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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER: 0-2222209
PEREGRINE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3773312
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
12670 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(619) 481-5000
(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
requirements for the past 90 days.
YES X NO
------- -------
The number of issued and outstanding shares of the Registrant's Common
Stock, $0.001 par value, as of June 30, 1997 was 15,215,735.
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PEREGRINE SYSTEMS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1997
AND MARCH 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 1997 AND 1996..... . . . . . . . . . . . . 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED JUNE 30, 1997 AND 1996... . . . . . . . . . . 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.. . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..... . . . . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.. . . . . . . . . . . . . . . . . . . . .13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . .13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.... . . . . . . . . . . . . .13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
2
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PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31,
1997 1997
----------- ---------
(UNAUDITED) (AUDITED)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . .$ 17,394,000 $ 305,000
Accounts receivable, net of allowance for
doubtful accounts of $350,000 and $220,000,
respectively . . . . . . . . . . . . . . . . 10,265,000 10,191,000
Financed receivables. . . . . . . . . . . . . 977,000 1,182,000
Deferred tax assets.. . . . . . . . . . . . . 975,000 1,752,000
Other current assets. . . . . . . . . . . . . 1,058,000 924,000
----------- -----------
Total current assets. . . . . . . . . . . . . 30,669,000 14,354,000
Property and Equipment, net . . . . . . . . . . . 4,391,000 4,364,000
Other Assets. . . . . . . . . . . . . . . . . . . 483,000 1,020,000
----------- -----------
$35,543,000 $19,738,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank line of credit . . . . . . . . . . . . . $ -- $ 1,974,000
Accounts payable. . . . . . . . . . . . . . . 694,000 916,000
Accrued expenses. . . . . . . . . . . . . . . 5,907,000 6,079,000
Deferred revenue. . . . . . . . . . . . . . . 8,929,000 8,419,000
Current portion of long-term debt . . . . . . 226,000 497,000
Current portion of capital lease obligation . 256,000 364,000
Net liabilities of discontinued operation . . -- 170,000
----------- -----------
Total current liabilities. . . . . . . . 16,012,000 18,419,00
Long-Term Debt, net of current portion. . . . . . - 1,395,000
Deferred Revenue, net of current portion. . . . . 3,080,000 2,773,000
----------- -----------
Total liabilities . . . . . . . . . . . . . . 19,092,000 22,587,000
----------- -----------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Preferred stock . . . . . . . . . . . . . . . -- --
Common stock. . . . . . . . . . . . . . . . . 15,000 13,000
Additional paid-in capital. . . . . . . . . . 33,205,000 15,081,000
Accumulated deficit . . . . . . . . . . . . . (14,390,000) (15,807,000)
Unearned portion of deferred compensation . . (1,680,000) (1,748,000)
Cumulative translation adjustment . . . . . . (437,000) (388,000)
Treasury stock, at cost . . . . . . . . . . . (262,000) --
----------- -----------
Total stockholders' equity (deficit). . . . . 16,451,000 (2,849,000)
----------- -----------
$35,543,000 $19,738,000
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
----------- ----------
Revenues:
Licenses. . . . . . . . . . . . . . . . . . . $ 6,328,000 $ 3,760,000
Maintenance and services. . . . . . . . . . . 4,687,000 3,740,000
----------- -----------
Total revenues . . . . . . . . . . . . . 11,015,000 7,500,000
----------- -----------
Costs and Expenses:
Cost of licenses. . . . . . . . . . . . . . . 59,000 61,000
Cost of maintenance and services. . . . . . . 1,781,000 1,149,000
Sales and marketing . . . . . . . . . . . . . 4,317,000 3,725,000
Research and development. . . . . . . . . . . 1,644,000 1,415,000
General and administrative. . . . . . . . . . 1,143,000 807,000
----------- -----------
Total costs and expenses . . . . . . . . 8,944,000 7,157,000
----------- -----------
Operating income (loss). . . . . . . . . 2,071,000 343,000
Interest income (expense) . . . . . . . . . . . . 186,000 (113,000)
Other income (expense), net . . . . . . . . . . . (8,000) 1,000
----------- -----------
Income from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . 2,249,000 231,000
Income tax expense. . . . . . . . . . . . . . . . 832,000 --
Net income. . . . . . . . . . . . . . . . . . . . $ 1,417,000 $ 231,000
----------- -----------
----------- -----------
Net income per share. . . . . . . . . . . . . . . $ 0.08 $ 0.02
----------- -----------
----------- -----------
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . 17,567,000 14,330,000
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
1997 1996
Cash flow from operating activities:
Net income. . . . . . . . . . . . . . . . . . $ 1,417,000 $ 231,000
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization . . . . . . . . 346,000 346,000
Increase (decrease) in cash resulting
from changes in:
Accounts receivable. . . . . . . . . . . (74,000) (467,000)
Financed receivables . . . . . . . . . . 205,000 --
Deferred tax asset . . . . . . . . . . . 777,000 --
Other current assets . . . . . . . . . . (384,000) (4,000)
Other assets . . . . . . . . . . . . . . 537,000 156,000
Accounts payable . . . . . . . . . . . . (222,000) (480,000)
Accrued expenses . . . . . . . . . . . . (172,000) 328,000
Deferred revenue . . . . . . . . . . . . 817,000 25,000
----------- ---------
. . . . . . . . . . . . . . . . . . . . 3,247,000 135,000
----------- ---------
Net cash used by discontinued business. . . . (170,000) (297,000)
----------- ---------
Net cash provided by (used in)
operating activities. . . . . . . . . . 3,077,000 (162,000)
----------- ---------
Cash flows from investing activities:
Purchases of property and equipment . . . . . (305,000) (102,000)
Proceeds from sale of product line. . . . . . 250,000 250,000
----------- ---------
Net cash provided by (used in) investing
activities. . . . . . . . . . . . . . . (55,000) 148,000
----------- ---------
Cash flows from financing activities:
Repayment on bank line of credit. . . . . . . (1,974,000) (156,000)
Repayments of long-term debt. . . . . . . . . (1,666,000) (120,000)
Issuance of common stock. . . . . . . . . . . 18,126,000 --
Treasury stock purchased. . . . . . . . . . . (262,000) --
Principal payments under capital lease
obligation . . . . . . . . . . . . . . . . . (108,000) (99,000)
----------- ---------
Net cash provided by (used in)
financing activities . . . . . . . . . 14,116,000 (375,000)
----------- ---------
Effect of exchange rate changes on cash . . . . . (49,000) (46,000)
----------- ---------
Net increase (decrease) in cash . . . . . . . . . 17,089,000 (435,000)
Cash and equivalents, beginning of period . . . . 305,000 437,000
----------- ---------
Cash and equivalents, end of period . . . . . . . $17,394,000 $ 2,000
----------- ---------
----------- ---------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . $ 10,000 $ 109,000
Income taxes . . . . . . . . . . . . . . $ -- $ 7,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of June 30,
1997 and the condensed consolidated statements of operations and cash flows
for the three month periods ended June 30, 1997 and 1996 have been prepared
by Peregrine Systems, Inc. (the "Company") and have not been audited. These
financial statements, in the opinion of management, include all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the financial position, results of operations and cash flows
for all periods presented. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K filed for the year ended March 31, 1997,
which provides further information regarding the Company's significant
accounting policies and other financial and operating information. Interim
operating results are not necessarily indicative of operating results for the
full year. The consolidated condensed financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
NOTE 2. USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3. LIQUIDITY AND CAPITAL RESOURCES
Cash equivalents represent highly liquid instruments with maturities of
90 days or less.
NOTE 4. COMPUTATION OF NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the periods. Common
equivalent shares are included in the per share calculations where the effect
of their inclusion would be dilutive. In March 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (SFAS 128), which changes the method of
calculating earnings per share. SFAS 128 is effective for financial
statements issued after December 15, 1997. The earnings per share of the
Company for the periods ended June 30, 1997 and 1996 would not be materially
different under SFAS 128 as that presented therein.
NOTE 5. INITIAL PUBLIC OFFERING
In April 1997, the Company offered and sold 2.3 million shares of its
common stock at an initial public offering price of $9.00 per share, raising
$19.3 million after underwriting discounts and commissions.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE
SET FORTH UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THIS
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS", IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, AND ELSEWHERE IN, OR INCORPORATED BY
REFERENCE INTO, THIS REPORT. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.
OVERVIEW
The Company develops, markets and supports ServiceCenter, a suite of
software applications for managing the Enterprise Service Desk. The Company
currently derives substantially all of its license revenues from the sale of
ServiceCenter and expects ServiceCenter to account for a significant portion
of the Company's revenues for the foreseeable future. As a result, the
Company's future operating results are dependent upon continued market
acceptance of ServiceCenter, including future enhancements. Factors adversely
affecting the pricing of, demand for or market acceptance of ServiceCenter,
such as competition or technological change, could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company's revenues are derived from product licensing, maintenance
and services. License fees are generally due upon the granting of the license
and typically include a one-year maintenance period as part of the license
agreement. The Company also provides ongoing maintenance services, which
include technical support and product enhancements, for an annual fee based
upon the current price of the product.
Revenues from license agreements are recognized currently, provided that
all of the following conditions are met: a non-cancelable license agreement
has been signed, the product has been delivered, there are no material
uncertainties regarding customer acceptance, collection of the resulting
receivable is deemed probable, and no other significant vendor obligations
exist. Revenues from post-contract support services are recognized ratably
over the term of the support period, generally one year. Maintenance revenues
which are bundled with license agreements are unbundled using vendor-specific
evidence. Consulting revenues are primarily related to implementation
services most often performed on a time and material basis under separate
service agreements for the installation of the Company's products. Revenues
from consulting and training services are recognized as the respective
services are performed.
The Company conducts business overseas in a number of foreign
currencies, principally the British Pound, the Deutsche Mark and the French
Franc. These currencies have been relatively stable against the U.S. dollar
for the past several years. As a result, foreign currency fluctuations have
not had a significant impact on the Company's revenues or results of
operations. Although the Company currently derives no revenues from highly
inflationary economies, the Company is expanding its presence in
international markets outside Europe, including the Pacific Rim and Latin
America, whose currencies have tended to fluctuate more relative to the U.S.
Dollar. There can be no assurance that European currencies will remain stable
relative to the U.S. dollar or that future fluctuations in the value of
foreign currencies will not have a material adverse effect on the Company's
business, operating results and financial condition. Management does not
currently have an active foreign exchange hedging program. Accordingly, to
the extent not hedged by obligations denominated in local currencies, the
Company's foreign operations are subject to the risks of future foreign
currency fluctuations. The Company may implement a foreign currency forward
hedging program to mitigate the foreign currency transaction risk in the
future.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
consolidated statements of operations data as a percentage of total revenues:
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THREE MONTHS ENDED JUNE30,
--------------------------
1997 1996
---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses 57.4% 50.1%
Maintenance and services 42.6 49.9
----- -----
Total revenues 100.0 100.0
Costs and expenses:
Cost of licenses 0.5 0.8
Cost of maintenance and services 16.2 15.3
Sales and marketing 39.2 49.7
Research and development 14.9 18.9
General and administrative 10.4 10.7
----- -----
Total costs and expenses 81.2 95.4
----- -----
Operating income 18.8 4.6
Interest income (expense) 1.7 (1.5)
Other income (expense), net (0.1) -
----- -----
Income (loss) before income taxes 20.4 3.1
Income tax expense 7.5 -
----- -----
Net income 12.9% 3.1%
----- -----
----- -----
THREE MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
REVENUES
Total revenues were $11.0 million and $7.5 million in the first quarter
of fiscal 1998 and 1997, respectively, representing a period-to-period
increase of 47%.
LICENSES. License revenues were $6.3 million and $3.8 million in the
first quarter of fiscal 1998 and 1997, respectively, representing 57% and 50%
of total revenues in the respective periods. The increases in license
revenues are attributable to increased demand for new licenses of
ServiceCenter, additional seats purchased by existing ServiceCenter
customers, higher average transaction sizes, more effective corporate
marketing programs, improved sales force productivity, and expansion of the
Company's international sales force.
MAINTENANCE AND SERVICES. Maintenance and services revenues were $4.7
million and $3.7 million in the first quarter of fiscal 1998 and 1997,
respectively, representing 43% and 50% of total revenues in the respective
periods. The dollar increases are attributable to renewals of maintenance
agreements from the Company's expanded installed base of customers and
maintenance revenues included as part of new licenses and an increased number
of consulting engagements related to implementation of software from initial
license agreements.
COSTS AND EXPENSES
COST OF LICENSES. Cost of license revenues was $59,000 and $61,000 in
the first quarter of fiscal 1998 and 1997, respectively, each representing 1%
of total license revenues in the respective periods.
COST OF MAINTENANCE AND SERVICES. Cost of maintenance and services
revenues was $1.8 million and $1.1 million in the first quarter of fiscal
1998 and 1997, respectively, representing 38% and 31% of total maintenance
and service revenues in the respective periods. The dollar increase in the
first quarter of fiscal 1998 over 1997 is attributable to an increase in
customer support personnel and professional services personnel in connection
with the corresponding increase in professional services revenue.
SALES AND MARKETING. Sales and marketing expenses were $4.3 million and
$3.7 million in the first quarter of fiscal 1998 and 1997, respectively,
representing 39% and 50% of total revenues in the respective periods. The
dollar increase in sales and marketing expenses is attributable to the
increase in personnel in the marketing department
8
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and marketing spending and, to a lesser extent, expansion of both the North
American and international sales forces and to moderate operating expense
increases. If the Company experiences a decrease in sales force productivity
or for any other reason a decline in revenues, it is likely that operating
margins will decline as well. The decrease in sales and marketing expenses
as a percentage of total revenues is attributable to increased revenues,
particularly increased license revenues, and economies of scale.
RESEARCH AND DEVELOPMENT. Research and development expenses were $1.6
million and $1.4 million in the first quarter of fiscal 1998 and 1997,
respectively, representing 15% and 19% of total revenues in the respective
periods. The dollar increase from fiscal 1997 to fiscal 1998 is due primarily
to the hiring of additional software developers, and the decrease as a
percentage of total revenues is due to increased revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1.1 million and $0.8 million in the first quarter of fiscal 1998 and 1997,
respectively, representing 10% and 11% of total revenues in the respective
periods. The dollar and percentage increases from fiscal 1997 to 1998 are
attributable primarily to administrative personnel additions to support the
Company's growth and the additional administrative expenses associated with
becoming a publicly traded company.
OTHER INCOME
Other income was not material in the first quarter of fiscal 1998 and 1997.
INCOME TAX EXPENSE
Income tax expense for the first fiscal quarter of 1998 amounted to $0.8
million compared with zero in the comparable quarter of 1997. This increase
results from the $2.0 million dollar increase in income before taxes. The
effective tax rate for the first quarter of fiscal 1998 was 37%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $17.4 million in cash and cash equivalents at June 30,
1997 compared to $0.3 million at March 31, 1997. The increase is
attributable to the Company's completion of its initial public offering in
April 1997. The Company offered and sold 2.3 million shares of its common
stock at an initial public offering price of $9.00 per share, raising $19.3
million after underwriting discounts and commissions.
The Company has a $4.5 million revolving bank credit line which expires
November 30, 1997, and a term loan from the same bank. The term loan is
secured by trade receivables and fixed assets of the Company and the
revolving credit line is secured by accounts receivable, equipment and
certain other assets of the Company. Both facilities are personally
guaranteed by the Company's majority stockholder. Both the credit line and
term loan were repaid from proceeds of the Company's April 1997 initial
public offering.
The Company believes that the net proceeds from its initial public
offering in April 1997, together with its current cash balances, cash
available under its bank facilities and cash flow from operations will be
sufficient to meet its working capital requirements for at least the next 12
months. Although operating activities may provide cash in certain periods, to
the extent the Company experiences growth in the future, the Company
anticipates that its operating and investing activities may use cash.
Consequently, any such future growth may require the Company to obtain
additional equity or debt financing, which may not be available on
commercially reasonable terms or which may be dilutive.
9
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FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING
STATEMENTS AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:
LIMITED PROFITABILITY; HISTORY OF OPERATING LOSSES. The Company has
recorded cumulative net losses of approximately $14.4 million through June
30, 1997. In recent years, the Company's product line has changed
substantially. The Company's ServiceCenter product, from which the Company
derived substantially all of its license revenues for the year ended March
31, 1997, only began shipping in mid-1995. As a result, prediction of the
Company's future operating results is difficult, if not impossible. Although
the Company has achieved profitability in each quarter since March 31, 1996,
that profitability is of limited history. In addition, that profitability
has fluctuated extensively. For these reasons, there can be no assurance that
the Company will be able to remain profitable on a quarterly basis or
maintain profitability on an annual basis. In addition, the Company does not
believe that the growth in revenues it has experienced in recent years is
necessarily indicative of future revenue growth or future operating results.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; LENGTHY SALES CYCLE;
SEASONALITY. The Company's quarterly operating results have varied
significantly in the past and may vary significantly in the future depending
upon a number of factors, many of which are beyond the Company's control.
These factors include, among others, the ability of the Company to develop,
introduce and market new and enhanced versions of its software on a timely
basis; market demand for the Company's software; the size, timing and
contractual terms of significant orders; the timing and significance of new
software product announcements or releases by the Company or its competitors;
changes in pricing policies by the Company or its competitors; changes in the
Company's business strategies; budgeting cycles of its potential customers;
changes in the mix of software products and services sold; changes in the mix
of revenues attributable to domestic and international sales; the impact of
acquisitions of competitors; seasonal trends; the cancellations of licenses
or maintenance agreements; product life cycles; software defects and other
product quality problems; and personnel changes. The Company has often
recognized a substantial portion of its revenues in the last month or weeks
of a quarter. As a result, license revenues in any quarter are substantially
dependent on orders booked and shipped in the last month or weeks of that
quarter. Due to the foregoing factors, quarterly revenues and operating
results are not predictable with any significant degree of accuracy. In
particular, the timing of revenue recognition can be affected by many
factors, including the timing of contract execution and delivery. The timing
between initial customer contact and fulfillment of criteria for revenue
recognition can be lengthy and unpredictable, and revenues in any given
quarter can be adversely affected as a result of such unpredictability. In
the event of any downturn in potential customers' businesses or the economy
in general, planned purchases of the Company's products may be deferred or
canceled, which could have a material adverse effect on the Company's
business, operating results and financial condition.
The license of the Company's software generally requires the Company to
engage in a sales cycle that typically takes approximately six to nine months
to complete. The length of the sales cycle may vary depending on a number of
factors over which the Company may have little or no control, including the
size of the transaction and the level of competition which the Company
encounters in its selling activities. In addition, the sales cycle is
typically extended 90 days for product sales through indirect channels.
During the sales cycle, the Company typically provides a significant level of
education to prospective customers regarding the use and benefits of the
Company's products. Any delay in the sales cycle of a large license or a
number of smaller licenses could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's business has experienced and is expected to continue to
experience seasonality. The Company's revenues and operating results in its
December quarter typically benefit from purchase decisions made by the large
concentration of customers with calendar year-end budgeting requirements,
while revenues and operating results in the March quarter typically benefit
from the efforts of the Company's sales force to meet fiscal year-end sales
quotas. In addition, the Company is currently attempting to expand its
presence in international markets, including Europe, the Pacific Rim and
Latin America. International revenues comprise a significant percentage of
the Company's
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total revenues, and the Company may experience additional variability in
demand associated with seasonal buying patterns in such foreign markets.
PRODUCT CONCENTRATION; DEPENDENCE ON MARKET ACCEPTANCE OF ENTERPRISE
SERVICE DESK SOFTWARE. The Company currently derives substantially all of
its license revenues from the sale of ServiceCenter and expects ServiceCenter
to account for a significant portion of the Company's revenues for the
foreseeable future. As a result, the Company's future operating results are
dependent upon continued market acceptance of ServiceCenter, including future
enhancements. Factors adversely affecting the pricing of, demand for, or
market acceptance of ServiceCenter, such as competition or technological
change, could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's product strategy has focused on integrating a broad array
of IT management applications with other traditional internal help desk
applications to create an Enterprise Service Desk. The market for Enterprise
Service Desk software is relatively new and is characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer
requirements. The Company's future financial performance will depend in part
on continued growth in the number of organizations implementing Enterprise
Service Desk solutions.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL. The
Company's success will depend to a significant extent on the continued
service of its senior management and certain other key employees of the
Company, including selected sales, consulting, technical and marketing
personnel. None of the Company's employees, including its senior management,
is bound by an employment or non-competition agreement, and the Company does
not maintain key man life insurance on any employee. The loss of the services
of one or more of the Company's executive officers or key employees or the
decision of one or more of such officers or employees to join a competitor or
otherwise compete directly or indirectly with the Company could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, several of the Company's executive
officers, including its President and Chief Executive Officer, Chief
Financial Officer, and certain operating vice presidents, have been employed
by the Company for a relatively short period of time. Since joining the
Company, the new management team has devoted substantial effort in refocusing
the Company's product, sales and marketing strategies. In connection with
such changes, the Company restructured its sales and marketing departments,
which resulted in the replacement of a significant number of employees.
Although management believes that this restructuring has benefitted the
Company, many of the Company's current employees have been with the Company
for only a limited period of time.
In addition, the Company believes that its future success will depend in
large part on its ability to attract and retain additional highly skilled
technical, sales, management and marketing personnel. Competition for such
personnel in the computer software industry is intense, and the Company has
at times in the past experienced difficulty in recruiting qualified
personnel. New employees hired by the Company generally require substantial
training in the use and implementation of the Company's products. There can
be no assurance that the Company will be successful in attracting and
retaining such personnel, and the failure to do so could have a material
adverse effect on the Company's business, operating results and financial
condition.
COMPETITION. The market for the Company's products is highly
competitive, fragmented and subject to rapid technological change and
frequent new product introductions and enhancements. Competitors vary in size
and in the scope and breadth of the products and services offered. The
Company encounters competition from a number of sources, including (i)
providers of internal help desk software applications such as Remedy
Corporation and Software Artistry, Inc., (ii) customer interaction software
companies such as Clarify Inc. and The Vantive Corporation, whose products
include internal help desk applications, and (iii) large information
technology and systems management companies such as International Business
Machines Corporation ("IBM") and Computer Associates International, Inc.
Because barriers to entry in the software market are relatively low, the
Company anticipates additional competition from other established and
emerging companies as the market for Enterprise Service Desk applications
expands. In addition, current and potential competitors have established or
may in the future establish cooperative relationships among themselves or
with third parties. The Company expects software industry consolidation to
occur in the future, and it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market
11
<PAGE>
share, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. Some of the Company's
current and many of its potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products than the
Company. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, operating results and financial condition.
MANAGEMENT OF GROWTH. The Company's business has grown substantially in
recent periods, with total revenues increasing from $19.6 million in fiscal
1995 to $23.8 million in fiscal 1996 and to $35.0 million in fiscal 1997. If
the Company is successful in achieving its growth plans, such growth is
likely to place a significant burden on the Company's operating and financial
systems, resulting in increased responsibility for senior management and
other personnel within the Company. The Company's ability to compete
effectively and to manage future growth, if any, and its future operating
results will depend in part on the ability of its officers and other key
employees to implement and expand operational, customer support and financial
control systems and to expand, train and manage its employee base. There can
be no assurance that the Company's existing management or any new members of
management will be able to augment or improve existing systems and controls
or implement new systems and controls in response to future growth, if any.
The Company's failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition.
EXPANSION OF DISTRIBUTION CHANNELS. The Company has historically sold
its products through its direct sales force and a limited number of
distributors and has provided maintenance and support services through its
technical and customer support staff. The Company is currently investing and
intends to continue to invest significant resources in developing additional
sales and marketing channels through system integrators and original
equipment manufacturers ("OEMs") and other channel partners. There can be no
assurance that the Company will be able to attract channel partners that will
be able to market the Company's products effectively and will be qualified to
provide timely and cost-effective customer support and service. To the extent
the Company establishes distribution through such indirect channels, its
agreements with channel partners may not be exclusive and such channel
partners may also carry competing product lines. Any failure by the Company
to establish and maintain such distribution relationships could have a
material adverse effect on the Company's business, operating results and
financial condition.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. International sales
represented approximately 29% of the Company's total revenues in both fiscal
1996 and fiscal 1997, respectively. The Company currently has international
sales offices in London, Paris, Frankfurt and Copenhagen. The Company
believes that its continued growth and profitability will require expansion
of its international operations, particularly in Europe, Latin America and
the Pacific Rim. Accordingly, the Company intends to expand its international
operations and enter additional international markets, which will require
significant management attention and financial resources. In addition, the
Company's international operations are subject to a variety of risks
associated with conducting business internationally, including fluctuations
in currency exchange rates, longer payment cycles, difficulties in staffing
and managing international operations, problems in collecting accounts
receivable, seasonal reductions in business activity during the summer months
in Europe and certain other parts of the world, increases in tariffs, duties,
price controls or other restrictions on foreign currencies, and trade
barriers imposed by foreign countries, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the Company has only limited experience in developing
localized versions of its products and marketing and distributing its
products internationally. There can be no assurance that the Company will be
able to successfully localize, market, sell and deliver its products
internationally. The inability of the Company to expand its international
operations successfully and in a timely manner could have a material adverse
effect on the Company's business, operating results and financial condition.
A significant portion of the Company's business is conducted in
currencies other than the U.S. dollar. Foreign currency transaction gains and
losses arising from normal business operations are credited to or charged
against earnings in the period incurred. As a result, fluctuations in the
value of the currencies in which the Company conducts its business relative
to the U.S. dollar have caused and will continue to cause currency
transaction gains and losses. Due to the substantial volatility of currency
exchange rates, among other factors, the Company cannot predict the effect of
exchange rate fluctuations upon future operating results. There can be no
assurance that the Company will not
12
<PAGE>
experience currency losses in the future. The Company has not previously
undertaken hedging transactions to cover its currency exposure but may hedge
a portion of its currency exposure in the future as management deems
appropriate.
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibits Exhibit Title
-------- -------------
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule
b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June 30, 1997.
13
<PAGE>
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 in the City of San Diego, California,
this 13th day of August, 1997.
PEREGRINE SYSTEMS, INC.
By /s/ DAVID A. FARLEY
-------------------
David A. Farley
Vice President, Finance, Chief Financial
Officer (Principal Financial and
Accounting Officer)
14
<PAGE>
EXHIBIT 11.1
PEREGRINE SYSTEMS, INC.
COMPUTATION OF NET INCOME PER SHARE
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
---- ----
Net income $ 1,417,000 $ 231,000
----------- ------------
Weighted Average Number of Shares and
Equivalent Shares Outstanding Weighted
Average Number of Shares Outstanding 14,994,000 12,904,000
Effect of Stock Options 2,573,000 1,426,000
----------- ------------
17,567,000 14,330,000
----------- ------------
Net Income Per Share $ 0.08 $ 0.02
----------- ------------
----------- ------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> JUN-30-1997
<CASH> 17,394,000
<SECURITIES> 0
<RECEIVABLES> 10,615,000
<ALLOWANCES> (350,000)
<INVENTORY> 0
<CURRENT-ASSETS> 30,669,000
<PP&E> 9,684,000
<DEPRECIATION> (5,293,000)
<TOTAL-ASSETS> 35,543,000
<CURRENT-LIABILITIES> 16,012,000
<BONDS> 0
0
0
<COMMON> 15,000
<OTHER-SE> 16,436,000
<TOTAL-LIABILITY-AND-EQUITY> 35,543,000
<SALES> 11,015,000
<TOTAL-REVENUES> 11,015,000
<CGS> 1,840,000
<TOTAL-COSTS> 8,944,000
<OTHER-EXPENSES> 8,000
<LOSS-PROVISION> 130,000
<INTEREST-EXPENSE> 10,000
<INCOME-PRETAX> 2,249,000
<INCOME-TAX> 832,000
<INCOME-CONTINUING> 1,417,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,417,000
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
