<PAGE>
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 SEPTEMBER 30, 1998
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 (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION
INCORPORATION OR NUMBER)
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 September 30, 1998 was 23,210,942.
<PAGE>
PEREGRINE SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited) and
March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the Three Months Ended
September 30, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for the Six Months Ended
September 30, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements (unaudited) . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
- -------- -----------------
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 23
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1998
--------- -------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $14,950 $12,552
Short-term investments . . . . . . . . . . . . . . . . . . 7,027 3,000
Accounts receivable, net of allowance for doubtful
accounts of $485 and $1,447, respectively. . . . . . . . 16,761 24,505
Deferred tax assets. . . . . . . . . . . . . . . . . . . . 7,297 7,297
Other current assets . . . . . . . . . . . . . . . . . . . 2,905 6,433
------- -------
Total current assets. . . . . . . . . . . . . . . . . . 48,940 53,787
Property and equipment, net . . . . . . . . . . . . . . . . . 5,455 9,609
Goodwill and other. . . . . . . . . . . . . . . . . . . . . . 2,342 11,913
------- -------
$56,737 $75,309
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 2,337 $ 4,992
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 9,310 15,860
Deferred revenue . . . . . . . . . . . . . . . . . . . . . 11,570 12,017
Current portion of long-term debt. . . . . . . . . . . . . 151 398
------- -------
Total current liabilities . . . . . . . . . . . . . . . 23,368 33,267
Long-term debt, net of current portion. . . . . . . . . . . . 966 927
Deferred revenue, net of current portion. . . . . . . . . . . 1,802 1,800
------- -------
Total liabilities. . . . . . . . . . . . . . . . . . 26,136 35,994
------- -------
Stockholders' Equity:
Preferred stock, $0.001 par value, 5,000 shares authorized,
no shares issued or outstanding. . . . . . . . . . . . . - -
Common stock, $0.001 par value, 200,000 shares authorized,
18,790 and 23,207 issued and outstanding, respectively . 19 23
Additional paid-in capital . . . . . . . . . . . . . . . . 74,351 168,024
Accumulated deficit. . . . . . . . . . . . . . . . . . . . (41,461) (125,862)
Unearned portion of deferred compensation. . . . . . . . . (1,493) (1,303)
Cumulative translation adjustment. . . . . . . . . . . . . (553) (496)
Treasury stock, at cost. . . . . . . . . . . . . . . . . . (262) (1,071)
------- -------
Total stockholders' equity . . . . . . . . . . . . . 30,601 39,315
------- -------
$56,737 $75,309
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, SIX MONTHS ENDED SEPT. 30,
---------------------------- --------------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses. . . . . . . . . . . . . . . . . . . . . $ 7,039 $ 17,375 $ 13,367 $ 31,257
Maintenance and services. . . . . . . . . . . . . 5,164 12,279 9,851 20,147
-------- -------- -------- --------
Total revenues . . . . . . . . . . . . . . . . 12,203 29,654 23,218 51,404
-------- -------- -------- --------
Costs and Expenses:
Cost of licenses. . . . . . . . . . . . . . . . . 69 52 128 123
Cost of maintenance and services. . . . . . . . . 2,095 6,952 3,876 11,407
Sales and marketing . . . . . . . . . . . . . . . 4,608 10,614 8,925 18,756
Research and development. . . . . . . . . . . . . 1,659 3,206 3,303 5,599
General and administrative. . . . . . . . . . . . 1,169 2,677 2,312 4,657
Acquired in-process research and development
costs . . . . . . . . . . . . . . . . . . . . . 34,775 91,765 34,775 91,765
-------- -------- -------- --------
Total costs and expenses . . . . . . . . . . . 44,375 115,266 53,319 132,307
-------- -------- -------- --------
Operating loss . . . . . . . . . . . . . . . . . . . (32,172) (85,612) (30,101) (80,903)
Interest income and other. . . . . . . . . . . . . . 226 193 404 453
-------- -------- -------- --------
Loss from operations before income taxes . . . . . . (31,946) (85,419) (29,697) (80,450)
Income tax expense . . . . . . . . . . . . . . . . . 1,048 2,209 1,880 3,951
-------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . $(32,994) $(87,628) $(31,577) $(84,401)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share - basic:
Net loss per share . . . . . . . . . . . . . . . $ (2.20) $ (4.06) $ (2.14) $ (4.12)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding . . . 15,001 21,559 14,777 20,506
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share - diluted:
Net loss per share . . . . . . . . . . . . . . . $ (2.20) $ (4.06) $ (2.14) $ (4.12)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding . . . $ 15,001 $ 21,559 $ 14,777 $ 20,506
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE>
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $(31,577) $(84,401)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 391 1,661
Charge for acquired research and development. . . . . . . . . 34,775 91,765
Increase (decrease) in cash resulting from changes in:
Accounts receivable . . . . . . . . . . . . . . . . . . (1,899) (5,125)
Financed receivables. . . . . . . . . . . . . . . . . . 217 -
Deferred tax asset. . . . . . . . . . . . . . . . . . . 1,415 -
Other current assets. . . . . . . . . . . . . . . . . . 7 (3,276)
Other assets. . . . . . . . . . . . . . . . . . . . . . 588 (166)
Accounts payable. . . . . . . . . . . . . . . . . . . . 893 1,289
Accrued expenses. . . . . . . . . . . . . . . . . . . . (1,425) (7,835)
Deferred revenue. . . . . . . . . . . . . . . . . . . . (1,027) (2,515)
-------- --------
2,358 (8,603)
-------- --------
Net cash used by discontinued business. . . . . . . . . (170) -
-------- --------
Net cash provided by (used in) operating activities. 2,188 (8,603)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . . . (280) (3,882)
Purchases of short-term investments . . . . . . . . . . . . . - (25,000)
Maturities of short-term investments. . . . . . . . . . . . . - 29,027
Cash acquired in acquisition. . . . . . . . . . . . . . . . . 582 46
-------- --------
Net cash provided by investing activities . . . . . . . 302 191
-------- --------
Cash flows from financing activities:
Repayment on bank line of credit, net . . . . . . . . . . . . (1,974) -
Repayments of long-term debt. . . . . . . . . . . . . . . . . (1,683) (489)
Issuance of common stock. . . . . . . . . . . . . . . . . . . 18,269 7,257
Treasury stock purchased. . . . . . . . . . . . . . . . . . . (262) (809)
Principal payments under capital lease obligation . . . . . . (218) -
-------- --------
Net cash provided by financing activities . . . . . . . 14,132 5,959
-------- --------
Effect of exchange rate changes on cash. . . . . . . . . . . . . (173) 55
-------- --------
Net increase (decrease) in cash. . . . . . . . . . . . . . . . . 16,449 (2,398)
Cash and equivalents, beginning of period. . . . . . . . . . . . 305 14,950
-------- --------
Cash and equivalents, end of period. . . . . . . . . . . . . . . $ 16,754 $ 12,552
-------- --------
-------- --------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 23 $ 10
Income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 567 $ 45
Supplemental disclosure of non-cash investing and financial activities:
Stock issued and other non-cash consideration for
acquisition. . . . . . . . . . . . . . . . . . . . . . . $ 38,617 $ 86,421
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of September
30, 1998, the condensed consolidated statements of operations for the three
and six month periods ended September 30, 1998 and 1997, and the condensed
consolidated statements of cash flows for the six month periods ended
September 30, 1998 and 1997 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, 1998, 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 or any other
future period. 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. EARNINGS PER SHARE
Effective fiscal year 1998, the Company retroactively adopted the
provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), "Earnings per share." SFAS No. 128 requires companies to compute net
income (loss) per share under two different methods, basic and diluted per
share data for all periods for which an income statement is presented. Basic
earnings per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if the
income were divided by the weighted-average number of common shares and
potential common shares from outstanding stock options for the period.
Potential common shares are calculated using the treasury stock method and
represent incremental shares issuable upon exercise of the Company's
outstanding options. For the periods reflected in the table below the
diluted loss per share calculation excludes effects of outstanding stock
options as such inclusion would be anti-dilutive. The following table
provides reconciliation of numerators and denominators used in calculating
basic and diluted loss per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30 SIX MONTHS ENDED SEPT. 30
--------------------------- -------------------------
1997 1998 1997 1998
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net loss . . . . . . . . . . . . . . . . . . . . (32,994) (87,628) (31,577) (84,401)
Weighted average common shares outstanding . . . 15,001 21,559 14,777 20,506
-------- -------- -------- --------
Basic loss per share . . . . . . . . . . . . . . . $ (2.20) $ (4.06) $ (2.14) $ (4.12)
-------- -------- -------- --------
-------- -------- -------- --------
DILUTED EARNINGS PER SHARE:
Net loss . . . . . . . . . . . . . . . . . . . . $(32,994) $(87,628) $(31,577) $(84,401)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding . . . 15,001 21,559 14,777 20,506
Common stock options outstanding
(unless anti-dilutive). . . . . . . . . . . . . - - - -
-------- -------- -------- --------
Total weighted average common shares and
equivalents . . . . . . . . . . . . . . . . . . . 15,001 21,559 14,777 20,506
-------- -------- -------- --------
Diluted loss per share . . . . . . . . . . . . . . $ (2.20) $ (4.06) $ (2.14) $ (4.12)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
6
<PAGE>
NOTE 3. ACCOUNTING STANDARDS
Statement of Financial Accounting Standards Board's SFAS No. 130,
"Reporting Comprehensive Income" is effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components (revenue, expense,
gains, and losses) in a full set of general-purpose financial statements. The
adoption of this statement had no impact on the Company's net income or
stockholders' equity, therefore no adjustments are reflected in stockholders'
equity.
Statement of Financial Accounting Standards Board's SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes
standards for related disclosures about products and services, major
customers, and material countries in which the entity holds assets and
reports revenue. The adoption of SFAS No. 131 did not affect the results of
operations or financial position of the Company, but may require the
Company to disclose segment information in its Annual Report on Form 10-K for
the year ending March 31, 1999.
Statement of Financial Accounting Standards Board's SFAS No. 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits" is
effective for fiscal years beginning after December 15, 1997. SFAS No. 132
established standards for employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans. The adoption of SFAS No.132 had no material
impact on the Company's financial statements or related disclosures thereto.
Statement of Financial Accounting Standards Board's SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" is effective
for fiscal years beginning after June 15, 1999. SFAS No. 133 establishes
standards for companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending
on the use of the derivatives and whether they qualify for hedge accounting.
The key criterion for hedge accounting is that the hedging relationship must
be highly effective in achieving offsetting changes in fair value or cash
flows. The Company has not yet determined what impact, if any, the adoption
of SFAS No. 133 will have on the Company's consolidated financial statements,
results of operations, or related disclosures thereto.
NOTE 4. ACQUISITIONS
On July 30, 1998, the Company completed the acquisition of Innovative
Tech Systems, Inc. ("Innovative"). The acquisition was structured as a
tax-free stock-for-stock exchange resulting in the issuance of 2,959,164
shares of Company Common Stock for all outstanding shares of Innovative
Common Stock valued at a total purchase price of $85.9 million, including
merger costs and assumed liabilities. The transaction was accounted for
under the purchase method of accounting and, accordingly, the assets,
including in-process research and development, and liabilities, were recorded
based on their fair values at the date of acquisition and the results of
operations for Innovative have been included in the financial statements for
the period subsequent to acquisition. The Company allocated the excess
purchase price over the fair value of net liabilities assumed to goodwill.
As of the acquisition date, technological feasibility of the in-process
technology had not been established; therefore the Company has expensed
in-process research and development of $81.6 million as of the date of
acquisition in accordance with generally accepted accounting principles.
On September 23, 1998, the Company completed the acquisition of certain
technology and other assets and liabilities from International Software
Solutions and related persons and entities (collectively "ISS"). The Company
issued 392,080 shares of Company Common Stock in exchange for these assets
valued at a total purchase price, including merger costs, of $15.6 million.
The transaction was accounted for as an asset purchase and, accordingly the
assets, including in-process research and development, were recorded based on
their fair value at the date of acquisition and the results of operations for
ISS have been included in the financial statements for the period subsequent
to the acquisition. The Company has allocated the excess purchase price over
the fair value of net assets acquired to goodwill.
7
<PAGE>
As of the acquisition date, technological feasibility of the in-process
technology had not been established; therefore the Company has expensed the
amount of the purchase price allocated to in-process research and development
of $10.1 million as of the date of acquisition in accordance with generally
accepted accounting principles.
The amount of the purchase prices for the aforementioned acquisitions
allocated to in-process research and development was determined by examining
the stage of development of each in-process research and development project
at the date of acquisition, estimating cash flows resulting from the expected
revenues generated from such projects, and discounting the net cash flows
back to their present value. The goodwill recorded in connection with these
acquisitions will be amortized over a five year period on a straight-line
basis. If these projects are not successfully developed, the Company may not
realize the value assigned to the in-process research and development
projects. In addition, the value of the other acquired intangible assets may
also become impaired.
The following unaudited pro forma consolidated operating results of
the Company and Innovative for the six months ended September 30, 1997 and
1998 are summarized below (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Revenue. . . . . . . . . . . . . . $30,345 $61,085
Operating income . . . . . . . . . 4,454 11,002
Net income . . . . . . . . . . . . 3,011 7,446
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as the amortization of
goodwill. However, they do not include the impact of the write-off of $34.8
million and $81.6 million of acquired in-process research and development
costs in 1997 and 1998, respectively. They do not purport to be indicative
of the results of operations that actually would have resulted had the
acquisitions been effective on April 1, 1997 and 1998, or of future results
of operations of the consolidated entities. The pro forma effect of the ISS
transaction, exclusive of the write-off of in-process research and
development, is considered immaterial for all periods presented.
8
<PAGE>
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 (alternatively "PSI" or "We") develops, markets, and
supports an integrated suite of software applications that automates the
management of complex, enterprise-wide information and infrastructure assets.
In 1995, the Company commenced sales of SERVICECENTER, the Company's
Enterprise Service Desk product suite. During fiscal 1998 the Company
expanded the strategic concept of its product line by implementing its
Infrastructure Management strategy and executing on that strategy with its
acquisition in September 1997 of United Software, Inc., including its
wholly-owned subsidiary Apsylog, S.A. ("Apsylog Acquisition"). As a result
of the Apsylog Acquisition, the Company acquired its ASSETCENTER asset
management product suite. SERVICECENTER and ASSETCENTER are currently
available for the Windows NT and UNIX platforms, and SERVICECENTER continues
to be available for the MVS platform.
Since the release of SERVICECENTER in July 1995, and until the Apsylog
Acquisition, SERVICECENTER accounted for substantially all of the Company's
license revenues. Since the Apsylog Acquisition, SERVICECENTER and
ASSETCENTER together have accounted for substantially all of the Company's
license revenues.
During fiscal 1998, the Company determined that customer needs required
a more comprehensive solution for control and management of their
infrastructure assets, including availability of assets, minimizing
investments and expense, consolidating data, and interfacing to enterprise
applications. Accordingly, the Company refocused its marketing strategy and
product positioning to focus on this Infrastructure Management strategy. The
Company's focus on the Infrastructure Management strategy, the Company's
rapid growth, and the Apsylog Acquisition have resulted in continuing efforts
to rebuild the Company's senior management team, redefine the product
development strategy, establish a comprehensive marketing strategy, and
strengthen the Company's financial and budgeting processes.
On July 30, 1998, the Company completed the acquisition of Innovative
Tech Systems, Inc., a provider of facilities management software systems
("Innovative"). The Company acquired Innovative to further its
Infrastructure Management strategy by coupling the Company's SERVICECENTER
and ASSETCENTER products, which focus on the users information technology
infrastructure, with Innovative's SPAN-FM product, which assist users to
track and manage their physical plant, facilities, and related assets.
On September 23, 1998, the Company completed the acquisition of certain
technology and other assets and liabilities of International Software
Solutions and related persons and entities ("ISS"). The Company acquired
these assets to further its Infrastructure Management strategy by extending
its ability to provide enterprise remote control activities.
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. The Company has sold its original
PNMS software to a sizable installed base of customers, many of whom have
transitioned to SERVICECENTER. The Company's installed customer base has
generated a consistent level of maintenance revenues.
9
<PAGE>
Revenues from license agreements are recognized currently, provided that
all of the following conditions are met: a noncancelable 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
objective 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 currently derives substantially all of its license revenues
from the sale of SERVICECENTER and ASSETCENTER and expects them 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 the SERVICECENTER and ASSETCENTER product
suites, including future enhancements, as well as SPAN-FM. Factors adversely
affecting the pricing of, demand for or market acceptance of the
SERVICECENTER, ASSETCENTER, or SPAN-FM product suites, such as competition or
technological change, could have a material adverse effect on the Company's
business, operating results, and financial condition.
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. The Company has
implemented a foreign currency forward hedging program. The hedging program
consists primarily of using 30-day forward-rate currency contracts. Currency
contracts are in accordance with SFAS No. 52 and receive hedge accounting
treatment. Accordingly, to the extent properly hedged by obligations
denominated in local currencies, the Company's foreign operations remain
subject to the risks of future foreign currency fluctuations, and there can
be no assurances that the Company's hedging activities will adequately
protect the Company against such risk.
Although the Company has been expanding its presence in the Pacific Rim
over the last year, its Pacific Rim sales activity has not been material.
Accordingly, the Company's operations and financial conditions have not been
materially impacted by the recent Asian financial crisis.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
consolidated statements of operations data as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, SIX MONTHS ENDED SEPT. 30,
---------------------------- --------------------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses. . . . . . . . . . . . . . . . . . . . . 57.7 % 58.6 % 57.6 % 60.8 %
Maintenance and services. . . . . . . . . . . . . 42.3 41.4 42.4 39.2
------ ------ ------ ------
100.0 100.0 100.0 100.0
Costs and expenses:
Cost of licenses. . . . . . . . . . . . . . . . . 0.6 0.2 0.6 0.2
Cost of maintenance and services. . . . . . . . . 17.1 23.4 16.7 22.2
Sales and marketing . . . . . . . . . . . . . . . 37.7 35.8 38.4 36.5
Research and development. . . . . . . . . . . . . 13.6 10.8 14.2 10.9
General and administrative. . . . . . . . . . . . 9.6 9.0 10.0 9.1
Acquired research and development costs . . . . . 285.0 309.5 149.8 178.5
------ ------ ------ ------
Total costs and expenses . . . . . . . . . . . 363.6 388.7 229.7 257.4
------ ------ ------ ------
Operating income. . . . . . . . . . . . . . . . . . (263.6) (288.7) (129.7) (157.4)
Interest income and other . . . . . . . . . . . . . 1.8 0.7 1.8 0.9
------ ------ ------ ------
Income (loss) before income taxes . . . . . . . . . (261.8) (288.0) (127.9) (156.5)
Income tax expense. . . . . . . . . . . . . . . . . 8.6 7.4 8.1 7.7
------ ------ ------ ------
Net income. . . . . . . . . . . . . . . . . . . . . (270.4)% (295.4)% (136.0)% (164.2)%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
THREE MONTH AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
The Company's results of operations for the three month and six month
periods ended September 30, 1998 include results of operation for (i)
Innovative subsequent to July 30, 1998 and (ii) subsequent to September 23,
1998, activity related to the assets and liabilities acquired from ISS.
REVENUES
Total revenues were $29.7 million and $12.2 million in the second
quarter of fiscal 1999 and 1998, respectively, representing a
period-to-period increase of 143%. For the six month periods ended September
30, 1998 and 1997, total revenues increased 121% from $23.2 million to $51.4
million. The reasons for the revenue increases are more fully discussed below.
LICENSES. License revenues were $17.4 million and $7.0 million in the
second quarter of fiscal 1999 and 1998, respectively, representing 59% and
58% of total revenues in the respective periods and $31.3 million and $13.4
million for the six months ended September 30, 1998 and 1997, respectively,
representing 61% and 58% of total revenues for such periods. License
revenues increased 147% in the second quarter of fiscal 1999 compared to the
second quarter of fiscal 1998. For the six months ended September 30, 1998,
license revenues increased 134% compared to the six month period ended
September 30, 1997. The increases in license revenues are attributable to
increased demand for new licenses of SERVICECENTER and ASSETCENTER, the full
quarter's effect of ASSETCENTER activity, additional seats purchased by
existing customers, higher average transaction sizes, more effective
corporate marketing programs, improved sales force productivity, expansion of
the Company's domestic and international sales forces, and the effects of
combining Innovative's operations since the Innovative acquisition in July
1998.
MAINTENANCE AND SERVICES. Maintenance and services revenues were $12.3
million and $5.2 million in the second quarter of fiscal 1999 and 1998,
respectively, representing 41% and 42% of total revenues in the respective
periods and $20.1 million and $9.9 million for the six months ended September
30, 1998 and 1997, respectively, representing 39% and 42% of total revenues
for such periods. Maintenance and services revenues increased 138% in the
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second quarter of fiscal 1999 compared to the second quarter of fiscal 1998.
For the six months ended September 30, 1998, maintenance and services
revenues increased 105% compared to the six months ended September 30, 1997.
The dollar increases are attributable to renewals of maintenance agreements
from the Company's expanded installed base of customers, maintenance revenues
included as part of new licenses, an increased number of consulting
engagements related to implementation of software from initial license
agreements, and the effects of combining Innovative's operations since the
Innovative acquisition in July 1998.
COSTS AND EXPENSES
COST OF LICENSES. Cost of licenses was $52,000 and $69,000 in the
second quarter of fiscal 1999 and 1998, respectively, each representing less
than 1% of total license revenues in the respective periods and $123,000 and
$128,000 for the six month periods ended September 30, 1998 and 1997,
respectively, again representing less than 1% of the total license revenues
in the respective periods.
COST OF MAINTENANCE AND SERVICES. Cost of maintenance and services
revenues was $7.0 million and $2.1 million in the second quarter of fiscal
1999 and 1998, respectively, representing 57% and 41% of total maintenance
and service revenues in the respective periods and $11.4 million and $3.9
million for the six months ended September 30, 1998 and 1997, respectively,
representing 57% and 39% of total maintenance and services revenues for such
periods, respectively. The dollar increases in the second quarter of fiscal
1999 over 1998 and in the six months ended September 30, 1998 over the same
period in 1997 are attributable to an increase in customer support personnel
and professional services personnel in connection with the corresponding
increase in professional services revenue, the full quarter's effect of
ASSETCENTER activity, and the effects of combining Innovative's operations
since the Innovative acquisition in July 1998. Cost of maintenance and
services increased as a percentage of related revenues because of increased
labor and associated recruiting costs.
SALES AND MARKETING. Sales and marketing expenses were $10.6 million
and $4.6 million in the second quarter of fiscal 1999 and 1998, respectively,
representing 37% and 38% of total revenues in the respective periods and
$18.8 million and $8.9 million for the six months ended September 30, 1998
and 1997, respectively, representing 36% and 38% of total revenues in such
periods. The dollar increases in sales and marketing expenses are
attributable to the significant expansion of both the North American and
international sales forces, increase in marketing personnel, the full
quarter's effect of ASSETCENTER activity, the effect of moderate operating
expense increases, and the effects of combining Innovative's operations since
the Innovative acquisition in July 1998. Sales and marketing have decreased
as a percentage of total revenues for the respective periods as a result of
revenues increasing at a faster rate. 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.
RESEARCH AND DEVELOPMENT. Research and development expenses were $3.2
million and $1.7 million in the second quarter of fiscal 1999 and 1998,
respectively, representing 11% and 14% of total revenues in the respective
periods and $5.6 million and $3.3 million for the six months ended September
30, 1998 and 1997, respectively, representing 11% and 14% of total revenues
in such periods. The dollar increases in research and development from
fiscal 1998 to 1999 are due primarily to the increased cost of product author
commissions, the hiring of additional software developers, an increase in the
number of personnel in the Research and Development department, the full
quarter's effect of ASSETCENTER activity, and the effects of combining
Innovative's operations since the Innovative acquisition in July 1998.
Research and development expenses have decreased as a percentage of total
revenues from the second quarter of fiscal 1998 to the second quarter of
fiscal 1999 as a result of revenues increasing at a faster rate.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2.7 million and $1.2 million in the second quarter of fiscal 1999 and 1998,
respectively, representing 9% and 10% of total revenues in the respective
periods, and $4.7 million and $2.3 million for the six months ended September
30, 1998 and 1997, respectively, representing 9% and 10% of total revenues in
such periods. The dollar increases from fiscal 1998 to 1999 are attributable
primarily to costs associated with administrative personnel additions to
support the Company's growth, amortization of goodwill, management
restructuring, the full quarter's effect of ASSETCENTER activity, and the
effects of combining Innovative's operations since the Innovative acquisition
in July 1998 while the decreases as a percentage of total revenues reflect
the fact that revenues grew at a faster rate than general and administrative
expenses.
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<PAGE>
ACQUIRED RESEARCH AND DEVELOPMENT COSTS. Acquired in-process research
and development costs of $91.8 million were incurred in the second quarter of
fiscal 1999 in connection with the Innovative and ISS acquisitions. Acquired
in-process research and development costs of $34.8 million were incurred in
the second quarter of fiscal 1998 in connection with the acquisition of
United Software, Inc.
INCOME TAX EXPENSE. Income tax expense for the second fiscal quarter of
1999 amounted to $2.2 million compared with $1.0 million in the comparable
quarter of fiscal 1998. This increase results from the $3.5 million dollar
increase in operating profits, before taxes and recognition of the acquired
research and development costs in the respective periods. Excluding the
effect of expensing the acquired in-process research and development costs,
the effective tax rate for the second quarter of fiscal 1998 and for the six
months ended September 30, 1998 was 35%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $15.6 million in cash, cash equivalents, and short-term
investments at September 30, 1998 compared to $22.0 million at March 31,
1998. The decrease in cash, cash equivalents, and short-term investments is
primarily attributable to acquisition related costs incurred during the six
month period.
The Company believes that 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.
YEAR 2000 RISKS
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
such Year 2000 requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
The Company utilizes third party equipment and software that may not be
Year 2000 compliant and is conducting an internal audit of products provided
by outside vendors to determine if such third party products are Year 2000
compliant. Although such audit is not net completed, the Company has received
assurances from suppliers of all third party software that the Company deems
material to its business that such software is Year 2000 compliant. Failure
of such third party equipment or software to operate properly with regard to
the Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
its business, results of operations, and financial condition. If key systems,
or a significant number of systems, were to fail as a result of Year 2000
problems or if the Company was to experience delays implementing Year 2000
compliant software products, the Company could incur substantial costs and
disruption of its business, which would potentially have a material adverse
effect on its results of operations and financial conditions.
The Company is still assessing the impact the Year 2000 issue will have
on its proprietary software products and internal information systems and
will take appropriate corrective actions based on the results of such
analyses. Management of the Company has not yet determined the costs related
to achieving Year 2000 compliance but does not believe such costs will be
material. To the extent the cost of achieving Year 2000 compliance are
material, such costs will have a material adverse effect on its business,
results of operations,and financial condition.
In the ordinary course of its business, the Company tests and evaluates
its own software products and believes that its software products are
generally Year 2000 compliant, meaning that the use or occurrence of dates on
or after January 1, 2000 will not materially affect the performance of such
software products with respect to four digit date dependent data or the
ability of such products to correctly create, store, process, and output
information related to such data. There can be no assurance, however, that
the Company will not subsequently learn that certain of its software products
do not contain all necessary software routines and codes necessary for the
accurate calculation, display, storage, and manipulation of data involving
dates. In addition, in certain circumstances, the Company has warranted that
the use or occurrence of dates on or after January 1, 2000 will not adversely
affect the performance of its products with respect to four digit date
dependent data or the ability to create, store, process, and output
information related to such data. If any licensees experience Year 2000
problems, such licensees could assert claims for damages.
In addition, the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues. Many companies are expending
significant resources to correct their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase software products such as those offered by the Company, which could
have an adverse effect on the business, results of operations, and financial
condition of the Company.
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
STATEMENT 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:
HISTORY OF OPERATING LOSSES. We have recorded cumulative net losses of
approximately $125.9 million through September 30, 1998. This amount includes
approximately $34.8 million related to the write-off of acquired in-process
research and development in connection with our acquisition of United
Software, Inc. including its Apsylog S.A. subsidiary ("Apsylog") which was
completed in September 1997, $81.6 million related to the write-off of
acquired in-process research and development in connection with our July 1998
acquisition of Innovative Tech Systems, Inc. ("Innovative"), and $10.1
million related to the write-off of acquired in-process research and
development in connection with our September 1998 acquisition of certain
remote control technology from International Software Solutions ("ISS"). Our
main product lines have changed substantially in recent years. For example,
our SERVICECENTER product only began shipping in mid-1995 and our ASSETCENTER
product only began shipping in mid-1996. As a result, prediction of our
future operating results is difficult, if not impossible. Although our
operating results were positive during the years ended March 31, 1997 and
1998 (excluding the impact of the $34.8 million charge related to acquired
in-process research and development in connection with our acquisition of
Apsylog), we may not remain profitable on a quarterly or annual basis. In
addition, we do not believe that the growth in our revenues that we have
experienced in recent years is 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
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<PAGE>
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 total revenues, and the Company may experience additional
variability in demand associated with seasonal buying patterns in such
foreign markets.
PRODUCT CONCENTRATION. Almost all of our license revenues results from
the sale of our SERVICECENTER and ASSETCENTER products. We expect these
products to continue to account for a large portion of our revenues for the
foreseeable future. Our future operating results are dependent upon continued
market acceptance of SERVICECENTER and ASSETCENTER, including future
enhancements. In addition, our operating results will be affected by customer
acceptance of SPAN-FM as a PSI product suite. We acquired SPAN-FM, a
facilities automation software application, through our July 1998 acquisition
of Innovative. Any factors adversely affecting the pricing of, demand for, or
market acceptance of SERVICECENTER, ASSETCENTER, or SPAN-FM, such as
competition or technological change, could materially adversely affect our
business, operating results, and financial condition.
DEPENDENCE ON MARKET ACCEPTANCE OF INFRASTRUCTURE MANAGEMENT SOFTWARE
SOLUTIONS AND RAPID TECHNOLOGY CHANGE. Until recently, we have focused on
developing software products to help manage many aspects of a business's
information technology ("IT") systems. In September 1997, we broadened our IT
infrastructure management product suite by acquiring ASSETCENTER, an asset
management product line, through our acquisition of Apsylog. In addition, we
have increased the functionality of SERVICECENTER to manage aspects of the
enterprise infrastructure not necessarily related to IT. In July 1998, we
acquired Innovative, a provider of facilities management software.
Innovative's product strategy has focused on providing building and
facilities management and fire safety and inspection software applications,
including SPAN-FM. In acquiring Innovative, we intend to further broaden our
product line beyond traditional IT infrastructure management. We are seeking
to offer a more comprehensive product suite capable of managing a business's
IT infrastructure, its physical plant and facilities, its communications
infrastructure, and its distribution systems.
In recent years, the market for enterprise software solutions has been
characterized by rapid technological
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<PAGE>
change, frequent new product announcements and introductions, and evolving
industry standards. In response to advances in technology, customer
requirements have become increasingly complex, resulting in industry
consolidation of product lines offering similar or related functionality. We
believe that a market for integrated enterprise-wide infrastructure
management solutions is evolving from existing requirements for specific IT
management solutions. Such enterprise-wide solutions would include
applications for IT management, asset management, building and facilities
management, communications resource management, and distribution systems
management. However, the existence of such a market is unproven. If such a
market does not fully develop, this would materially adversely affect our
business, operating results, and financial condition.
As a result of rapid technology change in our industry, our position in
existing markets or other markets that we may enter can be eroded rapidly by
product advances. The life cycles of our products are difficult to estimate.
Our growth and future financial performance depends in part upon our ability
to improved existing products, develop and introduce new products that keep
pace with technological advances, meet changing customer needs, and respond
to competitive products. Our product development efforts will continue to
require substantial investments. We may not have sufficient resources to make
the necessary investments.
INTEGRATION OF INNOVATIVE TECH SYSTEMS INTO PSI'S BUSINESS. Our
acquisition of Innovative, which was completed in July 1998, will require
integrating Innovative into PSI. Prior to the acquisition, Innovative and PSI
were two geographically separated companies that had been operated
independently. We believe that the acquisition of Innovative will further our
strategy to provide customers with a complete infrastructure management
software solution. However, difficulties may be encountered in integrating
the product offerings, operations and technology of Innovative with those of
PSI. We may not be able to successfully complete technology development or
market new products currently in development or develop any new products that
relate to the Innovative products. Anticipated marketing, distribution, or
other operational benefits and efficiencies from the acquisition of
Innovative may not be achieved. The morale of PSI and Innovative employees
may be adversely affected as a result of the acquisition and the resulting
integration.
Integrating Innovative into our existing business may prove difficult
given that the two companies were geographically separated, have different
corporate cultures and have personnel with different business backgrounds. We
may not be able to retain a sufficient number of Innovative's key employees.
Additionally, we may have problems combining the engineering teams from
Innovative with our existing teams so that such teams will successfully
cooperate and realize any technological benefits from the combined
businesses. Sales of Innovative products may not be markedly enhanced by the
broader distribution and marketing opportunities available through PSI. We
may not be able to benefit from the broader product offerings available as a
result of the acquisition or from any other anticipated benefits. Any failure
to integrate the businesses and technologies of the companies successfully or
any failure to realize the anticipated benefits of the acquisition could
materially adversely affect our business, results of operations, and
financial condition.
In addition, if our management devotes too much time and attention to
the integration of Innovative into our existing business, this also could
materially adversely affect our business, operating results, and financial
condition. In addition, certain of Innovative's suppliers, distributors, or
customers may end their agreements with Innovative as a result of the
acquisition. In addition, prospective customers of Innovative may delay their
orders as a result of uncertainties resulting from the acquisition. For
example, customers or potential customers of Innovative could terminate or
delay orders with PSI because they may feel that we are not committed to
providing products and enhancements or support services for Innovative
products. If a significant number of Innovative customers or potential
customers cancel or do not renew their arrangements with Innovative or PSI or
delay their orders of our products, this could have materially adversely
affect our business, results of operations, and financial condition. We
expect any such affects to be felt most strongly in near-term quarters.
INTEGRATION OF INTERNATIONAL SOFTWARE SOLUTIONS INTO PSI'S PRODUCTS. Our
acquisition of remote control technology from International Software
Solutions and related entities and persons (collectively "ISS"), which was
completed in September 1998, will require integrating the ISS technology with
SERVICECENTER and ASSETCENTER. Difficulties may be encountered in this
integration process. In addition, we may not be able to successfully complete
and market new products that use the ISS technology. The marketing,
distribution, or other operational benefits and efficiencies anticipated from
the acquisition of the ISS technology may not be achieved. We plan to
continue to work with employees of ISS to integrate the ISS technology with
our products. However, there may be problems combining
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<PAGE>
the engineering teams from ISS with our existing teams. As a result, we may
not fully realize the expected technological benefits from the acquired ISS
technology. Any failure to integrate the ISS technology into our products
could materially adversely affect our business, operating results, and
financial condition.
RISKS ASSOCIATED WITH PSI ACQUISITIONS. We have recently completed our
acquisitions of Apsylog, Innovative, and the ISS technology. In the future
PSI may make acquisitions of, or large investments in, other businesses that
offer products, services, and technologies that further our goal of providing
integrated infrastructure management software solutions to businesses. Our
acquisitions of Apsylog, Innovative, and the ISS technology and any future
acquisitions or investments that PSI were to complete present risks commonly
encountered with these types of transactions. The following are examples of
such risks:
- difficulty in combining the technology, operations, or work force of
the acquired business
- disruption of the Company's on-going businesses
- difficulty in realizing the potential financial and strategic position
of PSI through the successful integration of the acquired business
- difficulty in maintaining uniform standards, controls, procedures, and
policies -possible impairment of relationships with employees and
clients as a result of any integration of new businesses and management
personnel
- difficulty in obtaining preferred acquisition accounting treatment for
these types of transactions
- diversion of management attention
The risks described above, either individually or in the aggregate,
could materially adversely affect our business, operating results, and
financial condition. We expect that future acquisitions, if any, could
provide for consideration to be paid in cash, shares of PSI common stock, or
a combination of cash and PSI common stock. However, we may not be able to
complete any such additional acquisitions in the future.
DEPENDENCE ON KEY 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. Few of the Company's
employees, including its senior management, are bound by an employment or
noncompetition agreement. In addition, the Company does not generally
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 benefited the Company, many of the
Company's current employees have been with the Company for only a limited
period of time. The ultimate results of such restructuring is impossible to
predict.
ABILITY TO RECRUIT PERSONNEL.
EXECUTIVE OFFICERS AND KEY PERSONNEL. Our future success will likely
depend in large part on our 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 in the
past we have experienced difficulty in recruiting qualified personnel. New
employees generally require substantial training in the use of our products.
We may not succeed in attracting and retaining such personnel. If we do not,
our business, operating results, and financial condition could be materially
adversely affected.
FOREIGN EMPLOYEES. To achieve our business objectives we must be able to
recruit and employ skilled
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technical professionals from other countries. Any future shortage of
qualified technical personnel who are either United States citizens or
otherwise eligible to work in the United States could increase our reliance
on foreign professionals. Many technology companies have already begun to
experience shortages of such personnel. Any failure to attract and retain
qualified personnel as necessary, including as a result of limitations
imposed by federal immigration laws and the availability of visas issued
thereunder, could materially adversely affect our business and operating
results. Foreign computer professionals such as those employed by us
typically become eligible for employment in the United States by obtaining a
nonimmigrant visas. The number of nonimmigrant visas is limited by federal
immigration law. Currently, Congress is considering approving an increase in
the number of visas available. We cannot predict whether such legislation
will ultimately become law. We also cannot predict what effect any future
changes in the federal immigration laws will have on our business, operating
results, or financial condition.
COMPETITION. The market for our products is highly competitive and
diverse. The technology for infrastructure management software products can
change rapidly. New products are frequently introduced and existing products
are continually enhanced. Competitors vary in size and in the scope and
breadth of the products and services offered.
EXISTING COMPETITION. We have faced competition from a number of
sources, including:
- providers of internal help desk software applications such as Remedy
Corporation and Software Artistry, Inc. (now a division of Tivoli
Systems, Inc.)
- customer interaction software companies such as Clarify Inc. and The
Vantive Corporation, whose products include internal help desk
applications
- information technology and systems management companies such as IBM,
Computer Associates International, Inc., Network Associates, Inc.
(recently formed as a result of the business combination of McAfee
Associates, Inc. and Network General Corporation), and Hewlett-Packard
Company through its acquisition of PROLIN
- providers of asset management and facilities management software
- the internal information technology departments of those companies
with infrastructure management needs
FUTURE COMPETITION. Because competitors can easily penetrate the
software market, we anticipate additional competition from other established
and new companies as the market for enterprise infrastructure management
applications develops. In addition, current and potential competitors have
established or may in the future establish cooperative relationships among
themselves or with third parties. Large software companies may acquire or
establish alliances with smaller competitors of PSI. We expect that the
software industry will continue to consolidate. It is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
Our ability to sell our products depends in part on their compatibility
with and support by providers of system management products, including
Tivoli, Computer Associates, and Hewlett-Packard. Both Tivoli and
Hewlett-Packard have recently acquired providers of help desk software
products. These providers of system management products may decide to close
their systems to competing vendors like PSI. They may also decide to bundle
their infrastructure management and/or help-desk software products with other
products for enterprise licenses for promotional purposes or as part of a
long-term pricing strategy. If that were to happen, our ability to sell our
products could be adversely affected. Increased competition may result from
acquisitions of help desk and other infrastructure management software
vendors by system management companies. The results of increased competition
including price reductions of our products, reduced gross margins, and
reduction of market share, could materially adversely affect our business,
operating results, and financial condition.
GENERAL COMPETITION. Some of our current and many of our potential
competitors have much greater financial, technical, marketing, and other
resources than PSI. As a result, they may be able to respond more quickly to
new or emerging technologies and changes in customer needs. They may also be
able to devote greater resources to the development, promotion, and sale of
their products than we can. We may not be able to compete successfully
against current and future competitors. In addition, competitive pressures
faced by PSI may materially adversely
17
<PAGE>
affect our business, operating results, and financial condition.
MANAGEMENT OF GROWTH. We have grown greatly in recent periods, with
total revenues increasing from $19.6 million in fiscal 1995 to $23.8 million
in fiscal 1996, to $35.0 million in fiscal 1997, and to $61.9 million in
fiscal 1998.
If we achieve our growth plans, including the integration of Apsylog,
Innovative, and the technology acquired from ISS, such growth may burden our
operating and financial systems. This burden will require large amounts of
senior management attention and will require the use of other PSI resources.
Our ability to compete effectively and to manage future growth (and our
future operating results) will depend in part on our ability to implement and
expand operational, customer support, and financial control systems and to
expand, train, and manage our employees. In particular, in connection with
the acquisitions, we will be required to integrate additional personnel and
to augment or replace existing financial and management systems. Such
integration could disrupt our operations and could adversely affect our
financial results. We may not be able to augment or improve existing systems
and controls or implement new systems and controls in response to future
growth, if any. Any failure to do so could materially adversely affect our
business, operating results, and financial condition.
EXPANSION OF DISTRIBUTION CHANNELS. We sell our products through our
direct sales force and a limited number of distributors and we provide
maintenance and support services through our technical and customer support
staff. We plan to continue to invest large amounts of resources to our direct
sales force, particularly in North America where we have recently opened
several new sales offices. In addition, we are developing additional sales
and marketing channels through system integrators and original equipment
manufacturers and other channel partners. We may not be able to attract
channel partners that will be able to market our products effectively or that
will be qualified to provide timely and cost-effective customer support and
service. If we establish distribution through such indirect channels, our
agreements with channel partners may not be exclusive. As a result, such
channel partners may also carry competing product lines. If we do not
establish and maintain such distribution relationships, this could materially
adversely affect our business, operating results, and financial condition.
INTERNATIONAL OPERATIONS. International sales represented approximately
29% of our total revenues in fiscal 1997 and 36% of our total revenue in
fiscal 1998. We currently have international sales offices in London, Paris,
Frankfurt, Amsterdam, and Copenhagen. Our continued growth and profitability
will require continued expansion of our international operations,
particularly in Europe, Latin America, and the Pacific Rim. Accordingly, we
intend to expand our current international operations and enter additional
international markets. Such expansion will require significant management
attention and financial resources. Our international operations are subject
to a variety of risks associated with conducting business internationally,
including the following:
- 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 trade barriers imposed by foreign countries
These factors could materially adversely affect our business, operating
results, and financial condition. We have only limited experience in
developing local-language versions of our products and marketing and
distributing its products internationally. We may not be able to successfully
translate, market, sell and deliver our products internationally. If we are
unable to expand our international operations successfully and in a timely
manner, our business, operating results, and financial condition could be
adversely affected.
Recent instability in the Asian-Pacific economies and financial markets could
adversely affect our business, operating results, and financial condition in
future quarters as well.
18
<PAGE>
CURRENCY FLUCTUATION. A large portion of our business is conducted in
foreign currencies. Fluctuations in the value of foreign currencies relative
to the U.S. dollar have caused and will continue to cause currency
transaction gains and losses. We cannot predict the effect of exchange rate
fluctuations upon future operating results. We may experience currency losses
in the future. We currently maintain a foreign exchange hedging program,
consisting principally of purchases of one month forward-rate currency
contracts. However, our hedging activities may not adequately protect us
against the risks associated with foreign currency fluctuations.
ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION. On January 1, 1999,
certain member states of the European Economic Community (the "EEC") will fix
their respective currencies to a new currency, the euro. On that day, the
euro will become a functional legal currency within these countries. During
the three years beginning on January 1, 1999, business in these EEC member
states will be conducted in both the existing national currency, such as the
French franc or deutsche mark, and the euro. Companies operating in or
conducting business in EEC member states will need to ensure that their
financial and other software systems are capable of processing transactions
and properly handling the existing currencies, as well as the euro. Our
ASSETCENTER product was originally developed for the European market and is
capable of managing currency data measured in euros. We are still assessing
the impact that the euro will have on our internal systems and our other
products. We will take corrective actions based on the results of such
assessment. We have not yet determined the costs related to this problem.
Issues related to the introduction of the euro may materially adversely
affect our business, operating results, and financial condition.
CONTROL BY EXISTING STOCKHOLDERS. Based on shares outstanding as of
September 30, 1998, PSI's officers, directors, and entities directly related
to such individuals together beneficially own approximately 42.0% of the
outstanding shares of PSI common stock. In particular, John J. Moores,
Chairman of PSI's board of directors, owns approximately 36.3% of the
outstanding shares. As a result, PSI's officers and directors will be able to
control most matters requiring stockholder approval, including the election
of directors and the approval of mergers, consolidations, and sales of all or
substantially all of the assets of PSI. Such concentrated share ownership may
prevent or discourage potential bids to acquire PSI unless the terms of
acquisition are approved by such officers and directors.
PRODUCT DEVELOPMENT DELAYS. We have experienced product development
delays in the past and may experience delays in the future. Difficulties in
product development could delay or prevent the successful introduction or
marketing of new or improved products. Any such new or improved products may
not achieve market acceptance. Our current or future products may not conform
to industry requirements. If we are unable, for technological or other
reasons, to develop and introduce new and improved products in a timely
manner, our business, operating results, and financial condition could be
adversely affected.
Because our software products are complex, these products may contain
errors that could be detected at any point in a product's life cycle. In the
past we have discovered software errors in certain of our products and have
experienced delays in shipment of our products during the period required to
correct these errors. Despite testing by PSI and by current and potential
customers, errors in our products may be found in the future. Detection of
such errors may result in, among other things, loss of, or delay in, market
acceptance and sales of our products, diversion of development resources,
injury to our reputation, or increased service and warranty costs. If any of
these results were to occur, our business, operating results, and financial
condition could be materially adversely affected.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. Our success will be heavily
dependent upon proprietary technology. We rely primarily on a combination of
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect our proprietary rights. Such laws provide
only limited protection. Despite precautions that we take, it may be possible
for unauthorized third parties to copy aspects of our current or future
products or to obtain and use information that we regard as proprietary. In
particular, we may provide our licensees with access to our data model and
other proprietary information underlying our licensed applications. Such
means of protecting our proprietary rights may not be adequate. Additionally,
our competitors may independently develop similar or superior technology.
Policing unauthorized use of software is difficult and, while we do not
expect software piracy to be a persistent problem, some foreign laws do not
protect our proprietary rights to the same extent as United States laws.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity
and scope of the proprietary rights of others. Litigation could result in
substantial
19
<PAGE>
costs and diversion of resources to PSI and could materially adversely affect
our business, operating results, and financial condition.
RISKS OF INFRINGEMENT. While we are not aware that any of our software
product offerings infringes the proprietary rights of third parties, third
parties may claim infringement with respect to our current or future
products. We expect that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
the software industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time consuming, result in costly litigation, cause product shipment
delays, or require us to enter into royalty or licensing agreements. Royalty
or license agreements may not be available on acceptable terms or at all. As
a result, infringement claims could have a material adverse affect on our
business, operating results, and financial condition.
PRODUCT LIABILITY. Our license agreements with our customers typically
contain provisions designed to limit exposure to potential product liability
claims. Such limitation of liability provisions may, however, not be
effective under the laws of certain jurisdictions. Although we have not
experienced any product liability claims to date, the sale and support of our
products entails the risk of such claims. We may be subject to such claims in
the future. A product liability claim could materially adversely affect our
business, operating results, and financial condition.
20
<PAGE>
UNDESIGNATED PREFERRED STOCK. PSI's board of directors has the
authority to issue up to 5,000,000 shares of preferred stock in one or more
series. The board of directors can fix the price, rights, preferences,
privileges, and restrictions of such preferred stock without any further vote
or action by PSI's stockholders. The issuance of preferred stock allows PSI
to have flexibility in connection with possible acquisitions and other
corporate purposes. However, the issuance of shares of preferred stock may
delay or prevent a change in control transaction without further action by
the PSI stockholders. As a result, the market price of the PSI common stock
and the voting and other rights of the holders of PSI common stock may be
adversely affected. The issuance of preferred stock may result in the loss of
voting control to others. PSI has no current plans to issue any shares of
preferred stock.
CHARTER PROVISIONS. Certain provisions of PSI's charter documents
eliminate the right of stockholders to act by written consent without a
meeting and specify certain procedures for nominating directors and
submitting proposals for consideration at stockholder meetings. Such
provisions are intended to increase the likelihood of continuity and
stability in the composition of the PSI board of directors and in the
policies set by the board. These provisions also discourage certain types of
transactions which may involve an actual or threatened change of control
transaction. These provisions are designed to reduce the vulnerability of PSI
to an unsolicited acquisition proposal. As a result, these provisions could
discourage potential acquisition proposals and could delay or prevent a
change in control transaction. These provisions are also intended to
discourage certain tactics that may be used in proxy fights. However, they
could have the effect of discouraging others from making tender offers for
PSI's shares. As a result, these provisions may prevent the market price of
PSI common stock from reflecting the effects of actual or rumored takeover
attempts. These provisions may also prevent changes in the management of PSI.
ANTITAKEOVER EFFECTS OF DELAWARE LAW. PSI is subject to the
antitakeover provisions of the Delaware General Corporation Law, which
regulates corporate acquisitions. The Delaware law prevents certain Delaware
corporations, including PSI, from engaging, under certain circumstances, in a
"business combination" with any "interested stockholder" for three years
following the date that such stockholder became an interested stockholder.
For purposes of Delaware law, a "business combination" includes, among other
things, a merger or consolidation involving PSI and the interested
stockholder and the sale of more than 10% of PSI's assets. In general,
Delaware law defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a company
and any entity or person affiliated with or controlling or controlled by such
entity or person. Under Delaware law, a Delaware corporation may "opt out" of
the antitakeover provisions. PSI has not "opted out" of the antitakeover
provisions of Delaware Law.
VOLATILITY OF TRADING PRICES. We completed the initial public offering
of PSI common stock in April 1997. Prior to April 1997 no public market
existed for PSI common stock. In the past, the market price of PSI common
stock has varied greatly and the volume of PSI common stock traded has
fluctuated greatly as well. We expect such fluctuation to continue. The
fluctuation result due to a number of factors including:
- any shortfall in revenues or net income from revenues or net income
expected by securities analysts
- announcements of new products by PSI or our competitors
- quarterly fluctuations in our financial results or the results of
other software companies, including those of our direct competitors
- changes in analysts' estimates of our financial performance, the
financial performance of our competitors, or the financial performance
of software companies in general
- general conditions in the software industry - changes in prices for
our products or the products of our competitors
- changes in our revenue growth rates or the growth rates of our
competitors
- sales of large blocks of the PSI common stock conditions in the
financial markets in general
In addition, the stock market may from time to time experience extreme
price and volume fluctuations. Many technology companies in particular have
experienced such fluctuations. Often such fluctuations have been unrelated to
the operating performance of the specific companies. The market prices of
PSI's common stock may experience significant fluctuations in the future.
21
<PAGE>
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
On September 23, 1998, the Company completed the acquisition of certain
technology and other assets and liabilities from International Software
Solutions and related entities and persons (collectively "ISS") pursuant to
an Asset Purchase Agreement dated September 23, 1998. In connection with such
acquisition, the Company issued 392,080 shares of its Common Stock to the
sellers in reliance on the exemptions from the registration requirements of
the Securities Act of 1933, as amended, set forth in Section 4(2) of and
Regulation D under the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 Annual Meeting of the Stockholders of the Company was held on
September 9, 1998 in San Diego, California. John J. Moores, Christopher A.
Cole, David A. Farley, Stephen P. Gardner, Richard A. Hosley, Charles E.
Noell III, and Norris van den Berg were elected to the Board of Directors. In
addition, the following items were acted upon:
1. To approve an amendment to the Company's 1994 Stock Option Plan (the
"Stock Plan") to (i) increase the number of shares reserved for issuance
thereunder by 3,000,000 shares and (ii) provide for additional automatic
increases in the number of shares reserved for issuance thereunder such
that effective as of January 1 of each calendar year, beginning January
1, 1999 and ending January 1, 2003, the number of shares available for
issuance under the Stock Plan but not subject to outstanding options
will be not less than the lesser of 4% of the Company's outstanding
shares or 4,000,000 and to approve the material terms of the Stock Plan,
as amended.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
<S> <C> <C>
12,153,601 2,914,701 4,128
</TABLE>
2. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the authorized number of
shares of the Company's Common Stock from 50,000,000 to 200,000,000.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
<S> <C> <C>
15,146,977 1,617,987 3,800
</TABLE>
3. To approve the restricted stock agreement entered between the Company
and its President and Chief Executive Officer, pursuant to which the
Company issued 50,000 shares of Common Stock, which are subject to
accelerated vesting over six years if the Company achieves certain
financial milestones.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
<S> <C> <C>
13,693,828 1,414,382 4,900
</TABLE>
5. Ratification of Arthur Andersen LLP as independent accountants for the
Company for the year ending March 31, 1999.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
<S> <C> <C>
16,749,120 2,600 17,044
</TABLE>
22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
<TABLE>
<CAPTION>
Exhibits Exhibit Title
-------- -------------------------------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
b) Reports on Form 8-K:
The Company filed on Form 8-K on July 31, 1998, in connection with its
acquisition of Innovative Tech Systems, Inc. The Company filed on Form 8-K
on September 23, 1998 in connection with its acquisition of certain
technology and other assets and liabilities of International Software
Solutions.
23
<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 16th day of November, 1998.
PEREGRINE SYSTEMS, INC.
By /s/ David A. Farley
-----------------------------
David A. Farley
Vice President, Finance, Chief Financial
Officer (Principal Financial and
Accounting Officer)
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,552
<SECURITIES> 3,000
<RECEIVABLES> 24,505
<ALLOWANCES> (1,447)
<INVENTORY> 0
<CURRENT-ASSETS> 53,787
<PP&E> 21,498
<DEPRECIATION> (11,889)
<TOTAL-ASSETS> 75,309
<CURRENT-LIABILITIES> 33,267
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 39,292
<TOTAL-LIABILITY-AND-EQUITY> 75,309
<SALES> 51,404
<TOTAL-REVENUES> 51,404
<CGS> 11,530
<TOTAL-COSTS> 132,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 125
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (80,450)
<INCOME-TAX> 3,951
<INCOME-CONTINUING> (84,401)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84,401)
<EPS-PRIMARY> (4.12)
<EPS-DILUTED> (4.12)
</TABLE>
