan; Wellington and Auckland, New Zealand; and Brussels, Belgium. In 1998, the Company anticipates expanding existing facilities, depending upon the availability of suitable additional space. Commercial building vacancy rates have significantly dropped in many of the markets where the Company has significant operations. As a consequence, the Company expects to experience increasing difficulty in obtaining additional space within which to expand its operations. Failure to either obtain space, or obtain it on reasonably attractive commercial terms, may inhibit the Company's ability to grow, or otherwise adversely effect the Company's operations and financial results. The Company acquired an office building in Pleasanton, California in a cash transaction in December of 1995. The total cost was approximately $25 million, including all related transaction costs, for approximately 275,000 square feet of office space. As of December 31, 1997, approximately 180,000 square feet or approximately 65.5% was occupied by the Company and 95,000 square feet was occupied by existing tenants. In December 1996, the Company entered into a five-year lease for a new office facility in Pleasanton, California. The lessor has committed to fund up to a maximum of $70 million for construction of the facility. This lease is structured as an operating lease, however, the accounting treatment will ultimately be determined upon inception of the lease term when the Company occupies the facility. Construction on the facility is anticipated to be completed in the third quarter of 1998 and payments under this lease will be based on LIBOR rates applied to amounts funded and will begin at that time. The Company has an option to renew the lease for an additional three years, subject to certain conditions. If at the end of the lease term the Company does not purchase the property, the Company would guarantee a residual value to the lessor equal to a specified percentage of the lessor's cost of the facility. Under this lease, the Company is required to maintain compliance with certain financial covenants. Subsequent to 1997, the Company negotiated an amendment to this lease which extends the term of the lease until February 2003, with an option to renew for an additional three years. Additionally, the Company negotiated a fixed rate funding option under which the Company may elect that any or all of the amounts funded to date be charged a fixed interest rate. The Company has the option of setting the fixed rate expiration date for any date through the end of the lease term. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various legal disputes and proceedings arising from the ordinary course of general business activities. In the opinion of management, resolution of these matters is not expected to have a material adverse effect on the financial position, results of operations and cash flows of the Company. However, depending on the amount and timing, an unfavorable resolution of some or all these matters could materially affect the Company's future results of operations or cash flows in a particular period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the Nasdaq National Market under the symbol PSFT. In December 1997, the Company effected a two-for-one split of its common stock. All share and per share data applicable to prior periods have been restated to reflect the split. The following table lists the high and low sales for the last two years:
HIGH LOW ---- --- Fourth quarter of 1997 $39.50 $27.19
23 26 Third quarter of 1997 $33.19 $26.00 Second quarter of 1997 $28.44 $15.31 First quarter of 1997 $28.38 $18.88 Fourth quarter of 1996 $26.13 $20.13 Third quarter of 1996 $21.19 $14.09 Second quarter of 1996 $18.25 $11.94 First quarter of 1996 $14.81 $ 8.69
The trading price of the Company's common stock is subject to wide fluctuations in response to quarterly variations in contracting activity and operating results, announcements of technological innovations or new software products by the Company or its competitors, as well as other events or factors. In addition, the stock market has from time to time experienced extreme price and volume fluctuations which have particularly effected the market price of many high technology companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's common stock. As of March 20, 1998, the approximate number of common stockholders of record was 2,430, representing approximately 86,000 shareholder accounts. The Company has never paid cash dividends on its capital stock. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's facility lease prohibits the payment of cash dividends without the other's consent. Certain provisions of the Company's Certificate of Incorporation and Bylaws could delay the removal of incumbent directors and could make a merger, tender offer or proxy contest involving the Company more difficult, even if such events would be beneficial to the interests of the stockholders. In addition, the Company has 2,000,000 shares of authorized Preferred Stock. The Company may issue shares of such Preferred Stock in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. In addition, the staggered terms of the Company's Board of Directors could have the effect of delaying or deferring a change in control of the Company. Under a stockholder rights plan adopted in 1995, each share of the Company's common stock carries the right ("Right"), under certain circumstances, to purchase equity securities of the Company or an acquirer. Ten days after a tender offer or acquisition of 20% or more of the Company's common stock, each Right may be exercised for $190 ("Exercise Price") to purchase one one-thousandth of one share of the Company's Series A Participating Preferred Stock. Each one one-thousandth of each share of Series A Participating Preferred Stock will generally be afforded economic rights similar to one share of the Company's common stock. In addition after such rights are triggered, each Right entitles the holder to purchase common stock of the Company with a fair value of twice the Exercise Price or, in certain circumstances, securities of the acquiring company for the Exercise Price. Each Right expires in February 2005, and, during specified periods, the Company may redeem or exchange each Right for $.01 or one share of common stock, respectively. Based on the number of shares of common stock outstanding at March 20, 1998, officers and directors of the Company and persons who may be deemed to be affiliates, as a group, beneficially owned approximately 33% of PeopleSoft's outstanding common stock. As a result, officers and directors and their affiliates may have influence over the election of the Board of Directors and any matters requiring approval by the stockholders of the Company. In addition, the Company has entered into agreements with its officers and directors indemnifying them against losses they may incur in legal proceedings resulting from their service to the Company. 24 27 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31, (b) -------------------------------------------------------- 1993 (a) 1994 (a) 1995 (a) 1996 1997 -------- -------- -------- -------- -------- (in thousands except per share amounts) STATEMENTS OF INCOME DATA: Revenues: License fees $ 37,656 $ 68,580 $137,808 $252,799 $433,195 Services 20,565 44,503 94,331 197,253 382,456 -------- -------- -------- -------- -------- Total revenues 58,221 113,083 232,139 450,052 815,651 Costs and expenses: Cost of license fees 3,123 6,817 8,503 12,357 21,635 Cost of services 12,270 26,740 56,789 118,906 229,178 Sales and marketing 17,909 35,844 70,052 135,757 225,498 Product development 8,688 15,318 38,625 70,653 129,553 General and administrative 4,317 8,167 16,182 27,162 43,611 In-process research and development and merger related costs -- -- -- 29,393 -- -------- -------- -------- -------- -------- Total costs and expenses 46,307 92,886 190,151 394,228 649,475 -------- -------- -------- -------- -------- Operating income 11,914 20,197 41,988 55,824 166,176 Other income, interest expense and 1,167 2,192 4,149 5,888 9,862 other -------- -------- -------- -------- -------- Income before income taxes 13,081 22,389 46,137 61,712 176,038 Provision for income taxes 5,265 9,308 18,799 25,851 67,775 -------- -------- -------- -------- -------- Net income $ 7,816 $ 13,081 $ 27,338 $ 35,861 $108,263 ======== ======== ======== ======== ======== Basic income per share $ 0.04 $ 0.07 $ 0.13 $ 0.17 $ 0.49 ======== ======== ======== ======== ======== Shares used in basic per share computation 183,553 194,156 203,689 211,248 219,302 ======== ======== ======== ======== ======== Diluted income per share $ 0.04 $ 0.06 $ 0.12 $ 0.15 $ 0.44 ======== ======== ======== ======== ======== Shares used in diluted per share computation 203,592 213,644 228,987 239,452 248,321 ======== ======== ======== ======== ======== BALANCE SHEET DATA: Working capital $ 61,784 $ 72,290 $ 89,437 $109,806 $245,014 Total assets $108,584 $173,987 $322,241 $540,080 $898,336 Long-term obligations $ 989 $ 958 -- -- -- Stockholders' equity $ 72,054 $ 94,580 $161,094 $253,248 $417,304
(a) Historical financial information has been restated to reflect the combination of PeopleSoft and Red Pepper, accounted for as a pooling-of-interests. (b) Historical results of operations are not necessarily indicative of future results. Refer to the Results of Operations - Risk Factors under Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the discussion of factors which may impact future results. Note: Per share information for all periods presented reflects restatement for the two-for-one stock split in December 1997. No cash dividends have been declared or paid in any period presented. 25 28 ITEM 7. 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. The following discussion sets forth certain factors the Company believes could cause actual results to differ materially from those contemplated by the forward-looking statements. Forward-looking statements include but are not limited to those identified with a footnote(1) symbol. The Company undertakes no obligation to update the information contained in this Item 7. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of total revenues and the percentage of period over period growth represented by certain line items in the Company's consolidated statements of income:
Years Ended December 31, - --------------------------------------------------------------------------------------------------------------------------------- Percentage of Percentage of Dollar Increase Total Revenues Year Over Year - ---------------------------------------- -------------------------- 1995 1996 1997 96/95 97/96 - ---------- ---------- ---------- ---------- ---------- Revenues: 59% 56% 53% License fees 83% 71% 41 44 47 Services 109 94 - ---------- ---------- ---------- ---------- ---------- 100 100 100 Total revenues 94 81 Costs and expenses: 4 3 3 Cost of license fees 45 75 24 26 28 Cost of services 109 93 30 30 28 Sales and marketing 94 66 17 16 16 Product development 83 83 7 6 5 General and administrative development 68 61 In-process research and development development and non-recurring -- 6 -- acquisition costs N/A N/A - ---------- ---------- ---------- ---------- ---------- 82 87 80 Total costs and expenses 107 65 - ---------- ---------- ---------- ---------- ---------- 18 13 20 Operating income 33 198 2 1 1 Other income, interest expense and other 42 67 - ---------- ---------- ---------- ---------- ---------- 20 14 21 Income before income taxes 34 185 8 6 8 Provision for income taxes 38 162 - ---------- ---------- ---------- Net income ---------- ---------- 12% 8% 13% 31% 202% ========== ========== ========== ========== ==========
REVENUES The Company recognizes revenue when a non-cancelable license agreement has been signed, the software product has been shipped, there are no uncertainties surrounding product acceptance, there are no significant vendor obligations, the fees are fixed and determinable, and collection is considered probable. For customer license agreements which meet the Company's revenue recognition policy, the portion allocated to software license fees will generally be recognized in the current period, while the portion allocated to services is recognized as the services are performed. When the Company enters into a license agreement with a customer requiring significant customization of the software products, the Company recognizes revenue related to the license agreement using contract accounting. The total dollar amount of customer license agreements executed ("contracting activity") for software license fees and services increased from $218.6 million in 1995, to $407.6 million in 1996, and to $706.4 in 1997. 26 29 Contracting activity with new customers which numbered 628 comprised approximately 68% of the total contracting activity executed for the year ended December 31, 1997, compared with 539 new customers and 75% for the year ended December 31, 1996, and 316 new customers and 70% for the year ended December 31, 1995. Average contract size, computed by dividing the number of new customers into total contracting activity, increased from approximately $0.7 million in 1995, to $0.8 million in 1996, and to $1.1 million in 1997 due primarily to the Company's expanded software product offerings. Revenues from licensing fees increased by 83% from $137.8 million in 1995 to $252.8 million in 1996 and increased by 71% to $433.2 million in 1997 . The increase in license fee revenues was attributable to continued increased market acceptance of, and expanded breadth of, the Company's software product offerings and the increased capacity created by continued growth in the Company's sales, marketing and customer service organizations. Major new product releases in 1997 included a multi-language version of PeopleSoft 6 released in July; including financials, HRMS, and supply chain solutions; PeopleSoft 7 in September offering a three tier processing architecture, Web client, Universal Applications for self service transactions on the World Wide Web, Application Designer, a new integrated development tool, two new applications for distribution and manufacturing, and expanded functionality for the Supply Chain Optimization software product; HRMS for U.S. Federal Government 7 in November; HRMS for Public Sector 7 in December; and Student Administration/Higher Education 7 in December. Revenues from services increased by 109% from $94.3 million in 1995 to $197.3 million in 1996 and increased by 94% to $382.5 million in 1997. The Company's customer license agreements provide for initial maintenance, training, and installation services for specified periods or amounts. Therefore increases in customer licensing agreements have resulted in increases in revenues from these services. Service revenues as a percentage of total revenues were 41%, 44%, and 47% for the years ended December 31, 1995, 1996, and 1997 respectively. The increase in the relative percentage of service revenues to total revenues in these periods was attributable to two primary factors: increases in the installed base of customers receiving ongoing maintenance, training and other support services; and a significant increase in consulting revenue as a result of expanded demand for PeopleSoft's direct assistance during enterprise implementation projects. Total revenues increased by 94% from $232.1 million in 1995 to $450.1 million in 1996 and increased by 81% to $815.7 million in 1997. During the years ended December 31, 1995, 1996, and 1997, the Company's international revenues were approximately 16%, 16% and 15% of total revenues, respectively. The dollar increase in international revenues resulted from expanded international operations and the introduction of Release 6 which incorporated additional global features and functionality . The Company expects international revenues to continue to grow in absolute dollars during 1998, and accordingly, continues to invest heavily in international infrastructure, global product functionality and translated versions of financial and other software products(1). In the event international expansion and/or product globalization efforts are not successful, the Company's business operating results and financial condition may be adversely affected. COSTS AND EXPENSES Cost of license fees consists principally of royalties, technology access fees for certain third party software products and amortization of capitalized software costs. Cost of license fees increased from $8.5 million in 1995 to $12.4 million in 1996, and $21.6 million in 1997, representing 4%, 3% and 3% of total revenues and 6%, 5% and 5% of license fee revenues in those years, respectively. The Company's system solutions 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 seasonal fluctuations in revenues contrasted with certain fixed expenses such as the amortization of capitalized software. Royalties associated with certain software products currently under development by joint business arrangements and charges - ---------- (1) Forward-Looking Statement 27 30 associated with software products and technologies acquired from various third party vendors may cause the cost of license fees as a percentage of license fee revenues to increase in future periods. Cost of services consists principally of account management field support, training, consulting and product support. These costs increased from $56.8 million in 1995, to $118.9 million in 1996, and $229.2 million in 1997, representing 24%, 26%, and 28% of total revenues and 60% of service revenues in those years, respectively. These increases are due to the significant expansion of the Company's customer service resources across all categories, including consulting, telephone support, training, and account management staff. In particular, the Company has made a significant investment in its professional consulting services organization which has grown substantially over the past two years in response to customer demand. The Company anticipates cost of services will increase in dollar amount, and may increase as a percentage of total revenues, in future periods. Sales and marketing expenses increased from $70.1 million in 1995, to $135.8 million in 1996, and $225.5 million in 1997, representing 30%, 30%, and 28% of total revenues. The increase in sales and marketing expenses is attributable to the Company's continued expansion of its direct sales force, increased commission expense associated with higher revenue, increased depreciation from related equipment and facility expenditures, continued investment in building an international direct sales force and increased marketing expenses for the Company's expanded software product offerings. The Company continues to increase its direct sales and marketing expenditures to address certain international markets, establish an industry focused enterprise sales force structure and fund both cross industry and industry specific marketing and sales activities. Consequently, such expenses may increase as a percentage of total revenues in future periods. Software product development expenses increased from $38.6 million in 1995, to $70.7 million in 1996, and to $129.6 million in 1997, representing 17%, 16%, and 16% of total revenues, respectively. In addition, capitalization of internal software development costs were $2.4 million in 1995, $3.7 million in 1996, and $2.5 million in 1997. Software product development expenditure increases are directly attributable to increases in the Company's staff of software engineers and consultants, and the associated infrastructure costs required to support software product development initiatives in the following areas: (i) software releases described in the revenue section above; (ii) expansion and enhancement of the Company's core software product offerings in the areas of HRMS, Financial Management Systems, and Distribution/Materials Management Systems and Supply Chain Management software; (iii) the enhancement of the Company's platform development, certification, software product testing and overall release management capabilities; (iv) the continued enhancement of the Company's client/server architecture including its software development tools and the integration of these tools with various third party purchased or licensed technologies; (v) the localization and translation of certain versions of the Company's software products for specific foreign markets; and (vi) the development of certain vertical market products and versions of its core products suitable to the unique needs of customers within certain industries. In particular, the Company's development expenditure increases during 1997 were driven by: (i) the acquisition in 1996 of PeopleSoft Manufacturing, Inc. and PeopleMan L.P. (collectively referred to as PMI) and the ongoing associated expansion of the Company's manufacturing application development activities; (ii) the release in the second quarter of 1997 of a Japanese language based version of its HRMS and Financial software products; (iii) the release of Student Administration software products for the Higher Education marketplace in December 1997, and the associated merger in July of 1997 of Campus Solutions, the company primarily responsible for building the Student Administration product family; and (iv) expenditures associated with the Company's next major enterprise application release (PeopleSoft 7.5), expected to available in the first half of 1998(1) (see the Statement of Future Direction in Item 1 - Application Software Products). The Company intends to continue to invest significant resources in upcoming releases, and anticipates software product development expenditures will significantly increase in future periods due to continued incremental investment in all of the above areas, and overall development expenditures may increase as a percentage of revenues. General and administrative expenses increased from $16.2 million in 1995 to $27.2 million in 1996, and to $43.6 million in 1997, representing 7%, 6%, and 5% of total revenues, respectively. The dollar increase in general and administrative expenses resulted primarily from increases in staffing and related infrastructure to support the Company's growth, and increases in administrative expenses associated with the operation of foreign subsidiaries. - -------------- (1) Forward-Looking Statement 28 31 Other income, consisting primarily of interest, increased from $4.1 million in 1995 to $5.9 million in 1996, and $9.9 million in 1997 primarily due to a higher balance of cash, cash equivalents and investments. PROVISION FOR INCOME TAXES The Company's income tax provision increased from $18.8 million in 1995 to $25.9 million in 1996 and to $67.8 million in 1997. The 1997 effective tax rate decreased to 38.5% as compared to 41.9% in 1996 and 40.8% in 1995. The 1997 effective tax rate is lower than the 1996 rate mainly due to: the extension of the federal research tax credit as well as recent favorable changes in California's research tax credit rules; a reduction in the Company's overall state income tax rate; and the absence of major one time nondeductible charges. As permitted by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", the Company has recorded $32.7 million in net deferred tax assets at December 31, 1997. The realization of these deferred tax assets is based on historical tax positions and expectations about future taxable income. The Company anticipates that its 1998 effective tax rate will not exceed 38.5%(1). LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities provided cash of $230.1 million during 1997, compared to $130.9 million in 1996, and $67.0 million in 1995. Operating cash flows increased primarily due to increases in income before non-cash items, deferred revenue, accrued compensation and related expenses, the tax benefit of employee stock transactions, and income taxes payable, the sum of which were partially offset by increases in accounts receivable and other assets. Net accounts receivable increased from $100.2 million to $163.7 million and to $299.2 million as of December 31, 1995, 1996 and 1997, respectively, and deferred revenues increased from $98.1 million to $183.3 million and to $327.7 million over the same period. The increase in net accounts receivable resulted from the growth in customer licensing activity partially offset by increased cash collections. Deferred revenue has increased as a result of the growth in customer contracting activity and the associated deferrals of license fees and revenues related to services to be provided to new licensees. In addition, the Company's expanded installed base has resulted in increased deferred revenues related to ongoing maintenance and other services. The Company calculates accounts receivable days sales outstanding ("DSO") as the ratio of quarter-end accounts receivable to the sum of quarterly revenues and the net change in quarter-end deferred revenues, multiplied by 90. The Company believes this calculation is appropriate because license fees are typically billable regardless of whether revenue has been recognized or deferred. Under this method, accounts receivable days outstanding was 83 days as of December 31, 1996 as compared to 88 days as of December 31, 1997. The increase in DSO over the prior year is within the range of historical variation attributable to the timing of cash collections, variations in the terms of individual license agreements, and business linearity within the quarters. Since billing terms of the Company's agreements typically are spread out over a sequence of events (including contract execution through standard acceptance) or dates that generally span four to nine months, and contracting activity is concentrated at the end of each quarter, the Company anticipates that its DSO will continue to be substantial in future periods. The exercise of common stock options and issuance of stock under employee stock purchase plans have represented a significant source of cash, contributing $5.1 million, $15.1 million, and $33.3 million in the years ending December 31, 1995, 1996, and 1997, respectively. In addition, the Company believes granting stock options is essential in attracting and retaining key employees who are critical to the Company's success. In 1995, 1996 and 1997, the Company granted options aggregating 6.1%, 5.4% and 5.0%, respectively, of the common stock issued and outstanding at the beginning of each year. The Company anticipates that it will continue to grant a significant number of options each year. The actual number of options granted each year is based on a variety of factors including the Company's historical and anticipated employee count, the level of hiring activity, competitive factors associated with the labor market, and comparison of the Company's compensation philosophy and practice to other similar technology companies. There can be no assurance that employee stock activity will continue to generate substantial funds in the future. - --------------- (1) Forward-Looking Statement 29 32 In November 1995, the Company received $21.8 million through the private placement of warrants to purchase an aggregate of 8,000,000 shares of the Company's common stock. These warrants carry the right to purchase the Company's common stock at prices ranging from $13.75 to $19.375 per share of common stock. Upon notice of exercise by the holders of the warrants, the Company, at its option, may settle such exercise by either issuing the full amount of shares and receiving cash proceeds, issuing a net amount of shares with no cash proceeds, or purchasing the warrants for an amount equal to the difference between the then fair market value of the common stock and the warrant exercise price. In November 1997, the Company issued 942,880 shares of common stock pursuant to the net exercise of warrants to purchase 1,600,000 shares of common stock at $13.75 per share. While the Company has not determined how the warrants will be satisfied in the future, they represent a significant source of potential liquidity and may provide the Company with cash up to $48 million in 1998 and $58 million in 1999(1). During the years ended December 31, 1996 and 1997, the Company's principal use of cash for investing activities included investments and the purchase of property and equipment comprised of purchases of computer and networking equipment to accommodate employee and facility expansions and to support the Company's growing training capacity requirements. As of December 31, 1997, the Company had $245.0 million in working capital, including $267.9 million in cash and cash equivalents and $124.6 million in short-term investments, consisting primarily of high quality municipal bonds and tax-advantaged money market funds. The Company believes that existing cash and short term investment balances, proceeds from sale of stock under the employee purchase plan and stock option exercises, potential proceeds from issuance of stock for warrants, and potential cash flow from operations will be sufficient to meet its operating cash requirements at least through 1998 (1). FINANCIAL RISK MANAGEMENT FOREIGN EXCHANGE PeopleSoft's revenue originating outside the United States was 15% of total revenues in 1997. International revenues from each geographic region was less than 10% of total revenues. International sales are made mostly from the Company's foreign sales subsidiaries in the local countries and are typically denominated in the local currency of each country. These subsidiaries also incur most of their expenses in the local currency. Accordingly, all foreign subsidiaries use the local currency as their functional currency. The Company's international business is subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely impacted by changes in these or other factors. The Company's exposure to foreign exchange rate fluctuations arise in part from intercompany accounts in which cost of software, including certain development costs, incurred in the United States is charged to the Company's foreign sales subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order to centralize foreign exchange risk with the parent company in the United States. The Company is also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. The effect of foreign exchange rate fluctuations on the Company in 1997 was not material. However, subsequent to 1997, due to foreign exchange exposure to these fluctuations increasing as sales and intercompany balances grow, the Company initiated a hedging program designed to mitigate the potential for future adverse impact due to changes in foreign exchange rates. The program uses forward foreign exchange contracts as the vehicle for hedging these intercompany balances. In general, these forward foreign exchange contracts have three months or less to maturity. Gains and losses on these hedges will be recorded in Other income. Management of - ---------------- (1) Forward-Looking Statement 30 33 the foreign exchange hedging program is done in accordance with a corporate policy approved by the Company's Board of Directors. INTEREST RATES The Company invests its cash in a variety of financial instruments, including bank time deposits, and taxable and tax-advantaged variable rate and fixed rate obligations of corporations, municipalities, and local, state and national governmental entities and agencies. These investments are denominated in US Dollars. Cash balances in foreign currencies overseas are operating balances are and only invested in short term time deposits of the local operating bank. Interest income on the Company's investments is carried in Other Income. The Company accounts for its investment instruments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). All of the cash equivalent, short term, and long term investments are treated as available-for-sale" under SFAS 115. Investments in both fixed rate and floating rate interest earning instruments 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 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. The Company's investments are made in accordance with an investment policy approved by the Board of Directors. At year end 1997, the average maturity of the Company's investment securities was roughly four months. No investment securities had maturities exceeding two years. The following table presents certain information about the Company's financial instruments held by the Company at December 31, 1997 that are sensitive to changes in interest rates. These instruments are not leveraged and are held for purposes other than trading. For available-for-sale investment securities, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The Company believes its available-for-sale securities, comprised of highly liquid debt securities of corporations, municipalities, and the U.S. Government, are similar enough to aggregate. Because of the Company's effective tax rate, the Company finds it advantageous to invest largely in tax- advantaged securities, therefore the average interest rates below are most comparable to tax-exempt interest rates. Below is a tabular presentation of the maturity profile of the available-for-sale investment securities held by the Company at December 31, 1997: INTEREST RATE SENSITIVITY PRINCIPAL AMOUNT BY EXPECTED MATURITY WEIGHTED AVERAGE INTEREST RATE
Fair Value (dollars in millions) 1998 1999 Total 12/31/97 - -------------------------------------------------------------------------------------------------- Available-for-sale securities $253.3 $26.8 $280.1 $280.3 Weighted average interest rate 4.0% 4.0%
The Company is not an issuer of any corporate debt nor does it have any bank borrowings outstanding. FACTORS THAT MAY EFFECT FUTURE RESULTS The Company has identified certain forward-looking statements in the Management's Discussion and Analysis of Financial Condition and Results of Operations with a footnote(1) symbol. The Company may also make oral forward-looking statements from time to time. Actual results may differ materially from those projected in any such forward-looking statements due to a number of factors, including those set forth below and elsewhere in this Form 10-K. 31 34 The Company operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of these risks and uncertainties which may have a material adverse effect on the Company's business, financial condition or results of operations. This section should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 1995, 1996, and 1997 contained elsewhere in this Form 10-K. Fluctuations in Quarterly Operating Results. The Company's revenues and operating results can vary substantially from quarter to quarter. License revenues in any quarter are substantially dependent on aggregate contracting activity and the Company's ability to recognize revenue in that quarter in accordance with its revenue recognition policies. Contracting activity is difficult to forecast for a variety of reasons including: (i) a significant portion of the Company's license agreements are completed within the last few weeks of each quarter; (ii) the duration of the Company's sales cycle is relatively long and increasingly variable because the Company has broadened its marketing emphasis to encompass software product solutions for the customer's overall enterprise, thereby increasing the financial value of individual transactions and the complexity of the customer selection, negotiation and approval process; (iii) the size of license transactions can vary significantly; (iv) system replacement projects and new system evaluations may be postponed or canceled at any time due to changes in a customer's project, company management, budgetary constraints or strategic priorities; (v) customer evaluations and procurement processes vary significantly from company to company, and a customer's internal approval and expenditure authorization process can be arduous, even subsequent to actual vendor selection; (vi) the number, timing and significance of software product enhancements and new software product announcements by the Company and its competitors; (vii) as the Year 2000 approaches, many potential customers are evaluating their legacy systems and must decide whether to repair or replace existing applications which have Year 2000 operability issues. While the Company believes that such evaluations are favorably impacting demand for its applications, such demand is subject to change as the Year 2000 draws closer since lead times required to complete systems implementations preclude system replacement as a timely solution to the Year 2000 issue. Given the lack of precedent for an issue of this magnitude, the Company's ability to accurately forecast the impact of the issue on quarter to quarter revenue achievement is limited; (viii) changes in the Company's sales incentive plans have had and may continue to have an unpredictable impact on seasonal business patterns; and (ix) changes in economic, political and market conditions can adversely impact business opportunities without any notice. The correlation between license fee revenues recognized and contracting activity can vary significantly because of factors which may cause revenue to be initially deferred including: (i) the license agreement may be entirely related to then currently undeliverable software products; (ii) enterprise transactions which include software products that are then currently deliverable, as well as software products that are still under development. To the extent the Company enters into a license agreement for the provision of both software product categories, the Company must have established separate values for all elements under the license agreement, and the license agreement and supporting schedules to the license agreement must contain very precise contractual provisions consistent with generally accepted accounting principals to permit any revenue recognition under the license agreement; (iii) the customer may demand services that include significant modifications, customizations or complex interfaces; (iv) the license agreement may include non-standard acceptance criteria which may preclude revenue recognition; (v) the license agreement may include fees with extended payment terms or fees that are dependent upon acceptance of services or other contingencies; and (vi) all of the above factors, as well as other specific requirements under recently published generally accepted accounting standards for software revenue recognition create circumstances under which the Company must have very precise contractual agreements in order to recognize revenue upon initial software product delivery. Although the Company has a standard license agreement which meets the demanding criteria under generally accepted accounting principles, the Company must often negotiate and revise certain terms and conditions in large enterprise transactions. Negotiation of mutually acceptable language can extend the sales cycle, and in certain situations, the Company does not always obtain terms and conditions which permit recognition of revenue at the time of delivery or even under a percentage-of-completion method under contract accounting rules. 32 35 Services revenues may vary from quarter to quarter due to variances in prior quarter contracting activity which impacts consulting services revenue on a lag. The Company's ability to increase services revenue is dependent on its ability to grow licensing activity which provides opportunities for consulting, training, and subsequent maintenance revenues. Additionally the Company may not be able to recruit, hire, and train sufficient numbers of qualified consultants to perform such services. Due to the foregoing, it is likely that in one or more future quarters the Company's operating results will be below the expectations of public securities market analysts. In such event, the price of the Company's common stock would likely be materially adversely affected. Possible Adverse Impact of Recent Accounting Pronouncement. Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was issued in October 1997 and addresses software revenue recognition matters. The SOP supersedes SOP 91-1 and is effective for transactions entered into for fiscal years beginning after December 15, 1997. Based upon its reading and interpretation of SOP 97-2 the Company believes its current revenue recognition policies and practices are materially consistent with the SOP. However, implementation guidelines for this standard have not yet been issued and a wide range of potential interpretations are being discussed by the accounting profession. Once available, such implementation guidance could lead to unanticipated changes in the Company's current revenue accounting practices, and such changes could materially adversely affect the Company's future revenue and earnings. Such implementation guidance may necessitate substantial changes in the Company's business practices in order for the Company to continue to recognize a substantial portion of its license fee revenue upon delivery of its software products. Such changes may reduce demand, extend sales cycles, increase administrative costs and otherwise adversely affect operations. In addition, the Company may be put at a competitive disadvantage relative to foreign based competitors not subject to U.S. generally accepted accounting principles. Operating Leverage. Consistent with many companies in the software industry, the Company's business model is characterized by a very high degree of operating leverage. Employee and facility related expenditures comprise a significant portion of the Company's operating costs and expenses, and over the short term are relatively fixed. In addition, the Company's expense levels and hiring plans are based, in significant part, on the Company's projections of future revenue levels. If revenue levels fall below expectations, net income is likely to be disproportionately adversely affected. There can be no assurance that the Company will be able to increase or even maintain its current level of profitability on a quarterly or annual basis in the future. Future Operating Results Uncertain. Segments of the software industry have experienced significant economic downturns characterized by decreased product demand, price erosion, technological shifts, work slowdowns and layoffs. The Company's operations may, in the future, experience substantial fluctuations from period to period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from customers, and other factors affecting capital spending. There can be no assurance that such factors will not have a materially adverse effect on the Company's business, operating results or financial condition. Although the Company's 1998 operating budget is based on projections of a material increase in total revenues over the corresponding actual results for 1997, the Company does not believe that the percentage increases in revenues achieved in prior periods should be anticipated in future periods. The operating results of many software companies reflect seasonal trends, and the Company has been, and expects to continue to be, affected by such trends in the future. The Company's seasonal patterns of revenue achievement, which are typically characterized by relatively weaker first and second quarters and relatively stronger third and fourth quarters, can be caused by a variety of factors, including sales incentives, customer demand based on available capital budgets and release of new technologies. International Operations. The Company has utilized, and will continue to utilize substantial resources and funding to build its international service and support infrastructure. Operating costs in many countries, including many of those in which the Company operates, are higher than in the United States. In order to increase international sales in 1998 and subsequent periods, the Company must continue to globalize its software product 33 36 lines, expand existing and establish additional foreign operations, hire additional personnel, identify suitable locations for sales, marketing, customer service and development, and recruit international distributors and resellers in selected territories. In the event international expansion and/or product globalization are not successful, it is likely to have a negative impact on the Company's operating results. The Company's sales through its foreign operations are generally denominated in each respective subsidiary's functional currency. Unexpected changes in the exchange rates for these foreign currencies could result in significant fluctuations in the foreign currency transaction and translation gains and losses in future periods. The Company expects to have an increased amount of non-U.S. dollar denominated license agreements and implemented a hedging program designed to mitigate the potential impact of exchange rate fluctuations in January 1998. In addition to hedging existing transaction exposures, the Company's foreign exchange management policy allows for the hedging of anticipated transactions, and exposure resulting from the translation of foreign 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. These hedges will only be undertaken should the Company deem them necessary to protect the U.S. Dollar value of the underlying exposure. The Company foresees that hedges of such anticipated transactions and translation exposures will be done in the future using forward and option contracts(1), however in the event the Company is unable to hedge potential significant exposures due to lack of certainty or ability to reasonably estimate the foreign exchange exposure, there could be a material adverse impact to the Company's operating results. Competition. The market for business application software is intensely competitive. The Company faces competition from a variety of software vendors including enterprise application software vendors, manufacturing application software vendors, enterprise resource optimization application software vendors, financial management systems and HRMS application software vendors and software tools vendors. Although the Company believes its success has been due in part to its early emphasis on the client/server architecture, virtually all of the Company's competitors now offer software products based on a client/server architecture. Consequently, competitive differentiators now include more subtle architectural and technological factors, such as web enablement, enterprise software product breadth and individual product features, service reputation, product flexibility, ease of implementation, international software product version availability and support, and price. In the enterprise application software market, PeopleSoft faces significant competition from SAP AG, Oracle Corporation and Baan Company N. V. and to a lesser degree, Dun & Bradstreet Software (now operating as two separate divisions of Geac Computer Systems, Inc.), Computer Associates International, Inc. and other companies such as System Software Associates who previously focused primarily on the AS/400 marketplace. In this market, the chief competitive factors include the breadth and completeness of the enterprise solution offered by each vendor, the extent of software product integration across the enterprise solution and the availability of localized software products and technical support in key markets outside the United States. Primarily due to their significant worldwide presence and longer operating and product development history, both SAP and Oracle have certain competitive advantages over PeopleSoft in each of these areas. In addition, both SAP and Oracle have substantially greater financial, technical and marketing resources, and a larger installed base than PeopleSoft. Furthermore, Oracle's RDBMS (relational database management system) is a supported platform underlying a significant share of PeopleSoft's installed applications. In the manufacturing software application markets, in which PeopleSoft recently began competing, PeopleSoft faces competition from several of its existing competitors including those listed immediately above and others such as QAD, Ross Systems and J.D. Edwards and a large number of niche competitors already in the manufacturing market. In the emerging enterprise resource optimization software solutions market, in which the Company now competes since its acquisition of Red Pepper Software during the fourth quarter of 1996, PeopleSoft faces several current and potential competitors including: (i) companies such as i2 Technologies, Manugistics and Numetrix Software which have developed or are attempting to develop advanced planning and scheduling software products which complement or compete with MRP (material requirements planning) solutions; (ii) other companies that provide specialized planning and scheduling software for niche markets, including Chesapeake Systems, Waterloo - ------------------ (1) Forward Looking-Statement 34 37 Manufacturing Software, MAPICS, Inc. (formerly Marcam Corporation), Marcam Solutions, Inc. and Cap Logistics; (iii) other business application software vendors that may broaden their product offerings by internally developing (such as SAP's recently announced initiatives in this area), or by acquiring (such as Baan's recent acquisitions of Berclain Group, Inc. and Antalys, Inc.) or partnering with independent developers of advanced planning and scheduling software; (iv) internal development efforts by corporate information technology departments; and (v) companies offering standardized or customized products on mainframe and/or mid-range computer systems. PeopleSoft also faces competition from providers of HRMS software products including Cyborg, Lawson, Integral Systems, Inc., InPower and Ceridian, and from providers of financial management systems software products including Hyperion, Computron Software, Inc., Lawson Associates and other smaller companies. In addition, ADP, Inc. and Shared Medical Systems, Inc. ("SMS") have the right to sublicense selected PeopleSoft software products in competition with PeopleSoft's marketing efforts in selected markets. In addition, as the Year 2000 approaches, enterprises may consider outsourcing options including data center outsourcing and service bureaus as viable alternatives to purchasing the Company's software products which may result in increased competition from outsource services including Computer Science Corporation (CSC), Electronic Data Systems Corporation (EDS), IBM, ADP, Ceridian, and other smaller companies. Intense competition could potentially lead to increased price competition in the market, forcing the Company to reduce prices which may result in reduced gross margins and loss of market share by the Company which therefore, could materially adversely affect the Company's business, operating results and financial condition. In recent quarters the Company has observed increasingly aggressive pricing practices on the part of its competitors. There can be no assurance that the Company will continue to compete successfully with its existing competitors or will be able to compete successfully with new competitors. Certain Risks Associated With Acquisitions. As part of its overall strategy, the Company plans to continue to acquire or invest in complementary companies, products, or technologies and to enter into joint ventures and strategic alliances with other companies. Risks commonly encountered in such transactions include the difficulty of assimilating the operations and personnel of the combined companies, the potential disruption of the Company's ongoing business, the inability to retain key technical and managerial personnel, the inability of management to maximize the financial and strategic position of the Company through the successful integration of acquired businesses, decreases in reported earnings as a result of charges for in-process research and development and amortization of acquired intangible assets, adverse impact on the Company's annual effective tax rate, dilution of existing equity holders, difficulty in maintaining controls, procedures, and policies, and the impairment of relationships with employees and customers as a result of any integration of new personnel. There can be no assurance that the Company would be successful in overcoming these risks or any other problems encountered in connection with such business combinations, investments, or joint ventures, or that such transactions will not materially adversely affect the Company's business, financial condition, or operating results. Reliance on Proprietary Software Development Tools. The Company's software products include a suite of proprietary software development tools known as "PeopleTools," which are fundamental to the effective use of the Company's software products. While no industry standard exists for software development tools, several companies are focused specifically on providing software development tools and are attempting to establish their software development tools as accepted industry standards. In the event that a software product other than the Company's PeopleTools software product becomes the clearly established and widely accepted industry standard, the Company may need to abandon or modify PeopleTools in favor of such an established standard, may be forced to redesign its software products to operate with such third party's software development tools, or may be faced with the potential sales obstacle of marketing a proprietary software product against other vendors' software products incorporating a standardized software development toolset or components. Accordingly, in any of these cases, the Company's results of operations could be materially adversely affected. 35 38 Reliance on Third Parties for Sales and Marketing. A key aspect of the sales and marketing strategy for the Company is to build and maintain strong working relationships with businesses the Company believes play an important role in the successful marketing of its software products. The Company's customers and potential customers often rely on third party system integrators to develop, deploy and manage client/server applications. These include: (i) RDBMS software vendors; (ii) hardware vendors which offer both hardware platforms and, in the case of IBM, proprietary RDBMS products on which the Company's software products run; (iii) technology consulting firms and systems integrators, some of which are active in the selection and implementation of large information systems for the information-intensive organizations that comprise the Company's principal customer base; and (iv) benefits consulting firms that are active in the implementation of HRMS. The Company believes that its marketing and sales efforts are enhanced by the worldwide presence of these companies. However, there can be no assurance that these companies, most of which have significantly greater financial and marketing resources than PeopleSoft, will not start, or in some cases increase, the marketing of business application software in competition with PeopleSoft, or will not otherwise discontinue their relationships with or support of PeopleSoft. If the Company or its partners are unable to recruit and adequately train a sufficient number of consulting personnel to support the implementation of the Company's software products, demand for these software products could subsequently be materially adversely affected. In addition, PeopleSoft's software application architecture, including PeopleTools, may facilitate reduced implementation efforts for customers compared to the competitive alternatives. Consequently, PeopleSoft's software products may be a less desirable recommendation alternative for integrators who both provide selection advice and generate consulting fees from customers by providing implementation services. If PeopleSoft's relationship with its partners were to deteriorate, the Company's business and operating results could be materially adversely impacted Complexity of Software Products and Product Development. The market for the Company's software products is characterized by rapid technological change, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. The Company's future success will depend in part upon its ability to continue to enhance and expand its core applications, to continue to provide enterprise solutions, to enter new markets and to develop and introduce new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance. If the Company is unable to enhance existing products or develop and introduce new products in a timely manner, the Company's business and results of operations could be materially adversely affected. PeopleSoft's software products can be licensed for use with a variety of popular industry standard RDBMSs. There may be future or existing RDBMS platforms which achieve popularity within the business application marketplace and on which PeopleSoft may desire to offer its applications. Such future or existing RDBMS products may or may not be architecturally compatible with PeopleSoft's software product design. No assurance can be given concerning the successful development of PeopleSoft software products on additional platforms, the specific timing of the releases of any future software products, the performance characteristics of PeopleSoft applications on additional platforms or their acceptance in the marketplace. Beginning with Release 6, the Company integrated certain features of BEA's Tuxedo product into its applications. Over the next several releases, additional Tuxedo features will be integrated to allow applications to run on a distributed basis using a multi-tiered client/server architecture(1). Cognos' Powerplay product and Arbor's Essbase product will be bundled to incorporate desktop on-line analytical processing ("OLAP") capabilities(1). Such enhancements may be critical to the competitiveness of the Company's software products in the future. Integration of these and other products is complex and no assurance can be made that these efforts will be successful or result in significant software product enhancements (see Statement of Future Direction in Item 1 - Application Software Products). Software programs as complex as those offered by the Company are likely to contain a number of undetected errors or "bugs" when they are first introduced or as new releases are thereafter released. Despite testing by the Company and by third-parties, errors or system performance issues may arise with the possible result of - ---------- (1) Forward-Looking Statement 36 39 reduced acceptance of the Company's software products in the marketplace. Due to the increasing number of possible combinations of vendor hardware platforms, operating systems and updated versions, PeopleSoft application software products and updated versions, and RDBMS platforms and updated versions, the effort and expense of developing, testing and maintaining these software product lines in an increasing number of combinations will increase, and the ability to develop consistent software product performance characteristics across all of these combinations could place a significant strain on the Company's development resources and software product release schedules. Reliance on Client Platforms. At the present time, the Company supports client platforms utilizing browsers certified to run our Java based Web client, or Microsoft's Windows family of software products, including Windows 3.1 (PeopleSoft releases prior to Release 6 only), Windows NT and Windows 95. If Microsoft were to fundamentally change the architecture of its software product such that users of PeopleSoft's software applications experienced significant performance degradation or were rendered incompatible with future versions of Microsoft's Windows Operating System, the Company's results of operations could be materially adversely affected. The use of a Web browser (running on either a PC or network computer) to access client/server systems is emerging as an alternative client to the traditional desktop access through Microsoft Windows based personal computers. Such client access via the Internet will be subject to numerous risks inherent in utilizing the Internet including security, availability and reliability. There may be future or existing client platforms which achieve popularity within the business application marketplace and on which PeopleSoft may desire to offer its applications. Such future or existing client platforms may or may not be architecturally compatible with PeopleSoft's software product design. No assurance can be given concerning the Company's successful support for new client platforms, the specific timing of their availability or their acceptance in the marketplace. Reliance on Joint Business Arrangements. The Company has, and may in the future, enter into various development or joint business arrangements for the purpose of developing new software products or extensions to existing software products. Under these development arrangements, the Company is generally the exclusive remarketer of the developed software products and pays a royalty to the funding entities based on license fees received from end user licenses of these software products. Under joint business arrangements, the Company may distribute or jointly sell with its business partner an integrated software product offering. While the intent of such arrangements is to develop business applications which are integrated with the Company's software products, there can be no assurance that such software products will in fact be integrated or that an integrated enterprise solution will be accepted by the market. In addition, should such arrangements require additional investments from third parties or business partners to complete development or enhance the software product, there can be no assurance that investments will be available on terms mutually acceptable to the Company and the business partner, or the existing or other potential third party funding source(s). Should PeopleSoft acquire title to the software products or technology from the third party entity, such an acquisition might be accounted for using the purchase method which is likely to result in either or both of the following accounting treatments: (i) a charge to earnings for in-process research and development which would be recorded in the Statement of Income in the period such acquisition was completed; or (ii) the creation of significant intangible assets by virtue of an allocation of a substantial portion of the purchase price to the acquired technology or other intangible assets. Such intangible assets would be amortized in future periods as a cost of operations. Should either of these scenarios occur, the results of operations of one or more future periods could be materially adversely impacted. For example, in connection with its acquisition of PMI in 1996, the Company incurred a one-time charge to earnings of $22.5 million for in-process research and development. Application Security Architecture. The Company's application software products incorporate extensive security features designed to protect certain sensitive data managed by these applications from unauthorized retrieval or modification. The Company has developed a security architecture utilizing the capabilities of its own applications, the client operating system software, some of the security features contained in the RDBMS platforms on which the applications run, as well as certain third party security products. To date, the Company is not aware of any violations of its application security architecture within its installed base. Although these security features are subject to constant review and enhancement, no assurances can be given concerning the successful implementation of these security features and their effectiveness within a particular customer's operating environment. Should a breach of security or a suspected breach of security occur, the accompanying publicity or any subsequent claims 37 40 against the Company could have an adverse impact on the demand for the Company's software products and/or cause a decline in the market price of the Company's stock and/or adversely impact the Company's financial results due to lost or delayed closing of software licensing opportunities. Intellectual Property and Proprietary Rights. The Company regards certain aspects of its internal operations, software and documentation as proprietary, and relies on a combination of contract, patent, copyright, trademark and trade secret laws and other measures to protect its proprietary information. The Company received its first patent in June 1995 and its second patent in August 1995. In July 1995, the Company received title to a third patent as part of a teaming and development agreement. The Company also has four additional patent applications pending. There can be no assurance that any issued patents will result from such applications or that, if issued, such patents will provide any meaningful competitive advantage. Existing copyright laws afford only limited protection. The Company believes that, because of the rapid pace of technological change in the computer software industry, patent, trade secret and copyright protection are less significant than factors such as the knowledge, ability and experience of the Company's employees, frequent software product enhancements and the timeliness and quality of support services. There can be no assurance that these protections will be adequate or that PeopleSoft's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. Many customers of PeopleSoft are beneficiaries of a source code escrow arrangement to enable the customer to acquire a future limited right to use the Company's source code solely for their internal provision of maintenance services. This possible access to the Company's source code may increase the likelihood of misappropriation or other misuse of the Company's intellectual property. In addition, the laws of certain countries in which the Company's software products are or may be licensed do not protect the Company's software products and intellectual property rights to the same extent as the laws of the United States. The Company does not believe that its software products, third party software products the Company offers under sublicense agreements, Company trademarks or other Company proprietary rights infringe the property rights of any third parties. However, there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future software products or that any such assertion may not require the Company to enter into royalty arrangements or result in costly litigation. Product Liability. The Company's license agreements with its customers contain provisions designed to limit the exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in such license agreements may not be valid as a result of federal, state, local laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any product liability claims to date, the license and support of its software for use in mission critical applications creates the risk of a claim being pursued against the Company. Damage or injunctive relief resulting under such a successful claim could cause a materially adverse impact on the Company's business, operating results and financial condition. In addition, as PeopleSoft begins to compete in the manufacturing software application market, the mission critical nature of such software products may increase PeopleSoft's exposure to product liability claims against the Company. Growth in Operations. The Company has experienced an extended period of significant revenue growth, growth in the Company's customer base, expansion of its software product lines and supported platforms both through internal development and merger and acquisition, a significant expansion in the number of its employees, and expansion in the geographic scope of its operations. This growth has resulted in new and increased responsibilities for management personnel, and has placed and is expected to continue to place a significant strain upon the Company's management, operating, and financial controls and resources. To accommodate recent growth, compete effectively, and manage potential future growth, the Company must continue to implement and improve its operational and financial systems, procedures and controls. In addition, the Company must continue to expand, train and manage its employee base. There can be no assurance that the Company will be able to manage this expansion effectively, or that the Company's personnel, procedures, systems and controls will be adequate to support the Company's future operations. Key Personnel. PeopleSoft believes that its continued success will depend in large part upon its ability to attract, train and retain highly-skilled technical, managerial and marketing personnel. The Company continues to 38 41 hire a significant number of additional sales, services and technical personnel. Competition for the hiring of such personnel in the software industry is intense, and the Company from time to time experiences difficulty in locating candidates with appropriate qualifications within various desired geographic locations, or with certain industry specific domain expertise. Growth in contracting activity could be impacted by the Company's ability to attract, train, retain and manage productive sales and sales support personnel. The loss of services of one or more of the Company's key employees could have a materially adverse effect on the Company's business, operating results and financial condition. The Company has historically experienced a very low attrition rate amongst all of its employees, especially those in critical positions. The Company has several retention programs in place to retain such key personnel including granting of stock with annual vesting periods over five years. A number of key employees have vested stock options which have a relatively low price when compared to the Company's current stock price. These potential gains provide these employees the economic freedom to explore personal objectives both within and outside the Company which may result in the loss of one or more key employees during the coming years. It is widely held that the technology industry is at or beyond a condition of full employment. There can be no assurance that the Company will be successful in attracting, training and retaining the personnel it requires to develop, market, sell and support new or existing software or to continue to grow. In addition, the Company's success in penetrating key vertical markets is dependent upon its ability to attract, train and retain personnel with industry specific domain expertise. Year 2000 Compliance. The Company's internal business information systems are primarily comprised of the same commercial application software products generally offered for license by the Company to end user customers. These applications have been tested for Year 2000 compliance and are certified by the Information Technology Association of America (ITAA) as Year 2000 compliant, therefore the Company does not expect any Year 2000 compliance issues to arise related to its primary internal business information systems. PeopleSoft is not aware of any material operational issues or costs associated with preparing internal systems for the Year 2000. However, the Company utilizes other third party vendor network equipment, telecommunication products, and other third party software products which may or may not be Year 2000 compliant. Although the Company is currently taking steps to address the impact, if any, of the Year 2000 issue surrounding such third party products, failure of any critical technology components to operate properly in the Year 2000 may have an adverse impact on business operations or require the Company to incur unanticipated expenses to remedy any problems. Expansion of Facilities. Commercial building vacancy rates have significantly dropped in many of the markets where the Company has significant operations. As a consequence, the Company expects to experience increasing difficulty in obtaining additional space within which to expand its operations. Failure to either obtain space, or obtain it on reasonably attractive commercial terms, may inhibit the Company's ability to grow, or otherwise adversely affect the Company's operations and financial results. Volatility of Stock Price. As is frequently the case with stock of high technology companies, the market price of PeopleSoft's stock has been and may continue to be quite volatile. Factors such as quarterly fluctuations in results of operations, announcements of technological innovations by the Company or its competitors or the introduction of new software products by PeopleSoft or its competitors, and macroeconomic conditions in the computer hardware and software industries generally, may have a significant impact on the market price of the stock of PeopleSoft. If revenue or earnings in any quarter fail to meet the expectations (published or otherwise) of the investment community, there could be an immediate impact on PeopleSoft's stock price. In addition, as described in the Possible Adverse Effects of Recent Securities Issuances section below, the Company has issued shares, stock options and warrants which, if sold directly or exercised and sold on the open market in large concentrations, could cause the Company's stock price to decline in the short term. The Company makes no assurance as to when and if such a short term stock price decline may recover. Furthermore, the stock market has from time to time experienced extreme price and volume fluctuations which have particularly affected the market price for many high technology companies and which, on occasion, have been unrelated to the operating performance of those companies. These broad market fluctuations may materially adversely affect the market price of the stock of PeopleSoft. 39 42 Possible Adverse Effects of Recent Securities Issuances. The Company has outstanding warrants to purchase 6,400,000 shares of its common stock which have exercise prices below the current market price of the common stock. The exercise of these warrants and resale of the underlying shares could adversely affect the market price of the Company's common stock. At December 31, 1997 the Company had 13,121,129 outstanding exercisable options to purchase common stock issued pursuant to employee stock plans which have exercise prices below the current market price of the common stock. The exercise of such stock options and sale of a significant number of the underlying shares could adversely affect the market price of the Company's common stock. Investments and Liquidity. The Company's short term and long term investments consist primarily of high quality municipal bonds, U.S. government securities, corporate debt securities and tax-advantaged money market funds. Despite favorable credit ratings on these investments there can be no assurance the issuing agencies will not default on their obligations which may result in losses of principal and accrued interest by PeopleSoft. While operating activities may provide cash in certain periods, to the extent the Company experiences growth in the future, operating and investing activities may use cash, and, consequently, such growth may require the Company to obtain additional sources of financing. In addition, material acquisitions of complementary businesses, products or technologies and capital expenditures may require additional sources of financing. There can be no assurance that the Company would be able to obtain additional sources of financing or additional financing at terms favorable to the Company. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is included in Part IV Item 14(a) (1) and (2). ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Certain information required by Part III is omitted from this Report because the registrant will file a definitive Proxy Statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's officers required by this Item is included in the section in Part I hereof entitled "Personnel." The information concerning the Company's directors required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Election of Directors-Nominees." Information concerning the Company's officers, directors and 10% shareholders compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information contained in the Company's Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the Company's Proxy Statement under the heading "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 40 43 The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the Company's Proxy Statement under the heading "Certain Transactions with Management." PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: 1. Consolidated Financial Statements. The following consolidated financial statements of PeopleSoft, Inc. are filed as part of this report: Page ---- Report of Independent Auditors F-1 Covered by Report of Independent Auditors: Consolidated Balance Sheets at December 31, 1996 and 1997 F-2 Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997 F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 F-5 Notes to Consolidated Financial Statements F-6 Not Covered by Report of Independent Auditors: Supplemental Quarterly Financial Information F-18 2. Consolidated Financial Statements Schedules. None. 3. Exhibits.
2.1(7) Agreement and Plan of Reorganization between PeopleSoft, Inc. and Red Pepper Company dated as of September 4, 1996. 3.1(11) Restated Certificate of Incorporation of Registrant filed with the Secretary of State of the State of Delaware on May 25, 1996. 3.2(11) Certificate of Amendment to Certificate of Incorporation of Registrant, as filed with the Secretary of State of the State of Delaware on June 17, 1996. 3.3 Certificate of Amendment to Certificate of Incorporation of Registrant, as filed with the Secretary of State of the State of Delaware on July 3, 1997. 3.4 Certificate of Designation as filed with the Secretary of State of the State of Delaware on March 24, 1998. 3.5 Bylaws of Registrant, as amended to date. 4.1(9) Stockholder Rights Plan and Preferred Shares Rights Agreement dated February 15, 1995. 4.2(12) First Amended and Restated Preferred Shares Rights Agreement dated December 16, 1997. 10.1(11,5) Amended and Restated 1989 Stock Plan and forms of option agreements thereunder. 10.2(11) 1992 Employee Stock Purchase Plan as amended to date, and form of subscription agreement thereunder. 10.3(1) 1992 Directors' Stock Option Plan and forms of option agreements thereunder. 10.4(2,5) Executive Bonus Plan.
41 44 10.5(3) Amendment and Restatement of PeopleSoft, Inc. 401(K) Plan, dated December 13, 1995, Amendment No. 1 dated December 30, 1994, and Amendment No. 2, dated August 25, 1995. 10.6(1) Form of Indemnification Agreement entered into between the Registrant and each of its directors and officers. 10.7(3) Loan Agreement between the Registrant and West America Bank, N.A. dated October 31, 1995. 10.8(1) Office Lease for 1331 North California Boulevard dated July 23, 1990 between the Registrant and 1333 North California Boulevard, a California limited partnership, as amended by the First Amendment to Lease dated April 24, 1991 and the Second Amendment to Lease dated June 17, 1992 and related Lease Guarantees dated July 26, 1990 and June 14, 1991 between 1333 North California Boulevard and David A. Duffield. 10.9(1) Lease dated July 24, 1992 between the Registrant and Glen Pointe Associates. 10.12(1,6) Software License and Support Agreement dated June 23, 1992 between the Registrant and ADP, Inc., as amended by Amendment No. 1 dated September 30, 1992. 10.18(2) Lease dated June 23, 1993 between the Registrant and Westbrook Corporate Center. 10.19(2) Lease dated January 17, 1994 between the Registrant and R-H Associates Bldg. III Corp. 10.20(2) Lease dated March 10, 1994 between the Registrant and Rosewood Associates. 10.21(3) Contract of Sale and Escrow Instructions between the Company and Rosewood Owner of California (B) LLC, a California limited liability company, dated October 4, 1995. 10.22(4) Warrant Agreement between the Registrant and The First National Bank of Boston, as Warrant Agent, dated October 30, 1995. 10.23(4) Warrant Purchase Agreement between the Registrant and Goldman, Sachs & Co. dated October 30, 1995. 10.24(4) Registration Rights Agreement between the Registrant and Goldman, Sachs & Co. dated October 30, 1995. 10.25(8) Amendment No. 2 dated September 28, 1994, Amendment No. 3 dated September 21, 1995 and Amendment No. 4 dated December 28, 1995 to the Software License and Support Agreement dated June 23, 1992 between the Registrant and ADP, Inc. (Confidential treatment requested for Amendment No. 2 and No. 4 only). 10.26(8) Amended Software Development Agreement dated December 22, 1995 between the Registrant and Solutions for Education Administrators, Inc. 10.27(8) Exclusive Marketing and Distribution Agreement dated December 22, 1995 between the Registrant and SIS Development LLC ("SIS"). 42 45 10.28(13) Amendment No. 1 dated September 19, 1994, Amendment No. 2 dated May 15, 1995 and Amendment No. 3 dated June 19, 1995 to the Lease dated March 10, 1994 between the Registrant and Rosewood Associates. 10.29(8) Systems Integrator Agreement dated August 25, 1995 between the Registrant and Shared Medical Systems Corporation. 10.32(13) Lease dated December 4, 1996 between the Registrant and Lease Plan North America, Inc. 10.33(13) Purchase Agreement dated October 22, 1996 between the Registrant and Norwest Equity Partners IV, L.P. 10.34(10) Red Pepper Software Company 1993 Stock Option Plan, and forms of stock option agreement thereunder. 21.1 Subsidiaries. 23.1 Consent of Ernst and Young LLP, Independent Auditors. 24.1 Power of Attorney (see page 44). 27.1 Financial Data Schedule - ---------- 1 Incorporated by reference to the exhibit having the same number filed with the Registrant's Registration Statement on Form S-1 (No. 33-53000) filed October 7, 1992, Amendment No. 1 thereto filed October 26, 1992, Amendment No. 2 thereto filed November 10, 1992 and Amendment No. 3 thereto filed November 18, 1992, which Registration Statement became effective November 18, 1992 and the Registrant's Registration Statement on Form S-1 (No. 33-62356) filed on May 7, 1993, which Registration Statement became effective May 24, 1993. 2 Incorporated by reference to the exhibit having the same filed number with the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 3 Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-K filed with the Securities and Exchange Commission on December 15,1995. 4 Exhibits 10.22, 10.23, and 10.24 are incorporated by reference to Exhibits 10.1, 10.2, and 10.3, respectively, filed with the Company's Registration Statement on Form S-3 (No. 33-80755) filed with the Securities and Exchange Commission on December 22, 1995. 5 This agreement is a compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c). 6 Confidential treatment previously granted. 7 Incorporated by reference to Exhibit 2.1 filed with the Company's Form S-4 filed with the Securities and Exchange Commission on October 4, 1996. 8 Incorporated by reference to the exhibit having the same filed numbers with the Company's Annual Report on Form 10K for the year ended December 31, 1995. 9 Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-A filed with the Securities and Exchange Commission on February 15, 1995. 10 Incorporated by reference to Exhibit 2.1 filed with the Company's Form S-8 filed with the Securities and Exchange Commission on October 24, 1996. 11 Incorporated by reference to the exhibit filed with the Company's Form S-8 (No. 333-08575) filed with the Securities and Exchange Commission on July 22, 1996. 12 Incorporated by reference to Exhibit 1 filed with the Company's Form 8-A/A filed with the Securities and Exchange Commission on March 25, 1998. 13 Incorporated by reference to the exhibit having the same filed number with the Company's Annual Report on Form 10K for the year ended December 31, 1996. (b) Reports on Form 8-K. None 43 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. PEOPLESOFT, INC. By: /s/ Ronald E .F. Codd ------------------------------------- Ronald E. F. Codd, Senior Vice President of Finance and Administration and Chief Financial Officer Dated: March 27, 1998 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, David A. Duffield and Ronald E. F. Codd, and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report (Form 10-K) and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ David A. Duffield President, Chief Executive Officer March 27, 1998 - ------------------------------------ and Director (Principal Executive Officer) David A. Duffield /s/ Ronald E. F. Codd Senior Vice President of Finance and March 27, 1998 - ------------------------------------ Administration and Chief Financial Ronald E. F. Codd Officer (Principal Financial Officer) /s/ Alfred J. Castino Vice President of Finance and Corporate March 27, 1998 - ------------------------------------ Controller (Principal Accounting Officer) Alfred J. Castino /s/ Dr. Edgar F. Codd Director March 27, 1998 - ------------------------------------ Dr. Edgar F. Codd /a/ Albert W. Duffield Director March 27, 1998 - ------------------------------------ Albert W. Duffield /s/ A. George Battle Director March 27, 1998 - ------------------------------------ A. George Battle /s/ George J. Still, Jr. Director March 27, 1998 - ------------------------------------ George J. Still, Jr. /s/ Cyril J. Yansouni Director March 27, 1998 - ------------------------------------ Cyril J. Yansouni
44 47 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders PeopleSoft, Inc. We have audited the accompanying consolidated balance sheets of PeopleSoft, Inc. at December 31, 1996 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PeopleSoft, Inc. at December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Walnut Creek, California January 28, 1998 F-1 48 PEOPLESOFT, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, ------------------------------- 1996 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 169,875 $ 267,897 Short-term investments 27,138 124,565 Accounts receivable, less allowance for doubtful accounts of $7,423 in 1996 and $19,493 in 1997 163,676 299,243 Deferred income taxes 28,246 25,320 Other current assets 7,703 9,021 --------- --------- Total current assets 396,638 726,046 Property and equipment, at cost: Computer equipment 74,706 107,503 Furniture and fixtures 22,233 35,106 Leasehold improvements 18,485 27,261 Building 17,368 18,310 Land 7,487 7,487 --------- --------- 140,279 195,667 Less accumulated depreciation and amortization (43,581) (78,492) --------- --------- 96,698 117,175 Investments 18,270 26,783 Deferred income taxes 13,302 7,371 Capitalized software, less accumulated amortization 11,173 9,706 Other assets 3,999 11,255 --------- --------- $ 540,080 $ 898,336 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 19,630 $ 19,882 Accrued liabilities 27,498 43,626 Accrued compensation and related expenses 37,681 67,486 Income taxes payable 18,771 22,370 Deferred revenue 183,252 327,668 --------- --------- Total current liabilities 286,832 481,032 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 2,000,000 shares authorized; none issued and outstanding -- -- Common stock, $.01 par value, 320,000,000 shares authorized; shares issued and outstanding: 1996 - 215,279,000 and 1997 - 223,729,000 2,153 2,237 Additional paid-in capital 161,614 219,005 Accumulated foreign currency translation adjustment (89) (1,292) Retained earnings 89,570 197,354 --------- --------- Total stockholders' equity 253,248 417,304 ========= ========= $ 540,080 $ 898,336 ========= =========
See accompanying notes. F-2 49 PEOPLESOFT, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended December 31, ---------------------------------------------------- 1995 1996 1997 ------------ ------------ ------------ Revenues: License fees $ 137,808 $ 252,799 $ 433,195 Services 94,331 197,253 382,456 ------------ ------------ ------------ Total revenues 232,139 450,052 815,651 Costs and expenses: Cost of license fees 8,503 12,357 21,635 Cost of services 56,789 118,906 229,178 Sales and marketing 70,052 135,757 225,498 Product development 38,625 70,653 129,553 General and administrative 16,182 27,162 43,611 In-process research and development and acquisition costs -- 29,393 -- ------------ ------------ ------------ Total costs and expenses 190,151 394,228 649,475 ------------ ------------ ------------ Operating income 41,988 55,824 166,176 Other income, interest expense and other 4,149 5,888 9,862 ------------ ------------ ------------ Income before income taxes 46,137 61,712 176,038 Provision for income taxes 18,799 25,851 67,775 ------------ ------------ ------------ Net income $ 27,338 $ 35,861 $ 108,263 ============ ============ ============ Basic income per share $ 0.13 $ 0.17 $ 0.49 ============ ============ ============ Shares used in basic per share computation 203,689 211,248 219,302 ============ ============ ============ Diluted income per share $ 0.12 $ 0.15 $ 0.44 ============ ============ ============ Shares used in diluted per share computation 228,987 239,452 248,321 ============ ============ ============
See accompanying notes. F-3 50 PEOPLESOFT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
Accumulated Foreign Common Stock Additional Currency Total ------------------------ Paid-in Translation Retained Stockholders' Shares Amount Capital Adjustment Earnings Equity --------- --------- ---------- ----------- --------- ------------- Balances at December 31, 1994 198,433 $ 1,985 $ 66,356 $ (132) $ 26,371 $ 94,580 Exercise of common stock options and issuances under stock purchase plan 5,640 56 5,043 -- -- 5,099 Proceeds from sale of Red Pepper common and preferred stock 2,910 29 5,054 -- -- 5,083 Issuance of warrants -- -- 21,793 -- -- 21,793 Tax benefits from employee stock transactions -- -- 7,333 -- -- 7,333 Translation adjustment -- -- -- (132) -- (132) Net income for the year -- -- -- -- 27,338 27,338 --------- --------- --------- --------- --------- --------- Balances at December 31, 1995 206,983 2,070 105,579 (264) 53,709 161,094 Exercise of common stock options and issuances under stock purchase plan 7,580 76 15,015 -- -- 15,091 Acquisition of PMI 716 7 22,039 -- -- 22,046 Tax benefits from employee stock transactions -- -- 18,981 -- -- 18,981 Translation adjustment -- -- -- 175 -- 175 Net income for the year -- -- -- -- 35,861 35,861 --------- --------- --------- --------- --------- --------- Balances at December 31, 1996 215,279 2,153 161,614 (89) 89,570 253,248 Exercise of common stock options and issuances under stock purchase plan 6,906 69 33,263 -- -- 33,332 Acquisitions 601 6 80 -- (479) (393) Exercise of warrants 943 9 (9) -- -- -- Tax benefits from employee stock transactions -- -- 24,057 -- -- 24,057 Translation adjustment -- -- -- (1,203) -- (1,203) Net income for the year -- -- -- -- 108,263 108,263 --------- --------- --------- --------- --------- --------- Balances at December 31, 1997 223,729 $ 2,237 $ 219,005 $ (1,292) $ 197,354 $ 417,304 ========= ========= ========= ========= ========= =========
See accompanying notes. F-4 51 PEOPLESOFT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Years Ended December 31, ----------------------------------------- 1995 1996 1997 --------- --------- --------- OPERATING ACTIVITIES Net income $ 27,338 $ 35,861 $ 108,263 Adjustments to reconcile net income to net cash provided (used) by operating activities, net of acquired companies: Depreciation and amortization 11,540 26,691 38,873 Provision for doubtful accounts, net of write-offs and recoveries 2,860 2,597 12,070 Provision for deferred income taxes (7,790) (25,428) (6,932) In-process research and development and acquisition costs -- 26,509 -- Changes in operating assets and liabilities: Accounts receivable (51,908) (65,840) (147,637) Other current assets (2,896) (1,093) (1,318) Other noncurrent assets -- (7,245) (7,256) Accounts payable and accrued liabilities 12,841 15,214 16,380 Accrued compensation and related expenses 16,494 12,545 29,805 Deferred revenue 45,772 85,129 144,416 Income taxes payable 5,454 6,992 19,388 Tax benefits from employee stock transactions 7,333 18,981 24,057 --------- --------- --------- Net cash provided by operating activities 67,038 130,913 230,109 INVESTING ACTIVITIES Purchase of available-for-sale investments (69,571) (29,157) (177,584) Sale of available-for-sale investments 58,596 21,434 71,644 Purchase of property and equipment (54,318) (57,086) (55,388) Additions to capitalized software, net (5,631) (2,568) (2,495) Acquisitions -- 391 (393) --------- --------- --------- Net cash used in investing activities (70,924) (66,986) (164,216) FINANCING ACTIVITIES Net proceeds from sale of common stock and exercise of common stock options 5,099 15,091 33,332 Proceeds from sale of Red Pepper common and preferred stock 5,083 -- -- Net proceeds from the issuance of warrants 21,793 -- -- --------- --------- --------- Net cash provided by financing activities 31,975 15,091 33,332 Effect of foreign exchange rate changes on cash (132) 175 (1,203) --------- --------- --------- Net increase in cash and cash equivalents 27,957 79,193 98,022 Cash and cash equivalents at beginning of period 62,725 90,682 169,875 ========= ========= ========= Cash and cash equivalents at end of period $ 90,682 $ 169,875 $ 267,897 ========= ========= =========
See accompanying notes. F-5 52 PEOPLESOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES THE COMPANY PeopleSoft, Inc. (the "Company") designs, develops, markets, licenses and supports a family of client/server enterprise application software products, including manufacturing, distribution, financial, and human resource management systems. The Company also provides services such as maintenance, training, installation, consulting and product support services. Customers consist primarily of large and medium sized organizations including corporations, higher education institutions, non-profit entities and federal, state and local government agencies. The Company's business is predominately based in the United States. It does not have a concentration of credit or operating risk in any one industry or any one geographic region within the United States. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany transactions have been eliminated. USE OF ESTIMATES 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 revenue and expenses during the period. Despite management's best effort to establish good faith estimates and assumptions, actual results may differ from these estimates. CASH AND CASH EQUIVALENTS, SHORT TERM INVESTMENTS AND LONG TERM INVESTMENTS Cash equivalents are highly liquid investments with insignificant interest rate risk and remaining maturities of three months or less at the date of purchase and are stated at amounts which approximate fair value, based on quoted market prices. Cash equivalents consist principally of investments in interest-bearing demand deposit accounts with financial institutions, tax-advantaged money market funds and highly liquid debt securities of corporations, municipalities and the U.S. Government. All other cash is held in bank demand deposits. The Company accounts for its cash equivalents and investments under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. At December 31, 1996 and 1997 the Company has classified all of its debt securities as available-for-sale, the components of which follow (in thousands):
1996 1997 ---------- ---------- State and local municipalities $ 79,898 $ 233,374 U.S. Government 2,500 6,771 Corporate 25,605 39,940 ---------- ---------- $ 108,003 $ 280,085 ========== ========== Cash equivalents $ 62,595 $ 128,737 Investments due in one year or less 27,138 124,565 Investments due in one year to 18 months 18,270 26,783 ---------- ---------- $ 108,003 $ 280,085 ========== ==========
F-6 53 Unrealized gains and losses at December 31, 1996 and 1997 and realized gains and losses for the years then ended were not material. The cost of securities sold is based on the specific identification method. ACCOUNTS RECEIVABLE Accounts receivable are comprised of billed receivables arising from recognized and deferred revenues and unbilled receivables, which include accrued license fees for payments not yet due and accrued services. The Company does not require collateral for its receivables. Reserves are maintained for potential losses. For the years ended December 31, 1995, 1996, and 1997 actual write-offs were not significant. Future actual write-offs may differ from the Company's estimates and could have a material impact on the Company's future results of operations. The principal components of accounts receivable were as follows at December 31, (in thousands):
1996 1997 --------- --------- Billed receivables $ 94,343 $ 200,081 Unbilled receivables 76,756 118,655 --------- --------- 171,099 318,736 Allowance for doubtful accounts (7,423) (19,493) --------- --------- $ 163,676 $ 299,243 ========= =========
DEPRECIATION AND AMORTIZATION Depreciation and amortization are computed using the straight-line method over estimated useful lives of two to three years for computer equipment, five years for telephones and office equipment, seven years for furniture and fixtures, and 30 years for buildings. Leasehold improvements are depreciated over the shorter of the lease term or the useful life of the asset. Intangible assets are amortized over a three to five year life. CAPITALIZED SOFTWARE The Company capitalizes software purchased from third parties if the related software product under development has reached technological feasibility or if there are alternative future uses for the purchased software provided that capitalized amounts will be realized over a period not exceeding five years. In addition, the Company capitalizes certain internally incurred costs, consisting of salaries, related payroll taxes and benefits, and an allocation of indirect costs related to developing computer software products. Costs incurred prior to the establishment of technological feasibility are charged to product development expense. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life and changes in software and hardware technologies. Upon the general release of the software product to customers, capitalization ceases and such costs are amortized (using the straight-line method) on a product by product basis over the estimated life which is generally three years. All other research and development expenditures are charged to research and development expense in the period incurred. Capitalized software costs and accumulated amortization at December 31, 1995, 1996 and 1997 and related software amortization expense (included in cost of license fees) for the years then ended were as follows (in thousands):
1995 1996 1997 -------- -------- -------- Capitalized software: Internal development costs $ 7,016 $ 10,737 $ 13,232 Purchased from third parties 5,137 6,832 6,832 -------- -------- -------- 12,153 17,569 20,064 Accumulated amortization (4,811) (6,396) (10,358) -------- -------- -------- $ 7,342 $ 11,173 $ 9,706 ======== ======== ======== Amortization expense $ 1,722 $ 1,585 $ 3,962 ======== ======== ========
F-7 54 During 1995, the Company acquired certain manufacturing software from Andersen Consulting for $4.0 million for use in its manufacturing software products. Upon the acquisition of PeopleSoft Manufacturing, Inc. ("PMI"), and the subsequent general availability of PMI's manufacturing software product line in December 1996, the Company determined that the manufacturing software acquired from Andersen was redundant and expensed the balance at December 31, 1996 (see Note 8). Also, as part of the acquisition of PMI, the Company allocated $6.5 million to developed software costs which is being amortized over five years. DEFERRED REVENUE Deferred revenue is comprised of deferrals for license fees, maintenance, training and other services. The principal components of deferred revenue at December 31, 1996 and 1997 were as follows (in thousands):
1996 1997 -------- -------- License fees $ 34,224 $ 71,168 Maintenance 104,257 184,171 Training 30,607 46,201 Other services 14,164 26,128 -------- -------- $183,252 $327,668 ======== ========
REVENUE RECOGNITION The Company licenses software under noncancellable license agreements and provides services including training, installation, consulting and maintenance, consisting of product support services and periodic updates. License fee revenues are generally recognized when a noncancellable license agreement has been signed, the software product has been shipped, there are no uncertainties surrounding product acceptance, there are no significant vendor obligations, the fees are fixed and determinable, and collection is considered probable. The Company allocates a portion of contractual license fees to post-contract support activities covered under the contract including first year maintenance, installation assistance and limited training services. Revenues from maintenance agreements are recognized ratably over the maintenance period, which in most instances is one year. Revenues for training or consulting services are recognized as services are performed. Revenue and profits under contracts requiring significant customization are recognized using contract accounting. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). This statement provides for a liability approach under which deferred income taxes are provided based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. FOREIGN CURRENCY TRANSLATION The Company has determined that the functional currency of each foreign operation is the local currency. The effects of translation rate changes related to assets and liabilities located outside the United States are included as a component of stockholders' equity. Foreign currency transaction gains and losses are included in Other income, interest expense and other on the Consolidated Statements of Income. Through 1997, such gains and losses have not been significant. In January 1998, the Company initiated a foreign exchange hedging program designed to hedge foreign currency net receivables and payables of PeopleSoft's foreign subsidiaries. The program uses forward foreign exchange contracts as the vehicle for hedging these intercompany balances. In general, these forward foreign exchange contracts have terms of three months or less. Gains and losses on these contracts will be recognized as other income or expense in the current period, consistent with the period in which the gain or loss of the underlying F-8 55 transaction is recognized. The foreign exchange hedging program is managed in accordance with a corporate policy approved by the Company's Board of Directors. In addition to hedging existing transaction 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. These hedges will only be undertaken should the Company deem them necessary to protect the U.S. Dollar value of the underlying exposure. The Company foresees that hedges of such anticipated transactions and translation exposures will be done in the future using forward and option contracts. PER SHARE DATA Share amounts for all periods presented reflect restatement for the two-for-one stock split in December 1997. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS 128"), requiring public companies to exclude the dilutive effect of stock options in calculating basic earnings per share as of December 31, 1997. As a result, the Company changed the method used to compute earnings per share and restated earnings per share for all prior periods. Basic income per share as required under SFAS 128 is computed using the weighted average number of common shares outstanding during the period. Diluted income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options and warrants (using the treasury stock method). The following table sets forth the computation of basic and diluted income per share for the years ended December 31, (in thousands except per share amounts):
1995 1996 1997 -------- -------- -------- Numerator: Net income $ 27,338 $ 35,861 $108,263 ======== ======== ======== Denominator: Denominator for basic income per share - weighted average shares 203,689 211,248 219,302 Employee stock options 25,298 27,386 25,967 Warrants -- 818 3,052 -------- -------- -------- Denominator for diluted income per share - adjusted weighted average shares and assumed conversions 228,987 239,452 248,321 ======== ======== ======== Basic income per share $ 0.13 $ 0.17 $ 0.49 ======== ======== ======== Diluted income per share $ 0.12 $ 0.15 $ 0.44 ======== ======== ========
STOCK-BASED COMPENSATION In October 1995, the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued and effective for the year ending December 31, 1996. As permitted by SFAS 123, the Company has continued to account for employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and has made the pro forma disclosures required by SFAS 123 for each of the three years in the period ending December 31, 1997 in Note 3. NEWLY ISSUED ACCOUNTING STANDARDS F-9 56 Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was issued in October 1997 and addresses software revenue recognition. The SOP supersedes SOP 91-1 and is effective for transactions entered into for fiscal years beginning after December 15, 1997. Based upon its reading and interpretation of SOP 97-2 the Company believes its current revenue recognition policies and practices are materially consistent with the SOP. However, implementation guidelines for this standard have not yet been issued and a wide range of potential interpretations are being discussed by the accounting profession. Once available, such implementation guidance could lead to unanticipated changes in the Company's current revenue accounting practices, and such changes could be material to the Company's future revenue and earnings. In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income ("SFAS 130") was issued. Under SFAS 130 all items that meet the definition of comprehensive income will be reported in a financial statement for the period in which they are recognized. Comprehensive income will include changes in the balances of items that are reported directly in a separate component of Stockholders' equity on the Consolidated Balance Sheets. The Company will make the disclosures required by SFAS 130 in the first quarter of 1998. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") was issued in June 1997. SFAS 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, financial information is required to be reported on the basis used internally for evaluating segment performance and resource allocation. SFAS 131 is effective for fiscal years beginning after December 31, 1997, however, disclosure is not required in interim financial statements in the initial year of adoption. Accordingly, the Company will make the required disclosures for the year ending December 31, 1998, although the Company has not fully assessed the impact of SFAS 131 on its financial disclosures. 2. COMMITMENTS AND CONTINGENCIES The Company leases office facilities under operating leases which generally require the Company to pay operating costs, including property taxes, insurance and maintenance. The Company also leases certain computer equipment under operating leases. Computer leases require the return of the equipment or payment of residual values. Such residual values, which approximate fair values, are not material to the consolidated financial statements. Future minimum operating lease payments for the years ending December 31, are due as follows (in thousands): 1998 $20,335 1999 16,631 2000 11,512 2001 8,823 2002 6,073 Thereafter 10,757 ------- $74,131 =======
Rent expense totaled approximately $6.9 million, $9.8 million and $19.6 million in 1995, 1996 and 1997, respectively. In December 1996, the Company entered into a five-year lease for a new office facility in Pleasanton, California. This lease is structured as an operating lease, however, the accounting treatment will ultimately be determined upon inception of the lease term when the Company occupies the facility. The lease commitments related to this lease have been included in the amounts above. The lessor has committed to fund up to a maximum of $70.0 million for construction of the facility. Construction on the facility is anticipated to be completed in the third quarter of 1998 and payments under this lease will begin at that time. The interest rate charged on amounts funded is LIBOR plus 0.625% as measured on the date of each funding or rollover. At each funding or rollover date, the Company has its choice of term and LIBOR rate (1 month, 2 months, 3 months, 6 months, 9 months or 12 months) applicable to each tranche at the date the respective funding amount is requested and approved. The F-10 57 Company has an option to renew the lease for a an additional three years, subject to certain conditions. If at the end of the lease term the Company does not purchase the property, the Company would guarantee a residual value to the lessor equal to a specified percentage of the lessor's cost of the facility. Under this lease, the Company is required to maintain compliance with certain financial covenants, is prohibited from making certain payments, including cash dividends, and is subject to various other restrictions. At December 31, 1997, the total amount funded by the lessor for construction of the facility was $38.5 million. Subsequent to 1997, the Company negotiated an amendment to this lease which extends the term of the lease until February 2003, with an option to renew for an additional three years. Additionally, the Company negotiated a fixed rate funding option under which the Company may elect that any or all of the amounts funded to date be charged a fixed interest rate. The Company has the option of setting the fixed rate expiration date for any date through the end of the lease term. Under certain software license agreements, the Company is required to maintain surety bonds and/or letters of credit benefiting third party customers which may be drawn against if the Company fails to perform its contractual obligations. At December 31, 1997, three such surety bonds with a cumulative total value of $9.3 million with maturity dates ranging from September 1998 to June 2000, and one letter of credit for $991,000 with an expiration date of April 1998 were outstanding. 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 operations and cash flows of the Company. However, depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect the Company's future results of operations or cash flows in a particular period. 3. STOCKHOLDERS' EQUITY REDEEMABLE PREFERRED STOCK Under a stockholder rights plan established in 1995, every share of common stock carries the right (a "Right"), under certain circumstances, to purchase equity securities of the Company or an acquiring company. Ten days after a tender offer or acquisition of 20 percent or more of the Company's common stock, each Right may be exercised for $190 ("Exercise Price") to purchase one one-thousandth of one share of the Company's Series A Participating Preferred Stock. Each one one-thousandth of each share of Series A Participating Preferred Stock will generally be afforded economic rights similar to one share of the Company's common stock. In addition, each Right entitles the holder to purchase common stock of the Company with a fair value of twice the Exercise Price or, in certain circumstances, securities of the acquiring company for the Exercise Price. Each Right expires in February 2005, and, during specified periods, the Company may redeem or exchange each Right for $.01 or one share of common stock, respectively. COMMON STOCK In December 1997, the Company's common stock was split two for one. All share and per share amounts applicable to prior periods have been restated to reflect the split. The Company has never paid cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. At December 31, 1997, 67,102,507 authorized but unissued shares of common stock were reserved for issuance under the Company's stock plans and for outstanding warrants. STOCK PLANS 1992 EMPLOYEE STOCK PURCHASE PLAN Under the 1992 Employee Stock Purchase Plan ("ESPP"), eligible employees may purchase common stock at a price equal to 85 percent of the lower of the fair market value of the common stock at the beginning or end of each offering period. Participation in the offering is limited to the lesser of ten percent of an employee's compensation or $21,250 per year, may be terminated at any time by the employee and automatically ends upon termination of F-11 58 employment with the Company. A total of 6,000,000 shares of common stock have been reserved for issuance under this plan of which 4,453,504 shares have been issued through December 31, 1997. Under this plan, 1,031,568 shares, 869,956 shares and 741,628 shares were issued in 1995, 1996 and 1997, respectively. In January 1998, 420,906 shares were issued in connection with the offering period ended December 31, 1997. Subsequent six-month offering periods will commence on each January 1 and July 1. 1989 STOCK PLAN Pursuant to the 1989 Stock Plan, incentive and non-qualified stock options to purchase shares of the Company's common stock may be granted, and 99,600,000 shares have been reserved for issuance under this Plan. The exercise price of each incentive and non-qualified stock option shall not be less than 100 percent and 85 percent, respectively, of the fair market value of the stock on the date the option is granted. The options expire 10 years after the date of grant and are exercisable to the extent vested. Vesting is established by the Board of Directors and generally occurs at the rate of 20 percent per year from the date of grant. 1993 RED PEPPER SOFTWARE COMPANY PLAN In connection with the merger of PeopleSoft and Red Pepper in 1996, PeopleSoft assumed all of the outstanding stock options of Red Pepper (adjusted for the exchange ratio). As of the date of the merger, 2,163,388 shares of PeopleSoft common stock were reserved for issuance upon the exercise of options assumed in connection with the business combination. COMBINED OPTION ACTIVITY Option activity under the 1989 Stock Plan, including the 1993 Red Pepper Software Company Plan stock options assumed by PeopleSoft as a result of the merger, is as follows:
Weighted Average Exercise Price Shares -------------- ------------ Balances at December 31, 1994 $ 1.015 28,893,016 Granted 5.258 12,068,924 Exercised 0.521 (4,610,040) Canceled 6.760 (654,152) ------------ ------------ Balances at December 31, 1995 2.408 35,697,748 Granted 12.683 11,077,536 Exercised 1.156 (6,710,906) Canceled 9.103 (1,103,748) ------------ ------------ Balances at December 31, 1996 5.551 38,960,630 Granted 21.691 10,870,350 Exercised 3.264 (6,160,683) Canceled 11.918 (975,225) ============ ============ Balances at December 31, 1997 $ 9.982 42,695,072 ============ ============
The exercise prices for the above grants range from $0.001 to $39.00. At December 31, 1997, options to purchase 13,081,129 shares were exercisable and options for 15,651,435 shares were available for grant. 1992 DIRECTORS' STOCK OPTION PLAN Under the 1992 Directors' Stock Option Plan, directors who are not officers or employees may receive nonstatutory options to purchase shares of common stock. A total of 2,400,000 shares of common stock have been reserved for issuance under this plan and, as of December 31, 1997, options to purchase 578,000 shares with exercise prices of $1.766 to $23.97 per share have been granted. Under this plan, 176,000, 48,000, and 34,000 options were granted in 1995, 1996 and 1997, respectively. During 1997, options to purchase 4,000 shares were exercised. At December 31, 1997, options to purchase 28,000 shares were exercisable and options for 1,822,000 shares were available for grant. F-12 59 \STOCK-BASED COMPENSATION As permitted under SFAS 123, the Company has elected to continue to follow APB Opinion No. 25 in accounting for stock-based awards to employees. Under APB Opinion No. 25, the Company generally recognizes no compensation expense with respect to such awards, since the exercise price of the stock options granted are equal to the fair market value of the underlying security on the grant date. Pro forma information regarding net income and earnings per share is required by SFAS 123 for awards granted after December 31, 1994 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company's stock-based awards to employees was estimated as of the date of the grant using a Black-Scholes option pricing model. Limitations on the effectiveness of the Black-Scholes option valuation model are that it was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable and that the model requires the use of highly subjective assumptions including expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. Both of these plans are discussed in this Note above. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
Options ESPP ----------------------------------- ----------------------------------- 1995 1996 1997 1995 1996 1997 ------- ------- ------- ------- ------- ------- Expected life (in years) 3.55 3.51 3.50 0.49 0.49 0.48 Expected volatility 0.40 0.38 0.37 0.45 0.40 0.40 Risk free interest rate 6.80% 5.71% 6.33% 6.09% 5.23% 5.45%
For pro forma purposes, the estimated fair value of the Company's stock-based awards to employees is amortized over the vesting period for options and the six-month purchase period for stock purchases under the ESPP. The Company's pro forma information follows (in thousands except for income per share information):
1995 1996 1997 ----------- ----------- ----------- Net income As reported $ 27,338 $ 35,861 $ 108,263 Pro forma $ 20,476 $ 16,072 $ 74,610 Basic income per share As reported $ 0.13 $ 0.17 $ 0.49 Pro forma $ 0.10 $ 0.08 $ 0.34 Diluted income per share As reported $ 0.12 $ 0.15 $ 0.44 Pro forma $ 0.09 $ 0.07 $ 0.31
Because SFAS 123 is applicable only to stock-based awards granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until approximately 1999. The weighted-average fair value of options granted during 1995, 1996 and 1997 was $1.94, $4.77 and $6.66 per share, respectively. The weighted-average fair value of the ESPP during 1995, 1996 and 1997 was $1.55, $3.56 and $6.61 per share, respectively. F-13 60
Options Outstanding Options Exercisable --------------------------------------------------- --------------------------------- Weighted Average Remaining Weighted Weighted Range of Exercise Number of Contractual Average Number of Average Prices Shares Life (years) Exercise Price Shares Exercise Price - ----------------- --------- ------------ -------------- ---------- ---------------- $0.001 - 2.00 8,817,993 4.45 $ 0.47 6,108,653 $ 0.35 2.01 - 5.00 8,002,972 6.44 2.74 3,433,052 2.53 5.01 - 12.00 7,446,140 7.50 6.98 2,176,736 6.89 12.01 - 19.00 7,670,402 8.26 14.55 1,218,538 14.52 19.01 - 20.00 8,628,704 9.24 19.87 30,054 19.39 20.00 - 39.00 2,702,861 9.44 27.65 154,096 24.07 ========== ========== 43,269,072 13,121,129 ========== ==========
WARRANTS In November 1995, the Company received $21.8 million through the private placement of warrants to purchase an aggregate of 8,000,000 shares of the Company's common stock. Upon notice of exercise by the holders of the warrants, the Company, at its option, may settle such exercise by either issuing the full amount of shares and receiving cash proceeds, issuing a net amount of shares with no cash proceeds, or purchasing the warrants for an amount equal to the difference between the then fair market value of the common stock and the warrant exercise price. In November 1997, the Company issued 942,880 shares of common stock pursuant to the net exercise of warrants to purchase 1,600,000 shares of common stock at $13.75 per share. The warrants are exercisable by the holders at any time at the following prices and expire in October or November of the following years:
Year of Expiration Number of Shares Exercise Price - ------------------ ---------------- -------------- 1998 1,600,000 $13.750 1998 1,600,000 $16.875 1999 1,600,000 $16.875 1999 1,600,000 $19.375
4. INCOME TAXES The provision for income taxes consisted of the following components for the years ended December 31, (in thousands):
1995 1996 1997 -------- -------- -------- Current: Federal $ 20,964 $ 37,396 $ 60,565 State 5,387 10,545 10,711 Foreign 1,417 3,338 3,431 -------- -------- -------- 27,768 51,279 74,707 -------- -------- -------- Deferred: Federal (7,546) (20,240) (7,239) State (1,423) (5,188) 307 -------- -------- -------- (8,969) (25,428) (6,932) ======== ======== ======== Total provision for income tax $ 18,799 $ 25,851 $ 67,775 ======== ======== ========
F-14 61 The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to the Company's income before taxes as follows for the years ended December 31 (in thousands):
1995 1996 1997 -------- -------- -------- Income tax provision at federal statutory rate $ 16,148 $ 21,599 $ 61,613 State income tax, net of federal tax effect 2,577 3,323 8,849 Income from tax-advantaged investments (914) (1,425) (2,995) Research and development tax credit (550) (1,031) (3,211) Merger costs -- 1,015 -- Other 1,538 2,370 3,519 -------- -------- -------- Provision for income taxes $ 18,799 $ 25,851 $ 67,775 ======== ======== ========
Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes consisted of the following at December 31 (in thousands):
1996 1997 -------- -------- Deferred tax assets: Deferred revenue, net $ 18,202 $ 595 Depreciation 2,403 -- Research and development costs 8,766 8,362 Accrued compensation 2,880 7,582 Allowance for doubtful accounts 3,585 8,156 Self insured claims accruals 1,215 2,011 Net operating losses and tax credits 3,744 1,606 Other 4,898 10,784 -------- -------- Total deferred tax assets 45,693 39,096 -------- -------- Deferred tax liabilities: Capitalized software development costs (2,152) (1,973) State taxes (1,155) (523) Depreciation -- (1,720) Other (838) (2,189) -------- -------- Total deferred tax liabilities (4,145) (6,405) ======== ======== Total net deferred tax asset $ 41,548 $ 32,691 ======== ========
Deferred tax assets and liabilities are classified in the consolidated balance sheet based on the classification of the related asset or liability. Management has concluded that no valuation allowance is required based on its assessment that current and historical levels of taxable income are sufficient to realize the deferred tax asset. The income tax benefits from employee stock transactions have been recorded as an increase in additional paid-in capital. 5. RETIREMENT PLAN The Company has two defined contribution savings plans, a qualified plan (401k Plan) under the provisions of Section 401(k) of the Internal Revenue Code that covers all full-time employees and a non-qualified plan which covers employees with earnings over $160,000 per year. Under the terms of the 401k Plan, member employees may contribute varying amounts of their annual compensation (to a maximum of $9,500). The Company matches a portion of qualified employee contributions based upon years of service, up to a maximum of ten percent of the employee's compensation, subject to certain vesting provisions based on length of employee service. Company contributions to the 401k Plan totaled $0.5 million in 1995, $0.7 million in 1996 and $2.0 million in 1997. Under the terms of the non-qualified plan, member employees may contribute varying amounts of their annual compensation up to 100 percent. F-15 62 The Company matches a portion of non-qualified employee contributions based upon years of service, up to a maximum of $9,500, subject to certain vesting provisions based on length of employee service. Company contributions to the non-qualified plan totaled $118,000 in 1995, $291,000 in 1996, and $249,000 in 1997. 6. JOINT BUSINESS ARRANGEMENTS The Company and a limited liability company ("LLC") entered into agreements in 1995 and 1997, whereby the LLC will provide up to $9.6 million to fund the development of a suite of student information and administration system applications ("SIS Software") and the Company is the exclusive distributor of the SIS Software. Substantially all of the LLC's funds were provided equally by the Company's founder and principal stockholder and the Student Loan Marketing Association ("Sallie Mae"), an independent strategic business partner. The Company has no contractual obligation to provide funds to the LLC and does not have a right to acquire any of the LLC's equity interests. The Company will pay the LLC a royalty based on fees received from the licensing of the SIS Software until the later of five years from the commercial release of the SIS Software or $17 million in cumulative royalties. The royalty rate was determined based on negotiations between the Company and Sallie Mae. All ownership rights and interests in the SIS Software will transfer to the Company, upon the later of five years from the commercial release of the SIS Software or when $17 million in cumulative royalties have been paid to the LLC. The SIS Software became generally available for sale in December 1997, and the Company recorded $3.3 million in cumulative royalty expense in the year ended December 31, 1997. The LLC reimbursed the Company $2.0 million, $2.4 million and $3.2 million in 1995, 1996 and 1997, respectively, for development funding advanced by the Company, and, in 1998, the Company anticipates using the remaining $2.0 million to fund the development of two new related software products. In addition, the Company was reimbursed $98,000 in 1995 and $65,700 in 1996 for interest on such advances. 7. SEGMENT AND GEOGRAPHIC AREAS The Company operates in one industry segment, the design, development, marketing, licensing and support of a family of client/server enterprise application software products, and markets its software products and services through the Company's offices in the United States and its branches, subsidiaries and distributors in Canada, Europe/Africa, Asia/Pacific and Latin America. As discussed in Note 1, information about the Company's operating segments will be reported for the year ending December 31, 1998 as required by SFAS 131. International revenues from each geographic region was less than ten percent of total revenues. The following table presents a summary of operating information and certain year end balance sheet information by geographic region for the years ended December 31, (in thousands):
1995 1996 1997 -------- -------- -------- Revenues from unaffiliated customers Domestic operations $196,083 $377,782 $690,554 International operations 36,056 72,270 125,097 ======== ======== ======== Consolidated $232,139 $450,052 $815,651 ======== ======== ======== Operating income Domestic operations $ 39,537 $ 48,313 $157,035 International operations 2,451 7,511 9,141 ======== ======== ======== Consolidated $ 41,988 $ 55,824 $166,176 ======== ======== ======== Identifiable assets Domestic operations $284,403 $488,206 $782,888 International operations 37,838 51,874 115,448 ======== ======== ======== Consolidated $322,241 $540,080 $898,336 ======== ======== ========
8. BUSINESS COMBINATIONS 1997 BUSINESS COMBINATIONS F-16 63 In 1997, the Company completed three business combinations: Campus Solutions, Inc., Salerno Manufacturing, Inc., and TeamOne, LLC. Campus Solutions, a business partner since 1994, developed the Company's Student Administration application suite. Salerno Manufacturing develops, licenses and supports a suite of quality management software applications. TeamOne has been providing implementation services to middle market companies, and becomes an integral part of the PeopleSoft Select business unit. All of the outstanding shares of Campus Solutions and all of the assets of Salerno Manufacturing were acquired for approximately 600,000 shares of common stock in transactions accounted for as pooling-of-interests; however, prior period consolidated financial statements were not restated because the retroactive effects were not material. All of the member interests of TeamOne were acquired for $4 million cash in a transaction accounted for under the purchase method, and results of operations of TeamOne are included in the consolidated financial statements prospectively from the date of acquisition. The Company did not incur significant merger related costs associated with these transactions and the aggregate effect of the three acquisitions was not material to the financial position and results of operations of the Company in any period. 1996 BUSINESS COMBINATIONS In 1996, the Company completed two business combinations: Red Pepper Software Company (Red Pepper) and PMI. Red Pepper is a leader in the emerging supply chain management systems market, and PMI developed the Company's Manufacturing application suite. All of the outstanding shares of Red Pepper were acquired in exchange for approximately 10.8 million shares of common stock and the assumption, under the Company's stock option plan, of all outstanding rights to purchase Red Pepper common stock which approximated 1.1 million shares of PeopleSoft stock. The Red Pepper transaction was accounted for as a pooling of interests and the historical consolidated financial statements of PeopleSoft for the periods prior to the merger have been restated in the accompanying consolidated financial statements to include the financial position, results of operations and cash flows of Red Pepper. In addition, merger costs of $2.9 million were charged to operations in 1996. All of the assets of PMI were acquired in November 1996 for an aggregate purchase price of $30.1 million. This transaction has been accounted for under the purchase method and resulted in a one-time charge to earnings of $22.5 million in 1996 for in-process research and development. Significant components of the $30.1 million purchase price included the issuance of common stock with a fair value of $14.4 million, issuance of common stock options to PMI employees with a fair value of $7.6 million, issuance of a note payable of $4.7 million, and forgiveness of debt and other consideration of $3.4 million. The purchase price was allocated, based upon an independent valuation, to in-process research and development costs with a fair value of $22.5 million, capitalized software of $6.5 million and cash and other assets of $1.1 million. The results of the operations of PMI have been included in the Company's consolidated financial statements since November 1, 1996. The results of operations of PMI for periods prior to November 1, 1996, were not material to the consolidated financial statements. 9. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information is detailed below, except for non-cash activities related to the acquisition of PMI which are as discussed in Note 8 (in thousands):
Years Ended December 31, ------------------------------------ 1995 1996 1997 ---------- ---------- ---------- Cash paid for interest $ 24 $ 264 $ 381 ========== ========== ========== Cash paid for income taxes $ 13,902 $ 25,306 $ 30,680 ========== ========== ==========
F-17 64 PEOPLESOFT, INC. SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly supplemental consolidated financial information for 1996 and 1997 are as follows (in thousands, except per share amounts):
Quarter Ended ------------------------------------------------------------------------ March 31, June 30, September 30, December 31, 1996 ------------ ------------ ------------ ------------ Total revenues $ 82,282 $ 102,721 $ 117,382 $ 147,667 Operating income 14,156 17,668 20,713 3,287 Net income 9,459 11,480 13,179 1,743 Basic income per share $ 0.05 $ 0.05 $ 0.06 $ 0.01 Shares used in basic per share computation 207,922 211,138 213,316 214,648 Diluted income per share $ 0.04 $ 0.05 $ 0.05 $ 0.01 Shares used in diluted per share computation 234,359 238,463 241,377 246,055 1997 Total revenues $ 153,654 $ 184,376 $ 217,050 $ 260,571 Operating income 27,204 34,074 43,808 61,090 Net income 17,838 22,271 28,699 39,455 Basic income per share $ 0.08 $ 0.10 $ 0.13 $ 0.18 Shares used in basic per share computation 216,495 218,713 221,010 222,949 Diluted income per share $ 0.07 $ 0.09 $ 0.11 $ 0.16 Shares used in diluted per share computation 247,693 249,208 253,830 253,052
F-18 65 EXHIBIT INDEX Exhibit No. Document ----------- -------- 2.1(7) Agreement and Plan of Reorganization between PeopleSoft, Inc. and Red Pepper Company dated as of September 4, 1996. 3.1(11) Restated Certificate of Incorporation of Registrant filed with the Secretary of State of the State of Delaware on May 25, 1996. 3.2(11) Certificate of Amendment to Certificate of Incorporation of Registrant, as filed with the Secretary of State of the State of Delaware on June 17, 1996. 3.3 Certificate of Amendment to Certificate of Incorporation of Registrant, as filed with the Secretary of State of the State of Delaware on July 3, 1997. 3.4 Certificate of Designation as filed with the Secretary of State of the State of Delaware on March 24, 1998. 3.5 Bylaws of Registrant, as amended to date. 4.1(9) Stockholder Rights Plan and Preferred Shares Rights Agreement dated February 15, 1995. 4.2(12) First Amended and Restated Preferred Shares Rights Agreement dated December 16, 1997. 10.1(11,5) Amended and Restated 1989 Stock Plan and forms of option agreements thereunder. 10.2(11) 1992 Employee Stock Purchase Plan as amended to date, and form of subscription agreement thereunder. 10.3(1) 1992 Directors' Stock Option Plan and forms of option agreements thereunder. 10.4(2,5) Executive Bonus Plan. 10.5(3) Amendment and Restatement of PeopleSoft, Inc. 401(K) Plan, dated December 13, 1995, Amendment No. 1 dated December 30, 1994, and Amendment No. 2, dated August 25, 1995. 10.6(1) Form of Indemnification Agreement entered into between the Registrant and each of its directors and officers. 10.7(3) Loan Agreement between the Registrant and West America Bank, N.A. dated October 31, 1995. 10.8(1) Office Lease for 1331 North California Boulevard dated July 23, 1990 between the Registrant and 1333 North California Boulevard, a California limited partnership, as amended by the First Amendment to Lease dated April 24, 1991 and the Second Amendment to Lease dated June 17, 1992 and related Lease Guarantees dated July 26, 1990 and June 14, 1991 between 1333 North California Boulevard and David A. Duffield. 10.9(1) Lease dated July 24, 1992 between the Registrant and Glen Pointe Associates. 10.12(1,6) Software License and Support Agreement dated June 23, 1992 between the Registrant and ADP, Inc., as amended by Amendment No. 1 dated September 30, 1992. 10.18(2) Lease dated June 23, 1993 between the Registrant and Westbrook Corporate Center. 10.19(2) Lease dated January 17, 1994 between the Registrant and R-H Associates Bldg. III Corp. 10.20(2) Lease dated March 10, 1994 between the Registrant and Rosewood Associates. 10.21(3) Contract of Sale and Escrow Instructions between the Company and Rosewood Owner of California (B) LLC, a California limited liability company, dated October 4, 1995. 10.22(4) Warrant Agreement between the Registrant and The First National Bank of Boston, as Warrant Agent, dated October 30, 1995. 10.23(4) Warrant Purchase Agreement between the Registrant and Goldman, Sachs & Co. dated October 30, 1995. 10.24(4) Registration Rights Agreement between the Registrant and Goldman, Sachs & Co. dated October 30, 1995. 10.25(8) Amendment No. 2 dated September 28, 1994, Amendment No. 3 dated September 21, 1995 and Amendment No. 4 dated December 28, 1995 to the Software License and Support Agreement dated June 23, 1992 between the Registrant and ADP, Inc. (Confidential treatment requested for Amendment No. 2 and No. 4 only).
66 10.26(8) Amended Software Development Agreement dated December 22, 1995 between the Registrant and Solutions for Education Administrators, Inc. 10.27(8) Exclusive Marketing and Distribution Agreement dated December 22, 1995 between the Registrant and SIS Development LLC ("SIS"). 10.28(13) Amendment No. 1 dated September 19, 1994, Amendment No. 2 dated May 15, 1995 and Amendment No. 3 dated June 19, 1995 to the Lease dated March 10, 1994 between the Registrant and Rosewood Associates. 10.29(8) Systems Integrator Agreement dated August 25, 1995 between the Registrant and Shared Medical Systems Corporation. 10.32(13) Lease dated December 4, 1996 between the Registrant and Lease Plan North America, Inc. 10.33(13) Purchase Agreement dated October 22, 1996 between the Registrant and Norwest Equity Partners IV, L.P. 10.34(10) Red Pepper Software Company 1993 Stock Option Plan, and forms of stock option agreement thereunder. 21.1 Subsidiaries. 23.1 Consent of Ernst and Young LLP, Independent Auditors. 24.1 Power of Attorney (see page 44). 27.1 Financial Data Schedule
- ---------- 1 Incorporated by reference to the exhibit having the same number filed with the Registrant's Registration Statement on Form S-1 (No. 33-53000) filed October 7, 1992, Amendment No. 1 thereto filed October 26, 1992, Amendment No. 2 thereto filed November 10, 1992 and Amendment No. 3 thereto filed November 18, 1992, which Registration Statement became effective November 18, 1992 and the Registrant's Registration Statement on Form S-1 (No. 33-62356) filed on May 7, 1993, which Registration Statement became effective May 24, 1993. 2 Incorporated by reference to the exhibit having the same filed number with the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 3 Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-K filed with the Securities and Exchange Commission on December 15,1995. 4 Exhibits 10.22, 10.23, and 10.24 are incorporated by reference to Exhibits 10.1, 10.2, and 10.3, respectively, filed with the Company's Registration Statement on Form S-3 (No. 33-80755) filed with the Securities and Exchange Commission on December 22, 1995. 5 This agreement is a compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c). 6 Confidential treatment previously granted. 7 Incorporated by reference to Exhibit 2.1 filed with the Company's Form S-4 filed with the Securities and Exchange Commission on October 4, 1996. 8 Incorporated by reference to the exhibit having the same filed numbers with the Company's Annual Report on Form 10K for the year ended December 31, 1995. 9 Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-A filed with the Securities and Exchange Commission on February 15, 1995. 10 Incorporated by reference to Exhibit 2.1 filed with the Company's Form S-8 filed with the Securities and Exchange Commission on October 24, 1996. 11 Incorporated by reference to the exhibit filed with the Company's Form S-8 (No. 333-08575) filed with the Securities and Exchange Commission on July 22, 1996. 12 Incorporated by reference to Exhibit 1 filed with the Company's Form 8-A/A filed with the Securities and Exchange Commission on March 25, 1998. 13 Incorporated by reference to the exhibit having the same filed number with the Company's Annual Report on Form 10K for the year ended December 31, 1996. EX-3.3 2 CERTIFICATE OF AMENDMENT 1 Exhibit 3.3 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION PeopleSoft, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of PeopleSoft, Inc., resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and authorizing and directing the officers and directors of the corporation to solicit the consent of the stockholders of said corporation for consideration thereof. The resolution setting forth said amendment is as follows: RESOLVED: That the Certificate of Incorporation of this corporation be amended by changing the first paragraph of Article III thereof so that, as amended said paragraph shall be and read as follows: "The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock". The total number of shares which the corporation is authorized to issue is Three Hundred Twenty-Two Million (322,000,000) shares. Three Hundred Twenty Million (320,000,000) shares shall be Common Stock and Two Million (2,000,000) shares shall be Preferred Stock, each with a par value of One Cent ($0.01)." SECOND: That thereafter, the necessary number of shares of this corporation's capital stock as required by Section 228 of the General Corporation Law of Delaware voted in favor of such amendment at the corporation's Annual Meeting of Stockholders. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, PeopleSoft, Inc. has caused this certificate to be signed by Ronald E.F. Codd, its Senior Vice President of Finance and Administration, Chief Financial Officer and Secretary, this 3rd day of June, 1997. /s/ Ronald E.F. Codd ------------------------------------- Ronald E.F. Codd Senior Vice President of Finance and Administration, Chief Financial Officer and Secretary EX-3.4 3 CERTIFICATE OF DEISGNATION 1 Exhibit 3.4 Page 1 CERTIFICATE OF DESIGNATIONS OF RIGHTS, PREFERENCES AND PRIVILEGES OF SERIES A PARTICIPATING PREFERRED STOCK OF PEOPLESOFT, INC. The undersigned, David A. Duffield and Ronald E.F. Codd do hereby certify: 1. That they are the duly elected and acting President and Secretary, respectively, of PeopleSoft, Inc., a Delaware corporation (the "CORPORATION"). 2. That no shares of the Company's Series A Participating Preferred Stock have been issued. 3. That pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the said Corporation, the said Board of Directors on December 16, 1997 adopted the following resolution amending the designations, powers, preferences and relative and other special rights, limitations and restrictions of the Company's Series A Participating Preferred Stock: "RESOLVED, that pursuant to the authority vested in the Board of Directors of the corporation by the Restated Certificate of Incorporation, the Board of Directors does hereby fix and herein state and express the designations, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions of the Company's Series A Participating Preferred Stock as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "SERIES A PARTICIPATING PREFERRED STOCK." The Series A Participating Preferred Stock shall have a par value of $.01 per share, and the number of shares constituting such series shall be 1,000,000. Section 2. Proportional Adjustment. In the event the Corporation shall at any time after the issuance of any share or shares of Series A Participating Preferred Stock (i) declare any dividend on Common Stock of the Corporation ("COMMON STOCK") payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Corporation shall simultaneously effect a proportional adjustment to the number of outstanding shares of Series A Participating Preferred Stock. Section 3. Dividends and Distributions. (a) Subject to the prior and superior right of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Participating Preferred Stock with respect to dividends, the holders of shares of Series A Participating 2 Page 2 Preferred Stock shall be entitled to receive when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of January, April, July and October in each year (each such date being referred to herein as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Participating Preferred Stock. (b) The Corporation shall declare a dividend or distribution on the Series A Participating Preferred Stock as provided in paragraph (a) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock). (c) Dividends shall begin to accrue on outstanding shares of Series A Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 4. Voting Rights. The holders of shares of Series A Participating Preferred Stock shall have the following voting rights: (a) Each share of Series A Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. 3 Page 3 (b) Except as otherwise provided herein or by law, the holders of shares of Series A Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Except as required by law, holders of Series A Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 5. Certain Restrictions. (a) The Corporation shall not declare any dividend on, make any distribution on, or redeem or purchase or otherwise acquire for consideration any shares of Common Stock after the first issuance of a share or fraction of a share of Series A Participating Preferred Stock unless concurrently therewith it shall declare a dividend on the Series A Participating Preferred Stock as required by Section 3 hereof. (b) Whenever quarterly dividends or other dividends or distributions payable on the Series A Participating Preferred Stock as provided in Section 3 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Participating Preferred Stock; (ii) declare or pay dividends on, make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with Series A Participating Preferred Stock, except dividends paid ratably on the Series A Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Participating Preferred Stock; (iv) purchase or otherwise acquire for consideration any shares of Series A Participating Preferred Stock, or any shares of stock ranking on a parity with the 4 Page 4 Series A Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (c) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 5, purchase or otherwise acquire such shares at such time and in such manner. Section 6. Reacquired Shares. Any shares of Series A Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein and, in the Restated Certificate of Incorporation, as then amended. Section 7. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A Participating Preferred Stock shall be entitled to receive an aggregate amount per share equal to 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock plus an amount equal to any accrued and unpaid dividends on such shares of Series A Participating Preferred Stock. Section 8. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. Section 9. No Redemption. The shares of Series A Participating Preferred Stock shall not be redeemable. Section 10. Ranking. The Series A Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 11. Amendment. The Restated Certificate of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or 5 Page 5 change the powers, preference or special rights of the Series A Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority of the outstanding shares of Series A Participating Preferred Stock, voting separately as a class. Section 12. Fractional Shares. Series A Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Participating Preferred Stock. RESOLVED FURTHER, that the President or any Vice President and the Secretary or any Assistant Secretary of this corporation be, and they hereby are, authorized and directed to prepare and file a Certificate of Designation of Rights, Preferences and Privileges in accordance with the foregoing resolution and the provisions of Delaware law and to take such actions as they may deem necessary or appropriate to carry out the intent of the foregoing resolution." We further declare under penalty of perjury that the matters set forth in the foregoing Certificate of Designation are true and correct of our own knowledge. Executed at Pleasanton, California on March 4, 1998. David A., President Ronald E.F. Codd, Secretary EX-3.5 4 BYLAWS OF REGISTRANT 1 Exhibit 3.5 BY-LAWS OF PEOPLESOFT, INC. (As Amended through February 1995) 2 TABLE OF CONTENTS PAGE ARTICLE I - CORPORATE OFFICES............................................ 1 1.1 REGISTERED OFFICE.............................................. 1 1.2 OTHER OFFICES.................................................. 1 ARTICLE II - MEETINGS OF STOCKHOLDERS.................................... 1 2.1 PLACE OF MEETINGS.............................................. 1 2.2 ANNUAL MEETING................................................. 1 2.3 SPECIAL MEETING................................................ 2 2.4 NOTICE OF STOCKHOLDERS' MEETINGS............................... 2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................... 2 2.6 QUORUM......................................................... 2 2.7 ADJOURNED MEETING; NOTICE...................................... 2 2.8 CONDUCT OF BUSINESS............................................ 3 2.9 VOTING......................................................... 3 2.10 WAIVER OF NOTICE............................................... 3 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING........................................................ 3 2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS....................................................... 4 2.13 PROXIES........................................................ 5 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE.......................... 5 2.15 ADVANCE NOTICE OF STOCKHOLDER NOMINEES......................... 5 2.16 ADVANCE NOTICE OF STOCKHOLDER BUSINESS......................... 6 ARTICLE III - DIRECTORS.................................................. 7 3.1 POWERS......................................................... 7 3.2 NUMBER OF DIRECTORS............................................ 7 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS...................................................... 7 3.4 RESIGNATION AND VACANCIES...................................... 7 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE....................... 8 3.6 REGULAR MEETINGS............................................... 9 3.7 SPECIAL MEETINGS; NOTICE....................................... 9 3.8 QUORUM......................................................... 9 3.9 WAIVER OF NOTICE............................................... 10 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.............. 10 3.11 FEES AND COMPENSATION OF DIRECTORS............................. 10 3.12 APPROVAL OF LOANS TO OFFICERS.................................. 10 3.13 REMOVAL OF DIRECTORS........................................... 10 3 TABLE OF CONTENTS (CONTINUED) PAGE ARTICLE IV - COMMITTEES.................................................. 11 4.1 COMMITTEES OF DIRECTORS........................................ 11 4.2 COMMITTEE MINUTES.............................................. 12 4.3 MEETINGS AND ACTION OF COMMITTEES.............................. 12 ARTICLE V - OFFICERS..................................................... 12 5.1 OFFICERS....................................................... 12 5.2 APPOINTMENT OF OFFICERS........................................ 12 5.3 SUBORDINATE OFFICERS........................................... 13 5.4 REMOVAL AND RESIGNATION OF OFFICERS............................ 13 5.5 VACANCIES IN OFFICES........................................... 13 5.6 CHAIRMAN OF THE BOARD.......................................... 13 5.7 PRESIDENT...................................................... 13 5.8 VICE PRESIDENTS................................................ 14 5.9 SECRETARY...................................................... 14 5.10 CHIEF FINANCIAL OFFICER........................................ 14 5.11 ASSISTANT SECRETARY............................................ 15 5.12 ASSISTANT TREASURER............................................ 15 5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................. 15 5.14 AUTHORITY AND DUTIES OF OFFICERS............................... 16 ARTICLE VI - INDEMNITY................................................... 16 6.1 THIRD PARTY ACTIONS............................................ 16 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION.................. 16 6.3 SUCCESSFUL DEFENSE............................................. 17 6.4 DETERMINATION OF CONDUCT....................................... 17 6.5 PAYMENT OF EXPENSES IN ADVANCE................................. 17 6.6 INDEMNITY NOT EXCLUSIVE........................................ 18 6.7 INSURANCE INDEMNIFICATION...................................... 18 6.8 THE CORPORATION................................................ 18 6.9 EMPLOYEE BENEFIT PLANS......................................... 18 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.... 19 -ii- 4 TABLE OF CONTENTS (CONTINUED) PAGE ARTICLE VII - RECORDS AND REPORTS........................................ 19 7.1 MAINTENANCE AND INSPECTION OF RECORDS.......................... 19 7.2 INSPECTION BY DIRECTORS........................................ 20 7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................... 20 ARTICLE VIII - GENERAL MATTERS........................................... 20 8.1 CHECKS......................................................... 20 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS............... 20 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES......................... 21 8.4 SPECIAL DESIGNATION ON CERTIFICATES............................ 21 8.5 LOST CERTIFICATES.............................................. 22 8.6 CONSTRUCTION; DEFINITIONS...................................... 22 8.7 DIVIDENDS...................................................... 22 8.8 FISCAL YEAR.................................................... 22 8.9 SEAL........................................................... 22 8.10 TRANSFER OF STOCK.............................................. 23 8.11 STOCK TRANSFER AGREEMENTS...................................... 23 8.12 REGISTERED STOCKHOLDERS........................................ 23 ARTICLE IX - AMENDMENTS.................................................. 23 -iii- 5 BY-LAWS OF PEOPLESOFT, INC. (As Amended through February 1995) ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to be business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. At the meeting, directors shall be elected and any other proper business may be transacted. -1- 6 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by the president. No other person or persons are permitted to call a special meeting. No business may be conducted at a special meeting other than the business brought before the meeting by the board of directors or the chairman of the board or the president. 2.4 NOTICE OF STOCKHOLDERS' MEETING All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these by-laws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE: AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the corporation. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present of represented at any meeting of the stockholders, then either (i) the Chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING: NOTICE When a meeting is adjourned to another time or place, unless these by-laws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the -2- 7 corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business. 2.9 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.12 of these by-laws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate or incorporation of these by-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these by-laws. 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of a corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. -3- 8 Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.12 RECORD DATE FOR STOCKHOLDER NOTICE: VOTING: GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. -4- 9 2.13 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. 2.15 ADVANCE NOTICE OF STOCKHOLDER NOMINEES Nominations of persons for election to the Board of directors of the corporation may be made at a meeting of stockholders by or at the discretion of the board of directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than twenty (20) days nor more than sixty (60) days prior to the meeting; provided, however, that in the event less than thirty (30) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (i) the name, age, business address and -5- 10 residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required by law to be disclosed in solicitations of proxies that is required by law to be disclosed in solicitations of proxies for election of directors, and (v) such person's written consent to being named as a nominee and to serving as a director if elected; and (b) as to the stockholder giving the notice: (i) the name and address, as they appear on the corporation's books, of such stockholder, and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder, and (iii) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) relating to the nomination. At the request of the board of directors any person nominated by the Board for election as a director shall furnish to the secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section. The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws, and if he should so determine, he shall so declare at the meeting and the defective nomination shall be disregarded. 2.16 ADVANCE NOTICE OF STOCKHOLDER BUSINESS At the annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (a) as specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a stockholder. Business to be brought before an annual meeting by a stockholder shall not be considered properly brought if the stockholder has not given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than twenty (20) nor more than sixty (60) days prior to the meeting; provided, however, that in the event that less than thirty (30) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address of the stockholder proposing such business, (iii) the class and number of shares of the corporation, which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business, and (v) any other information that is required by law to be provided by the stockholder in his capacity as a proponent of a stockholder proposal. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any -6- 11 annual meeting except in accordance with the procedures set forth in this Section. The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section, and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these by-laws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The Board of Directors shall consist of five (5) persons until changed by a proper amendment of this Section 3.2. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these by-laws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting unless specified otherwise in the certificate of incorporation. Directors need not be stockholders unless so required by the certificate of incorporation or these by-laws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Elections of directors need not be by written ballot 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a -7- 12 future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies Unless otherwise provided in the certificate of incorporation or these by-laws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these by-laws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or -8- 13 similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 SPECIAL MEETINGS: NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two (2) directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. -9- 14 3.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these by-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these by-laws. 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.11 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these by-laws, the board of directors shall have the authority to fix the compensation of directors. 3.12 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.13 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these by-laws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, -10- 15 however, that, so long as stockholders of the corporation are entitled to cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his or her removal would be sufficient to elect such director if then cumulatively voted at an election of the entire board of directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the by-laws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets; (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the by-laws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the -11- 16 issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these by-laws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting), with such changes in the context of those by-laws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these by-laws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these by-laws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these by-laws, shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment. -12- 17 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these by-laws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled by the board of directors. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these by-laws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these by-laws. 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. The president shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. The president shall have the -13- 18 general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these by-laws. 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these by-laws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meeting or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these by-laws. The secretary shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these by-laws. 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, -14- 19 losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. The chief financial officer shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or these by-laws. The chief financial officer shall be the treasurer of the corporation. 5.11 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as may be prescribed by the board of directors or these by-laws. 5.12 ASSISTANT TREASURER The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the chief financial officer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the chief financial officer and shall perform such other duties and have such other powers as may be prescribed by the board of directors or these by-laws. 5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. -15- 20 5.14 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. ARTICLE VI INDEMNITY 6.1 THIRD PARTY ACTIONS The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) and amounts paid in settlement (if such settlement is approved in advance by the corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if the person acted in good faith and in -16- 21 manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Notwithstanding any other provision of this Article VI, no person shall be indemnified hereunder for any expenses or amounts paid in settlement with respect to any action to recover short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, as amended. 6.3 SUCCESSFUL DEFENSE To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection therewith. 6.4 DETERMINATION OF CONDUCT Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that the indemnification of the director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made (1) by the Board of Directors or the Executive Committee by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (2) or if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Notwithstanding the foregoing, a director, officer, employee or agent of the Corporation shall be entitled to contest any determination that the director, officer, employee or agent has not met the applicable standard of conduct set forth in Sections 6.1 and 6.2 by petitioning a court of competent jurisdiction. 6.5 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending a civil or criminal action, suit or proceeding, by an individual who may be entitled to indemnification pursuant to Section 6.1 or 6.2, shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that the individual is not entitled to be indemnified by the corporation as authorized in this Article VI. -17- 22 6.6 INDEMNITY NOT EXCLUSIVE The indemnification and advancement of expenses provided by or granted pursuant to the other sections of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office. 6.7 INSURANCE INDEMNIFICATION The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employer or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against the person and incurred by the person in any such capacity or arising out of the person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this Article VI. 6.8 THE CORPORATION For purposes of this Article VI, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under and subject to the provisions of this Article VI (including, without limitation the provisions of Section 6.4) with respect to the resulting or surviving corporation as the person would have with respect to such constituent corporation if its separate existence had continued. 6.9 EMPLOYEE BENEFIT PLANS For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article VI. -18- 23 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive officer or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these by-laws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent so to act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. -19- 24 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director, The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these by-laws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. -20- 25 8.3 STOCK CERTIFICATES: PARTLY PAID SHARES The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if the person were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. -21- 26 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION: DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these by-laws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The corporation may adopt a corporate seal, which shall be adopted and which may be altered by the board of directors, and may use the same by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. -22- 27 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The by-laws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal by-laws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal by-laws. -23- 28 CERTIFICATE OF AMENDMENT OF BY-LAWS OF PEOPLESOFT, INC. Certificate by Secretary of Amendment The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of PeopleSoft, Inc. and that the foregoing By-Laws, comprising twenty-five (25) pages, were ratified as the Amended and Restated By-Laws of the corporation by the Board of Directors on February 15, 1995. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 15 day of February, 1995. /s/ RONALD E. F. CODD ------------------------------------ Ronald E. F. Codd, Secretary 29 CERTIFICATE OF AMENDMENT TO BYLAWS OF PEOPLESOFT, INC. I, Ronald E.F. Codd, Secretary of PeopleSoft, Inc., a Delaware corporation ("the Company"), hereby declare and certify that below is a true and correct copy of the amendment to the Bylaws duly adopted by the board of directors of the Company on December 15, 1995: The first sentence of Section 3.2 of Article III of the Bylaws of the Company is hereby amended, effective December 15, 1995, to read in full as follows: "The number of directors of this corporation shall not be less than five (5) nor more than nine (9), until changed, within the limits specified above, by an amendment to this Section 3.2 duly adopted by the board of directors or by the stockholders." IN WITNESS WHEREOF, I declare under penalty of perjury that the foregoing statements are true and correct. /s/ Ronald E.F. Codd -------------------------------------- Ronald E.F. Codd, Secretary [seal] EX-21.1 5 SUBSIDIARIES 1 Exhibit 21.1 DIRECT SUBSIDIARIES OF PEOPLESOFT, INC.
INCORP/FORMED IN PEOPLESOFT ARGENTINA S.A. Argentina PEOPLESOFT CREDIT CORPORATION California, USA PEOPLESOFT DO BRASIL LTDA Brazil PEOPLESOFT FRANCE S.A. France PEOPLESOFT GERMANY GMBH Germany PEOPLESOFT IBERICA, S.L. Spain PEOPLESOFT JAPAN K.K. Japan PEOPLESOFT MEXICO SA DE CV Mexico PEOPLESOFT PROPERTIES, INC. California, USA PEOPLESOFT UK LTD. United Kingdom PEOPLESOFT USA, INC. California, USA PEOPLESOFT VENTURES, INC. California, USA PSFT INTERNATIONAL HOLDINGS C.V. Netherlands
INDIRECT SUBSIDIARIES OF PEOPLESOFT, INC.
INCORP/FORMED IN PEOPLESOFT ASIA PTE. LTD. Singapore PEOPLESOFT AUSTRALIA PTY. LTD. Australia PEOPLESOFT, B.V. Netherlands PEOPLESOFT CANADA CO. Canada PEOPLESOFT C.I. LTD. Cayman Islands PEOPLESOFT INTERNATIONAL B.V. Netherlands PEOPLESOFT NEW ZEALAND New Zealand PEOPLESOFT SOUTH AFRICA (PTY) LIMITED South Africa
EX-23.1 6 CONSENT OF ERNST AND YOUNG LLP 1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-3 No. 33-80755, No. 333-20555, and No. 333-36951) of PeopleSoft, Inc. and in the related Prospectuses and in the Registration Statements (Form S-8) pertaining to the 1989 Stock Option Plan, the 1992 Directors' Plan, the 1992 Employee Stock Purchase Plan of PeopleSoft, Inc. and the Red Pepper Software Company 1993 stock option plan, of our report dated January 28, 1998, with respect to the consolidated financial statements of PeopleSoft, Inc. included in this Form 10-K for the year ended December 31, 1997 filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Ernst & Young LLP Walnut Creek, California March 26, 1997 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 267,897 151,348 318,736 19,493 0 726,046 195,667 78,492 898,336 481,032 0 0 0 2,237 415,067 898,336 0 815,651 0 649,475 0 12,070 454 176,038 67,775 108,263 0 0 0 108,263 0.49 0.44 For purpose of this Exhibit, Primary means Basic. Earnings per share -- assuming dilution.
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