Back to GetFilings.com



 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

     
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004

OR

[   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ to ______

Commission File Number: 0-20710

PeopleSoft, Inc.

(Exact name of registrant as specified in its charter)

     
Delaware
(State or other jurisdiction of
incorporation or organization)
  68-0137069
(I.R.S. Employer Identification No.)

4460 Hacienda Drive, Pleasanton, California 94588-8618

(Address of principal executive offices, Zip Code)

(925) 225-3000

(Registrant’s telephone number, including area code)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [   ]

On August 3, 2004, the registrant had 366,881,431 shares of common stock outstanding.

 


 

TABLE OF CONTENTS

             
  PART I – FINANCIAL INFORMATION        
Item 1.
  Financial Statements (Unaudited)        
 
Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
    3  
 
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and June 30, 2003
    4  
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and June 30, 2003     5  
  Notes to Condensed Consolidated Financial Statements     6  
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     20  
Item 3.
  Quantitative and Qualitative Disclosures About Market Risk     46  
Item 4.
  Controls and Procedures     48  
  PART II – OTHER INFORMATION        
Item 1.
  Legal Proceedings     50  
Item 2.
  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities     52  
Item 3.
  Defaults Upon Senior Securities     52  
Item 4.
  Submission of Matters to a Vote of Security Holders     52  
Item 5.
  Other Information     53  
Item 6.
  Exhibits and Reports on Form 8-K     53  
SIGNATURES
        55  

2


 

PART I – FINANCIAL INFORMATION

ITEM 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PEOPLESOFT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)
(Unaudited)

                 
    June 30, 2004
  December 31, 2003
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 542,467     $ 439,385  
Short-term investments and restricted cash
    1,034,255       961,906  
Accounts receivable, net
    395,757       462,528  
Income tax refunds receivable
    11,671       18,749  
Deferred tax assets
    43,497       58,630  
Prepaid expenses and other current assets
    66,616       69,997  
 
   
 
     
 
 
Total current assets
    2,094,263       2,011,195  
Property and equipment, net
    482,365       448,211  
Long term investments
    40,713       29,219  
Deferred tax assets
    56,698       42,049  
Capitalized software, net
    204,483       234,217  
Goodwill
    1,002,977       1,005,660  
Other intangible assets, net
    413,351       444,991  
Other assets
    10,291       9,186  
 
   
 
     
 
 
Total assets
  $ 4,305,141     $ 4,224,728  
 
   
 
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 45,043     $ 51,190  
Accrued liabilities
    150,823       158,360  
Restructuring liabilities
    50,622       78,250  
Accrued compensation and related expenses
    186,906       224,983  
Income taxes payable
    64,680       106,355  
Short-term deferred revenues
    669,692       588,590  
 
   
 
     
 
 
Total current liabilities
    1,167,766       1,207,728  
Long-term deferred revenues
    118,081       119,896  
Other liabilities
    39,496       37,655  
 
   
 
     
 
 
Total liabilities
    1,325,343       1,365,279  
Commitments and contingencies (see Note 11)
Stockholders’ Equity:
               
Common stock
    3,828       3,776  
Additional paid-in capital
    2,600,103       2,508,995  
Retained earnings
    720,030       684,847  
Treasury stock
    (387,714 )     (387,046 )
Accumulated other comprehensive income
    43,551       48,877  
 
   
 
     
 
 
Total stockholders’ equity
    2,979,798       2,859,449  
 
   
 
     
 
 
Total liabilities and stockholders’ equity
  $ 4,305,141     $ 4,224,728  
 
   
 
     
 
 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)
(Unaudited)

                                 
    Three Months Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
Revenues:
                               
License fees
  $ 130,016     $ 111,726     $ 260,902     $ 192,567  
Maintenance revenue
    302,248       205,563       599,098       405,484  
Professional services revenue
    215,001       180,153       430,384       359,647  
 
   
 
     
 
     
 
     
 
 
Service revenue
    517,249       385,716       1,029,482       765,131  
 
   
 
     
 
     
 
     
 
 
Total revenues
    647,265       497,442       1,290,384       957,698  
Costs and expenses:
                               
Cost of license fees
    24,773       9,563       48,147       18,289  
Cost of services
    226,442       166,698       449,408       330,167  
Sales and marketing expense
    176,590       131,492       345,761       251,050  
Product development expense
    137,938       84,646       265,312       168,351  
General and administrative expense
    63,162       41,024       122,237       74,039  
Restructuring, acquisition and other charges
    4,043       13,799       12,272       13,799  
 
   
 
     
 
     
 
     
 
 
Total costs and expenses
    632,948       447,222       1,243,137       855,695  
 
   
 
     
 
     
 
     
 
 
Operating income
    14,317       50,220       47,247       102,003  
Other income, net
    2,696       4,712       7,796       11,678  
 
   
 
     
 
     
 
     
 
 
Income before provision for income taxes
    17,013       54,932       55,043       113,681  
Provision for income taxes
    6,035       18,398       19,860       38,668  
 
   
 
     
 
     
 
     
 
 
Net income
  $ 10,978     $ 36,534     $ 35,183     $ 75,013  
 
   
 
     
 
     
 
     
 
 
Basic income per share
  $ 0.03     $ 0.12     $ 0.10     $ 0.24  
Shares used in basic income per share computation
    363,566       315,707       362,664       315,302  
Diluted income per share
  $ 0.03     $ 0.11     $ 0.10     $ 0.23  
Shares used in diluted income per share computation
    368,517       318,630       369,741       319,299  

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

                 
    Six Months Ended June 30,
    2004
  2003
Operating activities:
               
Net income
  $ 35,183     $ 75,013  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    111,790       56,710  
Provision for doubtful accounts
    3,606       5,544  
Tax benefits from employee stock transactions
    8,652       3,585  
Provision for deferred income taxes
    688       7,739  
Loss (gain) on sales of investments and disposition of property and equipment, net
    81       (1,289 )
Non-cash stock compensation
    7,073       4,628  
Non-cash restructuring, acquisition and other charges
    3,972       1,722  
Changes in operating assets and liabilities:
               
Accounts receivable
    56,977       45,350  
Accounts payable and accrued liabilities
    (39,422 )     10,735  
Accrued compensation and related expenses
    (37,343 )     (26,157 )
Income taxes, net
    (34,763 )     (23,529 )
Deferred revenues
    83,192       26,439  
Other
    5,066       6,769  
 
   
 
     
 
 
Net cash provided by operating activities
    204,752       193,259  
Investing activities:
               
Purchase of available-for-sale investments
    (3,301,158 )     (6,822,384 )
Proceeds from sales and maturities of investments
    3,215,911       6,732,056  
Purchase of property and equipment
    (88,938 )     (213,801 )
 
   
 
     
 
 
Net cash used in investing activities
    (174,185 )     (304,129 )
Financing activities:
               
Net proceeds from employee stock transactions
    74,509       49,145  
 
   
 
     
 
 
Net cash provided by financing activities
    74,509       49,145  
Effect of foreign exchange rate changes on cash and cash equivalents
    (1,994 )     15,241  
 
   
 
     
 
 
Net increase (decrease) in cash and cash equivalents
    103,082       (46,484 )
Cash and cash equivalents at beginning of period
    439,385       319,344  
 
   
 
     
 
 
Cash and cash equivalents at end of period
  $ 542,467     $ 272,860  
 
   
 
     
 
 
Supplemental disclosures:
               
Cash paid for interest
  $ 329     $ 74  
Cash paid for income taxes
  $ 42,660     $ 50,330  

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

PEOPLESOFT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

     The accompanying condensed consolidated financial statements for the three and six month periods ended June 30, 2004 and 2003 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are consistent in all material respects with those applied in PeopleSoft Inc’s. (“PeopleSoft” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2003. These financial statements are unaudited and in the opinion of management, include all necessary normal recurring and other adjustments for the fair presentation of the Company’s financial position, results of operations and changes in cash flows. The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that may affect the amounts reported in the accompanying financial statements. Despite the Company’s best effort to make these good faith estimates and assumptions, actual results may differ. Certain prior period amounts have been reclassified to conform to the current period presentation.

     These interim financial statements are prepared in accordance with Securities and Exchange Commission rules and regulations, which allow certain information and footnote disclosures, normally included in annual financial statements, to be condensed or omitted. As a result, these interim financial statements should be read in conjunction with the Consolidated Financial Statements filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

2. Income Per Share

     Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period, excluding unvested restricted stock. Diluted income per share is computed by dividing net income by the sum of weighted average number of common shares outstanding and the number of potential dilutive common shares outstanding during the period, if dilutive. Potential dilutive common shares consist of shares issuable upon the exercise of stock options, restricted stock not yet vested, and shares issuable resulting from compensation withheld to purchase stock under the Company’s employee stock purchase plan (“ESPP”), using the treasury stock method.

     The following table sets forth the computation of basic income per share and diluted income per share (in thousands, except per share amounts):

                                 
    Three Months Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
Numerator:
                               
Net income
  $ 10,978     $ 36,534     $ 35,183     $ 75,013  
 
   
 
     
 
     
 
     
 
 
Denominator:
                               
Denominator for basic income per share — Weighted average shares outstanding
    363,566       315,707       362,664       315,302  
Employee stock options and other
    4,951       2,923       7,077       3,997  
 
   
 
     
 
     
 
     
 
 
Denominator for diluted income per share — Weighted average shares outstanding, assuming exercise of potential dilutive common shares
    368,517       318,630       369,741       319,299  
 
   
 
     
 
     
 
     
 
 
Basic income per share
  $ 0.03     $ 0.12     $ 0.10     $ 0.24  
Diluted income per share
  $ 0.03     $ 0.11     $ 0.10     $ 0.23  

     The following table sets forth the potential dilutive common shares that were excluded from the diluted income per share computations because the exercise prices were greater than the average market price of the common shares during the period or were otherwise not dilutive (in millions):

6


 

                                 
    Three Months Ended   Six Months Ended
    June 30,
  June 30,
    2004
  2003
  2004
  2003
Employee stock options
    43.6       51.9       41.8       45.3  
Unvested restricted stock
    0.8       0.7       0.6       0.7  
 
   
 
     
 
     
 
     
 
 
Total shares excluded
    44.4       52.6       42.4       46.0  

     The weighted average exercise prices of the employee stock options that are antidilutive for the three months ended June 30, 2004 and 2003 were $27.98 and $25.78 per share, respectively, and for the six months ended June 30, 2004 and 2003 were $28.44 and $27.72 per share, respectively.

     On January 12, 2004, the Board of Directors authorized the repurchase of up to $200 million of the Company’s common stock, par value $0.01 per share, in the open market or through privately negotiated purchases or otherwise, depending on market prices and other conditions. During the six months ended June 30, 2004, no common stock was repurchased under this program.

3. Stock-Based Compensation

     Our stock-based compensation consists of stock options and restricted stock awards. The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”). The following table illustrates the effect on net income and income per share as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to stock-based employee compensation for the three and six months ended June 30, 2004 and 2003 (in thousands, except per share amounts). The 2003 pro forma disclosure has been revised to correct the pro forma foreign tax benefits associated with stock options.

                                 
    Three Months Ended   Six Months Ended
    June 30,
  June 30,
    2004
  2003
  2004
  2003
Net income, as reported
  $ 10,978     $ 36,534     $ 35,183     $ 75,013  
Add: Stock-based employee compensation expense included in reported net income, net of tax
    3,277       2,067       6,374       4,147  
Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax
    (28,057 )     (36,749 )     (60,807 )     (80,455 )
 
   
 
     
 
     
 
     
 
 
Pro forma net income (loss)
  $ (13,802 )   $ 1,852     $ (19,250 )   $ (1,295 )
 
   
 
     
 
     
 
     
 
 
Basic income (loss) per share
                               
As reported
  $ 0.03     $ 0.12     $ 0.10     $ 0.24  
Pro forma
  ($ 0.04 )   $ 0.01     ($ 0.05 )   $ 0.00  
Diluted income (loss) per share
                               
As reported
  $ 0.03     $ 0.11     $ 0.10     $ 0.23  
Pro forma
  ($ 0.04 )   $ 0.01     ($ 0.05 )   $ 0.00  

     The fair value of the Company’s stock option awards to employees and the shares purchased under the ESPP were 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. The fair value of the Company’s stock option awards to employees and the shares purchased under the ESPP plan were estimated assuming no expected dividends and the following weighted-average assumptions:

                                 
    ESPP
  Options
    Three Months Ended June 30,
    2004
  2003
  2004
  2003
Expected life (in years)
    0.50       0.50       3.18       3.37  
Expected volatility
    0.37       0.55       0.69       0.89  
Risk free interest rate
    1.02 %     1.15 %     2.98 %     1.75 %

7


 

                                 
    ESPP
  Options
    Six Months Ended June 30,
    2004
  2003
  2004
  2003
Expected life (in years)
    0.50       0.50       3.18       3.34  
Expected volatility
    0.37       0.56       0.75       0.89  
Risk free interest rate
    1.02 %     1.22 %     2.58 %     1.80 %

4. Comprehensive Income

     Comprehensive income primarily includes net income, unrealized gains or losses on investments, mark-to-market adjustments on interest rate swap transactions, and foreign currency translation adjustments, which are reflected as a component of stockholders’ equity. The components of comprehensive income, net of tax, are as follows (in thousands):

                                 
    Three Months Ended   Six Months Ended
    June 30,
  June 30,
    2004
  2003
  2004
  2003
Net income
  $ 10,978     $ 36,534     $ 35,183     $ 75,013  
Other comprehensive income:
                               
Net unrealized gain (loss) on investments
    (912 )     1,896       (457 )     1,317  
Foreign currency translation adjustments
    (2,210 )     13,933       (4,869 )     19,731  
Interest rate swap transactions:
                               
Net unrealized loss on cash flow hedges
                      (58 )
Reclassification adjustment for earnings recognized during the period
          871             2,106  
Reclassification adjustment for realized loss on the termination of interest rate swap agreements
          881             881  
Comprehensive income
  $ 7,856     $ 54,115     $ 29,857     $ 98,990  
 
   
 
     
 
     
 
     
 
 

5. Derivative Financial Instruments

     Derivative financial instruments are only utilized by the Company to reduce foreign currency exchange and interest rate risks. The Company does not hold any derivative financial instruments for trading or speculative purposes.

Forward Foreign Exchange Contracts

     The Company has a foreign exchange hedging program principally designed to mitigate the potential impact due to changes in foreign currency exchange rates. Forward exchange contracts are primarily used to hedge foreign currency exposures and generally have terms of two months or less. The derivatives used in the foreign exchange hedging program are not designated as cash flow or fair value hedges under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended. These contracts are recorded on the balance sheet at fair value in “Accrued liabilities.” Changes in fair value of the contracts and the amounts being hedged are included in “Other income, net.” At June 30, 2004, each of the foreign exchange contracts matured within 60 days and had a book value that approximated fair value. Neither the cost nor the fair value of these forward foreign exchange contracts was material at June 30, 2004.

     During the three months ended June 30, 2004 and 2003, the Company recorded net foreign currency transaction losses of $2.5 million and $1 million, respectively. During the six months ended June 30, 2004 and 2003, the Company recorded net foreign currency transaction losses of $4.5 million and $1.2 million, respectively.

     At June 30, 2004, the Company had the following outstanding forward foreign exchange contracts to exchange foreign currency for U.S. dollars (in millions):

8


 

         
     
Foreign Currency
  Notional
Amount

Singapore dollars
  $ 14.9  
Hong Kong dollars
    8.5  
New Zealand dollars
    7.9  
British pounds
    6.2  
Japanese yen
    5.4  
Taiwanese dollars
    3.8  
 
   
 
 
 
  $ 46.7  
 
   
 
 

     At June 30, 2004, the Company had the following outstanding forward foreign exchange contracts to exchange U.S. dollars for foreign currency (in millions):

         
    Notional
Foreign Currency
  Amount
Mexican pesos
  $ 12.5  
Canadian dollars
    5.3  
Swiss francs
    3.0  
Euro
    2.7  
Swedish krona
    1.0  
 
   
 
 
 
  $ 24.5  
 
   
 
 

     At June 30, 2003, the Company had the following outstanding forward foreign exchange contracts to exchange foreign currency for U.S. dollars (in millions):

         
    Notional
Foreign Currency
  Amount
Singapore dollars
  $ 8.8  
Canadian dollars
    8.5  
New Zealand dollars
    1.0  
Japanese yen
    1.0  
Swiss francs
    0.9  
Swedish krona
    0.8  
Euros
    0.7  
Taiwanese dollars
    0.4  
 
   
 
 
 
  $ 22.1  
 
   
 
 

     At June 30, 2003, the Company had the following outstanding forward foreign exchange contracts to exchange U.S. dollars for foreign currency (in millions):

         
    Notional
Foreign Currency
  Amount
Hong Kong dollars
  $ 0.9  
South African rand
    0.6  
 
   
 
 
 
  $ 1.5  
 
   
 
 

Interest Rate Swap Transactions

     The Company used interest rate swap transactions to manage its exposure to interest rate changes on synthetic lease obligations related to certain of its headquarters facilities located in Pleasanton, California. The swaps had an aggregate notional principal amount of $175 million and matured at various dates in 2003, consistent with the expiration of the synthetic leases. Under the swap agreements, the Company received a variable interest rate based on the three month LIBOR rate and paid a weighted average fixed interest rate of 6.8%. The swaps were designated under SFAS 133 as hedges against changes in the amount of future cash flows. In February 2003, the Company exercised its option under a synthetic lease agreement to purchase certain of its headquarters facilities

9


 

located in Pleasanton, California for $70 million, and concurrently, swaps with an aggregate notional principal amount of $70 million matured. In June 2003, the Company exercised its option under a synthetic lease agreement to purchase certain of its headquarters facilities located in Pleasanton, California for $105 million. As a result of this transaction, the Company terminated its remaining interest rate swap agreements with an aggregate notional principal amount of $105 million resulting in pretax charge of $1.4 million to “Other income, net.” Included in “Accumulated other comprehensive income” at March 31, 2003 was a $1.8 million unrealized loss (after-tax) related to these interest rate swaps. In the second quarter of 2003, $0.9 million (after-tax) was reclassified from accumulated other comprehensive income into earnings by making scheduled swap payments and $0.9 million (after-tax) was recognized as a realized loss that was reclassified from accumulated other comprehensive income into earnings upon the termination of the remaining interest rate swap agreements.

Concentrations of Credit Risk

     The Company does not have a significant concentration of credit or operating risk in any one investment, customer, industry or geographic region within or outside of the United States.

6. Restructuring Liabilities

Third Quarter 2003 Restructuring Plan

     During the third quarter of 2003, in connection with the acquisition of J.D. Edwards & Company (J.D. Edwards), management approved and initiated plans to restructure the pre-acquisition operations of PeopleSoft to eliminate certain duplicative activities and reduce the Company’s cost structure. Consequently, from the date of the J.D. Edwards acquisition through June 30, 2004, the Company has recorded approximately $31.7 million of restructuring charges including costs for employee severance, acquisition-related employee retention, consolidating duplicate facilities and contract terminations. Approximately 200 pre-acquisition PeopleSoft employees were terminated under this restructuring plan. Terminated employees entitled to receive payments under this plan primarily consisted of general and administrative, consulting, and sales and marketing employees. These costs are accounted for in accordance with Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”) or Statement of Financial Accounting Standards No. 112 (“SFAS 112”), “Employers’ Accounting for Postemployment Benefits — an Amendment of FASB Statements No. 5 and 43” and are recorded as a charge to the results of operations in “Restructuring, acquisition and other charges.” Future cash payments related to restructuring liabilities for employee costs are expected to be made through October 2004. Future cash payments related to restructuring liabilities for facilities obligations are expected to be made through March 2012. The $10.8 million restructuring liability at June 30, 2004 related to exiting certain pre-acquisition activities of the Company is a cash obligation.

     The following table sets forth the activity in the Company’s restructuring liabilities accounted for under SFAS 146 or SFAS 112 for the six months ended June 30, 2004, for liabilities established during 2003, as a result of the acquisition of J.D. Edwards which pertain to the pre-acquisition operations of PeopleSoft. These liabilities are included in “Restructuring liabilities” in the accompanying condensed consolidated balance sheets (in thousands).

                         
    Employee   Facilities    
    Costs
  Costs
  Total
Balance as of December 31, 2003
  $ 10,304     $ 1,840     $ 12,144  
Restructuring costs relating to the J.D. Edwards plan
    3,179       9,093       12,272  
Cash payments
    (8,490 )     (1,031 )     (9,521 )
Non-cash items
    (211 )     (3,852 )     (4,063 )
 
   
 
     
 
     
 
 
Balance as of June 30, 2004
  $ 4,782     $ 6,050     $ 10,832  
 
   
 
     
 
     
 
 

     From the July 18, 2003 acquisition date of J.D. Edwards through June 30, 2004, the Company recorded approximately $97.5 million of restructuring costs in connection with exiting certain pre-acquisition activities of J.D. Edwards including employee severance costs, change in control payments, costs of consolidating duplicate facilities, contract termination costs and other costs. These costs have been accounted for in accordance with Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” (“EITF 95-3”) and have been recognized as a liability assumed in the purchase business combination. Approximately 600 pre-acquisition J.D. Edwards employees were terminated under this restructuring plan. Terminated employees entitled to receive severance and change in control payments under this plan primarily consisted of general and administrative, consulting, and sales and marketing employees. Change in control payments are made to employees covered by a plan

10


 

established by J.D. Edwards and subsequently assumed by PeopleSoft upon the completion of the merger. The change in control plan provides for specified severance and other change in control-related benefits to participants in the plan. The change in control plan covered 197 senior management employees. Future cash payments related to restructuring liabilities for employee costs are expected to be made through January 2005. Future cash payments related to restructuring liabilities for facilities obligations, contract terminations and other costs are expected to be made through January 2008. The $35.2 million restructuring liability at June 30, 2004 related to exiting certain pre-acquisition activities of J.D. Edwards is a cash obligation.

     The following table sets forth the activity in the Company’s restructuring liabilities accounted for in accordance with EITF 95-3, for the six months ended June 30, 2004, for liabilities established during 2003, as a result of the acquisition of J.D. Edwards which pertain to the pre-acquisition activities of J.D. Edwards. These liabilities are included in “Restructuring liabilities” in the accompanying condensed consolidated balance sheets (in thousands).

                                 
                    Contract    
    Employee   Facilities   Termination and    
    Costs
  Costs
  Other Costs
  Total
Balance as of December 31, 2003
  $ 17,065     $ 32,905     $ 9,736     $ 59,706  
Changes in estimated costs relating to the J.D. Edwards plan
    4,522       (1,882 )     (225 )     2,415  
Cash payments
    (16,042 )     (9,926 )     (608 )     (26,576 )
Non-cash items
    (82 )     (250 )           (332 )
 
   
 
     
 
     
 
     
 
 
Balance as of June 30, 2004
  $ 5,463     $ 20,847     $ 8,903     $ 35,213  
 
   
 
     
 
     
 
     
 
 

Other Restructuring Plans

     The following table sets forth the activity in the Company’s restructuring liabilities established prior to 2003 and accounted for in accordance with Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” for the six months ended June 30, 2004. Future cash payments related to these restructuring liabilities are expected to be made through October 2005. These liabilities are included in “Restructuring liabilities” in the accompanying condensed consolidated balance sheets (in thousands).

         
    Facilities
    Costs
Balance as of December 31, 2003
  $ 6,362  
Cash payments
    (1,785 )
 
   
 
 
Balance as of June 30, 2004
  $ 4,577  
 
   
 
 

7. Products and Service Warranty Reserve

     The Company provides for the estimated cost of product and service warranties based on specific warranty claims received, provided that it is probable that a liability exists, and provided the cost to repair or otherwise satisfy the claim can be reasonably estimated. The amount of the reserve recorded is equal to the costs to repair or otherwise satisfy the claim. If existing claims are settled for amounts which differ from the Company’s estimates, or if the estimated monetary value of the warranty claims were to increase or decrease, revisions to the estimated warranty liability may be required and the warranty expense could change from current levels.

     The following table sets forth the activity in the Company’s product and service warranty reserve, which is included in “Accrued liabilities,” for the six months ended June 30, 2004 (in thousands):

         
    Total
Balance as of December 31, 2003
  $ 18,828  
Expense related to new claims
    6,391  
Reduction in expense related to changes in estimates
    (5,161 )
Closed warranty claims, net of recoveries
    (3,688 )
 
   
 
 
Balance as of June 30, 2004
  $ 16,370  
 
   
 
 

11


 

8. Business Combinations

     Pursuant to an Amended and Restated Agreement and Plan of Merger with J.D. Edwards dated June 16, 2003, the Company acquired approximately 85% of the outstanding stock of J.D. Edwards on July 18, 2003 pursuant to an exchange offer and the remaining shares on August 29, 2003.

     J.D. Edwards offered enterprise software as well as consulting, education and support services. The Company’s Board of Directors (“Board”) approved the offer and the merger and believed that the offer and the merger would provide the Company with increased breadth and depth across the Company’s products, market segments and industry coverage. The Company’s Board believed that J.D. Edwards’ expertise in manufacturing and distribution applications would strengthen the Company’s enterprise application suite. In addition, the Board believed that J.D. Edward’s mid-market focused applications and AS/400 based solutions would be additive to the Company’s Internet-based enterprise application suite.

     In the exchange offer, holders of J.D. Edwards common stock were entitled to make an election to tender their shares for cash or shares of PeopleSoft stock. Such holders were entitled to receive cash, stock, or a combination of cash and stock, in each case having a value, on a per share basis of $7.05 plus 0.43 of a share of the Company’s common stock, allocated by prorating cash and shares available in the exchange offer among the elections made by the holders. At the completion of the acquisition, a total of 124,108,566 shares of J.D. Edwards common stock were tendered and accepted for exchange by PeopleSoft.

     The Company exchanged options to purchase J.D. Edwards common stock held by J.D. Edwards employees with options to purchase PeopleSoft common stock at a rate of 0.43 of a PeopleSoft share per J.D. Edwards share. Each exchanged PeopleSoft option retained the same vesting characteristics as the J.D. Edwards option it replaced and each J.D. Edwards option holder will receive $7.05 per share upon exercise in addition to the PeopleSoft shares.

     The aggregate purchase price was approximately $2 billion, which consisted of approximately $875 million in cash, $959.6 million in PeopleSoft common stock and stock options (net of deferred compensation), $97.5 million in restructuring costs (Note 6, “Restructuring Liabilities”) and $22.7 million in deal costs and other liabilities, which primarily consist of fees paid for legal, accounting and financial advisory services. A total of 53,366,059 shares of PeopleSoft common stock were issued in the transaction. The value of the stock issued to tendering J.D. Edwards shareholders was based upon the average of the closing prices of one share of the Company’s common stock for a few days before and after the amended terms of the merger were agreed to and announced, which was $17.22. The fair value of the Company’s stock-based awards to employees was estimated using a Black-Scholes option pricing model.

     The intrinsic value allocated to the unvested J.D. Edwards options assumed in the exchange was approximately $6.8 million at the date of the merger and was recorded as deferred compensation in the purchase price allocation. Option holders having options with strike prices of $7.05 (J.D. Edwards pre-merger price) or less were given 0.43 shares of the Company’s common stock plus $7.05 less the exercise price and any applicable taxes, in order to retire these options.

     In allocating the purchase price based on estimated fair values, the Company recorded approximately $948 million of goodwill, $477 million of amortizable purchased intangible assets, $491 million of net tangible assets, $226 million of capitalized software, $127 million of deferred tax liabilities, $75 million of deferred revenue and $15 million of in-process research and development. The purchase price allocation is preliminary and a final determination of required purchase accounting adjustments will be made upon the completion of a final analysis of the total purchase cost pending finalization of restructuring costs related to estimated involuntary termination of employees and facility related costs.

Pro Forma Financial Information

     The unaudited financial information in the table below summarizes the combined results of operations of PeopleSoft and J.D. Edwards, on a pro forma basis, as though the companies had been combined as of the beginning of the period presented. The impact of the restructuring charges associated with the acquisition have been excluded. This pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition taken place at the beginning of the period presented. The unaudited pro forma condensed combined statement of operations for the three months and six months ended June 30, 2003 combines the historical results for PeopleSoft for the three and six months ended June 30, 2003 and the historical results for J.D. Edwards for the three and six months ended April 30, 2003. The

12


 

following amounts are in thousands, except per share amounts.

                 
    Three Months   Six Months
    Ended June   Ended June
    30, 2003
  30, 2003
Revenues
  $ 652,436     $ 1,271,000  
Net loss
  $ (22,817 )   $ (38,414 )
Basic and diluted loss per share
  $ (0.06 )   $ (0.10 )

9. Goodwill and Other Intangible Assets

     The following table sets forth the carrying amount of goodwill (in thousands):

                         
    North        
    America
  International
  Total
Balance as of December 31, 2003
  $ 1,003,668     $ 1,992     $ 1,005,660  
Additional restructuring costs incurred under the Third Quarter 2003 Restructuring Plan (Note 6, “Restructuring Liabilities”).
    2,415             2,415  
Other goodwill adjustments
    (4,921 )           (4,921 )
Foreign currency translation
          (177 )     (177 )
 
   
 
     
 
     
 
 
Balance as of June 30, 2004
  $ 1,001,162     $ 1,815     $ 1,002,977  
 
   
 
     
 
     
 
 

     At June 30, 2004, identifiable intangible assets consisted of the following (in thousands):

                         
    Gross   Accumulated   Net Carrying
Identifiable Intangible Assets
  Value
  Amortization
  Amount
Capitalized software
  $ 310,881     $ 106,398     $ 204,483  
Patented technology
    61,190       12,060       49,130  
Customer contracts and related relationships
    106,600       14,960       91,640  
Maintenance agreements and related relationships
    306,231       33,650       272,581  
Non-compete agreements
    1,500       1,500        
 
   
 
     
 
     
 
 
Balance as of June 30, 2004
  $ 786,402     $ 168,568     $ 617,834  
 
   
 
     
 
     
 
 

     At December 31, 2003, identifiable intangible assets consisted of the following (in thousands):

                         
    Gross   Accumulated   Net Carrying
Identifiable Intangible Assets
  Value
  Amortization
  Amount
Capitalized software
  $ 310,881     $ 76,664     $ 234,217  
Patented technology
    61,190       5,927       55,263  
Customer contracts and related relationships
    106,600       7,249       99,351  
Maintenance agreements and related relationships
    306,231       15,917       290,314  
Non-compete agreements
    1,500       1,437       63  
 
   
 
     
 
     
 
 
Balance as of December 31, 2003
  $ 786,402     $ 107,194     $ 679,208  
 
   
 
     
 
     
 
 

     Total expected future annual amortization related to intangible assets is set forth in the table below (in thousands):

13


 

         
Estimated Amortization Expense
       
For the year ended December 31, 2004 (remaining six months)
  $ 59,884  
For the year ended December 31, 2005
    115,417  
For the year ended December 31, 2006
    113,689  
For the year ended December 31, 2007
    109,152  
For the year ended December 31, 2008
    87,590  
Thereafter
    132,102  
 
   
 
 
 
  $ 617,834  
 
   
 
 

10. Customer Assurance Program

     On June 6, 2003, Oracle Corporation (“Oracle”) announced that it intended to commence an unsolicited cash tender offer to purchase all of the outstanding shares of PeopleSoft for $16.00 per share, or approximately $5.1 billion in the aggregate (the “Oracle Tender Offer”). The Oracle Tender Offer formally commenced June 9, 2003. On June 18, 2003 Oracle amended the offer to increase the purchase price from $16.00 to $19.50 per share or approximately $6.2 billion in the aggregate. On February 4, 2004, Oracle increased its offer price to $26 per share, or approximately $9.5 billion in the aggregate. On May 14, 2004, Oracle reduced the offer price to $21 per share, or approximately $7.7 billion in the aggregate. Oracle has extended its tender offer period several times, and on July 12, 2004 announced extension of its tender offer period to August 27, 2004.

     In response to Oracle’s public statements about its intent to discontinue PeopleSoft’s products, and to minimize the loss of business while the Oracle Tender Offer remains pending, PeopleSoft implemented a customer assurance program. This program incorporates in its standard perpetual licensing arrangement a term that provides customers who purchase application licenses with financial protection in the circumstances described below. That financial protection is in the form of a payment generally equal to two to five times the total arrangement fees, with the multiple increasing as the fees increase. The specific criteria which have to be met before a payment is due under the customer assurance program vary in some respects among each of five versions of the language used in 2003 and through June 30, 2004. The customer assurance program has most recently been extended until the earlier of the date that Oracle terminates its tender offer or September 30, 2004. A payment will be generally due under the customer assurance program if each of the following events occurs:

  either within one year or two years (depending upon the applicable version of the program) from the contract effective date, there is an acquisition of PeopleSoft, as specifically described in the version; and
 
  either within two or four years (depending upon the applicable version of the program) from the contract effective date, the acquiring company takes certain action to discontinue or reduce support, licensing, updates or new releases for PeopleSoft’s products, as specifically described in each version of the program; and
 
  the customer requests the payment in writing by a specified date and the customer has timely paid for support services in accordance with the terms of the customer’s agreement with PeopleSoft.

     In Version Five of the program the term “acquisition” is limited to an acquisition of PeopleSoft by Oracle or its affiliates. This change is consistent with the terms of a pending settlement of certain stockholder litigation. See Note 11, “Commitments and Contingencies.”

     Customers retain rights to the licensed products whether or not the customer assurance program’s payments are triggered. No customer is entitled to a refund of fees previously paid under the customer’s contract with PeopleSoft, but the customer would be entitled to a payment under the customer assurance program if all of the conditions stated above are met.

     The customer assurance program has no current financial statement impact on PeopleSoft. A contingent liability may be recognized in the financial statements of PeopleSoft or its acquirer upon or after the consummation of a transaction that satisfies the acquisition criteria set forth in the specific terms of the applicable version of the customer assurance program, and if the amount due were probable and reasonably estimable. However, the determination of the timing of recognition and amount of any such contingent liability would be dependent upon the acquirer’s plans, assumptions and estimations. The terms of the customer assurance program require an acquisition by an entity other than PeopleSoft; therefore no action taken unilaterally by PeopleSoft would, by itself, result in the recognition of a contingent liability or any other financial statement impact. As discussed above, in Version Five of the program, the term “acquisition” is limited to an acquisition of PeopleSoft by Oracle or its affiliates.

14


 

     The table below sets forth for each version of the customer assurance program the dates during which such version was implemented in customer contracts and the approximate potential maximum liability, as of June 30, 2004, under the contracts containing language from each such version. As of June 30, 2004, the approximate aggregate maximum potential amount of future liability under the customer assurance program was $2.02 billion.

                 
            Approximate
            Amount of
            Maximum
Version
  Dates Offered to Customers*
  Potential Liability
Version One
  6/03/2003 to 9/12/2003   $310 million
Version Two
  9/12/2003 to 9/30/2003   $170 million
Version Three
  9/30/2003 to 11/7/2003   $40 million
Version Four
  11/18/2003 to 6/30/04   $1,342 million
Version Five
  6/16/04 to present   $156 million
   
 
  Total Amount of Maximum Potential Liability:   $2,018 million

* Some contracts originally submitted to customers prior to these end dates were executed following such dates.

11. Commitments and Contingencies

Synthetic Leases

     As a result of the acquisition of J.D. Edwards, the Company assumed three six-year master operating leases on four office buildings in Denver, Colorado (the “Denver Campus”). Two of the three master leases are effective at June 30, 2004. On April 2, 2004, the third master lease agreement terminated and the Company exercised its option to purchase two buildings for a net purchase price of $58.6 million. The lessor, a wholly owned subsidiary of a bank, which together with a syndication of other banks provided debt and equity financing of $121.2 million for the purchase and construction costs of the buildings. The lease payment obligations are based on a return on the lessor’s costs. The Company has an option to refinance or purchase the remaining leased properties at its sole discretion during the terms of the leases for approximately $62.6 million. In the event that the Company does not exercise its option to refinance or purchase the leased properties, it must guarantee the residual value of each building up to approximately 85% of the bank financing of $62.6 million or $53.2 million for the remaining two leases. The Company has evaluated the fair value of the Denver Campus and determined that at June 30, 2004 it is not probable that the value of the leased properties at the end of the lease terms will be less than the residual value guaranteed by the Company and as a result the Company does not believe that it will be called upon to perform under the residual guarantee. The Company is expecting to proceed with cash purchases of the remaining office buildings. The leases for the remaining buildings terminate during the third and fourth quarters of 2004.

     The Company may elect to reduce the interest rate used to calculate its lease expense by collateralizing the Denver Campus financing arrangements with investments. At June 30, 2004, investments totaling $63.8 million were designated as collateral for these leases. The Company may withdraw the funds used as collateral, excluding restricted amounts, at its sole discretion provided that it is not in default under the lease agreements. At June 30, 2004, funds used as collateral in the amount of $40.8 million were available for withdrawal. At June 30, 2004, the Company was in compliance with the covenants, representations, and warranties required under the lease agreements.

Customer Indemnification

     From time to time, the Company agrees to indemnify its customers against liability if the Company’s products infringe a third party’s intellectual property rights. In addition, the Company, on rare occasions, offers to its customers indemnity for personal injury and property damage that may result from the actions of the Company’s employees. As of June 30, 2004, the Company had no material claims or pending material litigation alleging that the Company’s products infringe the intellectual property rights of any third parties or asserting that the Company has any payment obligation on these customer indemnification provisions.

PeopleSoft Stockholder Actions — Delaware Court of Chancery

     On June 6, 2003, Felix Ezeir (Case No. 20349-NC), Teresita Fay (Case No. 20350-NC), Robert Crescente (Case No. 20351-NC),

15


 

Robert Corwin (Case No. 20352-NC) and Ernest Hack (Case No. 20353-NC), all of whom represented themselves to be PeopleSoft stockholders, each filed a putative stockholder class action suit in the Delaware Court of Chancery against the Company and several of the Company’s officers and directors. The suits allege that defendants breached their fiduciary duties in connection with the response to the tender offer announced by Oracle Corporation on June 6, 2003 and formally commenced June 9, 2003. Plaintiffs in each of the actions initially sought injunctive relief and an accounting. On June 10, 2003, Steven Padness filed an action in the Delaware Court of Chancery against these same defendants (Case No. 20358-NC) making similar allegations and seeking similar relief. On June 12, 2003, Thomas Nemes filed an action in the Delaware Court of Chancery (which was subsequently amended June 18, 2003) against these same defendants (Case No. 20365-NC), making similar allegations and seeking similar relief (the “Nemes Action”).

     On June 25, 2003, on an application filed in the Nemes Action, the Court consolidated the actions listed above under a single caption and case number: In re PeopleSoft, Inc. Shareholder Litigation, Consol. C.A. No. 20365-NC.

     On July 2, 2003, Richard Hutchings (Case No. 20403-NC) filed a putative stockholder class action in the Delaware Court of Chancery against PeopleSoft and several of the Company’s officers and directors. This action alleges that defendants breached their fiduciary duties in connection with the response to Oracle’s tender offer. Plaintiff sought injunctive relief, an accounting and damages. On July 22, 2003, the Delaware Court ordered that this action be consolidated with the other putative Delaware shareholder actions mentioned above.

     On May 26, 2004, PeopleSoft announced that the parties to the Delaware consolidated putative stockholder class action had entered into a memorandum of understanding providing for the settlement of that action. On June 17, 2004, the parties in the Delaware consolidated putative stockholder class action signed a Stipulation and Agreement of Compromise, Settlement and Release providing for settlement of that action (the “Settlement Stipulation”) and on July 22, 2004 filed the Settlement Stipulation with the Delaware Court of Chancery.

     In the Settlement Stipulation the stockholder plaintiffs state that, based on the actions of the US Department of Justice and the European Union and the current status of their anti-trust reviews and/or opposition to Oracle’s proposed acquisition of the Company, the discovery to date, and subject to confirmatory discovery, they had determined that the customer assurance program (see Note 10, above), as it relates to Oracle, serves a legitimate corporate purpose in light of Oracle’s tender offer and other conduct. Pursuant to the Settlement Stipulation, the Company agreed that if it extended the customer assurance program beyond June 30, 2004, the term “acquisition” would be limited to an acquisition of the Company by Oracle or its affiliates, and that prior to June 30, 2004 it would attempt to use that more limited definition in certain new contracts. In the Settlement Stipulation, which is subject to approval by the Delaware Court of Chancery, the stockholder plaintiffs, on behalf of a class of PeopleSoft stockholders, agreed to settle and dismiss all claims that were raised or could have been raised in the action against the Company and its directors. The Settlement Stipulation also provides, among other things, that following Delaware Court of Chancery approval of the settlement (if obtained), the Company will, for a two year period, amend its Bylaws to shorten the advance notice a stockholder must give to nominate candidates for director and amend its stockholder rights plan to provide that the rights plan will generally cease to be applicable to certain qualifying tender offers unless, within 90 days following commencement or amendment of the price term of the qualifying tender offer or certain other events, the Board of Directors, including a majority of its independent directors, shall have adopted a resolution determining that the rights plan shall remain applicable to such offer. The Settlement Stipulation also provides for the Company to pay attorneys’ fees and expenses of the stockholder plaintiffs in an amount to be determined by the Court as fair and reasonable. If approved, the settlement will bind all PeopleSoft stockholders except that it will not apply to Oracle, which is not precluded by the Settlement Stipulation from continuing to pursue its claims in the Delaware Court of Chancery and its counterclaims in the California Superior Court action, both as described immediately below.

     The Company believes that the claims and allegations asserted in each of the foregoing putative class action lawsuits are without merit, and intends to vigorously defend against these lawsuits if the proposed settlement of them is not approved by the Delaware Court of Chancery.

     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.

Oracle v. PeopleSoft — Delaware Court of Chancery

     On June 18, 2003, Oracle and Pepper Acquisition Corp. filed a lawsuit in the Delaware Court of Chancery (Case No. 20377-NC) (captioned Oracle Corp. v. PeopleSoft, Inc.) against the Company, several of its directors (the “Director Defendants”), and J.D. Edwards, alleging that the named directors breached their fiduciary duties in connection with the response to Oracle’s tender offer,

16


 

and that J.D. Edwards aided and abetted the named directors’ purported breach of fiduciary duty. Oracle sought injunctive, declaratory and rescissory relief.

     On June 24, 2004, Oracle and Pepper Acquisition Corp. filed an amended complaint in this action, eliminating J.D. Edwards as a separate defendant and adding PeopleSoft director Michael Maples as a defendant. The amended complaint updates the plaintiffs’ claims challenging PeopleSoft’s response to Oracle’s tender offer and alleges, among other things, that the directors of PeopleSoft have breached their duty of loyalty and duty of care and that the customer assurance program violates Delaware corporation law and was implemented without proper approval or supervision by PeopleSoft’s Board of Directors. The amended complaint seeks declaratory and injunctive relief, including an injunction prohibiting the future use of the customer assurance program and requiring PeopleSoft’s Board of Directors to eliminate the Company’s Shareholder Rights Plan.

     Discovery in this action is proceeding and is being coordinated with discovery in PeopleSoft’s action against Oracle in California, discussed below. Trial in the Delaware action has been scheduled to commence on September 27, 2004.

     The Company believes that the claims and allegations asserted in this action are without merit, and intends vigorously to defend against this lawsuit.

     In the opinion of management, resolution of this matter is not expected to have a material adverse effect on the financial position, results of operations and cash flows of the Company.

PeopleSoft Stockholder Actions — California Superior Court for the County of Alameda

     On June 6, 2003, separate actions were filed in the California Superior Court for the County of Alameda by Doris Staehr (Case No. RG03100291), the West Virginia Laborers Pension Trust Fund (Case No. RG03100306) and Lorrie McBride (Case No. RG03100300). On June 10, 2003, Ray Baldi (Case No. RG03100696) filed an additional case in the same court. The plaintiffs in these actions (collectively, the “Initial Alameda Shareholder Actions”) all purport to be PeopleSoft stockholders, and they make claims against several of PeopleSoft’s executive officers and directors. The suits allege that the defendants breached their fiduciary duties in connection with (i) the response to Oracle’s tender offer, (ii) the Company’s agreement to acquire J.D. Edwards, and (iii) the implementation of the 2003 Directors Stock Plan, which was approved by the PeopleSoft stockholders at the 2003 Annual Meeting of Stockholders. Plaintiffs seek injunctive, rescissory and declaratory relief. On June 16, 2003, the Initial Alameda Shareholder Actions were consolidated. On June 11 and 17, 2003, respectively, two additional actions were filed by Moshe Panzer (Case No. VG03100876) and Arace Brothers (Case No. VG03101830) asserting similar claims. By Order dated July 11, 2003, the Panzer and Arace Brothers actions were consolidated with the Initial Alameda Shareholder Actions (collectively “the Alameda Shareholder Actions”).

     By Order dated June 18, 2003, the Alameda County Superior Court granted the Company’s Motion to Stay the Initial Alameda Shareholder Actions pending resolution of the claims involving the duties of the defendant directors by the Delaware Court of Chancery. The California Court found that the stockholder actions required application of Delaware law, and that allowing the consolidated cases to proceed would create the specter of inconsistent orders. By Order dated July 11, 2003, the Alameda County Superior Court also stayed the Panzer and Arace Brothers cases pursuant to the June 18, 2003 Order in the Initial Alameda Shareholder Actions. Accordingly, all of the Alameda Shareholder Actions currently are stayed by order of the California Court.

     The Company believes that the claims and allegations asserted in each of the foregoing putative class action lawsuits are without merit, and intends to vigorously defend against these lawsuits if they are not dismissed by virtue of the settlement of the Delaware putative stockholder class action discussed above, or if that settlement is not approved by the Delaware Court of Chancery.

     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.

PeopleSoft v. Oracle — California Superior Court for the County of Alameda

     On June 13, 2003, PeopleSoft filed an action in the California Superior Court for the County of Alameda against Oracle and its subsidiary Pepper Acquisition Corp. and unnamed defendants affiliated with the two named defendants (Case No. RG03101434).

     On December 12, 2003, the Company filed a second amended complaint, incorporating claims formerly pursued by J.D. Edwards, which is now a subsidiary of the Company. In this lawsuit, PeopleSoft alleges that in connection with Oracle’s tender offer, the

17


 

defendants have engaged in: (i) untrue and misleading advertising in violation of California’s Business & Professions Code; (ii) unlawful disparagement of the Company’s products and services; (iii) unlawful interference with the Company’s relationships with its customers and prospective customers; and (iv) unfair trade practices in violation of California’s Business & Professions Code. The Company’s second amended complaint, portions of which have been filed with the California Court under seal, alleges new facts about what the Company believes are Oracle’s ongoing acts of unfair trade practices and attempts to eliminate PeopleSoft as a competitor, and Oracle’s deliberate campaign to mislead our customers about Oracle’s plans to terminate our products and force customers to migrate to Oracle systems. The Company seeks injunctive relief precluding Oracle from engaging in unfair trade practices and other unlawful actions, and from proceeding with the tender offer. The Company also seeks restitution and damages, including damage caused to J.D. Edwards. On January 20, 2004, Oracle demurred to the second amended complaint, which the court overruled on February 25, 2004.

     On March 30, 2004, Oracle filed a cross-complaint against PeopleSoft and members of its board, alleging, among other things, that they acted illegally in refusing to accept Oracle’s tender offer and in implementing a customer assurance program. The cross-complaint alleges causes of action for interference with prospective economic advantage and violations of various sections of California’s Civil Code and Business & Professions Code. Oracle seeks damages, restitution, punitive damages, and injunctive and equitable relief. PeopleSoft and the board members filed an answer to the cross-complaint on April 29, 2004, denying the allegations of the cross-complaint and asserting several affirmative defenses. The Company believes that the claims and allegations asserted in the cross-complaint are without merit, and intends to vigorously defend against them.

     On May 5, 2004, the court issued an order setting a jury trial in the action to commence on November 1, 2004.

     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.

Other Matters

     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 affect on the financial position, results of the operations and cash flows of the Company. However, depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect the Company’s future results of operations or cash flows in a particular period.

12. Segment Information

     The Company’s chief operating decision maker is its President and Chief Executive Officer (“CEO”). While the CEO is apprised of a variety of financial metrics and information, PeopleSoft is principally managed on a geographic basis in terms of revenue and segment margin performance. The Company’s two geographic business segments are: North America, which includes the United States and Canada, and International, which includes all other geographic regions. Operating expenses are managed functionally on a global basis. Assets are not identified with geographic segments because the CEO does not evaluate that information to make resource allocation decisions.

     Revenues are defined as revenues generated from unaffiliated customers. The segment margins reported for the North America and International business segments are computed by subtracting cost of revenues from revenues from unaffiliated customers. Cost of revenues includes the cost of license, cost of services and the direct selling cost included in sales and marketing expense. Operating expenses, which are managed functionally on a global basis, include corporate marketing, product development, general and administrative expenses as well as restructuring, acquisition and other charges.

     The accounting policies for each of the reportable segments are the same as those used on a consolidated basis. The following table presents a summary of operating information for the three and six months ended June 30, 2004 and 2003 (in thousands):

Three Months Ended June 30,

                                 
    Operating Segments
       
2004
  North America
  International
  Other
  Total
Revenues
  $ 461,723     $ 185,542     $     $ 647,265  

18


 

                                 
    Operating Segments
       
2004
  North America
  International
  Other
  Total
Cost of revenues
    222,514       106,758             329,272  
 
   
 
     
 
     
 
     
 
 
Segment margin
  $ 239,209     $ 78,784     $     $ 317,993  
 
   
 
     
 
     
 
     
 
 
Operating expenses
                    303,676       303,676  
 
                           
 
 
Operating income
                          $ 14,317  
 
                           
 
 
                                 
    Operating Segments
       
2003
  North America
  International
  Other
  Total
Revenues
  $ 367,458     $ 129,984     $     $ 497,442  
Cost of revenues
    169,230       70,562             239,792  
 
   
 
     
 
     
 
     
 
 
Segment margin
  $ 198,228     $ 59,422     $     $ 257,650  
 
   
 
     
 
     
 
     
 
 
Operating expenses
                    207,430       207,430  
 
                           
 
 
Operating income
                          $ 50,220  
 
                           
 
 

Six Months Ended June 30,

                                 
    Operating Segments
       
2004
  North America
  International
  Other
  Total
Revenues
  $ 909,205     $ 381,179     $     $ 1,290,384  
Cost of revenues
    443,320       214,428             657,748  
 
   
 
     
 
     
 
     
 
 
Segment margin
  $ 465,885     $ 166,751     $     $ 632,636  
 
   
 
     
 
     
 
     
 
 
Operating expenses
                    585,389       585,389  
 
                           
 
 
Operating income
                          $ 47,247  
 
                           
 
 
                                 
    Operating Segments
       
2003
  North America
  International
  Other
  Total
Revenues
  $ 718,113     $ 239,585     $     $ 957,698  
Cost of revenues
    328,709       139,098             467,807  
 
   
 
     
 
     
 
     
 
 
Segment margin
  $ 389,404     $ 100,487     $     $ 489,891  
 
   
 
     
 
     
 
     
 
 
Operating expenses
                    387,888       387,888  
 
                           
 
 
Operating income
                          $ 102,003  
 
                           
 
 

     Revenues from the Europe/Middle-East/Africa region represented 17% and 15% of revenues, respectively, for the three months ended June 30, 2004 and 2003. Revenues from the Europe/Middle-East/Africa region represented 18% and 14% of revenues, respectively, for the six months ended June 30, 2004 and 2003. No other international region had revenues equal to or greater than 10% for the three and six months ended June 30, 2004 and 2003. Revenues originated in each individual foreign country were less than 5% of total revenues during the three and six months ended June 31, 2004 and 2003 with the exception of Canada. Canadian revenues comprised 6% of total revenues for both the three and six month periods ended June 30, 2003.

     For the three months ended June 30, 2004 and 2003, revenues attributable to the U.S. were $431.3 million and $343.5 million, respectively. For the six months ended June 30, 2004 and 2003, revenues attributable to the U.S. were $852.4 million and $668.5 million, respectively.

19


 

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This Quarterly Report contains descriptions of our expectations regarding our future results and trends affecting our business and other forward-looking statements, all of which are subject to risks and uncertainties. Use of the future tense and words such as “anticipate,” “believe,” “estimate,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,” “should” and “will” and similar expressions as they relate to PeopleSoft, Inc. are intended to identify such forward-looking statements. The forward-looking statements made in this Quarterly Report are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Future results in particular are subject to risks and uncertainties, which could cause actual results and performance to differ significantly from those contemplated by the forward-looking statements. For a discussion of risks and uncertainties and other factors that could affect future results, see “Factors That May Affect Our Future Results or The Market Price of Our Stock.” starting on page 36. We undertake no obligation to update the information contained in this Quarterly Report.

MANAGEMENT OVERVIEW

     PeopleSoft, Inc. designs, develops, markets, implements and supports enterprise application software products for use throughout large and medium sized organizations worldwide. These organizations include corporations, educational institutions, non-profit organizations and national, state, provincial and local government agencies. Our strategy is to offer comprehensive applications that enable organizations to manage mission critical business processes and analyze and enhance their relationships with customers, suppliers, employees and partners.

Business Environment

     Our revenues for the second quarter and the first six months of 2004 increased relative to the same period last year, due to the addition of new product offerings from the acquisition of J.D. Edwards & Company (J.D. Edwards) and an improving economic environment. The impact of the Oracle Tender Offer (see below) continues to affect sales of licenses to new and existing customers resulting in longer customer sales cycles. In the second quarter of 2004, the added publicity of the anti-trust trial brought by the Department of Justice against Oracle further impacted customer confidence regarding the continued development and support of PeopleSoft’s products. We believe this added uncertainty impacted our second quarter 2004 revenue by causing delays in the sales cycle, delayed closure of deals and a decline in the average selling price, as we had to give larger discounts in certain cases and close smaller sized deals than initially anticipated. We believe our professional service revenue was also impacted, as customers delayed implementing software they had already licensed, pending the completion of the anti-trust trial. Additionally, the Oracle Tender Offer related litigation and the anti-trust trial have consumed extensive human and financial resources.

Financial Highlights

    Our total revenues for the second quarter of 2004 were $647.3 million, a 30% increase over the second quarter of 2003. Our total revenues for the first six months of 2004 were $1,290.4 million, a 35% increase over the first six months of 2003. The primary reason for the increase in revenues for the second quarter and the first six months of 2004 is the addition of new product offerings from the acquisition of J.D. Edwards. Second quarter 2004 license fees of $130 million increased by $18.3 million over the same period last year. License fees for the first six months of 2004 increased by $68.3 million to $260.9 million. The growth in license fees is due to the licensing of PeopleSoft EnterpriseOne and PeopleSoft World software as a result of the expansion of our product families from the acquisition of J.D. Edwards. We experienced an increase in maintenance fees of $96.7 million and $193.6 million for the second quarter of 2004 and for the first six months of 2004, respectively, compared to the same periods in 2003 due to an increase in our installed base of customers under maintenance agreements. Professional service revenue increased $34.8 million and $70.7 million for the second quarter of 2004 and for the first six months of 2004, respectively, compared to the same periods in 2003 as PeopleSoft’s consulting organization continued to win new customers.
 
    Due to the impact of purchase accounting charges resulting from the acquisition of J.D. Edwards and costs associated with the Oracle Tender Offer, our net income for the second quarter and the first six months of 2004 declined. Our net income decreased to $11 million in the second quarter of 2004 from $36.5 million in the second quarter of 2003. Our net income decreased to $35.2 million in the first six months of 2004 from $75 million in the first six months of 2003. The purchase accounting charges (after-tax) are primarily comprised of the amortization of capitalized software and other intangible assets of $16.4 million and $32.9 million and restructuring charges of $2.5 million and $7.6 million for the second quarter and the first six months of 2004, respectively. Expenses (after-tax) of responding to the Oracle Tender Offer were $10.5 million and

20


 

      $18.7 million for the second quarter and the first six months of 2004, respectively, and are comprised primarily of legal and investment banker fees.
 
    Cash provided by operations in the first six months of 2004 was approximately $204.8 million. During the first six months of 2004, our cash and investment balances increased by $186.9 million, when compared to our cash and investment balances at December 31, 2003.

     Integration of J.D. Edwards & Company

     We acquired J.D. Edwards in the third quarter of 2003 for approximately $2 billion, making PeopleSoft the second largest provider of enterprise application software in the world based on total revenues. We now have over 12,400 customers and approximately 11,500 employees. The combination has made PeopleSoft:

    a leader in both the mid-sized and large enterprise market-segments with three product families of high quality enterprise applications: PeopleSoft Enterprise, PeopleSoft EnterpriseOne and PeopleSoft World. (PeopleSoft EnterpriseOne and PeopleSoft World applications are primarily comprised of the former J.D. Edwards 5 and J.D. Edwards World Software applications.)
 
    a recognized leader in serving the enterprise software needs of service related industries including: financial services, communications, healthcare, education and government. PeopleSoft is also a leading provider to manufacturing and distribution related industries including: industrial and wholesale distribution, consumer products, pulp and paper manufacturing, life sciences and the construction industry.

     In the second quarter of 2004, we continued to execute on our J.D. Edwards integration plans across the Company as we consolidate redundant facilities, combine operations globally and integrate our various general and administrative functions. As of June 30, 2004, we were ahead of our internal planned cost reduction schedule targets and we remain confident in our stated objective of achieving $167 million to $207 million in revenue and cost synergies for the full year of 2004 as a part of the J.D. Edwards integration plan.

Oracle Tender Offer

     On June 9, 2003, following our announcement to acquire J.D. Edwards, Oracle Corporation (“Oracle”) launched a hostile tender offer of $16.00 per share to acquire PeopleSoft. On June 18, 2003, Oracle increased its bid to $19.50 per share. On June 12, 2003 and again June 19, 2003, based upon a recommendation from the Transaction Committee of our Board of Directors, our Board of Directors unanimously recommended that our stockholders reject the offer because the Board believed that the offer would face prolonged regulatory delays, with a significant likelihood that the offer would not be allowed to proceed and that Oracle’s offers significantly undervalued PeopleSoft. On February 4, 2004, Oracle amended its offer to increase the purchase price from $19.50 to $26.00 per share. On February 7, 2004, based upon the recommendation of the Transaction Committee, the Board unanimously recommended that our stockholders reject the revised offer because the Board believed the offer is inadequate from a financial point of view and does not reflect PeopleSoft’s real value, and the proposed combination of PeopleSoft and Oracle continues to face substantial regulatory scrutiny in both the United States and Europe and there is a significant likelihood that the transaction will be prohibited under antitrust law.

     On February 26, 2004, the United States Department of Justice (“DOJ”), joined by the states of Texas, Hawaii, Maryland, Massachusetts, Minnesota, New York and North Dakota filed a civil antitrust suit in the U.S. District Court for the Northern District of California to enjoin Oracle’s proposed acquisition of PeopleSoft. The plaintiffs allege that the effect of the proposed acquisition of PeopleSoft by Oracle would be to lessen competition substantially in interstate trade and commerce in violation of the Clayton Act. On April 14, 2004, the DOJ’s complaint was amended to add as plaintiffs the states of Connecticut, Michigan and Ohio. The trial commenced June 7, 2004 and closing arguments were presented on July 20, 2004.

     On February 13, 2004, the European Commission announced that the four-month schedule of the second stage of its investigation had resumed and that the provisional deadline by which the European Commission must decide whether it will challenge the proposed acquisition is May 11, 2004. On April 14, 2004, this deadline was extended indefinitely pending receipt of information requested from Oracle by the European Commission.

     On May 14, 2004, Oracle amended its offer to decrease the purchase price from $26.00 per share to $21.00 per share. On May 26,

21


 

2004, based upon the recommendation of the Transaction Committee, the Board unanimously recommended that our stockholders reject the revised offer because the Board believed the offer is inadequate from a financial point of view and does not reflect PeopleSoft’s real value, and the proposed combination of PeopleSoft and Oracle continues to face substantial regulatory scrutiny in both the United States and Europe and there is a significant likelihood that the transaction will be prohibited under antitrust law. On July 12, 2004, Oracle announced extension of its tender offer period to August 27, 2004. If the trial judge in the DOJ lawsuit referred to above were to rule against Oracle, but Oracle appeals that ruling, the delay and uncertainty regarding the outcome of the Oracle Tender Offer may continue to disrupt and damage our business. If the trial judge in the DOJ lawsuit referred to above were to rule against the DOJ, our ability to successfully conduct our business could be materially adversely impacted.

     The Oracle tender offer will continue to be a distraction to management at least until the outcomes of the U.S. antitrust litigation and European review are known.

     The recommendations to stockholders by the PeopleSoft Board of Directors are discussed and included in PeopleSoft’s Solicitation/ Recommendation Statement on Schedule 14D-9 and the amendments thereto filed with the SEC. These documents can be obtained without charge at www.sec.gov and www.peoplesoft.com. Our stockholders should read these filings as they contain important information about the Oracle Tender Offer and the Board’s recommendations. From June 6, 2003 through June 30, 2004 we incurred over $70 million in investment banking, legal and other fees and a significant amount of internal resources to respond to the tender offer and the related lawsuits. During the second quarter of 2004, we incurred $17.2 million in investment banking, legal and other fees and a significant amount of internal resources to respond to the tender offer and the related lawsuits. See Part II, Item 1 — Legal Proceedings. It is not possible to predict the amount of money or internal resources that will be required to respond to the Oracle Tender Offer in the future.

RESULTS OF OPERATIONS

     The following table indicates the percentage of total revenues and the percentage of period-over-period changes represented by line items in our consolidated statements of operations:

                                                 
    Percentage of                   Percentage    
    Dollar   Percentage of Total   of Dollar   Percentage of Total
    Change
  Revenues
  Change
  Revenues
    Three Months Ended June 30,
  Six Months Ended June 30,
    2004/2003
  2004
  2003
  2004/2003
  2004
  2003
Revenues:
                                               
License fees
    16 %     20 %     22 %     35 %     20 %     20 %
Maintenance revenue
    47       47       42       48       47       42  
Professional services revenue
    19       33       36       20       33       38  
 
           
 
     
 
     
 
     
 
     
 
 
Total revenues
    30       100       100       35       100       100  
Costs and expenses:
                                               
Cost of license fees
    159       4       2       163       4       2  
Cost of services
    36       35       34       36       35       34  
Sales and marketing expense
    34       27       26       38       27       26  
Product development expense
    63       21       17       58       20       18  
General and administrative expense
    54       10       8       65       9       8  
Restructuring, acquisition and other charges
    (71 )     1       3       (11 )     1       1  
 
           
 
     
 
             
 
     
 
 
Total costs and expenses
    42       98       90       45       96       89  
 
           
 
     
 
             
 
     
 
 
Operating income
    (72 )     2       10       (54 )     4       11  
Other income, net
    (43 )     1       1       (33 )     1       1  
 
           
 
     
 
             
 
     
 
 
Income before provision for income taxes
    (69 )     3       11       (52 )     5       12  
Provision for income taxes
    (67 )     1       4       (49 )     2       4  
 
           
 
     
 
             
 
     
 
 
Net income
    (70 )     2 %     7 %     (53 )     3 %     8 %
Diluted income per share
    (73 )%                     (57 )%                

     Net income decreased $25.6 million or 70% from $36.5 million in the second quarter of 2003 to $11 million in the second quarter of 2004. Diluted income per share decreased from $0.11 per share in the second quarter of 2003 to $0.03 per share in the second quarter of 2004. For the first six months of 2004 net income decreased $39.8 million or 53% from $75 million in the first six months

22


 

of 2003 to $35.2 million in the first six months of 2004. Diluted income per share decreased from $0.23 per share in the first six months of 2003 to $0.10 per share in the first six months of 2004.

Revenues

License Fee Revenues

                                 
    Quarters Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
    ($ in thousands)
License fees
  $ 130,016     $ 111,726     $ 260,902     $ 192,567  
Percentage of revenue
    20 %     22 %     20 %     20 %
Change from prior year
    16 %             35 %        

     Our software products generally are licensed to end-user customers under non-exclusive, perpetual license agreements. Revenue from license fees increased by 16% in the second quarter of 2004 as compared to the second quarter of 2003 and 35% for the first six months of 2004 as compared to the first six months of 2003. The increase was driven by the addition of the PeopleSoft EnterpriseOne and PeopleSoft World product families to our product offerings. We believe the ongoing impact of the Oracle Tender Offer and the anti-trust trial brought by the Department of Justice against Oracle and the related publicity negatively impacted our second quarter 2004 revenue. In the second quarter of 2004 we added 160 new customers compared to 109 in the same quarter last year. In the first six months of 2004, while the global economy is improving modestly, technology spending appears to remain sluggish. In the coming quarters, we expect to see a gradual strengthening of the economy and seasonal increases in software license purchases by new and existing customers, however, our ability to grow license revenue will largely depend on the outcome of the Oracle anti-trust trial and the related publicity.

Services Revenues

                                 
    Quarters Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
    ($ in thousands)
Maintenance revenue
  $ 302,248     $ 205,563     $ 599,098     $ 405,484  
Percentage of revenue
    47 %     42 %     47 %     42 %
Change from prior year
    47 %             48 %        
Professional services revenue
  $ 215,001     $ 180,153     $ 430,384     $ 359,647  
Percentage of revenue
    33 %     36 %     33 %     38 %
Change from prior year
    19 %             20 %        

     Our services revenue consists of software maintenance fees and professional services fees, which includes consulting fees, customer training fees, hosting fees and other miscellaneous fees.

     The increase in maintenance revenue in the second quarter and the first six months of 2004 as compared to the same periods last year is primarily attributable to the growth of our installed base of software applications, arising from sales to both new and existing customers. As a result of the acquisition of J.D. Edwards in July 2003, our installed base of customers has grown considerably. At the end of the second quarter 2004, we had an increase of approximately 639 installed customers over the end of the second quarter of 2003. In accordance with the purchase method of accounting, we were required to record J.D. Edwards deferred maintenance revenue at fair value as of the acquisition date reducing our maintenance revenue related to that expanded customer base by $14.9 million in the second quarter of 2004 and by $39.2 million in the first six months of 2004. As the J.D. Edwards customers, having deferred maintenance balances as of the acquisition date, renew their contracts with PeopleSoft during the remainder of 2004, we expect to increase revenues without incurring additional costs.

     The increase in professional services revenue in the second quarter and the first six months of 2004 is primarily due to additional consulting revenue attributed to the addition of the PeopleSoft EnterpriseOne and PeopleSoft World product families. We believe that our professional services was negatively impacted by the Oracle anti-trust trial, as customers delayed implementing software they had already licensed, pending the outcome of the trial. Changes in license revenues during a given period may also adversely impact our future services revenue, since professional services are typically related to our licensing activity in prior quarters.

     Our ability to maintain or increase maintenance or professional services revenue in the future depends primarily on our ability to

23


 

increase our installed customer base, renew maintenance agreements, and to maintain or increase the number or size of our professional services engagements.

Revenues by Segment

     The Company’s chief operating decision maker is its President and Chief Executive Officer (“CEO”). While the CEO is apprised of a variety of financial metrics and information, PeopleSoft is principally managed on a geographic basis in terms of revenue and segment margin performance. The Company’s two geographic business segments are: North America, which includes the United States and Canada, and International, which includes all other geographic regions. Revenues by geographic segment from external customers for the second quarter and six months ended June 30, 2004 and 2003 were:

                                 
    Quarters Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
    ($ in thousands)
North America
  $ 461,723     $ 367,458     $ 909,205     $ 718,113  
International
    185,542       129,984       381,179       239,585  
 
   
 
     
 
     
 
     
 
 
Total revenues
  $ 647,265     $ 497,442     $ 1,290,384     $ 957,698  
 
   
 
     
 
     
 
     
 
 

     Total revenues from the North America segment increased by 26% in the second quarter of 2004 as compared to the second quarter of 2003 and by 27% in the first six months of 2004 as compared to the first six months of 2003. As a percentage of total segment revenues, revenues from the North America segment were 71% in the second quarter of 2004 and 74% in the second quarter of 2003 and 70% in the first six months of 2004 and 75% in the first six months of 2003. Total revenues from the International segment increased by 43% in the second quarter of 2004 from the second quarter of 2003 and by 59% in the first six months of 2004 as compared to the first six months of 2003. As a percentage of total segment revenues, revenues from the International segment were 29% in the second quarter of 2004 and 26% in the second quarter of 2003 and 30% in the first six months of 2004 and 25% in the first six months of 2003. The increase in revenues from the second quarter and the first six months of 2003 to the second quarter and the first six months of 2004 resulted primarily from the acquisition of J.D. Edwards.

     In the North America segment, revenues attributable to the United States were $431.3 million and $852.4 million in the second quarter and the first six months of 2004 and $343.5 million and $668.5 million in the second quarter and first six months of 2003. Revenues from the Europe/Middle-East/Africa region represented 17% and 15% of revenues, respectively, for the three months ended June 30, 2004 and 2003. Revenues from the Europe/Middle-East/Africa region represented 18% and 14% of revenues, respectively, for the six months ended June 30, 2004 and 2003. No other international region had revenues equal to or greater than 10% for the three and six months ended June 30, 2004 and 2003. Revenues originated in each individual foreign country were less than 5% of total revenues during the three and six months ended June 31, 2004 and 2003 with the exception of Canada. Canadian revenues comprised 6% of total revenues for both the three and six month periods ended June 30, 2003.

Costs and Expenses

Cost of Licenses Fees

                                 
    Quarters Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
    ($ in thousands)
Cost of license fees
  $ 24,773     $ 9,563     $ 48,147     $ 18,289  
Percentage of revenue
    4 %     2 %     4 %     2 %
Change from prior year
    159 %             163 %        

     Our software products are based on a combination of internally developed and acquired technology, as well as bundled third party products and technology. Costs of license fees consist principally of royalties, license fees for certain third party software products, amortization of capitalized software and product warranty costs. The second quarter of 2004 increase of 159% over the same period last year primarily results from $11.3 million in amortization costs for the capitalized software acquired in the J.D. Edwards acquisition and from a $4.1 million increase in the cost of license fees associated with changes in the mix of royalty bearing license contracts and the increase in our license revenues in the same period. The increase of 163% for the six months ended June 2004 over the same period last year primarily results from $22.6 million in amortization costs for the capitalized software acquired in the J.D. Edwards acquisition and from a $6.5 million increase in the cost of license fees associated with changes in the mix of royalty bearing license contracts and the increase in our license revenues in the same period.

24


 

Cost of Services

                                 
    Quarters Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
    ($ in thousands)
Cost of services
  $ 226,442     $ 166,698     $ 449,408     $ 330,167  
Percentage of revenue
    35 %     34 %     35 %     34 %
Change from prior year
    36 %             36 %        

     Cost of services consists primarily of employee costs and the related infrastructure costs incurred in providing professional services and maintenance. Cost of services increased by 36% in the second quarter of 2004 as compared to the second quarter of 2003, and 36% in the six months ended June 2004 as compared to the six months ended June 2003, primarily due to the expansion of the support organization resulting from the larger installed base created by the J.D. Edwards acquisition and the expansion of the professional services activities and organization. Cost of services also increased $8.8 million in the second quarter of 2004 and $17.6 million for the six months ended June 2004 due to the amortization of acquired intangible assets for maintenance relationships and consulting agreements acquired from J.D. Edwards. Cost of services as a percentage of services revenues was 44% in the second quarter and first six months of 2004. Cost of services as a percentage of services revenues was 43% for the second quarter and first six months of 2003. If the demand for services from new and existing customers for installation, consulting, maintenance and training services increases over the next several quarters, we anticipate that our cost of services may also increase.

Sales and Marketing Expense

                                 
    Quarters Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
    ($ in thousands)
Sales and marketing
  $ 176,590     $ 131,492     $ 345,761     $ 251,050  
Percentage of revenue
    27 %     26 %     27 %     26 %
Change from prior year
    34 %             38 %        

     The increase in sales and marketing expense in the second quarter of 2004 and the first six months of 2004 as compared to the same periods last year is primarily due to costs associated with the growth of our sales force and marketing activities to support our expanded product line and geographic scope following the integration of J.D. Edwards. These expense increases are primarily attributed to compensation and related infrastructure costs associated with our expanded sales force. Additionally, the second quarter and first six months of 2004 includes $3.8 million and $7.5 million, respectively, of amortization of intangible assets relating to acquired customer relationships. Sales and marketing expense may increase in future periods as we increase our sales force and marketing and advertising expenses to increase our competitive positioning in the marketplace and to promote brand awareness and global recognition of our products.

Product Development Expense

                                 
    Quarters Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
    ($ in thousands)
Product development expense
  $ 137,938     $ 84,646     $ 265,312     $ 168,351  
Percentage of revenue
    21 %     17 %     20 %     18 %
Change from prior year
    63 %             58 %        

     Product development expense consists primarily of costs related to our software developers and the associated infrastructure costs of product development initiatives. The 63% increase in product development expense in the second quarter of 2004 as well as the 58% increase in the first six months of 2004 as compared to the comparable periods in 2003 were primarily due to the expansion of our development organization to support our expanded product offerings following the acquisition of J.D. Edwards. The second quarter and first six months of 2004 also includes amortization of intangible assets acquired from J.D. Edwards of $3 million and $6 million, respectively, for acquired patented technology. In addition, we incurred higher costs for outsourced development of $3.9 million in the second quarter of 2004 and $6.7 million for the first six months of 2004 as compared to the same period last year. We did not capitalize any internal development costs in the second quarter of 2004 or six month period ending June 30, 2004. Our current focus is to continue to extend our software offerings by delivering enhanced functionality to all three product families and to further develop new applications across both the PeopleSoft Enterprise and PeopleSoft EnterpriseOne application families.

25


 

General and Administrative Expense

                                 
    Quarters Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
    ($ in thousands)
General and administrative expense
  $ 63,162     $ 41,024     $ 122,237     $ 74,039  
Percentage of revenue
    10 %     8 %     9 %     8 %
Change from prior year
    54 %             65 %        

     General and administrative expense consists primarily of salary and other employee related costs plus outside service costs to perform legal, finance, and human resource functions. In addition, corporate insurance is recorded as general and administrative costs. The increase in general and administrative expense for the second quarter of 2004 as compared to the second quarter of 2003 includes additional administrative staff, infrastructure costs and other costs resulting from the J.D. Edwards acquisition and an increase in legal and investment banker fees of $5.6 million relating to our response to the Oracle Tender Offer and related legal proceedings. The increase in general and administrative expense for the six months ended June 30, 2004 as compared to the six months ended June 30, 2003 includes additional administrative staff, infrastructure costs and other costs resulting from the J.D. Edwards acquisition, an increase in legal and investment banker fees of $18.4 relating to our response to the Oracle Tender Offer and related legal proceedings and an increase in third party integration fees of $4.7 million relating to the J.D. Edwards acquisition. It is not possible to predict the amount of money or internal resources that will be required to respond to the Oracle Tender Offer and related legal proceedings in 2004. We expect the third party integration costs to decline in the remainder of 2004 as the integration of J.D. Edwards is completed.

Restructuring, Acquisition and Other Charges

     The following table sets forth the components of “Restructuring, acquisition and other charges”:

                                 
    Quarters Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
    ($ in thousands)
Restructuring, acquisition and other charges
  $ 4,043     $ 13,799     $ 12,272     $ 13,799  

     Restructuring charges and adjustments of $4 million in the second quarter of 2004 and of $12.3 million in the six month period ending June 30, 2004 are primarily the result of the Third Quarter 2003 Restructuring Plan relating to the acquisition of J.D. Edwards. In connection with the Third Quarter 2003 Restructuring Plan, we initiated plans to restructure our pre-acquisition operations to eliminate certain duplicative activities and reduce our cost structure. The costs associated with that plan include costs for employee severance, acquisition related employee retention, consolidating duplicate facilities and contract terminations. Terminated employees entitled to receive payments under this plan primarily consisted of general and administrative, consulting, and sales and marketing employees. The second quarter 2004 restructuring charge includes approximately $0.7 million related to employee costs and $3.3 million related to costs of consolidating duplicate facilities. The six month period ending June 30, 2004 restructuring charge includes approximately $3.2 million related to employee costs and $9.1 million related to costs of consolidating duplicate facilities. Of the $9.1 million in facilities costs, approximately $4 million relates to impaired furniture and equipment assets which were identified as certain duplicate facilities were vacated. Future cash payments related to these restructuring liabilities for employee costs are expected to be made through October 2004. Future cash payments related to facilities obligations are expected to be made through March 2012. Although management believes the liabilities recorded under the plans are substantially quantified, estimated restructuring costs may change in the future.

     Restructuring charges of $13.8 million for the second quarter and first six months of 2003 relate to the second quarter 2003 restructuring plan. These restructuring charges consisted of employee severance charges, fair value of lease obligations associated with the closure of an office facility and leasehold improvement write-offs. This restructuring plan was completed in the second quarter of 2004.

26


 

Other Income, Net

     The following table sets forth the significant components of “Other income, net”:

                                 
    Quarters Ended June 30,
  Six Months Ended June 30,
    2004
  2003
  2004
  2003
    ($ in thousands)
Interest income
  $ 5,343     $ 7,387     $ 11,898     $ 14,640  
Interest expense
    (251 )     71       (295 )     (192 )
Foreign currency transaction losses and other, net
    (2,396 )     (2,746 )     (3,807 )     (2,770 )
 
   
 
     
 
     
 
     
 
 
Other income, net
  $ 2,696     $ 4,712     $ 7,796     $ 11,678  
 
   
 
     
 
     
 
     
 
 

     The decrease in interest income of 28% in the second quarter of 2004 and 19% in the first six months of 2004 as compared to the same periods in the prior year was primarily due to lower interest rates and lower average cash and investment balances. The decrease in cash and investment balances is primarily due to the J.D. Edwards acquisition, the repurchase of common stock in the fourth quarter of 2003 and the purchase of the two buildings in the Denver Campus (see Liquidity and Capital Resources below).

Provision for Income Taxes

     Our provision for income taxes decreased to $6 million in the second quarter of 2004 from $18.4 million in the second quarter of 2003. Our provision for income taxes decreased to $19.9 million for the first six months of 2004 from $38.7 million in the first six months of 2003. The effective tax rate was 36.1% and 34% for the six months ended June 30, 2004 and 2003, respectively. The effective tax rate has increased primarily as a result of a decrease in tax exempt interest income earned from investments. Net deferred tax assets at June 30, 2004 were $100.2 million. In accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” (“SFAS 109”), the realization of the benefit associated with deferred tax assets is based upon an estimate of both the timing and amount of future taxable income. Future taxable income may be derived from pre-tax earnings generated by future operations, subsequent reversals of deferred tax liabilities and other sources.

Critical Accounting Policies and Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to utilize accounting policies and make estimates and assumptions that affect our reported results. We believe policies and estimates related to revenue recognition, business combinations, capitalized software, allowance for doubtful accounts, product and service warranty reserve, deferred tax asset valuation allowance and impairment of goodwill and long-lived assets represent our critical accounting policies and estimates. Future results may differ from our estimates under different assumptions or conditions.

Revenue Recognition

     We recognize revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions,” SOP 81-1, “Accounting for Performance of Construction-type and Certain Production-type Contracts,” the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” SAB No. 104, “Revenue Recognition,” and other authoritative accounting literature. We derive revenues from the following sources: license fees, maintenance fees and professional services.

     License Fee Revenue. For software license agreements that do not require significant modifications or customization of the software, we recognize software license revenue when all of the following are met:

  Persuasive Evidence of an Arrangement Exists. It is our practice to require a contract signed by both the customer and PeopleSoft, or a purchase order from those customers that have previously negotiated an end user license arrangement.

  Delivery Has Occurred. We deliver software by both physical and electronic means. Both means of delivery transfer title and risk to the customer. Physical delivery terms are generally FOB shipping point. For electronic delivery of the software, delivery is complete when the customer has been provided electronic access to their software. Acceptance provisions included in a software license agreement generally grant customers a right of refund or replacement only if the licensed

27


 

    software does not perform in accordance with its published specifications. Based on our history, the likelihood of non-acceptance in these situations is remote, and we recognize revenue when all other criteria of revenue recognition are met. If the likelihood of non-acceptance is determined to be other than remote, revenue is recognized upon the earlier of receipt of written acceptance or when the acceptance period has lapsed.
 
  The Vendor’s Fee is Fixed or Determinable. Fees are generally considered fixed or determinable when payment terms are within 120 days of contract execution date. For contracts with payment terms beyond 120 days, license revenue is generally recognized as payment becomes due and payable, assuming all other revenue recognition criteria have been met. We recognize revenue for delivered elements only when the fair value of the undelivered elements is known, uncertainties regarding customer acceptance are resolved, and there are no refund, cancellation, or return rights affecting the revenue recognized for delivered elements. Determination of the fee’s fixed or determinable nature is unaffected by the customer assurance program (see “Customer Assurance Program” below for further discussion).
 
  Collectibility is Probable. Customers must meet collectibility requirements pursuant to our credit policy. We perform a collectibility assessment for each transaction. For contracts that do not meet our collectibility criteria, revenue is recognized when cash is received.

     Our software license agreements generally include multiple products and services, or “elements.” We use the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence of the fair value of all undelivered elements exists. The fair value of the undelivered elements is determined based on the historical evidence of stand-alone sales of these elements to customers. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements does not exist, the total revenue is deferred and recognized when delivery of those elements occurs or when fair value is established.

     Consulting services, which are normally sold on a standalone basis, do not generally involve significant modification or customization of the licensed software, and will be accounted for under the residual method. In rare instances where consulting services do involve significant modification or customization as an element of the software license agreement, we account for the license revenue under SOP 81-1.

     Maintenance Revenue. Generally, maintenance is initially sold as an element of a license arrangement, with subsequent annual renewal. Maintenance revenue is recognized ratably over the term of the maintenance period, which typically is one year.

     Professional Services Revenue. Professional services revenue primarily consists of consulting and customer training revenues, which are usually charged on a time and materials basis and are recognized as the services are performed. Revenue from certain fixed price contracts is recognized on a proportional performance basis, which involves the use of estimates related to total expected hours to complete the contract derived, in part, from historical experience with similar contracts. If we do not have a sufficient basis to measure the progress towards completion, revenue is recognized when the project is completed or when we receive final acceptance from the customer.

Customer Assurance Program

     In response to Oracle’s public statements about its intent to discontinue PeopleSoft’s products, and to minimize the loss of business during Oracle’s offer to purchase all outstanding shares of PeopleSoft common stock (the “Oracle Offer”), PeopleSoft implemented a customer assurance program. The customer assurance program incorporates a contingent change in control provision in PeopleSoft’s standard perpetual licensing arrangement. That provision provides customers who purchase application licenses with financial protection in certain circumstances, as described below. That financial protection is in the form of a payment generally equal to two to five times the total arrangement fees. The multiple increases as the arrangement fees increase.

     PeopleSoft implemented the initial version of the customer assurance program in June 2003, and has used five different versions of the program. On July 6, 2004, the Board of Directors extended the program through the earlier of the date that Oracle terminates its tender offer or September 30, 2004. Under all versions of the customer assurance program, customers retain rights to the licensed products whether or not the customer assurance program’s payments are triggered. No customer is entitled to a refund of arrangement fees previously paid under the customer’s contract with PeopleSoft, but the customer would be entitled to a payment under the customer assurance program if all of the conditions stated below for the respective versions are met.

28


 

     The customer assurance program has no current financial statement impact on PeopleSoft. A contingent liability may be recognized in the financial statements of PeopleSoft or its acquirer upon or after the consummation of a transaction that satisfies the acquisition criteria set forth in the specific terms of the applicable version of the customer assurance program, and if the amounts due were probable and reasonably estimable. However, the determination of the timing of recognition and amount of any such contingent liability would be dependent upon the acquirer’s plans, assumptions and estimations. The terms of the customer assurance program require an acquisition by an entity other than PeopleSoft; therefore no action taken unilaterally by PeopleSoft would, by itself, result in the recognition of a contingent liability or any other financial statement impact.

     In Version Five of the program, the term “acquisition” is limited to an acquisition of PeopleSoft, Inc. by Oracle Corporation or its affiliates. This change was adopted consistent with the terms of a pending settlement of certain stockholder litigation. See Note 11, “Commitments and Contingencies” of the Notes to the unaudited Condensed Consolidated Financial Statements.

     The table below sets forth for each version of the customer assurance program the dates during which such version was implemented in customer contracts and the approximate potential maximum liability, as of June 30, 2004, under the contracts containing language from each such version. Following the table is a description of the material terms of each version of the program. With respect to each version, some variations exist in the specific language used in contracts, but such language generally incorporates the material terms of the applicable version, as described below. As of June 30, 2004, the approximate aggregate maximum potential amount of future liability under the customer assurance program was $2.02 billion.

         
        Approximate Amount of
        Maximum
Version
  Dates Offered to Customers*
  Potential Liability
Version One
  6/03/2003 to 9/12/2003   $310 million
Version Two
  9/12/2003 to 9/30/2003   $170 million
Version Three
  9/30/2003 to 11/7/2003   $40 million
Version Four
  11/18/2003 to 6/30/04   $1,342 million
Version Five
  6/16/04 to present   $156 million
 
     
 
 
  Total Amount of Maximum Potential Liability:   $2,018 million
 
     
 


*   Some contracts originally submitted to customers prior to these end dates were executed following such dates.

Version One

     Generally under Version One, a payment will be paid provided that the following events occur:

    within one year from the contract effective date, an entity acquires or merges with PeopleSoft, and PeopleSoft is not the surviving entity, and
 
    within two years from the contract effective date, the acquiring company;

    announces its intention to discontinue, or discontinues, support services before the end of the normal support term as defined by PeopleSoft’s standard policies,
 
    announces its intention to discontinue licensing PeopleSoft’s products to new customers, or
 
    announces its intention to not provide updates or new releases for supportable products; and

    the customer requests the payment in writing before December 31, 2005, and is, at the time of the request, and has been a continuous, compliant subscriber to support services and has timely paid all amounts owed under the customer’s agreement with PeopleSoft.

Version Two

29


 

     Generally under Version Two, a payment will be paid provided that the following events occur:

    within two years from the contract effective date, PeopleSoft is acquired by an entity not owned or controlled by or under the control of PeopleSoft, and
 
    within four years from the contract effective date, the acquiring company announces its intention:

    to discontinue, or discontinues, support services before the end of the normal support term as defined by PeopleSoft’s standard policies or materially reduces the level of support services from the level provided by PeopleSoft prior to the acquisition, or
 
    to discontinue licensing PeopleSoft’s products to new customers or certain existing customers, or
 
    to reduce, or materially reduces, the amount of money spent to develop updates for the supportable modules or provide support services below the level spent by PeopleSoft in the 12 months preceding the acquisition, or
 
    to delay, or delays, the timing of release of updates or new releases for the products or to reduce the extent and quality of such updates and new releases, compared to the timing, extent and quality of updates and new releases delivered in the release cycle prior to the acquisition, or
 
    to reduce or limit, or reduces or limits, the ability of the supportable modules to integrate or operate with third party products such as databases, software, products, and technologies; and

    the customer requests the payment in writing by June 30, 2008, and is, at the time of the request, and has been a continuous, compliant subscriber to support services and no amounts are owed under the customer’s agreement with PeopleSoft.

     For purposes of Version Two, the term “acquired” means (a) any person becomes the direct or indirect owner of more than 51% of PeopleSoft’s outstanding stock, (b) there is a change in the composition of the board of directors during a two-year period, such that less than a majority of the directors are either directors who were directors as of the date of the applicable contract or who were elected or nominated by a majority of incumbent directors, (c) the consummation of a merger of PeopleSoft unless stockholders prior to the merger hold at least 55% of the stock of the combined company, or (d) the sale of all or substantially all of PeopleSoft’s assets.

     PeopleSoft entered into contracts containing the terms of Version Two with 175 customers. Subsequent to entering into these contracts, PeopleSoft sent approximately 144 of the customers a letter clarifying that PeopleSoft would not be deemed acquired under the terms of Version Two as a result of a board composition change unless PeopleSoft were acquired after such change. PeopleSoft did not send such a letter to approximately 31 of such customers.

     Oracle has asserted that under Version Two of the customer assurance program a customer potentially could assert that a change in a majority of PeopleSoft’s board of directors, as described in Version Two (a “board composition change”), would, by itself, constitute an acquisition of PeopleSoft as that term is used in Version Two. Based upon all of the language of Version Two, PeopleSoft does not believe that such an interpretation is correct. However, if a board composition change were to occur prior to the expiration of Version Two, and if customers were to assert successfully that such board composition change, by itself, constituted an acquisition of PeopleSoft under Version Two, and if an entity not owned or controlled by or under the control of PeopleSoft (the acquiring entity) were to announce its intention to discontinue, reduce, delay or limit products or services as specified under the terms of Version Two, PeopleSoft could have a maximum potential liability of approximately $170 million. If there were a contested election of directors, stockholders of PeopleSoft should be aware of that possibility when electing directors of PeopleSoft who are not nominated by PeopleSoft’s current board of directors, despite PeopleSoft’s belief that this interpretation of Version Two is incorrect. On February 26, 2004, Oracle announced that it was withdrawing its director nominations and stockholders proposals for the PeopleSoft 2004 Annual Meeting of Stockholders which, if all of Oracle’s director nominees were elected and its stockholder proposals were passed, would have caused a board composition change.

     If a board composition change were to occur, it is possible that the newly elected board might refrain from taking certain actions it might otherwise decide to take relating to products and services, if it believed that such actions could be deemed to be taken by an acquiring entity and could trigger the product support, update and related criteria under the terms of Version Two and result in a

30


 

potential liability to PeopleSoft. However, given PeopleSoft’s overall commitment to developing and supporting its products and services, which is essential to the continuing vitality of PeopleSoft’s business, PeopleSoft believes that it is unlikely that a newly elected board would take such actions in any event or that PeopleSoft would incur such liability.

     If an entity not owned or controlled by or under the control of PeopleSoft acquires a majority of PeopleSoft’s common stock and PeopleSoft remains a stand-alone entity continuing to publish its own standalone financial statements, it is possible that, under the terms of Version Two, a customer could assert that PeopleSoft would be obligated to make payments upon the occurrence of one of the required product or service support events described above.

Version Three

     The terms of Version Three are virtually identical to Version Two, except that language was added to clarify that a change in the composition of the board by itself is not sufficient to be deemed an acquisition of PeopleSoft under the terms of the customer assurance program — there has to be both a change in the board and PeopleSoft has to be acquired. Version Three also changed from “money spent” to “resources allocated” the criteria to determine reduction of support for updates and services.

Version Four

     Generally under Version Four, a payment will be paid provided that the following events occur:

    within two years from the contract effective date, PeopleSoft is acquired by an entity not owned or controlled by or under the control of PeopleSoft, and
 
    within four years from the contract effective date, the company that results from an acquisition:

    discontinues or materially reduces support services before the end of the normal support term as defined by PeopleSoft’s standard policies, or
 
    discontinues licensing PeopleSoft’s products to new or existing customers, or
 
    discontinues providing updates for the supportable modules; provided that licensing for specific products may be discontinued and updates do not have to be provided if that product does not operate substantially as warranted or third party technology required for the operation of the product is no longer commercially available; and

    the customer requests the payment in writing by June 30, 2008, and is, at the time of the request, and has been a continuous, compliant subscriber to support services and no amounts are owed under the customer’s agreement with PeopleSoft.

     For purposes of Version Four, the term “acquired” generally is identical to Versions Two and Three except there is no provision regarding a change in the composition of the board of directors.

Version Five

     The Company implemented Version Five of the program in June 2004, to apply to contracts first presented to customers at that time. Version Five of the program, consistent with the terms of a pending settlement of Delaware stockholder litigation, revised the definition of the term “acquisition” to provide that the term “acquisition” includes an acquisition solely by Oracle and its affiliates. In other respects, Version Five is the same as Version Four, except that for contracts signed after June 30, 2004, the date by which the customer must request payment is December 31, 2008 rather than June 30, 2008.

     The Board believes that all versions of the customer assurance program give new and existing customers assurance that their investments in PeopleSoft products and services will be protected. This is reflected in customers’ continued purchases of products and services from PeopleSoft, and the Board believes the program ultimately preserves and enhances stockholder value. The Board also believes that the customer assurance program, and its beneficial effects on PeopleSoft’s ability to sell to new and existing customers, may increase the amount of consideration that a potential acquirer would be willing to pay for PeopleSoft. Nevertheless, it is possible that a potential acquirer of PeopleSoft would intend to discontinue, reduce, delay or limit products or services of PeopleSoft in a manner that would trigger payments under the customer assurance program or incur additional costs in continuing such products and

31


 

services in order to avoid making such payments, and such costs might limit the total amount of consideration that the potential acquirer would be willing to pay for PeopleSoft.

Business Combinations

     In accordance with the purchase method of accounting, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair values. We engage independent third-party appraisal firms to assist in determining the fair values of assets acquired and liabilities assumed. Such a valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets.

     Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from license sales, maintenance agreements, consulting contracts, customer contracts, and acquired developed technologies and patents; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; and discount rates. These estimates are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

     Other estimates associated with the accounting for acquisitions include restructuring costs. Restructuring costs are primarily comprised of severance costs, change in control payments, costs of consolidating duplicate facilities, and contract termination costs. During the second quarter of 2004, restructuring costs were incurred as a result of the acquisition of J.D. Edwards. Restructuring costs associated with pre-acquisition activities of J.D. Edwards have been accounted for in accordance with Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” (“EITF 95-3”) and have been recognized as a liability assumed in the purchase business combination. Other restructuring costs associated with activities of PeopleSoft are accounted for in accordance with Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (“SFAS 146”) or Statement of Financial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits — an Amendment of FASB Statements No. 5 and 43” (“SFAS 112”) and are recorded as a charge to the results of operations in “Restructuring, acquisition and other charges.” Restructuring costs are based upon plans that have been committed to by management and are subject to refinement. To estimate restructuring costs accounted for in accordance with EITF 95-3, management utilized assumptions of the number of employees that will either voluntarily or involuntarily terminate employment with PeopleSoft and of future costs to operate and eventually vacate duplicate facilities. Estimated restructuring costs may change as management executes the approved plan. Decreases to the estimates of executing the currently approved plans accounted for in accordance with EITF 95-3 are recorded as an adjustment to goodwill while increases to the estimates are recorded as an adjustment to goodwill within one year of the acquisition date and as operating expenses thereafter. Changes to currently approved plans accounted for in accordance with SFAS 146 or SFAS 112 will be recorded in “Restructuring, acquisition and other charges.”

     Our financial projections may ultimately prove to be inaccurate and unanticipated events and circumstances may occur. Therefore, no assurance can be given that the underlying assumptions used to project revenues and costs to develop such products will transpire as anticipated.

Capitalized Software

     We account for the development cost of software intended for sale in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed” (“SFAS 86”). SFAS 86 requires product development costs to be charged to expense as incurred until technological feasibility is attained. Technological feasibility is attained when our software has completed system testing and has been determined viable for its intended use. The time between the attainment of technological feasibility and completion of software development has historically been relatively short with immaterial amounts of development costs incurred during this period. Accordingly, we did not capitalize any development costs in the second quarter and the first six months of 2004. We capitalize software acquired through technology purchases and business combinations if the related software under development has reached technological feasibility or if there are alternative future uses for the software.

     We periodically evaluate the recoverability of capitalized software based on an estimate of future product revenues reduced by the estimated cost of completing the products and of performing maintenance and customer support. If our gross product revenues were to

32


 

be significantly less than our original estimate, the net realizable value of our capitalized software intended for sale may be partially or completely impaired.

Allowance for Doubtful Accounts

     We maintain an allowance for doubtful accounts at an amount estimated to be sufficient to provide adequate protection against losses resulting from collecting less than full payment on our receivables. Individual overdue accounts are reviewed, and allowance adjustments are recorded when determined necessary to state receivables at realizable value. Additionally, we judge the overall adequacy of the allowance for doubtful accounts by considering multiple factors including the aging of our receivables, historical bad debt experience, and the general economic environment. The key factor is the aging of our receivables, and the improvement or deterioration of the age of our receivables is the factor which will drive either a decrease or an increase to the allowance. A considerable amount of judgment is required when we assess the collectibility of our receivables, including assessing the probability of collection and the current creditworthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts may be required. Once all collection efforts are exhausted, the receivable is written-off against the balance in the allowance for doubtful accounts.

Product and Service Warranty Reserve

     We provide for the estimated cost of product and service warranties based on specific warranty claims received, provided that it is probable that a liability exists, and provided the cost to repair or otherwise satisfy the claim can be reasonably estimated. The amount of the reserve recorded is equal to the costs to repair or otherwise satisfy the claim. If existing claims are settled for amounts which differ from our estimates, or if the estimated monetary value of the warranty claims were to increase or decrease, revisions to the estimated warranty liability may be required and the warranty expense could change from current levels.

Deferred Tax Asset Valuation Allowance

     We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” We assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that based upon all the available positive and negative evidence, it is not likely that we will realize the benefit of a deferred tax asset in the future, we establish a valuation allowance. We consider our potential future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. Adjustments may be required in the future if we determine that the amount of deferred tax assets to be realized is greater or less than the amount we have recorded. Our valuation allowance relates mainly to established allowances on net operating losses incurred in certain foreign jurisdictions as well as on operating loss carryforwards and other tax benefits relating to various jurisdictions of certain acquired companies.

Impairment of Goodwill and Long-Lived Assets

     On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”). SFAS 142 requires that goodwill no longer be amortized and that goodwill be tested annually for impairment or more frequently if events and circumstances warrant. We selected the third quarter to perform our annual goodwill impairment testing. We determined that our reporting units are equivalent to our operating segments for the purposes of completing our SFAS 142 impairment test based upon the similar economic characteristics of each of the components that make up our operating segments (see Note 12, “Segment and Geographic Areas” of the Notes to the unaudited Condensed Consolidated Financial Statements). For purposes of performing our impairment test, we allocated tangible and intangible assets and liabilities to each reporting unit based upon the location in which the asset or liability was initially recorded and would ultimately be assigned to in the event of a purchase transaction. We determined that the carrying amount of goodwill was not impaired during the third quarter of 2003. Our impairment analysis was based upon the fair value assigned to each reporting unit. In estimating the fair value of the individual reporting units, we considered the enterprise fair value based upon the average closing price of the Company’s common stock from July 17, 2003 to July 31, 2003. We are not aware of any events or circumstances that would warrant an impairment charge through the second quarter of 2004.

     We account for the impairment and disposal of long-lived assets utilizing Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”). SFAS 144 requires that long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of an asset is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated.

33


 

If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. We do not believe there were any circumstances which indicated that the carrying value of an asset may not be recoverable.

LIQUIDITY AND CAPITAL RESOURCES

     We generate cash from licensing our software, providing professional services and through maintenance renewals. Our days sales outstanding for the second quarter of 2004 was 55 days, meaning that was the average number of days that passed before we collected payment from our customers. We use cash to pay our employees’ salaries, commissions, bonuses, and benefits; pay landlords to lease office space, procure insurance, pay taxes and pay vendors for services and supplies. In addition, we use cash to purchase capital assets to support the business. These assets are typically information technology hardware and facilities. On June 30, 2004, we did not have any debt, and we currently have no plans to pay cash dividends on our capital stock.

     On January 12, 2004, we announced our intention to repurchase $200 million of PeopleSoft common stock. We anticipate the successful completion of this repurchase in 2004. This repurchase activity is in keeping with our stated objective of continuing to utilize our positive cash flow to increase stockholder value. We intend to hold all shares repurchased pursuant to the stock repurchase program as treasury stock. We intend to fund all share repurchases from cash surplus and general corporate funds generated from operations. We believe that the combination of our cash and cash equivalents and short-term investment balances and currently anticipated cash flow from operations will be sufficient to satisfy our cash requirements, at least through the next twelve months.

     The table shown below presents our liquidity position for the quarter ended June 30, 2004 and for the prior year end:

                 
    Quarter   Year
    Ended   Ended
    June 30,   December 31,
    2004
  2003
    ($ in millions)
Cash and cash equivalents
  $ 542.5     $ 439.4  
Short-term investments and restricted cash (1)
  $ 1,034.2     $ 961.9  
 
   
 
     
 
 
Total
  $ 1,576.7     $ 1,401.3  
Working capital
  $ 926.5     $ 803.5  


(1)   Short-term investments and restricted cash principally include interest-bearing demand deposit accounts with various financial institutions, tax-advantaged money market funds and highly liquid debt securities of corporations and municipalities.

     As of June 30, 2004, our cash, cash equivalents and short-term investments increased by $175.4 million as compared to December 31, 2003. This increase was primarily due to positive operating cash flow and proceeds from employee stock purchases and stock option exercises, partially offset by the purchase of property and equipment, including two office buildings in Denver, Colorado.

     We generated cash flows from operations of $204.8 million in the first six months of 2004 compared to $193.3 million in the first six months of 2003. The principle source of our cash generated from operating activities comes from our net income adjusted for depreciation and amortization and collections on our accounts receivable. Partially offsetting our positive cash flows from operations in 2004 are payments made relating to the J.D. Edwards restructuring liabilities (See Note 6, “Restructuring Liabilities” of the Notes to the unaudited Condensed Consolidated Financial Statements) of $36.1 million and payments made for legal and investment banker fees relating to the Oracle Tender Offer of approximately $18 million.

     We historically have used cash for investing activities. Surplus cash has generally been used to purchase short-term investments, although in the third quarter of 2003 we liquidated some of our short-term investments to fund the cash portion of the purchase price of J.D. Edwards. We purchased property and equipment of $88.9 million during the first six months of 2004. We assumed operating leases on four office buildings in Denver as a result of our acquisition of J.D. Edwards. On April 2, 2004, one of the master lease agreements terminated and we exercised our option to purchase two buildings for a net purchase price of $58.6 million. We are currently considering cash purchases, totaling $62.6 million for the remaining two office buildings. The leases for the remaining buildings terminate during the third and fourth quarters of 2004. We purchased property and equipment of $213.8 million during the first six months of 2003, of which $175 million was utilized to purchase certain of our headquarters facilities in Pleasanton, California which we had been leasing under synthetic leases.

34


 

     The principal source of cash generated from financing activities relates to the exercise of stock options by our employees and the issuance of our common stock under the employee stock purchase program. These equity transactions generated cash of $74.5 million in the first six months of 2004. The Company has modified its equity compensation strategy to emphasize equity incentives other than stock options, and the cash generated from financing activities related to employee equity compensation may decrease in the future.

     Future cash payments related to restructuring liabilities for employee costs are expected to be made through January 2005. Future cash payments related to facilities obligations are expected to be made through March 2012. Our $50.6 million restructuring liability at June 30, 2004 is a cash obligation. Restructuring costs are being funded through operating cash flow. See Note 6 “Restructuring Liabilities” of the Notes to the unaudited Condensed Consolidated Financial Statements.

Commercial Commitments

Synthetic Leases

     As a result of the acquisition of J.D. Edwards, we assumed three six-year master operating leases on four office buildings in Denver, Colorado (the “Denver Campus”). Two of the three master leases are effective at June 30, 2004. On April 2, 2004, the third master lease agreement terminated and we exercised our option to purchase two buildings for a net purchase price of $58.6 million. The lessor, a wholly owned subsidiary of a bank, which together with a syndication of other banks provided debt and equity financing of $121.2 million for the purchase and construction costs of the buildings. The lease payment obligations are based on a return on the lessor’s costs. We have an option to refinance or purchase the remaining leased properties at our sole discretion during the terms of the leases for approximately $62.6 million. In the event that we do not exercise our option to refinance or purchase the leased properties, we must guarantee the residual value of each building up to approximately 85% of the bank financing of $62.6 million or $53.2 million for the remaining two leases. We have evaluated the fair value of the Denver Campus and determined that at June 30, 2004 it is not probable that the value of the leased properties at the end of the lease terms will be less than the residual value guaranteed by us and as a result we do not believe that we will be called upon to perform under the residual guarantee. We are expecting to proceed with cash purchases of the remaining office buildings. The leases for the remaining buildings terminate during the third and fourth quarters of 2004.

     We may elect to reduce the interest rate used to calculate our lease expense by collateralizing the Denver Campus financing arrangements with investments. At June 30, 2004, investments totaling $63.8 million were designated as collateral for these leases. We may withdraw the funds used as collateral, excluding restricted amounts, at our sole discretion provided that we are not in default under the lease agreements. At June 30, 2004, funds used as collateral in the amount of $40.8 million were available for withdrawal. At June 30, 2004, we were in compliance with the covenants, representations, and warranties required under the lease agreements.

35


 

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS OR THE MARKET PRICE OF OUR STOCK

     We operate in a dynamic, rapidly changing environment that involves numerous risks and uncertainties. The following section describes some, but not all, of these risks and uncertainties that may adversely affect our business, financial condition or results of operations. This section should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes thereto and the other parts of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2003 Annual Report on Form 10-K.

We may not successfully complete the integration of J.D. Edwards’ business operations into ours. In addition, we may not achieve all the anticipated benefits of the merger, which could adversely affect the price of our common stock.

     We completed the merger with J.D. Edwards on August 29, 2003, with the expectation that the acquisition would result in benefits to the combined company, including synergies and cost efficiencies related to combining operations and products. While the benefits have begun to be realized, the integration of both companies is in progress and there is a risk that the benefits might not be fully realized. To date, a combined product roadmap has been defined and we commenced delivery of intefaced products. During the first six months of 2004, we successfully completed the integration of our worldwide sales and service organizations to provide a consistent approach and methodology to our selling and consulting activities. Integrating the two companies’ operations may be difficult, time consuming and costly, particularly in light of the technical and complex nature of each company’s products. It is possible that the integration efforts will not be completed as efficiently or successfully as planned or will distract management from the operations of the Company’s business.

     The primary J.D. Edwards integration challenges that we believe remain, and the risks related to their execution, include the following:

  successful completion of the task of providing key integration applications between J.D. Edwards’ and PeopleSoft’s products, coordinating software development operations in an efficient manner to ensure timely development of product, and releasing future products to market in a timely manner;
 
  coordinating and integrating sales and marketing efforts to effectively communicate the capabilities of the combined company, cross selling products, and successfully managing the combined sales force;
 
  demonstrating to our existing and potential customers that the business combination will not result in adverse changes in customer service standards or business focus;
 
  retaining relationships on attractive terms with key suppliers, distributors, system integrators, customers, licensors, facility owners and other business partners;
 
  completing the consolidation of all the business data systems of the combined company to a fully operational coordinated system, including implementing and testing the systems, and training employees in the use of the systems;
 
  managing a substantially larger number of employees across a larger geographical area;
 
  creating and effectively implementing uniform standards, controls, procedures, and policies in a timely manner;
 
  retaining and recruiting key personnel; and
 
  successfully operating the combined company’s business with a minimum of disruption and distraction of management during the integration phase.

     The combined company may not successfully complete the integration of the operations of PeopleSoft and J.D. Edwards in a timely manner, or at all. There may be greater than anticipated costs and expenses related to restructuring, including employee severance or relocation costs, employee retention costs, and costs related to vacating leased facilities; and there may be potential unknown liabilities associated with any acquisition of a company’s business and combining its operations with an acquiror, such as

36


 

our acquisition and integration of J.D. Edwards. The combined company may not realize the anticipated benefits of the merger to the extent, or in the timeframe, anticipated, which could significantly harm our business and have a material adverse effect on the operations of the combined company.

Charges to earnings resulting from the acquisition of J.D. Edwards, including the application of the purchase method of accounting and restructuring and integration costs, may adversely affect the market value of our common stock.

     In accordance with accounting principles generally accepted in the United States of America, we accounted for the acquisition of J.D. Edwards using the purchase method of accounting. Accordingly, we have allocated the total purchase price to J.D. Edwards’ net tangible assets, amortizable intangible assets, and in-process research and development based on their fair values as of the date of completion of the merger, and recorded the excess of the purchase price over those fair values as goodwill. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain. Assumptions may be inaccurate, and unanticipated events and circumstances may occur, which may adversely affect future financial results. In the future, our financial results, including earnings per share, could be adversely affected by charges related to the purchase accounting, including the following:

  Goodwill may become impaired and we may be required to incur material charges relating to that impairment.
 
  Deferred revenue on J.D. Edwards’ balance sheet at the closing of the merger, which predominately represented maintenance revenue, was reduced to fair value in our balance sheet. The impact of this fair value reduction will continue to reduce the amount of deferred maintenance revenue available to be recognized into earnings as a result of the J.D. Edwards acquisition for the remaining term of the related maintenance contracts.
 
  We will incur charges to income to eliminate certain PeopleSoft pre-acquisition activities that are duplicative in nature with the assumed J.D. Edwards activities or to reduce cost structure.

     We expect to continue to incur costs associated with combining the operations of the two companies, which may be substantial. Additional costs that may be incurred relate to employee redeployment or relocation, accelerated amortization of deferred equity compensation and severance payments, employee retention which could include salary increases or bonuses, reorganization or closure of facilities, relocation and disposition of excess equipment, termination of contracts with third parties that provide redundant or conflicting services and other integration costs. We expect to account for these costs as expenses that may decrease our net income for the periods in which those charges are made.

     These costs may adversely impact earnings, which may result in a material adverse effect on the market value of our common stock.

Oracle Corporation’s tender offer to purchase all of our outstanding common stock is disruptive to our business and threatens to adversely affect our operations and results.

     On June 6, 2003, Oracle announced that it intended to commence a cash tender offer, referred to as the Oracle Tender Offer, to purchase all of our outstanding common stock. Oracle has changed the offering price and extended the offering period several times. On May 14, 2004, Oracle reduced the offer to $21.00 per share. The Oracle Tender Offer currently expires on August 27, 2004. We believe that the Oracle Tender Offer raises significant antitrust concerns that have resulted in a lengthy regulatory review process and litigation. On February 26, 2004, the United States Department of Justice (DOJ), joined by the states of Texas, Hawaii, Maryland, Massachusetts, Minnesota, New York and North Dakota, filed a civil antitrust suit in the U.S. District Court for the Northern District of California to enjoin Oracle’s proposed acquisition of PeopleSoft. On April 14, 2004, the DOJ’s complaint was amended to add as plaintiffs the states of Connecticut, Michigan and Ohio. The plaintiffs allege that the effect of the proposed acquisition of PeopleSoft by Oracle would be to lessen competition substantially in interstate trade and commerce in violation of the Clayton Act. The trial commenced June 7, 2004 and closing arguments were delivered on July 20, 2004. In addition, antitrust investigations by the European Commission and numerous other state attorneys general are ongoing. The European Commission has issued a preliminary statement of objections to Oracle in connection with its proposed acquisition of PeopleSoft. The delay and uncertainty associated with the continued regulatory review and the uncertainty regarding the outcome of the Oracle tender offer has caused significant business disruption and damages to us, and may continue to disrupt and damage our business. If the trial judge in the DOJ lawsuit referred to above were to rule against Oracle, but Oracle appeals that ruling, the delay and uncertainty regarding the outcome of the Oracle Tender Offer may continue to disrupt and damage our business. If the trial judge in the DOJ lawsuit referred to above were to rule against the DOJ, our ability to successfully conduct our business could be materially adversely impacted, which could result in a

37


 

material adverse effect on our financial condition and operating results.

     Oracle’s initial public statements were widely interpreted to reflect its intent to discontinue the development, sale and support of PeopleSoft products if the Oracle tender offer were to be successful. We believe the statements and perceptions have adversely impacted and may continue to adversely impact our ability to attract new customers and have caused and could continue to cause potential or current customers to defer purchases or to cancel existing orders. Oracle’s later statements that it would continue to sell to existing customers and to support PeopleSoft products for some time have resulted in additional confusion and uncertainty for our customers and prospective customers. Moreover, as a result of the Oracle tender offer, certain of our suppliers, distributors, and other business partners may seek to change or terminate their relationships with us. These actions may adversely affect our financial condition and results of operations.

     Additionally, as a consequence of the uncertainty surrounding our future, our key employees may seek other employment opportunities. Moreover, our ability to attract and retain key management, sales, marketing and technical personnel could be harmed. If key employees leave as a result of the Oracle tender offer, or if we are unable to attract or retain qualified personnel, there could be a material adverse effect on our business and results of operations.

     Responding to the Oracle tender offer has been, and may continue to be, a major distraction for our management and employees and has required and will continue to require us to incur significant costs which could impact spending on other initiatives. Management and employee distraction related to the Oracle tender offer also may adversely impact our ability to successfully conduct our business and complete the integration of J.D. Edwards with PeopleSoft, which could adversely affect our business and results of operations as described above.

Litigation related to the Oracle tender offer may result in significant monetary damages or may otherwise negatively impact our business and results of operations.

     At least fourteen stockholder lawsuits have been filed in Delaware and California state courts against PeopleSoft and certain of our directors and officers alleging breaches of fiduciary duties in connection with the Oracle tender offer. The California stockholder lawsuits have been stayed pending resolution of the Delaware matters. While the parties to the consolidated Delaware stockholder litigation have executed a Stipulation and Agreement of Compromise, Settlement and Release (the “Settlement Stipulation”) relating to that litigation and have filed the Settlement Stipulation with the Delaware Court of Chancery, the Delaware Court of Chancery has not yet approved any settlement of that litigation and there can be no assurance that it will do so. On June 18, 2003, Oracle filed a lawsuit against PeopleSoft and members of our board in the Delaware Court of Chancery. The lawsuit alleges breaches of fiduciary duties against PeopleSoft’s board of directors and seeks to enjoin us from continuing to use our customer assurance program and to require elimination of the Company’s Shareholder Rights Plan. In addition, on March 30, 2004, Oracle filed a cross-complaint against PeopleSoft and its directors in California state court seeking damages and an injunction arising out of the customer assurance program and alleged misrepresentations and unfair competition. Fluctuation in the price of PeopleSoft common stock may also expose the Company to the risk of securities class-action lawsuits. Any conclusion of such litigation in a manner adverse to PeopleSoft could have a material adverse effect on the combined company’s business, financial condition and results of operations. In addition, the cost of defending this litigation, even if resolved favorably, will be substantial. Such litigation could also substantially divert the attention of management and resources in general. Furthermore, uncertainties resulting from the initiation and continuation of any litigation could harm our ability to compete in the marketplace. For a more detailed description of the litigation related to the Oracle tender offer, see the discussions under Part II, Item 1, “Legal Proceedings” and Note 11, “Commitments and Contingencies” of the Notes to the unaudited Condensed Consolidated Financial Statements.

Our Certificate of Incorporation and Bylaws include anti-takeover provisions that may make it difficult for another company to acquire control of PeopleSoft or limit the price investors might be willing to pay for our stock.

     Certain provisions of our Certificate of Incorporation and Bylaws could delay the removal of incumbent directors and could make it more difficult to successfully complete a merger, tender offer or proxy contest involving us. These provisions include adoption of a Preferred Shares Rights Agreement (“Rights Agreement”), commonly known as a “poison pill” and provisions in our Certificate of Incorporation that give our board the ability to issue preferred stock and determine the rights and designations of the preferred stock at any time without stockholder approval. The rights of the holders of our 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 our outstanding voting stock. In addition, the staggered terms of our board of directors could have the effect of delaying or deferring a change in control.

38


 

     One of the conditions of the Oracle tender offer is the removal or amendment of our Rights Agreement such that Oracle’s acquisition of PeopleSoft stock would not trigger the provisions of the Rights Agreement. To date, our board of directors has not agreed to such removal or amendment. We currently are involved in litigation with Oracle in which it seeks to cause us to redeem the Rights issuable under the Rights Agreement or to render the Rights Agreement inapplicable to the proposed acquisition of PeopleSoft by Oracle.

     In addition, certain provisions of the Delaware General Corporation Law (“DGCL”) including Section 203 of the DGCL, may have the effect of delaying or preventing changes in the control or management of PeopleSoft. In its current litigation, Oracle also seeks to enjoin our Board from taking any action to enforce Section 203 of the DGCL. Section 203 of the DGCL provides, with certain exceptions, for waiting periods applicable to business combinations with stockholders owning at least 15% and less than 85% of the voting stock (exclusive of stock held by directors, officers and employee plans) of a company.

     The above factors may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in the control or management of PeopleSoft, including transactions in which our stockholders might otherwise receive a premium over the fair market value of our common stock. We can give no assurance as to the ultimate outcome of the litigation seeking to invalidate or enjoin the action of our takeover defenses or provisions of Delaware law, as described above.

Our stock price may remain volatile.

     The trading price of our common stock has fluctuated significantly in the past. Changes in our business, operations or prospects, ongoing market assessments of the benefits of the J.D. Edwards merger and the industry in which we compete, regulatory considerations, general market and economic conditions, or other factors may affect the price of our common stock. Many of these factors are beyond our control. We believe the future trading price of our common stock is likely to be volatile and could be subject to wide price fluctuations in response to such factors, including:

  the impact of the pending unsolicited Oracle tender offer (discussed in the preceding risk factors) or any other proposed acquisition of us;
 
  actual or anticipated fluctuations in revenues or operating results, including revenue or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment community;
 
  changes in recommendations or financial estimates by securities analysts;
 
  rumors or dissemination of false and/or misleading information, particularly through internet chat rooms, instant messaging and other means;
 
  announcements of technological innovations by us or our competitors;
 
  introduction and success of new products or significant customer wins or losses by us or our competitors;
 
  fluctuations in demand for our products, which may depend on, among other things, potential uncertainty regarding the success of the J.D. Edwards merger and the operations of the combined company, our customer assurance program, the acceptance of our products in the marketplace and the general level of spending in the software industry;
 
  the mix of products and services sold by us;
 
  the timing of significant orders received by us;
 
  developments (including infringement claims or other matters which could result in costly litigation) with respect to our intellectual property rights, including patents, or those of our competitors;
 
  changes in management;
 
  proposed and completed acquisitions or other significant transactions by us or our competitors;

39


 

  conditions and trends in the software industry, or consolidation within the technology industry, that may impact our customers, partners, suppliers or competitors;
 
  adoption of new accounting standards, including those affecting the software industry;
 
  acts of war or terrorism; and
 
  general market conditions.

Our future revenue is dependent in part on our installed customer base continuing to license additional products, renew maintenance agreements and purchase additional professional services.

     Our installed customer base has traditionally generated additional license, professional service and maintenance revenues. In future periods, customers may not necessarily license additional products or contract for additional services or maintenance. Maintenance is generally renewable annually at a customer’s option, and there are no mandatory payment obligations or obligations to license additional software. If our customers decide not to renew their maintenance agreements or license additional products or contract for additional services, or if they reduce the scope of the maintenance agreements, our revenues could decrease and our operating results could be adversely affected.

If we fail to introduce new or improved products and service offerings or if our current products become technologically obsolete, our results of operations and the financial condition of the business could suffer.

     The market for our software products is intensely competitive and is characterized by rapid technological change, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. The competitive environment demands that we constantly improve our existing products and services and create new products. Our future success may depend in part upon our ability to:

  invest in research and development and/or acquire complementary technologies or businesses;
 
  improve our existing products and develop new ones to keep pace with technological developments, including developments related to the internet;
 
  successfully integrate third party products;
 
  enter new markets;
 
  satisfy customer requirements with respect to products and services; and
 
  maintain market acceptance.

     While we are one of the largest providers of enterprise applications, our competitors may have more resources than we do. Our decisions regarding how to utilize our resources to either develop or acquire new products are critical. If, as a result of our decisions, resources are used ineffectively and we are unable to meet the challenge of delivering new or improved product and service offerings, our results of operations and our financial condition may be adversely affected.

Market acceptance of new platforms and operating environments may require us to undergo the expense of developing and maintaining compatible product lines.

     Although our software products can be licensed for use with a variety of popular industry standard relational database management system platforms, there may be existing or future platforms that achieve popularity in the marketplace which may not be architecturally compatible with our software product design. Moreover, existing or future user interfaces that achieve popularity within the business application marketplace may or may not be architecturally compatible with our current software product design. Developing and maintaining consistent software product performance characteristics across all of these combinations could place a significant strain on our resources and software product release schedules which could adversely affect revenue and results of

40


 

operations. To maintain software performance across accepted platforms and operating environments, or to enjoy continued market acceptance of those that we support, or to adapt to popular new ones, our expenses may increase and our sales and revenues may be adversely affected.

Competitive pressures in our industry or general economic conditions may require that we increase product development expenditures, reduce our prices or offer other favorable terms to customers on our products and services which could result in lower margins and reduce net income.

     We compete with other software vendors in all of our major product lines. Some of our competitors may have advantages over us due to their larger worldwide presence, longer operating and product development history, substantially greater technical and marketing resources, or exclusive intellectual property rights. We compete with SAP and Oracle within the large enterprise market segment, each of whom has considerable resources with which to compete on price, contract terms and development activity. We also compete with SAP and Oracle and a variety of other competitors in the mid-market for enterprise applications and in more narrowly defined market segments.

     If competitors offer more favorable pricing, payment or other contractual terms, warranties, or functionality which we do not currently provide, or if general economic conditions decline such that customers are less willing or able to pay the cost of our products, we may need to lower prices or offer other favorable terms in order to successfully compete.

As our international business grows, currency risks, political considerations and other costs and contingencies could adversely affect our results.

     We continue to invest in the expansion of our international operations. The global reach of our business could cause us to be subject to unexpected, uncontrollable and rapidly changing economic and political conditions that could adversely affect our results of operations. The following factors, among others, present risks that could have an adverse impact on our business:

  conducting business in currencies other than United States dollars subjects us to fluctuations in currency exchange rates and currency controls;
 
  increased cost and development time required to adapt our products to local markets;
 
  lack of experience in a particular geographic market;
 
  legal, regulatory, social, political, labor or economic uncertainties in a specific country or region, including loss or modification of exemptions for taxes and tariffs, increased withholding or other taxes on payments by subsidiaries, import and export license requirements, trade tariffs or restrictions, war, terrorism and civil unrest;
 
  higher operating costs due to local laws or regulation; and
 
  inability to hedge the currency risk for some transactions because of uncertainty or the inability to reasonably estimate our foreign exchange exposure.

Political and market conditions may cause a decrease in demand for our software and related services which may negatively affect our revenue and operating results.

     Our revenue and profitability depend on the overall demand for our software, professional services and maintenance. Regional and global changes in the economy, governmental budget deficits and political instability in certain geographic areas have resulted in companies, government agencies and educational institutions reducing their spending for technology projects generally and delaying or reconsidering potential purchases of our products and related services. The uncertainty posed by the long-term effects of the war in the Middle East, terrorist activities and related uncertainties and risks and other geopolitical issues may impact the purchasing decisions of current or potential customers. Future declines in demand for our products and/or services could adversely affect our revenues and operating results.

41


 

Catastrophic events or national security issues could result in disruptions to our business and may negatively affect our operating results or financial condition.

     Our corporate headquarters, including our data center and certain of our research and development operations, are located in Pleasanton, California, in an area known for seismic activity. A major earthquake in that region, or other major catastrophe such as fire, flood or terrorist attack, could severely disrupt our business. Significant structural damage to the data center could cause a disruption of our information systems and loss of financial data and certain customer data. In addition, disruptions in airline travel due to terrorist threats or attacks could also impair our ability to sell and market our products, provide consulting services, and otherwise be able to compete, because of the world wide geographic scope of our business. Any such event or occurrence could reduce revenue or entail significant expense to us and adversely impact our results of operations or financial condition.

If our customers lose confidence in the security of data on the internet, our revenues could be adversely affected.

     Maintaining the security of computers and computer networks is an issue of critical importance for our customers. Attempts by experienced computer programmers, or hackers, to penetrate customer networks security or the security of web sites to misappropriate confidential information are currently an industry-wide phenomenon that affects computers and networks across all platforms. As we develop new products and improve existing products, our development and improvement efforts include the creation of features designed to optimize security in our products. Despite these efforts, actual or perceived security vulnerabilities in our products (or the internet in general) could lead some customers to seek to reduce or delay future purchases or to purchase competitive products which are not internet based applications. Customers may also increase their spending to protect their computer networks from attack, which could delay adoption of new technologies. Any of these actions by customers could adversely affect our revenues.

We may be required to undertake a costly redesign of our products if third party software development tools become an industry standard or cause obsolescence of our toolsets.

     Our software products include a suite of proprietary software development tools, known as PeopleTools® and EnterpriseOne tools, which are fundamental to effective use of our products. While no industry standard exists for software development tools, several companies have focused on providing software development tools and each of them is attempting to establish its own tools as the accepted industry standard. If a software product were to emerge as a clearly established and widely accepted industry standard or if rising expectations of toolsets of applications cause our toolsets to become obsolete, we may not be able to adapt our tools appropriately or rapidly enough to satisfy market demand. In addition, we could be forced to abandon or modify our tools or to redesign our software products to accommodate the new industry standard. This would be expensive and time consuming and may adversely affect results of operations and the financial condition of the business. Our failure to drive or adapt to new and changing industry standards or third party interfaces could adversely affect sales of our products and services.

Increased complexity of our software may result in more difficult detection and correction of errors, delays in the introduction of new products and more costly performance and warranty claims.

     Our software programs, like all software programs generally, may contain a number of undetected errors despite internal and third party testing. Increased complexity of our software and more sophisticated expectations of customers may result in higher costs to correct such errors and delay the introduction of new products or enhancements in the marketplace.

     Errors in our software could subject us to litigation and liability based on performance and/or warranty claims. Although our agreements contain provisions designed to limit our exposure to potential liability claims, these provisions could be invalidated by unfavorable judicial decisions or by federal, state, local or foreign laws or regulations. If a claim against us were to be successful, we might be required to incur significant expense and pay substantial damages. Even if we were to prevail, the accompanying publicity could adversely impact the demand for our products.

If we lose access to critical third party software or technology, our costs could increase and the introduction of new products and product enhancements could be delayed.

     We license software and technology from third parties, including some competitors, and incorporate them into or sell them in conjunction with our own software products, some of which are critical to the operation of our software. If any of the third party software vendors were to change product offerings, increase prices or terminate our licenses, we might need to seek alternative vendors and incur additional internal or external development costs to ensure continued performance of our products. Such alternatives may not be available on attractive terms, or may not be as widely accepted or as effective as the software provided by our

42


 

existing vendors. If the cost of licensing or maintaining these third party software products or other technology significantly increases, our gross margin levels could significantly decrease. In addition, interruption in functionality of our products could adversely affect future sales of licenses and services.

Disruption of our relationships with third party systems integrators could adversely affect revenues and results of operations.

     We build and maintain strong working relationships with businesses that we believe play an important role in the successful marketing and deployment of our software application products. Our current and potential customers often rely on third party system integrators to develop, deploy and manage applications. We believe that our relationships with these companies enhance our marketing and sales efforts. However, if these system integrators are unable to recruit and adequately train a sufficient number of consulting personnel to support the successful implementation of our software products, we may lose customers. Moreover, our relationships with these companies are not exclusive, and they are free to start, or in some cases increase, the marketing of competitive business application software, or to otherwise discontinue their relationships with us. In addition, integrators who generate consulting fees from customers by providing implementation services may be less likely to recommend our software if our products are more difficult or costly to install than competitors’ similar product offerings. Disruption of our relationships with these companies could adversely affect revenues and results of operations.

We may be unable to achieve the benefits we anticipate from joint software development or marketing arrangements with our business partners.

     We enter into various development or joint business arrangements to develop new software products or extensions to our existing software products. We may distribute ourselves or jointly sell with our business partners an integrated software product and pay a royalty to the business partner based on end-user license fees under these joint business arrangements. While we intend to develop business applications that are integrated with our software products, these software products may in fact not be integrated or brought to market, or the market may reject the integrated enterprise solution. As a result, we may not achieve the revenues that we anticipated at the time we entered into the joint business arrangement.

Our future success depends on our ability to continue to retain and attract qualified employees.

     We believe that our future success depends upon our ability to continue to train, retain, effectively manage and attract highly skilled technical, managerial, sales and marketing personnel. If our efforts in these areas are not successful, our costs may increase, development and sales efforts may be hindered and our customer service may be degraded. Without limiting the foregoing, uncertainty created by the Oracle Tender Offer and the United States versus Oracle antitrust trial may result in an increase in our compensation expense if we were to implement and/or increase employee retention programs. Although we invest significant resources in recruiting and retaining employees, there is intense competition for personnel in the software industry. From time to time, we experience difficulties in locating enough highly qualified candidates in desired geographic locations, or with required industry-specific expertise.

The loss of key personnel could have an adverse effect on our operations and stock price.

     We believe that there are certain key employees within the organization, primarily in the senior management team, who must be retained by us to meet our objectives. Due to the competitive employment nature of the software industry and due to the uncertainty of the Oracle tender offer, there is a risk that we will not be able to retain these key employees. The loss of one or more key employees could adversely affect our continued operations. In addition, uncertainty created by turnover of key employees could result in reduced confidence in our financial performance which could cause fluctuations in our stock price and result in further turnover of our employees.

Decreased effectiveness of equity compensation could negatively impact our ability to attract and retain employees, and a modification to our equity compensation strategy or proposed changes in accounting for equity compensation could adversely affect our earnings.

     We have historically used stock options and other forms of equity compensation as key components of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages. In recent periods, many of our employee stock options have had exercise prices in excess of our market stock price, which could affect our ability to retain our employees. In addition, the Financial Accounting Standards Board and other agencies have proposed changes to accounting principles generally accepted in the United States that would require us (as well as other companies) to record a charge to earnings for employee stock option grants, sales of shares under our employee stock purchase plan and other equity compensation awards and for certain liability classified awards. At the Company’s 2004 annual

43


 

meeting of stockholders, a stockholder proposal was adopted urging the Board of Directors to adopt a policy that we treat the value of stock options granted to employees and directors as compensation expense. The Board is reviewing the issue, including the stockholder vote, as part of its evaluation of the accounting treatment of option grants. Moreover, recent changes in applicable stock exchange listing standards relating to obtaining stockholder approval of equity compensation plans could make it more difficult or expensive for us to grant options to employees in the future. We have modified our equity compensation strategy to emphasize equity incentives other than stock options in light of these developments. If employees believe that the grants that they receive under this modified strategy are less attractive, we may find it difficult to attract, retain and motivate employees. In addition, the use of alternative equity incentives may increase our compensation expense and may negatively impact our earnings. To the extent that new regulations make it more difficult or expensive to grant stock options to employees, we may incur increased compensation costs, further change our equity compensation strategy or find it difficult to attract, retain and motivate employees as a result of a modified equity compensation strategy, each of which could materially and adversely affect our business.

Our quarterly revenues and results of operations can be difficult to predict and may fluctuate substantially, which may adversely affect our net income.

     Our revenues and results of operations can be difficult to predict and may fluctuate substantially from quarter to quarter. Our operating expense decisions, capital commitments and hiring plans are based on projections of future revenues. If our actual revenues fall below expectations, our net income may be adversely affected. Factors that may affect the predictability of actual revenues include the following:

  the impact of the pending Oracle tender offer or any other proposed acquisition of PeopleSoft;
 
  our sales cycle may vary as a result of the complexity of a customer’s overall business needs and may extend over one or more quarters;
 
  the complexity and size of license transactions can result in protracted negotiations;
 
  a significant number of our license agreements typically are completed within the last few weeks of the quarter and purchasing decisions may be delayed to future quarters;
 
  the effect of economic downturns and unstable political conditions may result in decreased product demand, price erosion, and other factors that may substantially reduce license and service revenue;
 
  customers may unexpectedly postpone or cancel anticipated system replacement or new system implementation due to changes in strategic priorities, project objectives, budgetary constraints, internal purchasing processes or company management;
 
  changes in our competitors’ and our own pricing policies and discount plans may affect customer purchasing patterns and decisions;
 
  the number, timing and significance of our competitors’ and our own software product enhancements and new software product announcements may affect purchasing decisions; and
 
  changes in customers’ seasonal purchasing patterns may result in imprecise quarterly revenue projections.

We may be required to defer recognition of license revenue for a significant period of time after entering into an agreement, which could negatively impact our results of operations.

     We may have to delay recognizing license revenue for a significant period of time for a variety of types of transactions, including:

  transactions that include both currently deliverable software products and software products that are under development or contain other currently undeliverable elements;
 
  transactions where the customer demands services that include significant modifications, customizations or complex interfaces that could delay product delivery or acceptance;

44


 

  transactions that involve non-standard acceptance criteria or identified product-related performance issues; and
 
  transactions that include contingency-based payment terms or fees.

     These factors and other specific accounting requirements for software revenue recognition require that we have very precise terms in our license agreements to allow us to recognize revenue when we initially deliver software or perform services. Although we have a standard form of license agreement that we believe meets the criteria for current revenue recognition on delivered elements, we negotiate and revise these terms and conditions in some transactions. Therefore, it is possible that from time to time we may license our software or provide service with terms and conditions that do not permit revenue recognition at the time of delivery or even as work on the project is completed.

If accounting interpretations relating to revenue recognition change, our reported revenues could decline or we could be forced to make changes in our business practices.

     There are several accounting standards and interpretations covering revenue recognition for the software industry. These pronouncements include, Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions,” SOP 81-1, “Accounting for Performance of Construction-type and Certain Production-type Contracts,” the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” SAB No. 104, “Revenue Recognition,” and other authoritative accounting literature. These standards address software revenue recognition matters primarily from a conceptual level and do not include specific implementation guidance. We believe that our revenue has been recognized in compliance with these three standards.

     The accounting profession and regulatory agencies continue to discuss various provisions of these pronouncements with the objective of providing additional guidance on their application. These discussions and the issuance of new interpretations, once finalized, could lead to unanticipated reductions in recognized revenue. They could also drive significant adjustments to our business practices which could result in increased administrative costs, lengthened sales cycles and other changes which could adversely affect our reported revenues and results of operations.

Increases in service revenue as a percentage of total revenues may decrease overall margins.

     We realize lower margins on services revenue than on license revenues. In addition, we may contract with certain third parties to supplement the services we provide to customers, which generally yields lower gross margins than our service business. As a result, if service revenue increases as a percentage of total revenue or if we increase our use of third parties to provide such services, our gross margins would be lower and our operating results may be impacted.

Our intellectual property and proprietary rights may offer only limited protection.

     We consider certain aspects of our internal operations and our software and documentation to be proprietary, and we rely on a combination of patent, copyright, trademark and trade secret laws and other measures to protect our proprietary rights. Patent applications or issued patents, as well as trademark, copyright, and trade secret rights, may not provide significant protection or a competitive advantage. We also rely on contractual restrictions in our agreements with customers, employees and others to protect our intellectual property rights. There can be no assurance that these agreements will not be breached, that we have adequate remedies for any breach, or that our patents, copyrights, trademarks or trade secrets will not come into the public domain. Moreover, the laws of some countries do not protect intellectual property rights at all or as effectively as do the laws of the United States. Protecting and defending our intellectual property rights could be costly regardless of venue.

     Through an escrow arrangement, we have granted some of our customers a contingent future right to use our source code solely for maintenance services to support their internal use of our software. If our source code is accessed through escrow, the likelihood of misappropriation or other misuse of our intellectual property may increase.

Third parties may claim that our products infringe upon their intellectual property rights, which could result in material costs or our use of certain rights could be enjoined.

     Third parties may assert infringement claims against us in the future, especially in light of recent developments in patent law

45


 

expanding the scope of patents on software and business methods. These assertions, regardless of their validity, could result in costly and time-consuming litigation, including damage awards and indemnification payments to customers, or could require costly redesign of products or present the need to enter into royalty arrangements which could decrease margins and could adversely affect our results of operations. Any such litigation or redesign of products could also negatively impact customer confidence in our products and could result in damage to our reputation and reduced licensing revenue.

Future acquisitions may present risks and we may be unable to achieve the product, financial or strategic goals intended at the time of any acquisition.

     As a component of our strategy, in addition to our acquisition of J.D. Edwards, we may acquire or invest in companies, products or technologies, and may enter into joint ventures and strategic alliances with other companies. The risks that would commonly impact such transactions include:

  difficulty assimilating the operations and personnel of the acquired company;
 
  difficulty effectively integrating the acquired technologies or products with our current products and technologies;
 
  difficulty in maintaining controls, procedures and policies during the transition and integration;
 
  ongoing business may be disrupted by transition and integration issues;
 
  key technical and managerial personnel from the acquired business may not be able to be retained;
 
  the financial and strategic goals for the acquired and combined businesses may not be achieved;
 
  relationships with partner companies or third party providers of technology or products could be adversely affected;
 
  relationships with employees and customers could be impaired;
 
  due diligence processes may fail to identify significant issues with product quality, product architecture, legal and financial contingencies, and product development, among other things; and
 
  significant exit charges may be sustained if products acquired in business combinations are unsuccessful.

It has been and may continue to be increasingly expensive to obtain and maintain liability insurance.

     We contract for insurance to cover a variety of potential risks and liabilities. Over the last two years, our premiums and deductibles have increased significantly. In the current market, insurance coverage continues to be more restrictive, and when insurance coverage is offered, the deductibles for which we are responsible are larger and the premiums are increasing. This has resulted in our being forced to bear the burden of an increased portion of risks for which we have traditionally been covered by insurance. If we were found to be liable for a significant claim in the future, our results of operations may be negatively impacted.

     ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk

     International sales are made mostly from our foreign subsidiaries in their respective countries and are typically denominated in the local currency of each country. Our foreign subsidiaries incur most of their expenses in local currency as well.

     Our international business is subject to risks, including, but not limited to: unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.

     Our exposure to foreign exchange rate fluctuations arises in part from intercompany transactions in which certain costs incurred in the United States are charged to our foreign subsidiaries. Intercompany transactions are typically denominated in the functional

46


 

currency of the foreign subsidiaries in order to centralize foreign exchange risk in the parent company in the United States. We are also exposed to foreign exchange rate fluctuations as the financial results of our foreign subsidiaries are translated into U.S. dollars during consolidation. As exchange rates vary, these results, when translated, may vary from expectations and may adversely impact overall expected profitability.

     We have a foreign exchange hedging program principally designed to mitigate the future potential impact due to changes in foreign currency exchange rates. Forward exchange contracts are used to hedge foreign currency exposures of the parent company as well as foreign currency exposures of our foreign subsidiaries. We operate in certain countries in Latin America and Asia Pacific where there are limited forward currency exchange markets, and thus we have unhedged exposures in these countries. In general, our forward foreign exchange contracts have terms of two months or less, which approximate the expected settlement date of the underlying exposure. Gains and losses on the settled contracts are included in “Other income, net” in the accompanying unaudited condensed consolidated statements of operations and are recognized in the current period, consistent with the period in which the gain or loss of the underlying transaction is recognized. The foreign currency hedging program is managed in accordance with a corporate policy approved by our Board of Directors.

     In addition to hedging existing transaction exposures, our foreign exchange management policy allows for the hedging of exposure resulting from the translation of foreign subsidiary financial results into U.S. dollars. Such hedges can only be undertaken to the extent that the exposures are highly certain, reasonably estimable and significant in amount. No such hedges have occurred through June 30, 2004.

     At June 30, 2004, we had the following outstanding forward foreign exchange contracts to exchange foreign currency for U.S. dollars (in millions, except for notional weighted average exchange rates):

                 
            Notional Weighted
    Notional   Average Exchange
Functional Currency
  Amount
  Rate per US $
Singapore dollars
  $ 14.9       1.711  
Hong Kong dollars
    8.5       7.791  
New Zealand dollars
    7.9       1.569  
British pounds
    6.2       0.549  
Japanese yen
    5.4       108.066  
Taiwanese dollars
    3.8       33.77  
 
   
 
       
 
  $ 46.7          
 
   
 
       

     At June 30, 2004, we had the following outstanding forward foreign exchange contracts to exchange U.S. dollars for foreign currency (in millions, except for notional weighted average exchange rates):

                 
            Notional Weighted
            Average Exchange
Functional Currency
  Notional Amount
  Rate per US $
Mexican pesos
  $ 12.5       11.487  
Canadian dollars
    5.3       1.346  
Swiss francs
    3.0       1.245  
Euro
    2.7       1.217  
Swedish krona
    1.0       7.525  
 
   
 
       
 
  $ 24.5          
 
   
 
       

     Each of these contracts matured within 60 days and had a cost that approximated fair value. Neither the cost nor the fair value of these forward foreign exchange contracts was material at June 30, 2004. During the three months ended June 30, 2004 and 2003, the Company recorded net foreign currency transaction losses of $2.5 million and $1 million, respectively. During the six months ended June 30, 2004 and 2003, the Company recorded net foreign currency losses of $4.5 million and $1.2 million, respectively.

Interest Rate Risk

Investments in Debt Securities

     We invest our cash in a variety of financial instruments, consisting principally of investments in interest-bearing demand deposit

47


 

accounts with financial institutions, tax-exempt money market funds and highly liquid debt securities of corporations and municipalities. Our investments are made in accordance with an investment policy approved by our Board of Directors. Cash balances in foreign currencies overseas represent operating balances that are typically invested in short term time deposits in local operating banks.

     We classify debt securities based on maturity dates on the date of purchase and re-evaluate the classification as of each balance sheet date. Debt securities which management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other debt securities are classified as available-for-sale and carried at fair value, which is determined based on quoted market prices, with net unrealized gains and losses included in “Accumulated other comprehensive income,” net of tax, in the accompanying condensed consolidated balance sheets. If unrealized losses are determined to be other-than-temporary, they are reclassified from “Accumulated other comprehensive income” into earnings. As of June 30, 2004, all our investments were classified as available-for-sale and no other-than-temporary impairments were identified.

     Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities, that typically have a shorter duration, may produce less income than expected if interest rates fall. Due in part to these factors, our investment income may decrease in the future due to changes in interest rates.

     At June 30, 2004, the average maturity of our investment securities was less than four months and all investment securities had maturities of less than eighteen months. The following table presents certain information about our financial instruments at June 30, 2004 that are sensitive to changes in interest rates. Due to our tax rate, it is presently advantageous for us to invest largely in tax-exempt securities. The average interest rates shown below reflect a weighted average rate for both taxable and tax-exempt investments. At June 30, 2004, we invested heavily in tax-exempt investments which reduced our weighted average interest rate.

     Below is a presentation of the maturity profile of our investments in debt securities at June 30, 2004 ($ in millions):

                                 
    Expected   Expected        
    Maturity   Maturity        
    1 Year   More Than   Principal   Fair
    or Less
  1 Year
  Amount
  Value
Available-for-sale securities
  $ 1,008.4     $ 40.4     $ 1,048.8     $ 1,051.3  
Weighted average interest rate
    1.2 %     1.3 %                

Interest Rate Swap Transactions

     We used interest rate swap transactions to manage our exposure to interest rate changes on synthetic lease obligations related to certain of our headquarters facilities located in Pleasanton, California. The swaps had an aggregate notional principal amount of $175 million and matured at various dates in 2003, consistent with the expiration of the synthetic leases. Under the swap agreements, we received a variable interest rate based on the three month LIBOR rate and paid a weighted average fixed interest rate of 6.8%. The swaps were designated under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” as hedges against changes in the amount of future cash flows. In February 2003, we exercised our option under a synthetic lease agreement to purchase certain of our headquarters facilities located in Pleasanton, California for $70 million, and concurrently, swaps with an aggregate notional principal amount of $70 million matured. In June 2003, we exercised our option under the synthetic lease agreement to purchase certain of our headquarters facilities located in Pleasanton, California for $105 million. As a result of this transaction, we terminated our remaining interest rate swap agreements with an aggregate notional principal amount of $105 million resulting in a pretax charge of $1.4 million. There are no remaining amounts included in “Accumulated other comprehensive income” at June 30, 2004 related to these interest rate swaps.

ITEM 4 – CONTROLS AND PROCEDURES

     As of the end of the second quarter ended June 30, 2004, the Company completed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934. That evaluation was completed under the supervision and participation of members of our management including the

48


 

Company’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective in alerting them in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

     During the most recent fiscal quarter, there has not occurred any change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

49


 

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

PeopleSoft Shareholder Actions — Delaware Court of Chancery

     On June 6, 2003, Felix Ezeir (Case No. 20349-NC), Teresita Fay (Case No. 20350-NC), Robert Crescente (Case No. 20351-NC), Robert Corwin (Case No. 20352-NC) and Ernest Hack (Case No. 20353-NC), all of whom represented themselves to be PeopleSoft stockholders, each filed a putative stockholder class action suit in the Delaware Court of Chancery against the Company and several of the Company’s officers and directors. The suits allege that defendants breached their fiduciary duties in connection with the response to the tender offer announced by Oracle Corporation on June 6, 2003 and formally commenced June 9, 2003. Plaintiffs in each of the actions initially sought injunctive relief and an accounting. On June 10, 2003, Steven Padness filed an action in the Delaware Court of Chancery against these same defendants (Case No. 20358-NC) making similar allegations and seeking similar relief. On June 12, 2003, Thomas Nemes filed an action in the Delaware Court of Chancery (which was subsequently amended June 18, 2003) against these same defendants (Case No. 20365-NC), making similar allegations and seeking similar relief (the “Nemes Action”).

     On June 25, 2003, on an application filed in the Nemes Action, the Court consolidated the actions listed above under a single caption and case number: In re PeopleSoft, Inc. Shareholder Litigation, Consol. C.A. No. 20365-NC.

     On July 2, 2003, Richard Hutchings (Case No. 20403-NC) filed a putative stockholder class action in the Delaware Court of Chancery against us and several of our officers and directors. This action alleges that defendants breached their fiduciary duties in connection with the response to Oracle’s tender offer. Plaintiff sought injunctive relief, an accounting and damages. On July 22, 2003, the Delaware Court ordered that this action be consolidated with the other putative Delaware shareholder actions mentioned above.

     On May 26, 2004, PeopleSoft announced that the parties to the Delaware consolidated putative stockholder class action had entered into a memorandum of understanding providing for the settlement of that action. On June 17, 2004, the parties in the Delaware consolidated putative stockholder class action signed a Stipulation and Agreement of Compromise, Settlement and Release providing for settlement of that action (the “Settlement Stipulation”) and on July 22, 2004 filed the Settlement Stipulation with the Delaware Court of Chancery.

     In the Settlement Stipulation the stockholder plaintiffs state that, based on the actions of the US Department of Justice and the European Union and the current status of their anti-trust reviews and/or opposition to Oracle’s proposed acquisition of the Company, the discovery to date, and subject to confirmatory discovery, they had determined that the customer assurance program (see Note 10, above), as it relates to Oracle, serves a legitimate corporate purpose in light of Oracle’s tender offer and other conduct. Pursuant to the Settlement Stipulation, the Company agreed that if it extended the customer assurance program beyond June 30, 2004, the term “acquisition” would be limited to an acquisition of the Company by Oracle or its affiliates, and that prior to June 30, 2004 it would attempt to use that more limited definition in certain new contracts. In the Settlement Stipulation, which is subject to approval by the Delaware Court of Chancery, the stockholder plaintiffs, on behalf of a class of PeopleSoft stockholders, agreed to settle and dismiss all claims that were raised or could have been raised in the action against the Company and its directors. The Settlement Stipulation also provides, among other things, that following Delaware Court of Chancery approval of the settlement (if obtained), the Company will, for a two year period, amend its Bylaws to shorten the advance notice a stockholder must give to nominate candidates for director and amend its stockholder rights plan to provide that the rights plan will generally cease to be applicable to certain qualifying tender offers unless, within 90 days following commencement or amendment of the price term of the qualifying tender offer or certain other events, the Board of Directors, including a majority of its independent directors, shall have adopted a resolution determining that the rights plan shall remain applicable to such offer. The Settlement Stipulation also provides for the Company to pay attorneys’ fees and expenses of the stockholder plaintiffs in an amount to be determined by the Court as fair and reasonable. If approved, the settlement will bind all PeopleSoft stockholders except that it will not apply to Oracle, which is not precluded by the Settlement Stipulation from continuing to pursue its claims in the Delaware Court of Chancery and its counterclaims in the California Superior Court action, both as described immediately below.

     We believe that the claims and allegations asserted in each of the foregoing putative class action lawsuits are without merit, and intend to vigorously defend against these lawsuits if the proposed settlement of them is not approved by the Delaware Court of Chancery.

Oracle v. PeopleSoft — Delaware Court of Chancery

50


 

     On June 18, 2003, Oracle and Pepper Acquisition Corp. filed a lawsuit in the Delaware Court of Chancery (Case No. 20377-NC) (captioned Oracle Corp. v. PeopleSoft, Inc.) against us, several of our directors and J.D. Edwards, alleging that the named directors breached their fiduciary duties in connection with the response to Oracle’s tender offer, and that J.D. Edwards aided and abetted the named directors’ purported breach of fiduciary duty. Oracle sought injunctive, declaratory and rescissory relief.

     On June 24, 2004, Oracle and Pepper Acquisition Corp. filed an amended complaint in this action, eliminating J.D. Edwards as a separate defendant and adding PeopleSoft director Michael Maples as a defendant. The amended complaint updates the plaintiffs’ claims challenging PeopleSoft’s response to Oracle’s tender offer and alleges, among other things, that the directors of PeopleSoft have breached their duty of loyalty and duty of care and that the customer assurance program violates Delaware corporation law and was implemented without proper approval or supervision by PeopleSoft’s Board of Directors. The amended complaint seeks declaratory and injunctive relief, including an injunction prohibiting the future use of the customer assurance program and requiring PeopleSoft’s Board of Directors to eliminate the Company’s Shareholder Rights Plan.

     Discovery in this action is proceeding and is being coordinated with discovery in PeopleSoft’s action against Oracle in California, discussed below. Trial in the Delaware action has been scheduled to commence on September 27, 2004.

     We believe that the claims and allegations asserted in this action are without merit, and intend vigorously to defend against this lawsuit.

PeopleSoft Shareholder Actions — California Superior Court for the County of Alameda

     On June 6, 2003, separate actions were filed in the California Superior Court for the County of Alameda by Doris Staehr (Case No. RG03100291), the West Virginia Laborers Pension Trust Fund (Case No. RG03100306) and Lorrie McBride (Case No. RG03100300). On June 10, 2003, Ray Baldi (Case No. RG03100696) filed an additional case in the same court. The plaintiffs in these actions (collectively, the “Initial Alameda Shareholder Actions”) all purport to be PeopleSoft stockholders, and they make claims against several of our executive officers and directors. The suits allege that the defendants breached their fiduciary duties in connection with (i) the response to Oracle’s tender offer, (ii) our agreement to acquire J.D. Edwards, and (iii) the implementation of the 2003 Directors Stock Plan, which was approved by the PeopleSoft stockholders at the 2003 Annual Meeting of Stockholders. Plaintiffs seek injunctive, rescissory and declaratory relief. On June 16, 2003, the Initial Alameda Shareholder Actions were consolidated. On June 11 and 17, 2003, respectively, two additional actions were filed by Moshe Panzer (Case No. VG03100876) and Arace Brothers (Case No. VG03101830) asserting similar claims. By Order dated July 11, 2003, the Panzer and Arace Brothers actions were consolidated with the Initial Alameda Shareholder Actions (collectively “the Alameda Shareholder Actions”).

     By Order dated June 18, 2003, the Alameda County Superior Court granted our Motion to Stay the Initial Alameda Shareholder Actions pending resolution of the claims involving the duties of the defendant directors by the Delaware Court of Chancery. The California Court found that the stockholder actions required application of Delaware law, and that allowing the consolidated cases to proceed would create the specter of inconsistent orders. By Order dated July 11, 2003, the Alameda County Superior Court also stayed the Panzer and Arace Brothers cases pursuant to the June 18, 2003 Order in the Initial Alameda Shareholder Actions. Accordingly, all of the Alameda Shareholder Actions currently are stayed by order of the California Court.

     We believe that the claims and allegations asserted in each of the foregoing putative class action lawsuits are without merit, and intend to vigorously defend against these lawsuits if they are not dismissed by virtue of the settlement of the Delaware putative stockholder class action discussed above, or if that settlement is not approved by the Delaware Court of Chancery.

PeopleSoft v. Oracle — California Superior Court for the County of Alameda

     On June 13, 2003, we filed an action in the California Superior Court for the County of Alameda against Oracle and its subsidiary Pepper Acquisition Corp. and unnamed defendants affiliated with the two named defendants (Case No. RG03101434).

     On December 12, 2003, we filed a second amended complaint, incorporating claims formerly pursued by J.D. Edwards, which is now our subsidiary. In this lawsuit, we allege that in connection with Oracle’s tender offer, the defendants have engaged in: (i) untrue and misleading advertising in violation of California’s Business & Professions Code; (ii) unlawful disparagement of the Company’s products and services; (iii) unlawful interference with the Company’s relationships with its customers and prospective customers; and (iv) unfair trade practices in violation of California’s Business & Professions Code. Our second amended complaint, portions of which have been filed with the California Court under seal, alleges new facts about what we believe are Oracle’s ongoing acts of unfair trade

51


 

practices and attempts to eliminate PeopleSoft as a competitor, and Oracle’s deliberate campaign to mislead our customers about Oracle’s plans to terminate our products and force customers to migrate to Oracle systems. We seek injunctive relief precluding Oracle from engaging in unfair trade practices and other unlawful actions, and from proceeding with the tender offer. We also seek restitution and damages, including damage caused to J.D. Edwards. On January 20, 2004, Oracle demurred to the second amended complaint, which the court overruled on February 25, 2004.

     On March 30, 2004, Oracle filed a cross-complaint against PeopleSoft and members of its board, alleging, among other things, that they acted illegally in refusing to accept Oracle’s tender offer and in implementing the customer assurance program. The cross-complaint alleges causes of action for interference with prospective economic advantage and violations of various sections of California’s Civil Code and Business & Professions Code. Oracle seeks damages, restitution, punitive damages, and injunctive and equitable relief. PeopleSoft and the board members filed an answer to the cross-complaint on April 29, 2004, denying the allegations of the cross-complaint and asserting several affirmative defenses. We believe that the claims and allegations asserted in the cross-complaint are without merit, and intend to vigorously defend against them.

     On May 5, 2004, the court issued an order setting a jury trial in the action to commence on November 1, 2004.

Other Matters

     We are party to various legal disputes and proceedings arising during the ordinary course of business. In the opinion of management, resolution of these matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows. Notwithstanding our belief, an unfavorable resolution of some or all of these matters could materially affect our future results of operations or cash flows.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

ISSUER PURCHASES OF EQUITY SECURITIES

                                 
                            (d) Maximum
                            Number (or
                            Approximate
                    (c) Total Number   Dollar Value) of
                    of Shares (or   Shares (or Units)
                    Units) Purchased   that May Yet Be
    (a) Total Number   (b) Average Price   as Part of Publicly   Purchased Under
    of Shares (or   Paid per Share (or   Announced Plans   the Plans or
Period
  Units) Purchased
  Unit)
  or Programs
  Programs
Month #1 April 1-30, 2004
  4,946 shares1   $16.88 per share         $200 million2
Month #2 May 1-31, 2004
  1,622 shares1   $17.66 per share         $200 million2
Month #3 June 1-30, 2004
  1,659 shares3   $18.39 per share         $200 million2
Total
  8,227 shares               $200 million2


1 Represents shares delivered to the Company from restricted stock held by the Company employees upon vesting for the purpose of covering the recipients’ tax withholding obligations.
 
2 Represents the maximum aggregate dollar amount of shares authorized for repurchase by the Company as announced on January 12, 2004. The program does not contain an expiration date.
 
3 Represents shares delivered to the Company to pay the purchase price of stock received upon exercise of options under the Company’s stock option plans.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

52


 

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits

     
2.1
  Amended and Restated Agreement and Plan of Merger and Reorganization, dated as of June 16, 2003, by and among PeopleSoft, Inc., J.D .Edwards & Company and Jersey Acquisition Corporation (incorporated by reference to Exhibit 2.1 filed with PeopleSoft, Inc.’s Registration Statement on Form S-4 (No. 333-106269) filed with the Securities and Exchange Commission on June 19, 2003).
 
   
10.1
  Assignment and Assumption Agreement and Acknowledgement and Consent dated as of September 30, 2003, by and among J.D. Edwards & Company LLC (“JDE LLC”), PeopleSoft, Inc. (“PeopleSoft”) and Selco Service Corporation (“Selco”) (incorporated by reference to Exhibit 10.1 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.2
  Assignment and Assumption of Security Documents and Amendment to Memorandum of Lease (including Lease Supplement No. 1) (Phase I) dated as of September 30, 2003, by and among JDE LLC, PeopleSoft and Selco (incorporated by reference to Exhibit 10.2 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.3
  Assignment and Assumption of Security Documents, Amendment to Memorandum of Lease and Amendment to Memorandum of Ground Lease(Phases II/III) dated as of September 30, 2003, by and among JDE LLC, PeopleSoft and Selco (incorporated by reference to Exhibit 10.3 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14,2003).
 
   
10.4
  Assignment and Assumption of Security Documents, Amendment to Memorandum of Lease (including Lease Supplement No.1) and Amendment to Memorandum of Ground Lease (Phase IV) dated as of September 30, 2003, by and among JDE LLC, PeopleSoft and Selco (incorporated by reference to Exhibit 10.4 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.5
  Second Amendment to Definitions Appendix (Phase I) dated as of September 30, 2003, by and among Selco, PeopleSoft and KeyBank National Association (“KeyBank”) (incorporated by reference to Exhibit 10.5 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.6
  Second Amendment to Definitions Appendix (Phase II/III) dated as of September 30, 2003, by and among Selco, PeopleSoft and KeyBank (incorporated by reference to Exhibit 10.6 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.7
  Second Amendment to Definitions Appendix (Phase IV) dated as of September 30, 2003, by and among Selco, PeopleSoft and KeyBank (incorporated by reference to Exhibit 10.7 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.8
  Addendum to Employment Contract between Guy Dubois and PeopleSoft, Inc. dated January 1, 2004.
 
   
10.9
  Memorandum of understanding regarding settlement of stockholder class actions (incorporated by reference to Exhibit (e)(13) to PeopleSoft’s Amendment No. 26 to Schedule 14D-9 filed on May 27, 2004).
 
   
10.10
  Amendment to memorandum of understanding regarding settlement of stockholder class actions (incorporated by reference to Exhibit (e)(14) to PeopleSoft’s Amendment No. 27 to Schedule 14D-9 filed on June 14, 2004).
 
   
10.11
  Second amendment to memorandum of understanding regarding settlement of stockholder class actions (incorporated by reference to Exhibit (e)(17) to PeopleSoft’s Amendment No. 28 to Schedule 14D-9 filed on June 16, 2004).
 
   
10.12
  Amended Executive Severance Policy—Executive Vice Presidents, amended as of June 14, 2004 (incorporated by reference to Exhibit (e)(18) to PeopleSoft’s Amendment No. 29 to Schedule 14D-9 filed on June 18, 2004).
 
   
10.13
  Amended Executive Severance Policy—Senior Vice Presidents, amended as of June 14, 2004 (incorporated by reference to Exhibit (e)(19) to PeopleSoft’s Amendment No. 29 to Schedule 14D-9 filed on June 18, 2004).

53


 

     
10.14
  Stipulation and Agreement of Compromise, Settlement and Release dated June 17, 2004 (incorporated by reference to Exhibit (e)(21) to PeopleSoft’s Amendment No. 29 to Schedule 14D-9 filed on June 18, 2004).
 
   
31.1
  Certification by the Chief Executive Officer Pursuant to Rule13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification by the Chief Financial Officer Pursuant to Rule13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification by the Chief Executive Officer and the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

  1.   The Company furnished a Current Report on Form 8-K on April 22, 2004 reporting under Item 12 the issuance of a press release and an earnings conference call announcing its earnings results for the first quarter of 2004.
 
  2.   The Company filed a Current Report on Form 8-K on June 24, 2004 reporting under Item 11 the notice of a trading blackout issued to PeopleSoft directors and executives related to a corresponding pension plan blackout in connection with the Oracle tender offer.

54


 

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 6, 2004
         
  PEOPLESOFT, INC.
 
 
  By:   /s/ KEVIN T. PARKER    
  Kevin T. Parker   
  Executive Vice President,
Finance and Administration, Chief Financial Officer 
 

55


 

INDEX TO EXHIBITS

     
Exhibit Number
  Description
2.1
  Amended and Restated Agreement and Plan of Merger and Reorganization, dated as of June 16, 2003, by and among PeopleSoft, Inc., J.D .Edwards & Company and Jersey Acquisition Corporation (incorporated by reference to Exhibit 2.1 filed with PeopleSoft, Inc.’s Registration Statement on Form S-4 (No. 333-106269) filed with the Securities and Exchange Commission on June 19, 2003).
 
   
10.1
  Assignment and Assumption Agreement and Acknowledgement and Consent dated as of September 30, 2003, by and among J.D. Edwards & Company LLC (“JDE LLC”), PeopleSoft, Inc. (“PeopleSoft”) and Selco Service Corporation (“Selco”) (incorporated by reference to Exhibit 10.1 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.2
  Assignment and Assumption of Security Documents and Amendment to Memorandum of Lease (including Lease Supplement No. 1) (Phase I) dated as of September 30, 2003, by and among JDE LLC, PeopleSoft and Selco (incorporated by reference to Exhibit 10.2 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.3
  Assignment and Assumption of Security Documents, Amendment to Memorandum of Lease and Amendment to Memorandum of Ground Lease(Phases II/III) dated as of September 30, 2003, by and among JDE LLC, PeopleSoft and Selco (incorporated by reference to Exhibit 10.3 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14,2003).
 
   
10.4
  Assignment and Assumption of Security Documents, Amendment to Memorandum of Lease (including Lease Supplement No.1) and Amendment to Memorandum of Ground Lease (Phase IV) dated as of September 30, 2003, by and among JDE LLC, PeopleSoft and Selco (incorporated by reference to Exhibit 10.4 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.5
  Second Amendment to Definitions Appendix (Phase I) dated as of September 30, 2003, by and among Selco, PeopleSoft and KeyBank National Association (“KeyBank”) (incorporated by reference to Exhibit 10.5 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.6
  Second Amendment to Definitions Appendix (Phase II/III) dated as of September 30, 2003, by and among Selco, PeopleSoft and KeyBank (incorporated by reference to Exhibit 10.6 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.7
  Second Amendment to Definitions Appendix (Phase IV) dated as of September 30, 2003, by and among Selco, PeopleSoft and KeyBank (incorporated by reference to Exhibit 10.7 to PeopleSoft’s Quarterly Report on Form 10-Q filed on November 14, 2003).
 
   
10.8
  Addendum to Employment Contract between Guy Dubois and PeopleSoft, Inc. dated January 1, 2004.
 
   
10.9
  Memorandum of understanding regarding settlement of stockholder class actions (incorporated by reference to Exhibit (e)(13) to PeopleSoft’s Amendment No. 26 to Schedule 14D-9 filed on May 27, 2004).
 
   
10.10
  Amendment to memorandum of understanding regarding settlement of stockholder class actions (incorporated by reference to Exhibit (e)(14) to PeopleSoft’s Amendment No. 27 to Schedule 14D-9 filed on June 14, 2004).
 
   
10.11
  Second amendment to memorandum of understanding regarding settlement of stockholder class actions (incorporated by reference to Exhibit (e)(17) to PeopleSoft’s Amendment No. 28 to Schedule 14D-9 filed on June 16, 2004).
 
   
10.12
  Amended Executive Severance Policy—Executive Vice Presidents, amended as of June 14, 2004 (incorporated by reference to Exhibit (e)(18) to PeopleSoft’s Amendment No. 29 to Schedule 14D-9 filed on June 18, 2004).
 
   
10.13
  Amended Executive Severance Policy—Senior Vice Presidents, amended as of June 14, 2004 (incorporated by reference to Exhibit (e)(19) to PeopleSoft’s Amendment No. 29 to Schedule 14D-9 filed on June 18, 2004).
 
   
10.14
  Stipulation and Agreement of Compromise, Settlement and Release dated June 17, 2004 (incorporated by reference to Exhibit (e)(21) to PeopleSoft’s Amendment No. 29 to Schedule 14D-9 filed on June 18, 2004).
 
   
31.1
  Certification by the Chief Executive Officer Pursuant to Rule13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification by the Chief Financial Officer Pursuant to Rule13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification by the Chief Executive Officer and the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

56