##### 



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 1934For the Quarterly Period Ended March 31, 2004OR[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes [X] No
[   ] On May 4, 2004, the Registrant had 364,876,037 shares of common stock
outstanding. 1




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TABLE OF CONTENTS PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
(Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and March 31, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and March 31, 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4.
    
    Controls and Procedures
    
    
    46PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    46Item 2.
    
    Changes in
Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    48Item 3.
    
    Defaults Upon Senior Securities
    
    
    48Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    48Item 5.
    
    Other Information
    
    
    49Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    49SIGNATURES
 2




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PART I  FINANCIAL INFORMATION 
 ITEM 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PEOPLESOFT, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 
 March 31, 2004
    
    December 31, 2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    493,539
    
    
    $
    439,385Short-term investments and restricted cash
    
    
    1,043,555
    
    
    
    961,906Accounts receivable, net
    
    
    376,787
    
    
    
    462,528Income tax refund receivable
    
    
    19,125
    
    
    
    18,749Deferred tax assets
    
    
    51,043
    
    
    
    58,630Prepaid expenses and other current assets
    
    
    68,267
    
    
    
    69,997Total current assets
    
    
    2,052,316
    
    
    
    2,011,195Property and equipment, net
    
    
    435,147
    
    
    
    448,211Long term investments
    
    
    44,945
    
    
    
    29,219Deferred tax assets
    
    
    51,279
    
    
    
    42,049Capitalized software, net
    
    
    219,132
    
    
    
    234,217Goodwill
    
    
    1,005,970
    
    
    
    1,005,660Other intangible assets
    
    
    429,141
    
    
    
    444,991Other assets
    
    
    8,872
    
    
    
    9,186Total assets
    
    $
    4,246,802
    
    
    $
    4,224,728LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    52,773
    
    
    $
    51,190Accrued liabilities
    
    
    146,755
    
    
    
    161,548Restructuring reserves
    
    
    56,818
    
    
    
    75,062Accrued compensation and related expenses
    
    
    154,740
    
    
    
    224,983Income taxes payable
    
    
    78,290
    
    
    
    106,355Short-term deferred revenues
    
    
    649,861
    
    
    
    588,590Total current liabilities
    
    
    1,139,237
    
    
    
    1,207,728Long-term deferred revenues
    
    
    115,435
    
    
    
    119,896Other liabilities
    
    
    38,253
    
    
    
    37,655Total liabilities
    
    
    1,292,925
    
    
    
    1,365,279Commitments and contingencies (see Note 11)Stockholders Equity:Common stock
    
    
    3,922
    
    
    
    3,776Additional paid-in capital
    
    
    2,581,801
    
    
    
    2,508,995Retained earnings
    
    
    709,052
    
    
    
    684,847Treasury stock
    
    
    (387,571
    )
    
    
    (387,046
    )Accumulated other comprehensive income
    
    
    46,673
    
    
    
    48,877Total stockholders equity
    
    
    2,953,877
    
    
    
    2,859,449Total liabilities and stockholders equity
    
    $
    4,246,802
    
    
    $
    4,224,728
 See accompanying notes to unaudited condensed consolidated financial statements. 3




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##### 



PEOPLESOFT, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 Three Months Ended March 31,2004
    
    2003Revenues:License fees
    
    $
    130,886
    
    
    $
    80,841Maintenance revenue
    
    
    296,850
    
    
    
    199,921Professional services revenue
    
    
    215,383
    
    
    
    179,494Service revenue
    
    
    512,233
    
    
    
    379,415Total revenues
    
    
    643,119
    
    
    
    460,256Costs and expenses:Cost of license fees
    
    
    23,374
    
    
    
    8,726Cost of services
    
    
    222,966
    
    
    
    163,469Sales and marketing expense
    
    
    169,171
    
    
    
    119,558Product development expense
    
    
    127,374
    
    
    
    83,705General and administrative expense
    
    
    59,075
    
    
    
    33,015Restructuring, acquisition and other charges
    
    
    8,229
    
    
    
    Total costs and expenses
    
    
    610,189
    
    
    
    408,473Operating income
    
    
    32,930
    
    
    
    51,783Other income, net
    
    
    5,100
    
    
    
    6,966Income before provision for income taxes
    
    
    38,030
    
    
    
    58,749Provision for income taxes
    
    
    13,825
    
    
    
    20,270Net income
    
    $
    24,205
    
    
    $
    38,479Basic income per share
    
    $
    0.07
    
    
    $
    0.12Shares used in basic income per share computation
    
    
    361,866
    
    
    
    314,782Diluted income per share
    
    $
    0.07
    
    
    $
    0.12Shares used in diluted income per share computation
    
    
    370,776
    
    
    
    319,831
 See accompanying notes to unaudited condensed consolidated financial statements. 4




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PEOPLESOFT, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 )
 Three Months Ended March 31,2004
    
    2003Operating activities:Net income
    
    $
    24,205
    
    
    $
    38,479Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    55,813
    
    
    
    26,884Provision for doubtful accounts
    
    
    2,605
    
    
    
    3,780Tax benefits from employee stock transactions
    
    
    7,955
    
    
    
    1,956(Benefit) provision for deferred income taxes
    
    
    (1,949
    )
    
    
    6,562Gain on sales of investments and disposition of property and
equipment, net
    
    
    (100
    )
    
    
    (649
    )Non-cash stock compensation
    
    
    3,396
    
    
    
    2,304Non-cash restructuring, acquisition and other charges
    
    
    3,964
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    87,607
    
    
    
    41,742Accounts payable and accrued liabilities
    
    
    (32,667
    )
    
    
    (11,509
    )Accrued compensation and related expenses
    
    
    (71,014
    )
    
    
    (39,701
    )Income taxes, net
    
    
    (28,093
    )
    
    
    (16,698
    )Deferred revenues
    
    
    59,217
    
    
    
    21,015Other
    
    
    4,593
    
    
    
    584Net cash provided by operating activities
    
    
    115,532
    
    
    
    74,749Investing activities:Purchase of available-for-sale investments
    
    
    (1,627,417
    )
    
    
    (3,226,843
    )Proceeds from sales and maturities of investments
    
    
    1,529,144
    
    
    
    3,123,799Purchase of property and equipment
    
    
    (15,195
    )
    
    
    (86,695
    )Net cash used in investing activities
    
    
    (113,468
    )
    
    
    (189,739
    )Financing activities:Net proceeds from employee stock transactions
    
    
    60,901
    
    
    
    30,068Net cash provided by financing activities
    
    
    60,901
    
    
    
    30,068Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    (8,811
    )
    
    
    4,609Net increase (decrease) in cash and cash equivalents
    
    
    54,154
    
    
    
    (80,313
    )Cash and cash equivalents at beginning of period
    
    
    439,385
    
    
    
    319,344Cash and cash equivalents at end of period
    
    $
    493,539
    
    
    $
    239,031Supplemental disclosures:Cash paid for interest
    
    $
    205
    
    
    $
    58Cash paid for income taxes
    
    $
    34,414
    
    
    $
    28,675
 See accompanying notes to unaudited condensed consolidated financial statements. 5




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##### 



PEOPLESOFT, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying financial statements for the three months ended March 31,
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 the Companys 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 Statement 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, 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 March 31,2004
    
    2003Numerator:Net income
    
    $
    24,205
    
    
    $
    38,479Denominator:Denominator for basic income per
share - Weighted average shares
outstanding
    
    
    361,866
    
    
    
    314,782Employee stock options and other
    
    
    8,910
    
    
    
    5,049Denominator for diluted income per
share - Weighted average shares
outstanding, assuming exercise of
potential dilutive common shares
    
    
    370,776
    
    
    
    319,831Basic income per share
    
    $
    0.07
    
    
    $
    0.12Diluted income per share
    
    $
    0.07
    
    
    $
    0.12
 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): Three Months Ended March 31,2004
    
    2003Employee stock options
    
    
    35.7
    
    
    
    44.5Unvested restricted stock
    
    
    0.7
    
    
    
    0.8Total shares excluded
    
    
    36.4
    
    
    
    45.3
 6




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The weighted average exercise prices of the employee stock options that
are antidilutive for the three months ended March 31, 2004 and 2003 were $30.30
and $27.89 per share. 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 quarter ended
March 31, 2004, no common stock was repurchased under this program. 3. Stock-Based Compensation 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 months ended March 31, 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 March 31,2004
    
    2003Net income, as reported
    
    $
    24,205
    
    
    $
    38,479Add: Stock-based employee
compensation expense included
in reported net income, net
of tax
    
    
    3,097
    
    
    
    2,080Deduct: Stock-based employee
compensation expense
determined under the fair
value method, net of tax
    
    
    (32,751
    )
    
    
    (43,706
    )Pro forma net loss
    
    $
    (5,449
    )
    
    $
    (3,147
    )Basic income (loss) per shareAs reported
    
    $
    0.07
    
    
    $
    0.12Pro forma
    
    $
    (0.02
    )
    
    $
    (0.01
    )Diluted income (loss) per shareAs reported
    
    $
    0.07
    
    
    $
    0.12Pro forma
    
    $
    (0.02
    )
    
    $
    (0.01
    )
 The fair value of the Companys stock-based awards to employees was
estimated as of the date of the grant using a Black-Scholes option pricing
model. Limitations on the effectiveness of the Black-Scholes option valuation
model are that it was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable and that
the model requires the use of highly subjective assumptions including expected
stock price volatility. The fair value of the Companys stock-based awards to
employees was estimated assuming no expected dividends and the following
weighted-average assumptions: ESPP
    
    OptionsThree Months Ended March 31,2004
    
    2003
    
    2004
    
    2003Expected life (in years)
    
    
    0.50
    
    
    
    0.50
    
    
    
    3.18
    
    
    
    3.18Expected volatility
    
    
    0.32
    
    
    
    0.58
    
    
    
    0.77
    
    
    
    0.91Risk free interest rate
    
    
    1.02
    %
    
    
    1.22
    %
    
    
    2.17
    %
    
    
    2.12
    %
 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, were as follows (in thousands): 7




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Three Months EndedMarch 31,2004
    
    2003Net income
    
    $
    24,205
    
    
    $
    38,479Other comprehensive income:Net unrealized gain (loss) on investments
    
    
    455
    
    
    
    (579
    )Foreign currency translation adjustments
    
    
    (2,659
    )
    
    
    5,798Interest rate swap transactions:Net unrealized loss on cash flow hedges
    
    
    
    
    
    
    (58
    )Reclassification adjustment for
earnings recognized during the period
    
    
    
    
    
    
    1,235Comprehensive income
    
    $
    22,001
    
    
    $
    44,875
 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. During the three months ended March 31, 2004 and 2003, the Company
recorded net foreign currency transaction losses of $2.0 million and $0.2
million, respectively. At March 31, 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 March 31, 2004. At March 31, 2004, the Company had the following outstanding forward
foreign exchange contracts to exchange foreign currency for U.S. dollars (in
millions): NotionalForeign Currency
    
    AmountBritish pounds
    
    $
    11.9Hong Kong dollars
    
    
    10.3Singapore dollars
    
    
    7.2New Zealand dollars
    
    
    3.3Taiwanese dollars
    
    
    1.3Swedish krona
    
    
    0.8$
    34.8
 At March 31, 2004, the Company had the following outstanding forward
foreign exchange contracts to exchange U.S. dollars for foreign currency (in
millions): NotionalForeign Currency
    
    AmountEuros
    
    $
    33.5Mexican pesos
    
    
    13.4Canadian dollars
    
    
    22.4Japanese yen
    
    
    4.5Australian dollars
    
    
    3.2Danish krone
    
    
    0.6Swedish krona
    
    
    0.5$
    78.1
 8




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At March 31, 2003, the Company had the following outstanding forward
foreign exchange contracts to exchange foreign currency for U.S. dollars (in
millions): NotionalForeign Currency
    
    AmountEuros
    
    $
    12.7Singapore dollars
    
    
    8.4Canadian dollars
    
    
    2.3Chilean pesos
    
    
    0.7Australian dollars
    
    
    0.6Tiawanese dollars
    
    
    0.4$
    25.1
 At March 31, 2003, the Company had the following outstanding forward
foreign exchange contracts to exchange U.S. dollars for foreign currency (in
millions): NotionalForeign Currency
    
    AmountBritish pounds
    
    $
    1.4Japanese yen
    
    
    0.8Swiss francs
    
    
    0.7Swedish krona
    
    
    0.4South African rand
    
    
    0.4$
    3.7
 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 $175.0 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 located in Pleasanton, California for $70.0 million, and
concurrently, swaps with an aggregate notional principal amount of $70.0
million matured. In the second quarter of 2003, the Company exercised its
option under a synthetic lease agreement to purchase certain of its
headquarters facilities located in Pleasanton, California for $105.0 million.
As a result of this transaction, the Company terminated its remaining interest
rate swap agreements with an aggregate notional principal amount of $105.0
million. 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, industry or geographic region within or
outside of the United States. 6. Restructuring Reserves 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 March 31,
2004, the Company has recorded approximately $27.6 million of restructuring
charges including costs for employee severance, acquisition-related 9




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##### 



employee
retention, vacating 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 under 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 these restructuring reserves for employee costs are
expected to be made through October 2004. Future cash payments related to these
restructuring reserves for payments related to facilities obligations, contract
terminations and other items are expected to be made through March 2012. The
remaining $7.6 million restructuring liability at March 31, 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
reserves accounted for under SFAS 146 or SFAS 112 for the three months ended
March 31, 2004, for reserves established during 2003, as a result of the
acquisition of J.D. Edwards which pertain to the pre-acquisition operations of
PeopleSoft. These reserves are included in Restructuring reserves in the
accompanying consolidated balance sheets (in thousands). Employee
    
    FacilitiesCosts
    
    Costs
    
    TotalBalance as of December 31, 2003
    
    $
    9,833
    
    
    $
    1,840
    
    
    $
    11,673Restructuring costs relating to the J.D.
Edwards plan
    
    
    2,351
    
    
    
    5,878
    
    
    
    8,229Cash payments
    
    
    (7,767
    )
    
    
    (445
    )
    
    
    (8,212
    )Non-cash items
    
    
    (101
    )
    
    
    (3,957
    )
    
    
    (4,058
    )Balance as of March 31, 2004
    
    $
    4,316
    
    
    $
    3,316
    
    
    $
    7,632
 Additionally,
from the date of the J.D. Edwards acquisition through March
31, 2004, the Company recorded approximately $95.8 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
vacating duplicate facilities, contract termination costs and other costs.
These costs have been accounted for under 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 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 reserves for employee costs are expected to be made
through January 2005. Future cash payments related to facilities obligations
are expected to be made through January 2008. The remaining $43.7 million
restructuring liability at March 31, 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
reserves accounted for under EITF 95-3, for the three months ended March 31,
2004, for reserves 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 reserves are included in Restructuring reserves in the accompanying
consolidated balance sheets (in thousands). ContractEmployee
    
    Facilities
    
    Termination andCosts
    
    Costs
    
    Other Costs
    
    TotalBalance as of December 31, 2003
    
    $
    16,690
    
    
    $
    30,564
    
    
    $
    9,736
    
    
    $
    56,990Restructuring costs relating to the
J.D. Edwards plan
    
    
    583
    
    
    
    
    
    
    
    (225
    )
    
    
    358Cash payments
    
    
    (11,106
    )
    
    
    (2,096
    )
    
    
    
    
    
    
    (13,202
    )Non-cash items
    
    
    (268
    )
    
    
    (146
    )
    
    
    
    
    
    
    (414
    )Balance as of March 31, 2004
    
    $
    5,899
    
    
    $
    28,322
    
    
    $
    9,511
    
    
    $
    43,732
 Second Quarter 2003 Restructuring Plan 10




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##### 



During the second quarter of 2003, the Company recorded pretax
restructuring charges of $13.2 million. These restructuring charges consisted
of employee severance charges, the fair value of lease obligations associated with the
closure of an office facility and leasehold improvement impairment charges.
Approximately 149 employees were terminated under this restructuring plan.
These costs are accounted for under SFAS 146 or SFAS 112 and have been included
as a charge to the results of operations in Restructuring, acquisition and
other charges. Terminated individuals receiving payments under this
restructuring plan primarily consisted of general and administrative,
consulting, and sales and marketing employees. Future cash payments related to
these restructuring reserves are expected to be made through October 2005. The
remaining $5.1 million second quarter 2003 restructuring plan liability at
March 31, 2004 is a cash obligation. The following table sets forth the activity in the Companys restructuring
reserves accounted for under SFAS 146 or SFAS 112 for the three months ended
March 31, 2004 for reserves established under the second quarter 2003
Restructuring Plan. These reserves are included in Restructuring reserves in
the accompanying consolidated balance sheets (in thousands). Employee
    
    FacilitiesCosts
    
    Costs
    
    TotalBalance as of December 31, 2003
    
    $
    38
    
    
    $
    5,843
    
    
    $
    5,881Cash payments
    
    
    
    
    
    
    (818
    )
    
    
    (818
    )Non-cash items
    
    
    
    
    
    
    63
    
    
    
    63Balance as of March 31, 2004
    
    $
    38
    
    
    $
    5,088
    
    
    $
    5,126
 The following table sets forth the activity in the Companys restructuring
reserves established prior to 2003 and accounted for under 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 three months ended March 31, 2004. These reserves
are included in Restructuring reserves in the accompanying consolidated
balance sheets (in thousands). FacilitiesCostsBalance as of December 31, 2003
    
    $
    518Cash payments
    
    
    (190
    )Balance as of March 31, 2004
    
    $
    328
 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
three months ended March 31, 2004 (in thousands): TotalBalance as of December 31, 2003
    
    $
    18,828Expense related to new claims
    
    
    3,289Reduction in expense related to changes in estimates
    
    
    (3,188
    )Closed warranty claims, net of recoveries
    
    
    470Balance as of March 31, 2004
    
    $
    19,399
 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. 11




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##### 



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 and 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 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), $95.8 million in
restructuring costs (Note 6, Restructuring Reserves) and $27.3 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 $951 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 (unaudited) 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 ended March 31,
2003 combines the historical results for PeopleSoft for the three months ended
March 31, 2003 and the historical results for J.D. Edwards for the three months
ended January 31, 2003. The following amounts are in thousands, except per
share amounts. Three MonthsEnded March31, 2003Revenues
    
    $
    629,187Net loss
    
    $
    (8,306
    )Basic and diluted loss per share
    
    $
    (0.02
    )
 12




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##### 



9. Goodwill and Other Intangible Assets On January 1, 2002, the Company 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.
The following table sets forth the carrying amount of goodwill (in thousands): NorthAmerica
    
    International
    
    TotalBalance as of December 31, 2003
    
    $
    1,003,668
    
    
    $
    1,992
    
    
    $
    1,005,660J.D. Edwards restructuring
reserve adjustments (Note
6, Restructuring Reserves).
    
    
    358
    
    
    
    
    
    
    
    358Foreign currency translation
    
    
    
    
    
    
    (48
    )
    
    
    (48
    )Balance as of March 31, 2004
    
    $
    1,004,026
    
    
    $
    1,944
    
    
    $
    1,005,970
 Goodwill acquired during the three months ended March 31, 2004 primarily
relates to additional restructuring costs incurred under the Third Quarter 2003
Restructuring Plan accounted for under EITF 95-3. Refer to Note 6,
Restructuring Reserves for further information. At March 31, 2004, identifiable intangible assets consisted of the
following (in thousands): Gross
    
    Accumulated
    
    Net CarryingIdentifiable Intangible Assets
    
    Value
    
    Amortization
    
    AmountCapitalized software
    
    $
    310,881
    
    
    $
    91,749
    
    
    $
    219,132Patented technology
    
    
    61,190
    
    
    
    8,992
    
    
    
    52,198Customer contracts and related relationships
    
    
    106,600
    
    
    
    11,104
    
    
    
    95,496Maintenance agreements and related relationships
    
    
    306,231
    
    
    
    24,784
    
    
    
    281,447Non-compete
agreements
    
    
    1,500
    
    
    
    1,500
    
    
    
    Balance as of March 31, 2004
    
    $
    786,402
    
    
    $
    138,129
    
    
    $
    648,273
 At December 31, 2003, identifiable intangible assets consisted of the
following (in thousands): Gross
    
    Accumulated
    
    Net CarryingIdentifiable Intangible Assets
    
    Value
    
    Amortization
    
    AmountCapitalized software
    
    $
    310,881
    
    
    $
    76,664
    
    
    $
    234,217Patented technology
    
    
    61,190
    
    
    
    5,927
    
    
    
    55,263Customer contracts and related relationships
    
    
    106,600
    
    
    
    7,249
    
    
    
    99,351Maintenance agreements and related relationships
    
    
    306,231
    
    
    
    15,917
    
    
    
    290,314Non-compete
agreements
    
    
    1,500
    
    
    
    1,437
    
    
    
    63Balance 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): Estimated Amortization ExpenseFor the year ended 12/31/04 (remaining nine months)
    
    $
    90,290For the year ended 12/31/05
    
    
    115,417For the year ended 12/31/06
    
    
    113,689For the year ended 12/31/07
    
    
    109,152For the year ended 12/31/08
    
    
    87,590Thereafter
    
    
    132,135$
    648,273
 13




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##### 



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 tender offer formally commenced June
9, 2003, and on June 18, 2003 Oracle amended the offer to increase the purchase
price from $16.00 to $19.50 per share. On February 4, 2004, Oracle increased
its offer price to $26 per share, or approximately $9.5 billion in the
aggregate. In response to Oracles public statements about its intent to discontinue
PeopleSofts products, and to minimize a potential loss of business during the
Oracle tender offer, PeopleSoft implemented a customer assurance program. This
program, which has currently been extended until the earlier of the date that
Oracle terminates its tender offer or June 30, 2004, incorporates a contingent
change in control provision to its standard perpetual licensing arrangement.
That provision 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, and the multiple increases 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 four versions of
the language used in 2003 and 2004. A payment will be generally due under the
customer assurance program if each of the following events occur:  
    
    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. 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. 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 potential maximum payments, as of March 31, 2004, under the
contracts containing language from each such version. As of March 31, 2004, the
aggregate maximum potential amount of future liability under the customer
assurance program was approximately $1.96 billion. Amount ofMaximumVersion
    
    Dates Offered to Customers*
    
    Potential LiabilityVersion One
    
    6/03/2003 to 9/12/2003
    
    $
    670.3 millionVersion Two
    
    9/12/2003 to 9/30/2003
    
    $
    170.1 millionVersion Three
    
    9/30/2003 to 11/7/2003
    
    $
    39.8 millionVersion Four
    
    11/18/2003 to present
    
    $
    1,083.9 millionTotal Amount of Maximum Potential Liability:
    
    $
    1.96 billion
 14




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##### 



*
    
    Some contracts originally submitted to customers prior to these end dates
were executed following such dates. 11. Commitments and Contingencies Synthetic Leases The Company assumed leases on four office buildings in Denver, Colorado
(the Denver Campus) as a result of the acquisition of J.D. Edwards. The
Denver Campus was constructed on land originally owned by J.D. Edwards and is
leased under operating leases, which commenced in 1997 and 1998. The Company
has three six-year master lease agreements with a lessor, a wholly owned
subsidiary of a bank, which together with a syndication of other banks has
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 also has an option to refinance or
purchase the leased properties at its sole discretion during the terms of the
leases for approximately $121.2 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 $121.2 million. The Company has evaluated the fair value of
the Denver Campus and determined that at March 31, 2004 it is not probable that
the value of the property at the end of the lease term 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.
On April 2, 2004, one of the three master lease agreements terminated and the
Company exercised its option to purchase two buildings for a net purchase price
of $58.6 million. The Company is currently considering cash purchases of the
remaining office buildings totaling $62.6 million as the leases come due. The leases for the
remaining buildings terminate during the third and fourth quarters of 2004. The Company can elect to reduce the interest rate used to calculate its
lease expense by collateralizing the Denver Campus financing arrangements with
investments. At March 31, 2004, investments totaling $123.5 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 March 31,
2004, funds used as collateral in the amount of $88.1 million were available
for withdrawal. At March 31, 2004, the Company was in compliance with the
covenants, representations, and warranties required under the lease agreements.
Subsequent to the purchase of the buildings subject to one of the master leases on April 2, 2004,
restricted cash of approximately $12.3 million designated as collateral for
that lease became unrestricted. 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 March 31, 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), Robert Corwin (Case No.
20352-NC) and Ernest Hack (Case No. 20353-NC), all of whom purport 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 seek 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.
Defendants filed their answer to the consolidated Delaware action on June 25,
2003. 15




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##### 



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 seeks 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 listed above. Document discovery has commenced in the consolidated Delaware actions and
is being coordinated with the discovery in the action filed against PeopleSoft
by Oracle in Delaware and PeopleSofts action filed against Oracle in
California. No trial date has yet been set in the Delaware actions. The Company believes that the claims and allegations asserted in each of
the foregoing putative class action suits are without merit, and
intends to
vigorously defend against these lawsuits. 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, and that J.D. Edwards aided and abetted the named directors purported
breach of fiduciary duty. Oracle seeks injunctive, declaratory and rescissory
relief. Discovery in this action is proceeding and is being coordinated with the
stockholder actions against PeopleSoft in Delaware, discussed above, and
PeopleSofts action against Oracle in California, discussed below. No trial
date has yet been set in this action. The Company believes that the claims and allegations asserted in this
action are without merit, and intend 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. 16




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##### 



The Company believes that the claims and allegations asserted in each of
the foregoing putative class action suits are without merit, and
intends to
vigorously defend against these lawsuits. 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 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, 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. 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 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. The
Company and the board members 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. 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 17




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##### 



administrative expenses as well as restructuring, acquisition and other
charges. 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 months ended March 31, 2004 and 2003 (in
thousands): Operating Segments2004
    
    North America
    
    International
    
    Other
    
    TotalRevenues
    
    $
    447,481
    
    
    $
    195,638
    
    
    $
    
    
    
    $
    643,119Cost of revenues
    
    
    221,377
    
    
    
    107,670
    
    
    
    
    
    
    
    329,047Segment margin
    
    $
    226,104
    
    
    $
    87,968
    
    
    $
    
    
    
    $
    314,072Operating expenses
    
    
    
    
    
    
    
    
    
    $
    281,142
    
    
    $
    281,142Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    32,930
 Operating Segments2003
    
    North America
    
    International
    
    Other
    
    TotalRevenues
    
    $
    350,655
    
    
    $
    109,601
    
    
    $
    
    
    
    $
    460,256Cost of revenues
    
    
    159,479
    
    
    
    68,536
    
    
    
    
    
    
    
    228,015Segment margin
    
    $
    191,176
    
    
    $
    41,065
    
    
    $
    
    
    
    $
    232,241Operating expenses
    
    
    
    
    
    
    
    
    
    $
    180,458
    
    
    $
    180,458Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    51,783
 Revenues from the Europe/Middle-East/Africa region represented 19% and 14%
of revenues, respectively, for the three months ended March 31, 2004 and 2003.
No other international region had revenues equal to or greater than 10% the
three months ended March 31, 2004 and 2003. Revenues originated in each
individual foreign country were less than 5% of total revenues during the three
months ended March 31, 2004 and 2003 with the exception of Canada. Canada had
revenues which comprised 5% of total revenues for the three months ended March
31, 2003. For the three months ended March 31, 2004 and 2003, revenues attributable
to the U.S. were $421.1 million and $324.4 million, respectively. 13. Recently Issued Accounting Standards In December 2003, the FASB issued Interpretation No. 46 (FIN 46R)
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 (ARB 51), which
addresses how a business enterprise should evaluate whether it has a
controlling interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
No. 46 (FIN 46), which was issued in January 2003. Before concluding that it
is appropriate to apply ARB 51 voting interest consolidation model to an
entity, an enterprise must first determine that the entity is not a variable
interest entity (VIE). As of the effective date of FIN 46R, an enterprise
must evaluate its involvement with all entities or legal structures created
before February 1, 2003, to determine whether consolidation requirements of FIN
46R apply to those entities. There is no grandfathering of existing entities.
Public companies must apply either FIN 46 or FIN 46R immediately to entities
created after December 15, 2003 and no later than the end of the first
reporting period that ends after March 15, 2004 for all other entities. The
adoption of FIN 46 had no effect on the Companys consolidated financial
position, results of operations or cash flows. 18




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##### 



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 33. 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 first quarter of 2004 increased relative to the same
period last year, due in part to an improving economic environment and the
addition of new product offerings from the acquisition of J.D. Edwards. While
the global economy appears to be improving modestly, the tentative nature of
the recovery continues to limit sales of licenses to new and existing customers
resulting in longer customer sales cycles. Financial Highlights for the first quarter of 2004  
    
    Our total revenues for the first quarter of 2004 were $643 million, a
40% increase over the first quarter of 2003. License fees increased by
$50.0 million. The growth in license fees is due to
the licensing of EnterpriseOne and World software as a result of the
expansion of our product families and improved customer purchasing
behavior. Additionally, we saw an increase in maintenance fees
of $96.9 million due to an increased installed base and an increase in
our professional services revenue of $35.9 million as we continued to
win new customers for PeopleSofts consulting organization.
    
    Our net income decreased to $24 million for the first quarter of 2004
from $38 million for the first quarter of 2003. The primary reason for
the decrease is the impact of purchase accounting charges resulting from
the acquisition of J.D. Edwards & Company (J.D. Edwards) relating to
the amortization of capitalized software and other intangible assets of
$16.6 million (after tax) and restructuring charges of $5.1 million
(after tax). We also incurred $12.8 million ($8.2 million after tax) of
expenses responding to Oracles tender offer.
    
    Cash provided by operations in the first quarter of 2004 was
approximately $116 million. During the first quarter of 2004, our cash
and investment balances increased by $151.5 million to $1.58 billion. 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 for the
first quater of 2004. We now have over
12,000 customers and approximately 11,800 employees. The combined company:  
    
    is 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.) 19




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##### 




    
    is 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 first quarter of 2004, we continued to focus on the integration of
J.D. Edwards into PeopleSoft. During the first quarter of 2004, we
successfully completed the integration of the worldwide sales force to provide
a consistent approach and methodology to our selling efforts. Additionally,
the professional services organization integration was completed, and as a
result, we are utilizing a consistent global services delivery model. The
integration of our various administrative and financial functions continues to
move ahead on schedule and is expected to be substantially complete in
mid-2004. As of March 31, 2004,
we were ahead of our internal planned cost reduction
schedule targets and we remain confident in our stated objective of achieving
$167 to $207 million in revenue and cost synergies in 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 7, 2004, a motion to amend the DOJs complaint was filed to add as
plaintiffs the states of Connecticut, Michigan and Ohio. A trial date has
been set for June 7, 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 January 23, 2004, Oracle nominated a slate of five directors to be
voted upon at our annual meeting, including one director to fill a seat to be
created by Oracles proposed amendment to our Bylaws to increase the size of
our Board of Directors to nine directors. On February 26, 2004, Oracle
announced that, in light of the Department of Justice lawsuit,
it was
withdrawing its slate of nominees and would not be soliciting proxies for use at
the annual meeting. On February 26, 2004, Oracle also announced extension of
the expiration date of its tender offer to June 25, 2004 and its intention to
defend against the Department of Justice lawsuit. The Oracle tender offer will
continue to be a distraction to management 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 March 31, 2004 we spent over $55
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 first quarter of 2004, we spent $12.8 million in investment banking,
legal and other 20




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##### 



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 growth represented by line items in our
consolidated statements of operations: Quarters Ended March 31,Percentage of Dollar
    
    Percentage of TotalChange Quarter Over Quarter
    
    Revenues2004/2003
    
    2004
    
    2003Revenues:License fees
    
    
    62
    %
    
    
    20
    %
    
    
    18
    %Maintenance revenue
    
    
    48
    
    
    
    46
    
    
    
    43Professional services revenue
    
    
    20
    
    
    
    34
    
    
    
    39Total revenues
    
    
    40
    
    
    
    100
    
    
    
    100Costs and expenses:Cost of license fees
    
    
    168
    
    
    
    4
    
    
    
    2Cost of services
    
    
    36
    
    
    
    35
    
    
    
    36Sales and marketing expense
    
    
    41
    
    
    
    26
    
    
    
    26Product development expense
    
    
    52
    
    
    
    20
    
    
    
    18General and administrative expense
    
    
    79
    
    
    
    9
    
    
    
    7Restructuring, acquisition and other charges
    
    NM
    
    
    1
    
    
    
    Total costs and expenses
    
    
    49
    
    
    
    95
    
    
    
    89Operating income
    
    
    (36
    )
    
    
    5
    
    
    
    11Other income, net
    
    
    (27
    )
    
    
    1
    
    
    
    1Income before provision for income taxes
    
    
    (35
    )
    
    
    6
    
    
    
    12Provision for income taxes
    
    
    (32
    )
    
    
    2
    
    
    
    4Net income
    
    
    (37
    )
    
    
    4
    %
    
    
    8
    %Diluted income per share
    
    
    (42
    )%
   NM  Not meaningful Net income decreased $14.3 million or 37% from $38.5 million in the first
quarter of 2003 to $24.2 million in the first quarter of 2004. Diluted income
per share decreased from $.12 per share in the first quarter of 2003 to $.07
per share in the first quarter of 2004. Revenues License Fee Revenues Quarters Ended March 31,2004
    
    2003($ in thousands)License fees
    
    $
    130,886
    
    
    $
    80,841Percentage
of revenue
    
    
    20
    %
    
    
    18
    %Change from prior year
    
    
    62
    %
 Our software products generally are licensed to end-user customers under
non-exclusive, perpetual license agreements. Revenue from license fees
increased by 62% in the first quarter of 2004 as compared to the first quarter
of 2003 driven by an improving economic climate and the addition of the
EnterpriseOne product family to our product offerings. Partially
offsetting this increase was more seasonality in the EnterpriseOne side of our business than we
anticipated. In the first quarter of 2004 we added 120 new customers compared
to 72 in the same quarter last year. In the first quarter of 2003, we
experienced lower license revenue primarily due to the war in Iraq and the
continued global economic downturn. In the coming quarters, we expect to see
continued growth in our license revenue due to a strengthening of the economy
and due to seasonal increases in license purchases by new and existing
customers. Services Revenues 21




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##### 



Quarters Ended March 31,2004
    
    2003($ in thousands)Maintenance revenue
    
    $
    296,850
    
    
    $
    199,921Percentage of revenue
    
    
    46
    %
    
    
    43
    %Change from prior year
    
    
    48
    %Professional services revenue
    
    $
    215,383
    
    
    $
    179,494Percentage of revenue
    
    
    34
    %
    
    
    39
    %Change from prior year
    
    
    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 first quarter of 2004 compared
to the same period 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 2003, our
installed base of customers has grown considerably. The first quarter 2004
maintenance revenue includes an increase of 588 installed customers over the
first 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 $24.4 million in the first quarter of 2004. As the
former J.D. Edwards customers having deferred maintenance balances as of the
acquisition date renew their contracts during the remainder of 2004, we expect
to realize increased revenues without any additional costs. The increase in professional service revenue in the first quarter of 2004
is primarily due to additional consulting revenue attributed to the addition of the
PeopleSoft EnterpriseOne and PeopleSoft World product families. Changes in
license revenues during a given quarter may 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 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. First quarter 2004 revenues by geographic segment from external
customers were: Quarters Ended March 31,2004
    
    2003($ in thousands)North America
    
    $
    447,481
    
    
    $
    350,655International
    
    
    195,638
    
    
    
    109,601Total revenues
    
    $
    643,119
    
    
    $
    460,256
 Total revenues from the North America segment increased by 28% in the first
quarter of 2004 from the first quarter of 2003. As a percentage of total
segment revenues, revenues from the North America segment were 70% in the first
quarter of 2004 and 76% in the first quarter of 2003. Total revenues from the
International segment increased by 79% in the first quarter of 2004 from the
first quarter of 2003. As a percentage of total segment revenues, revenues from
the International segment were 30% in the first quarter of 2004 and 24% in the
first quarter of 2003. The increase in revenues from the first quarter of 2003
to the first quarter of 2004 resulted primarily from the acquisition of J.D.
Edwards and strength in the PeopleSoft Enterprise product family sales. In the North America segment, revenues attributable to the United States
were $421.1 million in the first quarter of 2004 and $324.4 million in the
first quarter of 2003. Also, in the North America segment, Canada had revenues
which comprised 5% of total revenues in the first quarter of 2003. Revenues in
the International segment attributed to the Europe/Middle-East/Africa region
represented 19% of total revenues in the first quarter of 2004 and 14% of total
revenues in the first quarter of 2003. No other 22




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##### 



international region had revenues equal to or greater than 10% of total
revenues in the first quarter of 2004 or 2003. Revenues originating in each
individual foreign country were less than 5% of total revenues during
the first quarter of 2004 and 2003 with the exception of Canada. Canada had
revenues which comprised 5% of total revenues for the three months ended March
31, 2003. Costs and Expenses Cost of Licenses Fees Quarters Ended March 31,2004
    
    2003($ in thousands)Cost of license fees
    
    $
    23,374
    
    
    $
    8,726Percentage of revenue
    
    
    4
    %
    
    
    2
    %Change from prior year
    
    
    168
    %
 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 first quarter of 2004 increase of 168%
primarily results from $11.3 million in amortization costs for the capitalized
software acquired in the J.D. Edwards acquisition and from $2.4 million 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. Cost of Services Quarters Ended March 31,2004
    
    2003($ in thousands)Cost of services
    
    $
    222,966
    
    
    $
    163,469Percentage of revenue
    
    
    35
    %
    
    
    36
    %Change from prior year
    
    
    36
    %
 Cost of services consists primarily of employee costs and the related
infrastructure costs incurred in providing professional services and support.
Cost of services increased by 36% in the first quarter of 2004 as compared to
the first quarter of 2003, primarily due to the expansion of the support
organization arising 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 in the first quarter of 2004 due
to the amortization of acquired intangible assets of $8.8 million for
maintenance relationships and consulting agreements. Partially offsetting these
cost of services increases were lower compensation costs of $4.0 million due to
a decrease in discretionary bonus expense. Cost of services as a percentage of
services revenues was 35% in 2004 and 36% in 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 March 31,2004
    
    2003($ in thousands)Sales and marketing
    
    $
    169,171
    
    
    $
    119,558Percentage of revenue
    
    
    26
    %
    
    
    26
    %Change from prior year
    
    
    41
    %
 The increase in
sales and marketing expense in the first quarter of 2004
as compared to the same period 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 as well as the
additional variable compensation resulting from the license revenue increases year over
year. Additionally, the first quarter of 2004 includes
$3.8 million 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. 23




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##### 



Product Development Expense Quarters Ended March 31,2004
    
    2003($ in thousands)Product development expense
    
    $
    127,374
    
    
    $
    83,705Percentage of revenue
    
    
    20
    %
    
    
    18
    %Change from prior year
    
    
    52
    %
 Product development expense consists primarily of costs related to our
software developers and the associated infrastructure costs of product
development initiatives. The 52% increase in product development expense in the
first quarter of 2004 as compared to the first quarter of 2003 was primarily
due to the expansion of our development organization to support our expanded
product offerings following the acquisition of J.D. Edwards. The first quarter
of 2004 also includes amortization of intangible assets for $3.0 million for
acquired patented technology. In addition, we incurred higher compensation
costs of $3.0 million for outsourced development. We did not capitalize any
internal development costs or product development costs acquired through
business combinations or purchased from third parties in the first quarter of
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. General and Administrative Expense Quarters Ended March 31,2004
    
    2003($ in thousands)General and administrative expense
    
    $
    59,075
    
    
    $
    33,015Percentage of revenue
    
    
    9
    %
    
    
    7
    %Change from prior year
    
    
    79
    %
 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 first quarter of 2004 as compared to the first quarter of 2003
includes additional administrative staff and related infrastructure costs
resulting from the J.D. Edwards acquisition, legal and investment banker fees
of $12.8 million relating to Oracle tender offer and $2.4 million in
integration fees paid to third parties relating to the J.D. Edwards
acquisition. Partially offsetting these general and administrative increases
were lower compensation costs due to a decrease in funding of discretionary
bonuses and lower bad debt expense due to improved collection efforts as
discussed in liquidity and capital resources. 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 2004. We expect the third party integration costs to
decline in the remainder of 2004 as the integration process is nearing
completion. Restructuring, Acquisition and Other Charges The following table sets forth the components of Restructuring,
acquisition and other charges: Quarters Ended March 31,2004
    
    2003($ in thousands)Restructuring, acquisition other charges
    
    $
    8,229
    
    
    $
    
 Restructuring charges and adjustments of $8.2 million in the first quarter
of 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 restructuring plan relating to the acquisition of J.D. Edwards, 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 includes costs for employee severance, acquisition
related employee retention, vacating 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 first
quarter 2004 restructuring charge includes approximately 24




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##### 



$2.3 million related to employee costs and $5.9 million related to costs
of vacating duplicate facilities. Of the $5.9 million in facilities costs,
approximately $4.0 million relates to impaired furniture and equipment assets
which were identified as certain duplicate
facilities were vacated. Future cash payments related to these restructuring
reserves 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. Other Income, Net The following table sets forth the components of Other income, net: Quarters Ended March 31,2004
    
    2003($ in thousands)Interest income
    
    $
    6,555
    
    
    $
    7,325Interest expense
    
    
    (44
    )
    
    
    (263
    )Foreign currency transaction (losses) and other, net
    
    
    (1,411
    )
    
    
    (96
    )Other income, net
    
    $
    5,100
    
    
    $
    6,966
 The decrease in interest income in the first quarter of 2004 as compared
to the first quarter of 2003 was due to lower interest rates and lower average
cash and investment balances. Lower interest rates in the United States
accounted for approximately $0.7 million of the decrease while lower cash and
net investment balances following the J.D. Edwards acquisition accounted for
approximately $1.5 million of the decrease. Partially offsetting these
decreases was $1.0 million in interest income received in connection with a tax
refund and a $0.4 million increase in interest income due to higher investment
balances in international entities. Provision for Income Taxes Our provision for income taxes decreased to $13.8 million in the first
quarter of 2004 from $20.3 million in the first quarter of 2003. The effective
tax rate was 36.4% and 34.5% for the three months ended March 31, 2004 and
2003, respectively. The net deferred tax assets at March 31, 2004 were $102.3
million. The effective tax rate has increased primarily as a result of reduced
tax benefits from tax advantaged investments. 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: 25




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
    
    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
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 costs of completing the contract derived 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 a potential 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. 26




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PeopleSoft implemented the initial version of the customer assurance
program in June 2003, and has used four different versions of the program.
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. 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. 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 potential maximum payments, as of March 31, 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 March 31, 2004, the aggregate
maximum potential amount of future liability under the customer assurance
program was approximately $1.96 billion. Amount ofMaximumVersion
    
    Dates Offered to Customers*
    

    Potential LiabilityVersion One.
    
    6/03/2003 to 9/12/2003
    
    $
    670.3 millionVersion Two.
    
    9/12/2003 to 9/30/2003
    
    $
    170.1 millionVersion Three
    
    9/30/2003 to 11/7/2003
    
    $
    39.8 millionVersion Four.
    
    11/18/2003 to present
    
    $
    1,083.9 millionTotal Amount of Maximum Potential
Liability:
    
    $
    1.96 billion
   *
    
    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 27




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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 $170.1 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 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. 28




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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. The Company is currently making the terms of Version Four of the customer
assurance program available until the earlier of the date that Oracle
terminates its tender offer or June 30, 2004. The Board believes that the customer assurance program gives 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 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. 29




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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 vacating duplicate facilities, and
contract termination costs. During the first 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 under 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 under 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 under 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 additional information
becomes available regarding the assets acquired and liabilities assumed and as
management continues its assessment of the pre-merger operations and executes
the approved plan. Decreases to the estimates of executing the currently
approved plans accounted for under 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 to the results of
operations thereafter. Changes to currently approved plans accounted for under
SFAS 146 or SFAS 112 will be recorded in our results of operations as an
adjustment to 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 forecast revenues and costs to
develop such projects will transpire as projected. 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 material
amounts of development costs in the first quarter 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 evaluate the recoverability of capitalized software based on estimated
future gross revenues reduced by the estimated cost of completing the products
and of performing maintenance and customer support. If our gross revenues were
to be significantly less than our estimates, the net realizable value of our
capitalized software intended for sale would be 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 30




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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 degradation 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
realization 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
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 first 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. 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. Newly Adopted and Recently Issued Accounting Standards FASB Interpretation No. 46 31




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In December 2003, the FASB issued Interpretation No. 46 (FIN 46R)
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 (ARB 51), which
addresses how a business enterprise should evaluate whether it has a
controlling interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
No. 46 (FIN 46), which was issued in January 2003. Before concluding that it
is appropriate to apply ARB 51 voting interest consolidation model to an
entity, an enterprise must first determine that the entity is not a variable
interest entity (VIE). As of the effective date of FIN 46R, an enterprise
must evaluate its involvement with all entities or legal structures created
before February 1, 2003, to determine whether consolidation requirements of FIN
46R apply to those entities. There is no grandfathering of existing entities.
Public companies must apply either FIN 46 or FIN 46R immediately to entities
created after December 15, 2003 and no later than the end of the first
reporting period that ends after March 15, 2004 to entities considered to be
special purpose entities. The adoption of FIN 46 had no effect on our
consolidated financial position, results of operations or cash flows. LIQUIDITY AND CAPITAL RESOURCES We generate cash from licensing our software and providing professional
services. In addition, we generate cash through maintenance renewals where
customers generally pay us at the beginning of the contract term. Our days
sales outstanding for the first quarter of 2004 was 53 days, meaning that was
the average number of days that passed before we collected payment from our
customers. We primarily 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 procure capital assets to support the business. These assets are typically
information technology hardware. At March 31, 2004, we did not have any debt
and we do not have any current plans to pay cash dividends on our capital
stock. During
the fourth quarter of 2003, we repurchased 16.5 million shares
of our common stock for approximately $350 million.
On January 12, 2004, we announced our intention to acquire $200 million of
PeopleSoft common stock. We anticipate the successful completion of this
program in 2004. This program 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 March 31, 2004 and for the prior year end: Quarter
    
    YearEnded
    
    EndedMarch 31,
    
    December 31,2004
    
    2003($ in millions)Cash and cash equivalents
    
    $
    493.5
    
    
    $
    439.4Short-term investments and restricted cash (1)
    
    $
    1,043.6
    
    
    $
    961.9Total
    
    $
    1,537.1
    
    
    $
    1,401.3Working capital
    
    $
    913.1
    
    
    $
    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 March 31, 2004, our cash, cash equivalents and short-term
investments increased by $135.8 million as compared to December 31, 2003. This
increase was primarily due to positive operating cash flow driven by our strong
collection efforts plus proceeds from employee stock purchases and stock option
exercises. We generated strong cash flows from operations of $115.5 million in the
first quarter of 2004 compared to $74.7 million in the first quarter of 2003.
The principle source of our cash generated from operating activities comes from
earnings adjusted for depreciation and amortization and strong collections on
our accounts receivable. 32




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We historically have used cash in 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 $15.2 million in the first quarter of 2004. Besides the typical
information technology purchases, as mentioned above, we spent $175 million in
the first and second quarter of 2003 to purchase certain of our headquarters
facilities in Pleasanton, California which we had been leasing under synthetic
leases. We assumed leases on four office buildings in Denver as a result of
our acquisition of J.D. Edwards, which are under synthetic leases that we have
accounted for as operating leases. On April 2, 2004, one of the three master
lease agreements terminated and the Company exercised its option to purchase
two buildings for a net purchase price of $58.6 million. The Company is
currently considering a cash purchase, 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. The principal source of cash generated from financing activities relates
to the exercise of stock options by our employees and the issuance of our stock
under the employee stock purchase program. The transactions generated cash of
$60.9 million in the first quarter of 2004. Future cash payments related to restructuring reserves 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 $56.8
million restructuring liability is a cash obligation. These restructuring costs
are being funded through operating cash flow. See Note 6 Restructuring
Reserves of the Notes to the unaudited Condensed Consolidated Financial
Statements. Commercial Commitments Synthetic Leases We assumed leases on four office buildings in Denver, Colorado (the
Denver Campus) as a result of the acquisition of J.D. Edwards. The Denver
Campus was constructed on land originally owned by J.D. Edwards and is leased
under operating leases, which commenced in 1997 and 1998. We have three six-
year master lease agreements with a lessor, a wholly owned subsidiary of a
bank, which together with a syndication of other banks has provided debt and
equity financing of $121.2 million for the purchase and construction costs of
the buildings. The lease payments equal the amount of interest which accrues on
the amount financed. We also have an option to refinance or purchase the leased
properties at our sole discretion during the terms of the leases for
approximately $121.2 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 $121.2
million. We do not believe that we will be called upon to perform under the
residual guarantee to satisfy any financial obligations under the leases. We
have evaluated the fair value of the Denver Campus and determined that as of
the date of this Report, it is not probable that the value of the property at
the end of the lease term will be less than the residual value guaranteed by
us. On April 2, 2004, one of the three master lease agreements terminated and
the Company exercised its option to purchase two buildings subject to
the terminated master lease for a net purchase
price of $58.6 million. We are currently considering cash purchases of the
remaining office buildings totaling $62.6 million as the leases terminate. The leases for the
remaining buildings terminate during the third and fourth quarters of 2004. We can elect to reduce the interest rate used to calculate our lease
expense by collateralizing the Denver Campus financing arrangements with
investments. At March 31, 2004, investments totaling $123.5 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 March 31, 2004, funds used
as collateral in the amount of $88.1 million were available for withdrawal. At
March 31, 2004, we were in compliance with the covenants, representations, and
warranties required under the lease agreements. Subsequent to the purchase of
the buildings subject to the terminated master lease on April 2, 2004, restricted cash of approximately $12.3
million designated as collateral for that lease became unrestricted. 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 33




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Form 10-K. We may not successfully complete the integration of J.D. Edwards business
operations into ours. In addition, we may not achieve 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 in December 2003, we commenced delivery of integrated
products. During the first quarter of 2004, we successfully completed
the integration of our worldwide sales force to provide a consistent approach and methodology
to our selling efforts. The
professional services organization is also integrated and utilizing one global
delivery model. The remaining work related to 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
combined 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 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 and trading
price of our common stock. 34




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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 and unpredictable. 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 adjustments related to the
purchase accounting, including the following:  
    
    The value of goodwill may become impaired and we may be required to
incur material charges relating to its 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 additional 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 adjustments are made. These costs may adversely impact earnings, which may result in a material
adverse effect on the market value and trading price 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 extended the offering period several
times. On February 4, 2004, Oracle raised its offer to $26 per PeopleSoft
share. The Oracle tender offer currently expires June 25, 2004. We believe that
the Oracle tender offer raises significant antitrust concerns that have
resulted in a lengthy regulatory review process and have resulted in litigation
which could be protracted. 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 7, 2004, a motion to amend the DOJs complaint
was filed to add as plaintiffs the states of Connecticut, Michigan and Ohio. A
trial date of June 7, 2004 has been set. 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 us significant business disruption and damages, and may
continue to disrupt and damage our business which could result in a 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. 35




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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 J.D. Edwards merger and 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. On June 18, 2003, Oracle filed a lawsuit
against PeopleSoft, the members of our board and J.D. Edwards in the Delaware
Chancery Court. 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 seeks rescission of the J.D. Edwards merger.
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
merger and 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 Condensed Consolidated Financial Statements. We have adopted anti-takeover defenses that could 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. 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 and other purported PeopleSoft
stockholders in which the plaintiffs seek 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. 36




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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;
    
    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. 37




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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 offering becomes 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 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 business;
    
    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; 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 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 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 or 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 a variety of 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. SAP and Oracle are our significant competitors
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 a variety of other competitors in more narrowly
defined market segments. 38




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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, we will become increasingly subject to
currency risks, political considerations and other costs and contingencies that
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. The
impact of the recent economic slowdown on political and market
conditions may continue to 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. 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 39




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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 their effective use.
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 is 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 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. 40




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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. 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. If FASBs current proposal relating to the accounting treatment for employee
stock purchases and stock options is adopted, or if the Board adopts a policy
changing such accounting treatment, our earnings will be affected and we may be
forced to change our business practices. We currently account for the issuance of stock options under APB Opinion
No. 25, Accounting for Stock Issued to Employees. The Financial Accounting
Standards Board (FASB) has issued a Proposed Statement Share-Based Payment:
and amendment of FASB Statements No. 123 and 95 that would, if adopted, change
the accounting treatment for grants of options, sale of shares under our
employee stock purchase plan, and other equity instruments issued to employees
on and after January 1, 2005. The proposed Statement would eliminate our
ability to account for equity instruments issued to employees under APB Opinion
No. 25 and would instead require us to account for equity instruments issued to
employees or liability classified awards to employees under the Proposed
Statement. The Proposed Statement would require us to value equity instruments
issued to employees and liability-classified awards at grant date fair value or
based upon certain valuation methods that approximate grant date fair value,
and to record those values as compensation expense in our statement of
operations. In addition, at the Companys 2004 annual 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 has stated that it will give
this stockholder vote careful consideration as part of its evaluation of the
accounting treatment of option grants. If the Board adopts such a policy, or
if FASBs Proposed Statement is adopted, our earnings will be negatively
impacted. As a result, we may decide to terminate our employee stock purchase
plan, reduce the number of stock options granted to employees or to grant
options to fewer employees. This could affect our ability to retain existing
employees and attract qualified candidates, and also could increase the cash
compensation we would have to pay to them. 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; 41




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
    
    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;
    
    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. 42




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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 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; 43




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##### 




    
    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 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 primarily used to hedge foreign
currency exposures of the parent company as well as the U.S. dollar denominated
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 also 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 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 March 31, 2004. At March 31, 2004, we had the following outstanding forward foreign
exchange contracts to exchange foreign currency for U.S. dollars: 44




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##### 



Notional WeightedNotional
    
    Average ExchangeFunctional Currency
    
    Amount
    
    Rate per US $British pounds
    
    $11.9 million
    
    
    0.553Hong Kong dollars
    
    10.3 million
    
    
    7.791Singapore dollars
    
    7.2 million
    
    
    1.686New Zealand dollars
    
    3.3 million
    
    
    1.536Taiwanese dollars
    
    1.3 million
    
    
    33.190Swedish krona
    
    0.8 million
    
    
    7.686$34.8 million
 At March 31, 2004, we had the following outstanding forward foreign
exchange contracts to exchange U.S. dollars for foreign currency: Notional WeightedAverage ExchangeFunctional Currency
    
    Notional Amount
    
    Rate per US $Euros
    
    $33.5 million
    
    
    0.823Mexican pesos
    
    13.4 million
    
    
    11.165Canadian dollars
    
    22.4 million
    
    
    1.307Japanese yen
    
    4.5 million
    
    
    105.198Australian dollars
    
    3.2 million
    
    
    1.340Danish krone
    
    0.6 million
    
    
    6.179Swedish krona
    
    0.5 million
    
    
    7.539$78.1 million
 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 March 31, 2004. During the three
months ended March 31, 2004 and 2003, we recorded net foreign currency
transaction losses of $2.0 million and $0.2 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 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 (loss), net of
tax, in the accompanying consolidated balance sheets. As of March 31, 2004 and
December 31, 2003, all our investments were classified as available-for-sale. 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 March 31, 2004, the average maturity of our investment securities was
less than three months and all investment securities had maturities of less
than eighteen months. The following table presents certain information about
our financial instruments at March 31, 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
March 31, 2004, we invested heavily in tax-exempt investments which reduced our
weighted average interest rate. 45




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Below is a presentation of the maturity profile of our investments in debt
securities at March 31, 2004 ($ in millions): Expected Maturity1 Year
    
    More Than
    
    Principal
    
    Fairor Less
    
    1 Year
    
    Amount
    
    ValueAvailable-for-sale securities
    
    $
    1,005.0
    
    
    $
    44.5
    
    
    $
    1,049.5
    
    
    $
    1,052.4Weighted average interest rate
    
    
    1.0
    %
    
    
    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 March 31, 2004 related to these interest rate swaps. 
 ITEM 4  CONTROLS AND PROCEDURES As of the end of
the first quarter ended March 31, 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
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. 
 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 purport to be
PeopleSoft stockholders, each filed a putative stockholder class action suit in
the Delaware Court of Chancery against us and several of our 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 seek 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). 46




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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.
Defendants filed their answer to the consolidated Delaware action on June 25,
2003. 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 seeks 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 listed above. Document discovery has commenced in the consolidated Delaware actions and
is being coordinated with the discovery in the action filed against us by
Oracle in Delaware and our action filed against Oracle in California, both of
which are discussed below. No trial date has yet been set in the Delaware
actions. We believe that the claims and allegations asserted in each of the
foregoing putative class action suits are without merit, and intend to
vigorously defend against these lawsuits. 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 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 directors purported breach of fiduciary duty. Oracle seeks
injunctive, declaratory and rescissory relief. Discovery in this action is proceeding and is being coordinated with the
stockholder actions against PeopleSoft in Delaware, discussed above, and
PeopleSofts action against Oracle in California, discussed below. No trial
date has yet been set in this action. 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 suits are without merit, and intend to
vigorously defend against these lawsuits. PeopleSoft v. Oracle  California Superior Court for the County of Alameda 47




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On June 13, 2003, we filed an action in the California Superior Court for
the County of Alameda against Oracle and 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 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 (d) MaximumNumber (orApproximate(c) Total Number
    
    Dollar Value) ofof Shares (or
    
    Shares (or Units)Units) Purchased
    
    that May Yet Be(a) Total Number
    
    (b) Average Price
    
    as Part of Publicly
    
    Purchased Underof Shares (or
    
    Paid per Share (or
    
    Announced Plans
    
    the Plans orPeriod
    
    Units) Purchased
    
    Unit)
    
    or Programs
    
    ProgramsMonth #1
January 1-31, 2004
    
    7,180 shares1
    
    $21.57 per share
    
    
    
    
    
    $200 million2Month #2
February 1-29, 2004
    
    1,672 shares1
    
    $22.93 per share
    
    
    
    
    
    $200 million2Month #3
March 1-31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $200 million2Total
    
    8,852 shares1
    
    
    
    
    
    
    
    
    
    $200 million2 1Represents 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. 2Represents 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. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders  (a)
    
    The Company held its Annual Meeting of Stockholders on March
25, 2004.(b)
    
    Pursuant to the election of the four directors listed under
Item 4(c)(i), Messrs. A. George (Skip) Battle, Craig A. Conway,
Frank J. Fanzilli, Jr., and Cyril J. Yansouni were each elected as
Class II directors for a term of two years. Messrs. Aneel Bhusri,
David A. Duffield and Steven D. Goldby were each elected at the
prior years annual meeting for a term of two years and continue as
Class I directors. Mr. Michael J. Maples was appointed by the Board
to serve as a Class I director in July 2003, upon the expansion of
the Board to eight directors.(c)
    
    The Companys stockholders voted on the following matters:  (i)
    
    Election of four directors. All directors proposed
by management were elected. 48




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##### 



Number of votes
    
    AuthorityName of Nominee
    
    For
    
    WithheldA. George (Skip) Battle
    
    
    281,522,432
    
    
    
    12,824,002Craig A. Conway.
    
    
    279,515,622
    
    
    
    14,830,812Frank J. Fanzilli, Jr.
    
    
    284,724,447
    
    
    
    9,621,987Cyril J. Yansouni
    
    
    279,429,900
    
    
    
    14,916,534
  (ii)
    
    Ratification of the appointment of KPMG LLP as
independent auditors of the Company for the year ending
December 31, 2004. For
    
    
    291,312,748Against
    
    
    2,807,514Abstain
    
    
    226,172
  (iii)
    
    Approval of a proposal urging the Board of
Directors to adopt a policy that the cost of employee and
director stock options be recognized in PeopleSofts income
statement. For
    
    
    132,329,729Against
    
    
    113,400,165Abstain
    
    
    4,210,160Non-vote
    
    
    44,406,380
 
 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). 49




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##### 



31.1
    
    Certification by the Chief Executive Officer Pursuant to Rule
13a-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 Rule
13a-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 filed a Current Report on Form 8-K on January 22,
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.2.
    
    The Company furnished a Current Report on Form 8-K on February
4, 2004 reporting under Item 12 the issuance of a press release and
an earnings conference call announcing its earnings results for the
fourth quarter of 2003.3.
    
    The Company filed a Current Report on Form 8-K on February 18,
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. 
 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: May 7, 2004PEOPLESOFT, INC.By:
    
    /s/ KEVIN T. PARKERKevin T. ParkerExecutive Vice President,Finance and Administration, ChiefFinancial Officer(Principal Financial andAccounting Officer)
 50




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##### 



INDEX TO EXHIBITS Exhibit Number
    
    Description2.1
    
    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).31.1
    
    Certification by the Chief Executive Officer Pursuant to Rule
13a-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 Rule
13a-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.
 52