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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, 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.
JURISDICTION OF EMPLOYER
INCORPORATION OR IDENTIFICATION
ORGANIZATION) NUMBER)
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, 1998 was 19,383,570.
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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, 1998
AND MARCH 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . .3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 1998 AND 1997. . . . . . . . . . . . . . . . . .4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED JUNE 30, 1998 AND 1997. . . . . . . . . . . . . . .5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . .6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . .8
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
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PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . $14,950 $13,216
Short-term investments. . . . . . . . . . 7,027 7,800
Accounts receivable, net of allowance for
doubtful accounts of $485 and $545,
respectively. . . . . . . . . . . . . . 16,761 17,929
Deferred tax assets . . . . . . . . . . . 7,297 7,297
Other current assets. . . . . . . . . . . 2,905 5,053
--------- ----------
Total current assets. . . . . . . . . . 48,940 51,295
Property and equipment, net. . . . . . . . . . 5,455 7,177
Goodwill and other . . . . . . . . . . . . . . 2,342 2,218
--------- ----------
$56,737 $60,690
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable. . . . . . . . . . . . . $ 2,337 $ 4,351
Accrued expenses. . . . . . . . . . . . . 9,310 9,121
Deferred revenue. . . . . . . . . . . . . 11,570 10,222
Current portion of long-term debt . . . . 151 251
--------- ----------
Total current liabilities . . . . . . . 23,368 23,945
Long-term debt, net of current portion . . . . 966 449
Deferred revenue, net of current portion . . . 1,802 1,879
--------- ----------
Total liabilities . . . . . . . . . 26,136 26,273
--------- ----------
Stockholders' Equity:
Preferred stock, $0.001 par value,
5,000,000 shares authorized no shares
issued or outstanding . . . . . . . . . - -
Common Stock, $0.001 par value, 50,000,000
shares authorized, 18,790,000 and
19,384,000 shares issued and outstanding,
respectively. . . . . . . . . . . . . . 19 20
Additional paid-in capital. . . . . . . . 74,351 75,705
Accumulated deficit . . . . . . . . . . . (41,461) (38,234)
Unearned portion of deferred compensation (1,493) (1,404)
Cumulative translation adjustment . . . . (553) (599)
Treasury stock (at cost). . . . . . . . . (262) (1,071)
--------- ----------
Total stockholders' equity. . . . . . . 30,601 34,417
--------- ----------
$56,737 $60,690
--------- ----------
--------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1998
--------- ---------
<S> <C> <C>
Revenues:
Licenses . . . . . . . . . . . . . . . . . . $ 6,328 $13,882
Maintenance and services . . . . . . . . . . 4,687 7,868
-------- --------
Total revenues. . . . . . . . . . . . . . 11,015 21,750
-------- --------
Costs and Expenses:
Cost of licenses . . . . . . . . . . . . 59 71
Cost of maintenance and services . . . . . . 1,781 4,455
Sales and marketing. . . . . . . . . . . . . 4,317 8,142
Research and development . . . . . . . . . . 1,644 2,393
General and administrative . . . . . . . . . 1,143 1,980
-------- --------
Total costs and expenses. . . . . . . . . 8,944 17,041
-------- --------
Operating income . . . . . . . . . . . . . . . 2,071 4,709
Interest income and other, net . . . . . . . . 178 260
-------- --------
Income before income taxes . . . . . . . . . . 2,249 4,969
Income tax expense . . . . . . . . . . . . . . 832 1,742
-------- --------
Net Income. . . . . . . . . . . . . . . . $ 1,417 $ 3,227
-------- --------
-------- --------
Net income per share - basic:
Net income per share . . . . . . . . . . . . . $ 0.10 $ 0.17
-------- --------
-------- --------
Weighted average common shares outstanding . . 14,493 19,235
-------- --------
-------- --------
Net income per share - diluted:
Net income per share . . . . . . . . . . . . . $ 0.08 $ 0.16
-------- --------
-------- --------
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . 17,567 20,478
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1998
---------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income. . . . . . . . . . . . . . . . . $ 1,417 $ 3,227
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . 346 654
Increase (decrease) in cash resulting from
changes in:
Accounts receivable . . . . . . . . . . . (74) (1,168)
Financed receivables. . . . . . . . . . . 205 -
Deferred tax assets . . . . . . . . . . . 777 -
Other current assets. . . . . . . . . . . (384) (2,148)
Accounts payable. . . . . . . . . . . . . (222) 2,014
Accrued expenses. . . . . . . . . . . . . (172) (189)
Deferred revenue. . . . . . . . . . . . . 817 (1,271)
Other . . . . . . . . . . . . . . . . . . 537 28
---------- ----------
3,247 1,147
---------- ----------
Net cash used by discontinued business. . (170) -
---------- ----------
Net cash provided by operating activities 3,077 1,147
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments. . . . . - (27,573)
Maturities of short-term investments . . . . - 26,800
Purchases of property and equipment. . . . . (305) (2,191)
Proceeds from sale of product line . . . . . 250 -
---------- ----------
Net cash used in investing activities . . (55) (2,964)
---------- ----------
Cash flows from financing activities:
Repayment on bank line of credit . . . . . . (1,974) -
Repayments of long-term debt . . . . . . . . (1,666) (417)
Issuance of common stock . . . . . . . . . . 18,126 1,356
Treasury stock purchased . . . . . . . . . . (262) (809)
Principal payments under capital lease
obligation . . . . . . . . . . . . . . . . . (108) -
---------- ----------
Net cash provided by financing activities 14,116 130
---------- ----------
Effect of exchange rate changes on cash. . . . (49) (47)
---------- ----------
Net increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . 17,089 (1,734)
Cash and cash equivalents, beginning of period 305 14,950
---------- ----------
Cash and cash equivalents, end of period . . . $17,394 $13,216
---------- ----------
---------- ----------
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . $ 10 $ 5
Income taxes. . . . . . . . . . . . . . $ - $ 20
</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 June 30,
1998 and the condensed consolidated statements of operations and cash flows
for the three month periods ended June 30, 1998 and 1997 have been prepared
by Peregrine Systems, Inc. (the "Company") without audit. 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
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS
128 replaced the previously reported primary and fully diluted income per
share with basic and diluted income per share. Unlike primary income per
share, basic income per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted income per share is similar to
the previously reported fully diluted income per share.
Basic income per share is computed using the weighted average number of
common shares outstanding. Diluted income per share is computed using the
weighted average number of common shares and common share equivalents
outstanding during the period. Dilutive common share equivalents consist of
employee stock options using the treasury method.
The following table sets forth the computation of basic and diluted
income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
--------------------------
1997 1998
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Numerator:
Net income . . . . . . . . . . . . . . . $ 1,417 $ 3,227
--------- ---------
--------- ---------
Denominator:
Denominator for basic income per share,
weighted average shares. . . . . . . . 14,493 19,235
Effective of dilutive securities:
--------- ---------
Employee stock options . . . . . . . . . 3,074 1,243
--------- ---------
Dilutive potential common shares . . . . 17,567 20,478
Denominator for diluted income per share 17,567 20,478
--------- ---------
--------- ---------
Net income per share - basic . . . . . . $ 0.10 $ 0.17
--------- ---------
--------- ---------
Net income per share - diluted . . . . . $ 0.08 $ 0.16
--------- ---------
--------- ---------
</TABLE>
6
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NOTE 3. REVENUE RECOGNITION
As of April 1, 1998, the Company adopted AICPA SOP 97-2, Software
Revenue Recognition, as amended by EITF 98-4 which was effective for
transactions that the Company entered into in fiscal year 1998. Prior years
were not restated. The adoption of SOP 97-2 did not have a material adverse
effect on the revenues or income for the three months ended June 30, 1998.
NOTE 4. COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards 130 "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components. The adoption of this
statement had no material impact on the Company's net income or stockholders'
equity, therefore no adjustments will be reported in stockholders' equity.
NOTE 5. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company will be required to adopt Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Statement 131
superseded FASB Statement No. 14, Financial Reporting for Segments of a
Business Enterprise effective fiscal 1999. Statement 131 established
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. Statement 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of Statement 131 will not affect the results of
operations or financial position, but may affect the disclosure of the
segment information that will be disclosed in the Annual Report on Form 10-K
for the year ended March 31, 1999.
NOTE 6. ACQUISITION
On July 30, 1998, the Company completed the acquisition of Innovative
Tech Systems, Inc. The acquisition was completed as a stock-for-stock
exchange at the ratio of 0.2341 shares of Peregrine Systems Common Stock for
each share of Innovative Tech Common Stock. In addition, certain outstanding
warrants to acquire Innovative Tech Common Stock were exchanged for and
converted into shares of Peregrine Common on a net issuance basis, based on
such exchange ratio and the trading price of Peregrine Common Stock prior to
the closing of the acquisition. Based on the measurement date of the
transaction, consideration given for the acquisition is expected to be $72.9
million plus acquisition related costs and net liabilities assumed. The
acquisition will be accounted for as a purchase, and the Company expects to
take a charge related to the purchase of in-process research and development
in the quarter ending September 30, 1998, of substantially all of the
acquisition price.
7
<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.
OVERVIEW
The Company 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 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
Infrastrusture 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.
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
recently transitioned to SERVICECENTER. The Company's installed customer base
has generated a consistent level of maintenance revenues.
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.
8
<PAGE>
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.
9
<PAGE>
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 JUNE 30,
---------------------------
1997 1998
-------- --------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses 57.4% 63.8%
Maintenance and services 42.6 36.2
------- -------
Total revenues 100.0 100.0
Costs and expenses:
Cost of licenses 0.5 0.4
Cost of maintenance and services 16.2 20.5
Sales and marketing 39.2 37.4
Research and development 14.9 11.0
General and administrative 10.4 9.1
------- -------
Total costs and expenses 81.2 78.4
------- -------
Operating income 18.8 21.6
------- -------
Interest income and other 1.6 1.2
------- -------
Income before income taxes 20.4 22.8
------- -------
Income tax expense 7.5 8.0
------- -------
Net income 12.9% 14.8%
------- -------
------- -------
</TABLE>
THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
REVENUES
Total revenues were $21.8 million and $11.0 million in the first quarter
of fiscal 1999 and 1998, respectively, representing a period-to-period
increase of 97%.
LICENSES. License revenues were $13.9 million and $6.3 million in the
first quarter of fiscal 1999 and 1998, respectively, representing 64% and 57%
of total revenues in the respective periods. The increases in license
revenues are attributable to increased demand for new licenses of
SERVICECENTER (and following the Apsylog Acquisition, licenses for
ASSETCENTER), additional seats purchased by existing SERVICECENTER 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 effect of combining
Apsylog's operations since the Apsylog Acquisition in September 1997.
MAINTENANCE AND SERVICES. Maintenance and services revenues were $7.9
million and $4.7 million in the first quarter of fiscal 1999 and 1998,
respectively, representing 36% and 43% 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,
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 licenses was $71,000 and $59,000 in the first
quarter of fiscal 1999 and 1998, respectively, each representing less than 1%
of total license revenues in the respective periods.
COST OF MAINTENANCE AND SERVICES. Cost of maintenance and services
revenues was $4.5 million and $1.8 million in the first quarter of fiscal
1999 and 1998, respectively, representing 57% and 38% of total maintenance
and service revenues in the respective periods. The dollar increase in the
first quarter of fiscal 1999 over 1998 is attributable to an increase in
customer
10
<PAGE>
support personnel and professional services personnel in connection with the
corresponding increase in professional services revenue and the effect of
combining Apsylog's operations since the Apsylog Acquisition in September
1997. Cost of maintenance and services increased as a percentage of related
revenues because of increased labor costs.
SALES AND MARKETING. Sales and marketing expenses were $8.1 million and
$4.3 million in the first quarter of fiscal 1999 and 1998, respectively,
representing 37% and 39% of total revenues in the respective periods. The
dollar increase in sales and marketing expenses is attributable to the
significant expansion of both the North American and international sales
forces, increase in marketing personnel, the effect of combining Apsylog's
operations since the Apsylog Acquisition in September 1997, and the effect of
moderate operating expense increases. 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 $2.4
million and $1.6 million in the first quarter of fiscal 1999 and 1998,
respectively, representing 11% and 15% of total revenues in the respective
periods. The dollar increase from the first quarter of fiscal 1998 to the
first quarter of fiscal 1999 is due primarily to the increased cost of
product author commissions, an increase in the number of personnel in the
Research and Development department, and effect of combining Apsylog's
operations since the Apsylog Acquisition in September 1997. Research and
development expenses have decreased as a percentage of total revenues from
the first quarter of fiscal 1998 to the first quarter of fiscal 1999 as a
result of revenues increasing at a faster rate.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2.0 million and $1.1 million in the first quarter of fiscal 1999 and 1998,
respectively, representing 9% and 10% of total revenues in the respective
periods. The dollar increase from fiscal 1998 to 1999 are attributable
primarily to costs associated with administrative personnel additions to
support the Company's growth, management restructuring, and the effect of
combining Apsylog's operations since the Apsylog Acquisition in September
1997.
PROVISION FOR INCOME TAXES
Income tax expense for the first fiscal quarter of 1999 amounted to $1.7
million compared with $0.8 million in the comparable quarter of fiscal 1998.
This increase results from the $2.7 million dollar increase in income before
taxes. The effective tax rates for the first quarters of fiscal 1999 and
fiscal 1998 were 37% and 35%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Until April 1997, Peregrine financed its operations through bank
borrowings and private sales of the Company's Common Stock. At June 30, 1998
the Company had an aggregate cash and short-term investments balance of $21.0
million due primarily to the Company's April 1997 initial public offering
proceeds and cash generated by operations.
The Company believes that the net proceeds from its initial public
offering in April 1997, together with its current cash and short-term
investments balances, 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 Peregrine experiences growth in the future, Peregrine anticipates that
its operating and investing activities may use cash. Consequently, any such
future growth may require Peregrine to obtain additional equity or debt
financing, which may not be available on commercially reasonable terms or
which may be dilutive.
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:
HISTORY OF OPERATING LOSSES. Through June 30, 1998, the Company has
recorded cumulative net losses of approximately $38.2 million, including
approximately $34.8 million related to the write-off of acquired in-process
research
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and development in connection with the Apsylog Acquisition. The Company
anticipates recognizing a significant net loss in the quarter ended September
30, 1998 related to the write-off of acquired in-process research and
development in connection with the acquisition of Innovative. In recent
years, the product lines of both the Company and Apsylog have changed
substantially. The Company's SERVICECENTER product, from which the Company
derived substantially all of its license revenues until the acquisition of
ASSETCENTER, only began shipping in mid-1995. Apsylog's ASSETCENTER product
only began shipping in mid-1996. As a result, prediction of the Company's
future operating results is difficult, if not impossible. Although the
Company achieved profitability 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 the Apsylog
Acquisition), there can be no assurance that the Company will be able to
remain profitable on a quarterly or annual basis. In addition, the Company
does not believe that the growth in revenues it has 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, (i) the ability of the Company to
develop, introduce and market new and enhanced versions of its software on a
timely basis; (ii) market demand for the Company's software; (iii) the size,
timing and contractual terms of significant orders; (iv) the timing and
significance of new software product announcements or releases by the Company
or its competitors; (v) changes in pricing policies by the Company or its
competitors; (vi) changes in the Company's business strategies; (vii)
budgeting cycles of its potential customers; (viii) changes in the mix of
software products and services sold; (ix) changes in the mix of revenues
attributable to domestic and international sales; (x) the impact of
acquisitions of competitors; (xi) seasonal trends; (xii) the cancellations of
licenses or maintenance agreements; (xiii) product life cycles; (xiv)
software defects and other product quality problems; (xv) and personnel
changes. The Company has historically operated with little or no backlog and
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. In particular, the quarter ended September 30 tends to
reflect the effects of summer slowing of international business activity,
particularly in Europe.
PRODUCT CONCENTRATION. The Company currently derives substantially all
of its license revenues from the sale of its SERVICECENTER and ASSETCENTER
suites of applications and expects them to account for a significant portion
of the Company's revenues for the foreseeable future. The Company's future
operating results are dependent upon continued
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market acceptance of SERVICECENTER and ASSETCENTER, including future
enhancements as well as SPAN-FM. Factors adversely affecting the pricing of,
demand for, or market acceptance of SERVICECENTER, ASSETCENTER, or SPAN-FM
such as competition or technological change, could have a material adverse
effect on the Company's business, results of operations, and financial
condition.
DEPENDENCE ON MARKET ACCEPTANCE OF INFRASTRUCTURE MANAGEMENT SOFTWARE
SOLUTIONS. Until recently, 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 capable of managing multiple aspects of an enterprise's IT structure.
In recent years, the Company's license revenues have derived principally from
sales of its SERVICECENTER suite of IT management applications. In September
1997, the Company broadened its IT infrastructure management product suite by
acquiring ASSETCENTER, an asset management product line, through the Apsylog
Acquisition. In addition, the Company has increased the functionality of
SERVICECENTER to manage aspects of the enterprise infrastructure not
necessarily related to IT. In July 1998, the Company acquired Innovative Tech
Systems, Inc. ("Innovative"), a provider of facilities management software.
Innovative's product strategy has focused on providing building and
facilities management software applications, and its license revenues have
consisted entirely of sales of its SPAN-FM applications suite. In acquiring
Innovative, the Company intends to further broaden its product line beyond
traditional IT infrastructure management to offer a more comprehensive
product suite capable of managing a business enterprise'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 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. In particular, the Company believes that a
market for integrated enterprise-wide infrastructure management solutions,
including applications for IT management, asset management, building and
facilities management, communications resource management, and distribution
systems management, is evolving from existing requirements for specific IT
management solutions. Nevertheless, the existence of such a market is
unproven. Any failure of such a market to develop would have a material
adverse effect on the Company's business, results of operations, or financial
condition. Regardless of the development of a market for integrated
infrastructure management solutions, factors adversely affecting the pricing
of, demand for, or market acceptance of one or more of SERVICECENTER or
ASSETCENTER, or SPAN-FM could have a material adverse effect on the Company's
business, results of operations, and financial condition.
INTEGRATION OF INNOVATIVE TECH SYSTEMS INTO THE COMPANY'S BUSINESS. The
acquisition of Innovative, which was completed in July 1998, will require
integration of two geographically separated companies that have previously
operated independently. The Company believes that the acquisition will
further its strategy to provide customers with a complete infrastructure
management software solution. Nevertheless, no assurance can be given that
difficulties will not be encountered in integrating the product offerings and
operations of Innovative Tech with those of the Company, that the Company and
Innovative will successfully complete and commercialize new products
currently in development by Innovative or develop any new products through
Innovative, that the marketing, distribution, or other operational benefits
and efficiencies anticipated from integration of the respective businesses
and products of Innovative will be achieved, or that Innovative employee
morale will not be adversely affected as a result of the acquisition and the
resulting integration. Such integration could result in a diversion of
management's time and attention, which could have a material adverse effect
on revenues and results of operations of the Company. The difficulties of
integration may be increased by the necessity of coordinating geographically
separated organizations or of integrating personnel with disparate business
backgrounds and different corporate cultures. There can be no assurance that
the Company will retain its key personnel, that the combined engineering
teams will successfully cooperate and realize any technological benefits,
that Innovative will benefit from the broader distribution and marketing
opportunities available through the Company or that the Company will benefit
from the broader product offerings available, or that the Company will
realize any of the other anticipated benefits of the acquisition. Any failure
to integrate the businesses and technologies of the companies successfully or
any failure to realize the anticipated benefits of the acquisition could have
a material adverse effect on the business, results of operations, and
financial condition of the Company.
In addition, the consummation of the acquisition could result in the
cancellation, termination, or nonrenewal of arrangements with Innovative's
suppliers, distributors, or customers, or the loss of certain key employees,
or the
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termination of negotiations or delays in ordering by prospective customers of
Innovative as a result of uncertainties that may be perceived to result from
the acquisition. For example, customers or potential customers of Innovative
who utilize enterprise service desk, asset management, or other
infrastructure management software, including help desk software, marketed by
competitors of Innovative could terminate or delay orders due to perceived
uncertainties over Innovative's continued commitment to provide products and
enhancements or support services for its products used in conjunction with
such competing enterprise software. Any significant amount of cancellations,
terminations, delays, or nonrenewals of arrangements with either company or
loss of key employees or termination of negotiations or delays in ordering
could have a material adverse effect on the business, results of operations,
and financial condition of the Company, particularly in the quarter ending
September 30,1998 and other near-term quarters.
RISKS ASSOCIATED WITH OTHER PEREGRINE ACQUISITIONS. In addition to the
Apsylog Acquisition and the acquisition of Innovative, the Company may make
acquisitions of, or significant investments in, businesses that offer
complementary products, services, and technologies and that further the
Company's strategy of providing an integrated infrastructure management
software solution. There can be no assurances, however, that the Company will
make any additional acquisitions in the future. Any such future acquisitions
or investments would present risks commonly encountered in acquisitions of
businesses. Such risks include, among others, the difficulty of assimilating
the technology, operations, or personnel of the acquired business, the
potential disruption of the Company's on-going businesses, the inability of
management to maximize the financial and strategic position of the Company
through the successful incorporation of acquired personnel, clients, or
technologies, the maintenance of uniform standards, controls, procedures, and
policies, and the impairment of relationships with employees and clients as a
result of any integration of new businesses and management personnel. The
Company expects that future acquisitions, if any, could provide for
consideration to be paid in cash, shares of Company Common Stock, or a
combination of cash and Company Common Stock. In the event of such an
acquisition or investment, the factors described herein could have a material
adverse effect on the Company's business, results of operation, and financial
condition.
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 benefited 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.
The Company's ability to achieve anticipated revenues is also dependent
in part upon its ability to recruit and employ skilled 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 their 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 have a material adverse effect on the business and results
of
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operations of the Company.
In particular, foreign computer professionals such as the type utilized
by the Company typically become eligible for employment by obtaining a
nonimmigrant visa commonly known as an H-1B. The Immigration Act of 1990
limits the number of available H-1B visas to 65,000 per year. This limitation
was reached for the first time approximately one month prior to the federal
government's fiscal year ending September 30, 1997. In a notice published on
May 11, 1998, the Immigration and Naturalization Service announced that the
65,000 annual limitation on H-1B visas had already been reached for the
federal government's fiscal year ending September 30, 1998. As a result,
computer professionals from other countries who need an H-1B visa in order to
be eligible for employment will not be eligible for employment in the United
States until after October 1, 1998 at the earliest. Currently, legislation is
pending in the United States Congress which, if passed in its present form,
would increase the number of H-1B visas available. It is impossible to
predict whether such legislation will ultimately become law. Likewise, it is
impossible to predict what effect any future changes in the federal
immigration laws will have on the business, results of operations, or
financial condition of the Company.
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. (now a division of Tivoli Systems,
Inc.); (ii) customer interaction software companies such as Clarify Inc. and
The Vantive Corporation, whose products include internal help desk
applications; (iii) 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; (iv) providers of asset management
and facilities management software; and (v) the internal information
technology departments of those companies with Infrastructure Management
requirements. 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
infrastructure management applications expands. In addition, current and
potential competitors have established or may in the future establish
cooperative relationships among themselves or with third parties, or large
software companies could acquire or establish alliances with smaller
competitors of the Company. The Company expects software industry
consolidation to continue in the future, and it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. For example, the Company's ability to sell its
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. The decision of one or more
providers of system management products to close their systems to competing
vendors like the Company, or 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, could have
an adverse effect on the Company's ability to sell its products. Increased
competition, including increased competition as a result of acquisitions of
help desk and other infrastructure management software vendors by system
management companies, is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, results of operations, 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, results of operations,
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, and
to $61.9 million in fiscal 1998. If the Company is successful in achieving
its growth plans, including the integration of Apsylog and Innovative, 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.
In particular, in connection with the acquisitions, the Company will be
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required to integrate additional personnel and to augment or replace
Innovative's existing financial and management systems. Such integration
could result in a disruption of operations of the Company and could adversely
affect the financial results of the Company. 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. In addition to continuing to invest in
its direct sales force, particularly in North America where it has recently
opened several new sales offices, 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% and 36% of the Company's total revenues in both
fiscal 1997 and fiscal 1998, respectively. The Company currently has
international sales offices in London, Paris, Frankfurt, Munich, Amsterdam
and Copenhagen. The Company believes that its continued growth and
profitability will require continued 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, results of operations, and financial
condition. In particular, recent instability in the Asian-Pacific economies
and financial markets, could have an adverse effect on the Company's
operating results in future quarters. In addition, the Company has only
limited experience in developing localized versions of its products and
marketing and distributing its products internationally and 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, results of
operations 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 experience currency losses in the future.
The Company has recently implemented a foreign exchange hedging program,
consisting principally of purchases of one month forward-rate currency
contracts. Notwithstanding such a program, there can be no assurances that
the Company's hedging activities will adequately protect the Company 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 next three years, 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. As a result, companies operating in or conducting
business in EEC member states will need to ensure that
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their financial and other software systems are capable of processing
transactions and properly handling these currencies, including the euro. The
Company's ASSETCENTER product was originally developed for the European
market and is capable of managing currency data measured in euros. The
Company is still assessing the impact that the euro will have on its internal
systems and the other products it sells, however. The Company will take
appropriate corrective actions based on the results of such assessment. The
Company has not yet determined the costs related to addressing this issue,
and there can be no assurance that this issue and its related costs will not
have a material adverse affect on the Company's business, results of
operations, and financial condition.
RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT RISKS. The markets
for the Company's products are subject to rapid technological change,
changing customer needs, frequent new product introductions, and evolving
industry standards that may render existing products and services obsolete.
As a result, the Company's position in its existing markets or other markets
that it may enter could be eroded rapidly by product advances. The life
cycles of the Company's products are difficult to estimate. The Company's
growth and future financial performance will depend in part upon its ability
to enhance existing applications, develop and introduce new applications that
keep pace with technological advances, meet changing customer requirements
and respond to competitive products. The Company's product development
efforts are expected to continue to require substantial investments. There
can be no assurance that the Company will have sufficient resources to make
the necessary investments. The Company has in the past experienced
development delays, and there can be no assurance that the Company will not
experience such delays in the future. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction or marketing of new or enhanced
products. In addition, there can be no assurance that such products will
achieve market acceptance, or that the Company's current or future products
will conform to industry requirements. The inability of the Company, for
technological or other reasons, to develop and introduce new and enhanced
products in a timely manner could have a material adverse effect on business,
results of operations, and financial condition of the Company.
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in a product's life cycle. The
Company has in the past discovered software errors in certain of its products
and has experienced delays in shipment of products during the period required
to correct these errors. There can be no assurance that, despite testing by
the Company and by current and potential customers, errors will not be found,
resulting in loss of, or delay in, market acceptance and sales, diversion of
development resources, injury to their reputation, or increased service and
warranty costs, any of which could have a material adverse effect on the
business, results of operations, and financial condition of the Company.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT. The
success of the Company will be, heavily dependent upon proprietary
technology. The Company relies primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company seeks to protect
its software, documentation and other written materials under trade secret
and copyright laws, which provide only limited protection. Despite
precautions taken by the Company, it may be possible for unauthorized third
parties to copy aspects of its current or future products or to obtain and
use information that either regards as proprietary. In particular, the
Company may provide its respective licensees with access to its data model
and other proprietary information underlying its licensed applications. There
can be no assurance that such means of protecting their proprietary rights
will be adequate or that their competitors will not independently develop
similar or superior technology. Policing unauthorized use of software is
difficult and, while the Company is able to determine the extent to which
piracy of its software products exists, software piracy can be expected to be
a persistent problem. In addition, the laws of some foreign countries do not
protect the proprietary rights of the Company to the same extent as do the
laws of the United States. Litigation may be necessary in the future to
enforce their intellectual property rights, to protect trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the business, results of operations,
and financial condition of any or all of the Company.
The Company is not aware that any of its software product offerings
infringes the proprietary rights of third parties. There can be no assurance,
however, that third parties will not claim infringement with respect to
current or future products of the Company. The Company expects that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in their industry segment grows and the
functionality of
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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 the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may
not be available on acceptable terms or at all, which could have a material
adverse effect on the business, results of operations, and financial
condition of the Company.
PRODUCT LIABILITY. The license agreements which the Company enters with
its customers typically contain provisions designed to limit exposure to
potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in such license agreements may
not be effective under the laws of certain jurisdictions. Although the
Company has not experienced any product liability claims to date, the sale
and support of their products may entail the risk of such claims, and there
can be no assurance that the Company will not be subject to such claims in
the future. A product liability claim brought against the Company could have
a material adverse effect on its respective businesses, results of
operations, and financial condition.
CONTROL BY EXISTING STOCKHOLDERS. Based on shares outstanding as of May
31, 1998, the Company's officers, directors and their affiliates together
beneficially own approximately 58.6% of the outstanding shares of the Company
Common Stock. In particular, John J. Moores, Chairman of the Company Board,
owns approximately 49.4% of the outstanding shares of the Company Common
Stock. As a result, these stockholders 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 the Company. This may prevent or discourage potential bids to
acquire the Company unless the terms of acquisition are approved by such
stockholders.
EFFECT OF CERTAIN COMPANY CHARTER PROVISIONS; LIMITATION OF LIABILITY OF
DIRECTORS; ANTITAKEOVER EFFECTS OF DELAWARE LAW. The Company is authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Company Board
has the authority to issue Preferred Stock in one or more series and to fix
the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting a series or the designation of such series,
without any further vote or action by Peregrine's stockholders. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
delaying, deferring, or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the market price
of the Common Stock and the voting and other rights of the holders of Common
Stock. The issuance of Preferred Stock with voting and conversion rights may
adversely affect the voting power of the holders of Common Stock, including
the loss of voting control to others. The Company has no current plans to
issue any shares of Preferred Stock.
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws 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 enhance the likelihood
of continuity and stability in the composition of the Company Board and in
the policies formulated by the Company Board and to discourage certain types
of transactions which may involve an actual or threatened change of control
of the Company. Such provisions are designed to reduce the vulnerability of
the Company to an unsolicited acquisition proposal and, accordingly, could
discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. Such provisions are also intended to
discourage certain tactics that may be used in proxy fights but could,
however, have the effect of discouraging others from making tender offers for
the Company's shares and, consequently, may also inhibit fluctuations in the
market price of the Company's Common Stock that could result from actual or
rumored takeover attempts. These provisions may also have the effect of
preventing changes in the management of the Company.
The Company is subject to Section 203 of the Delaware General
Corporation Law (the "Antitakeover Law"), which regulates corporate
acquisitions. The Antitakeover Law prevents certain Delaware corporations,
including those whose securities are listed for trading on the Nasdaq
National Market, 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
the Antitakeover Law, a "business combination" includes, among other things,
a merger or consolidation involving Peregrine and the interested stockholder
and the sale of more than 10% of the Company's assets. In general, the
Antitakeover Law defines an "interested stockholder" as any entity or person
18
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beneficially owning 15% or more of the outstanding voting stock of the
Company and any entity or person affiliated with or controlling or controlled
by such entity or person. A Delaware corporation may "opt out" of the
Antitakeover Law with an express provision in its original certificate of
incorporation or an express provision in its certificate of incorporation or
bylaws resulting from amendments approved by the holders of at least a
majority of the company's outstanding voting shares. The Company has not
"opted out" of the provisions of the Antitakeover Law.
VOLATILITY OF TRADING PRICES. The Company completed its initial public
offering of Common Stock in April 1997, prior to which time no public market
existed for the Company's Common Stock. The market price of the Company's
Common Stock has been subject to significant price and volume fluctuations
and is expected to continue to be subject to significant price and volume
fluctuations as a result of a number of factors. These factors include any
shortfall in revenues or net income from revenues or net income expected by
securities analysts; announcements of new products by the Company or its
competitors; quarterly fluctuations in financial results or the results of
other software companies, including those of direct competitors of the
Company; changes in analysts' estimates of the Company's financial
performance, the financial performance of competitors, or the financial
performance of software companies in general; general conditions in the
software industry; changes in prices for products of the Company or products
of competitors; changes in revenue growth rates for the Company or its
competitors; sales of large blocks of the Company's Common Stock; and
conditions in the financial markets in general. In addition, the stock market
may from time to time experience extreme price and volume fluctuations, which
particularly affect the market price for the securities of many technology
companies and which have often been unrelated to the operating performance of
the specific companies. There can be no assurance that market prices of the
Company's Common Stock will not experience significant fluctuations in the
future.
19
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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
-------- -------------
10.3 1994 Stock Option Plan, as amended through July 1998,
including 1995 Stock Option Plan for French employees.
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, 1998.
20
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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
14th day of August, 1998.
PEREGRINE SYSTEMS, INC.
By /s/ David A. Farley
------------------------
David A. Farley
Vice President, Finance, Chief Financial
Officer (Principal Financial and
Accounting Officer)
21
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PEREGRINE SYSTEMS, INC.
1994 STOCK OPTION PLAN
(AS AMENDED THROUGH JULY 16, 1998)
1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are
to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to Employees and
Consultants of the Company and its Subsidiaries and to promote the success of
the Company's business. Options granted under the Plan may be incentive stock
options (as defined under Section 422 of the Code) or non-statutory stock
options, as determined by the Administrator at the time of grant of an option
and subject to the applicable provisions of Section 422 of the Code, as
amended, and the regulations promulgated thereunder.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are, or will be, granted under
the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a Committee appointed by the Board of Directors
in accordance with Section 4 of the Plan.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means Peregrine Systems, Inc., a Delaware corporation.
(h) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services.
(i) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means that the
employment or consulting relationship or directorship is not interrupted or
terminated by the Employee, Consultant or Director or the Company, or any Parent
or Subsidiary. Continuous Status as an Employee, Director, or Consultant shall
not be considered interrupted in the case of:
Page 1 of 11
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(i) any leave of absence approved by the Company, including sick leave,
military leave, or any other personal leave; provided, however, that for
purposes of Incentive Stock Options, no such leave may exceed ninety (90)
days, unless reemployment upon the expiration of such leave is guaranteed by
contract (including certain Company policies) or statute; provided, further,
that on the ninety-first (91st) day of any such leave (where reemployment is
not guaranteed by contract or statute) the Optionee's Incentive Stock Option
shall cease to be treated as an Incentive Stock Option and will be treated
for tax purposes as a Nonstatutory Stock Option; or (ii) transfers between
locations of the Company or between the Company, its Parent, its Subsidiaries
or its successor.
(j) "DIRECTOR" shall mean a member of the Board.
(k) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
National Market System or the Nasdaq SmallCap Market of the Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for such stock
(or the closing bid, if no sales were reported, as quoted on such exchange or
system for the last market trading day prior to the time of determination) as
reported in THE WALL STREET JOURNAL or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low asked prices for
the Common Stock on the last market trading day prior to the day of
determination, as reported in THE WALL STREET JOURNAL or such other source as
the Administrator deems reliable or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
Page 2 of 11
<PAGE>
(p) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(q) "NOTICE OF GRANT" means a written notice evidencing certain terms
and conditions of an individual Option grant. The Notice of Grant is part of
the Option Agreement.
(r) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "OPTION" means a stock option granted pursuant to the Plan.
(t) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the Plan.
(u) "OPTIONED STOCK" means the Common Stock subject to an Option.
(v) "OPTIONEE" means an Employee, Director, or Consultant who
receives an Option.
(w) "PARENT" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(x) "PLAN" means this 1994 Stock Option Plan, as amended.
(y) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(z) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 11 below.
(aa) "SUBSIDIARY" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 6,148,000, plus an annual increase, effective January 1 of
each calendar year beginning January 1, 1999 and ending January 1, 2003, equal
to such number of additional Shares of Common Stock as may then be required to
fix the number of Shares of Common Stock then available for new Option grants at
an amount not less than the lesser of (i) four percent (4%) of the Company's
then issued and outstanding Common Stock or (ii) 4,000,000 Shares. The Shares
may be authorized, but unissued, or reacquired Common Stock.
Page 3 of 11
<PAGE>
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be
administered by different Committees with respect to different Optionees.
(ii) SECTION 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) RULE 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3.
(iv) OTHER ADMINISTRATION. Other than as provided above,
the Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and, in the case of a Committee, the specific duties delegated by the
Board to such Committee, and subject to the approval of any relevant
authorities, including the approval, if required, of any stock exchange upon
which the Common Stock is listed, the Administrator shall have the authority,
in its discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(m) of the Plan;
(ii) to select the Consultants, Directors, and Employees
to whom Options may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to modify or amend each Option, including the
discretionary authority to extend the post-termination exercisability period
of Options longer than is otherwise provided for in the Plan;
Page 4 of 11
<PAGE>
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options may be exercised (which may be based on
performance criteria), any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option of the
shares of Common Stock relating thereto, based in each case on such factors
as the Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9 instead of Common Stock;
(viii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option has declined since the date the Option was granted;
(ix) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of
the Shares to be withheld shall be determined on the date that the amount of
tax to be withheld is to be determined. All elections by an Optionee to have
Shares withheld for this purpose shall be made in such form and under such
conditions as the Administrator may deem necessary or advisable;
(x) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan; and
(xi) to prescribe, amend, and rescind rules and regulations
relating to the Plan, including rules and regulations relating to subplans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations, and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options may be granted to Employees,
Directors, and Consultants. Incentive Stock Options may be granted only to
Employees. An Employee, Director, or Consultant who has been granted an Option
may, if otherwise eligible, be granted additional Options.
Page 5 of 11
<PAGE>
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares underlying Incentive Stock Options are exercisable for the
first time by any Optionee during any calendar year (under all plans of the
Company or any Parent or Subsidiary) in excess of $100,000, such excess shall be
treated as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with respect
to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company or service as a Director, nor shall it interfere in any way with his or
her right or the Company's right to terminate his or her employment, service as
a Director or consulting relationship at any time, with or without cause.
(e) LIMITATIONS.
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 450,000 Shares.
(ii) The foregoing limitation shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 11(a).
(iii) If an Option is canceled (other than in connection with
a transaction described in Section 11), the canceled Option will be counted
against the limit set forth in Section 5(e)(i). For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
6. TERM OF PLAN. The Plan became effective upon its adoption by the
Board of Directors. It shall continue in effect for a term of ten (10) years
from such date, unless sooner terminated under Section 13 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that in the case of an Incentive Stock
Option the term shall be no more than ten (10) years from the date of grant
thereof. However, in the case of an Incentive Stock Option granted to an
Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement.
Page 6 of 11
<PAGE>
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in the preceding paragraph, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the Administrator. However, in the
case of a Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of the Fair Market Value per
Share on the date of grant pursuant to a merger or other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option have been owned by the Optionee for more
than six months on the date of surrender and (y) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan; (6) such other consideration and method of payment for the issuance of
Shares to the extent permitted by Applicable Laws, or (7) any combination of the
foregoing methods of payment. In making its determination as to the type of
consideration to accept, the Board shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company.
Page 7 of 11
<PAGE>
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan. All Options granted hereunder shall be exercisable at the rate of at least
20% per year over five years from the date the Option is granted. An Option may
not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under the Plan. Until the issuance
(as evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of such Shares, no right to vote or
receive dividends or any other rights as a shareholder shall exist with respect
to the Optioned Stock, notwithstanding the exercise of the Option. The Company
shall issue (or cause to be issued) such Shares promptly upon exercise of the
Option. No adjustment will be made for a dividend or other right for which the
record date is prior to the date the Shares are issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR, OR
CONSULTANT. In the event that an Optionee's Continuous Status as an Employee,
Director, or Consultant terminates (but not in the event of a change of status
from Employee to Consultant (in which case an Employee's Incentive Stock Option
shall automatically convert to a Nonstatutory Stock Option on the ninety-first
(91st) day following such change of status) or from Consultant to Employee)
other than upon the Optionee's death or disability, the Optionee may exercise
his or her Option, within 90 days of the date of termination, and only to the
extent that the Optionee was entitled to exercise it at the date of termination
(but in no event later than the expiration of the term of such Option as set
forth in the Notice of Grant); provided, however, that (i) the Administrator may
in its discretion extend the period of exercisability of the Option beyond a
termination of an Optionee's Continuous Status as an Employee, Director, or
Consultant until a date not later than the expiration of the term of such Option
as set forth in the Notice of Grant and (ii) the Administrator may in its
discretion extend the termination date for the purpose of vesting accrual to a
date beyond the actual termination date of employment (the "deemed termination
date") (but in no event may the deemed termination date be later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the event the Administrator shall exercise such discretion to extend the term of
an Option, such Option shall be exercisable
Page 8 of 11
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during such extended term to the extent it was exercisable at the date of
such termination or the deemed termination date, as applicable. Similarly,
in the event the Administrator shall exercise such discretion to extend the
termination date of an Optionee, such Option shall be exercisable during such
term (or such extended term if applicable) to the extent it would be
exercisable at the deemed termination date. If at the date of termination
the Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan.
If after termination the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. In the event of termination of an
Optionee's Continuous Status as an Employee, Director, or Consultant as a result
of his or her Disability, Optionee may, but only within six (6) months from the
date of such termination (and in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), exercise the Option
to the extent otherwise entitled to exercise it at the date of such termination.
To the extent that Optionee is not entitled to exercise the Option at the date
of termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death, the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. NON-TRANSFERABILITY OF OPTIONS. Unless determined otherwise, by the
Administrator, Options may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
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11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding, and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option will terminate immediately prior to
the consummation of such proposed action.
(c) MERGER, SALE OF ASSETS, OR STOCK TRANSFER. In the event of (i) a
merger or consolidation of the Company with or into another corporation
resulting in the outstanding voting securities of the Company immediately prior
thereto representing (either by remaining or by being converted into voting
securities of the surviving entity) less than fifty percent (50%) of the total
voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation;
(ii) the sale of all or substantially all of the assets of the Company; or (iii)
the sale or other transfer by John Moores and any stockholder affiliated (within
the meaning of the Securities Act) with Mr. Moores, in a single transaction or a
series of related transactions, of shares of Common Stock constituting more than
fifty percent (50%) of the then outstanding Common Stock of the Company to any
person or entity not affiliated with Mr. Moores or the Company, the Optionee
shall fully vest in and have the right to exercise the Option as to all of the
Optioned Stock, including Shares as to which it would not otherwise be vested or
exercisable. Notwithstanding the provisions of clause (iii) above, any such sale
or other transfer by Mr. Moores or any stockholder affiliated with Mr. Moores of
shares of Common Stock through a registered public offering of securities under
the Securities Act, or in compliance with the requirements of paragraphs (c),
(d), (e), and (f) of Rule 144 under the Securities Act, shall not cause the
Option to become fully vested and exercisable. If an Option becomes fully vested
and exercisable in the event of a merger or consolidation, sale of assets, or
sale or transfer of Common Stock by Mr. Moores as provided above, the
Page 10 of 11
<PAGE>
Administrator shall notify the Optionee in writing or electronically that the
Option shall be fully vested and exercisable.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Applicable Laws,
the Company shall obtain shareholder approval of any Plan amendment in such a
manner and to such a degree as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted, and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company. Termination of the Plan shall not affect the Administrator's ability to
exercise the powers granted to it hereunder with respect to Options granted
under the Plan prior to the date of such termination.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with
Applicable Laws and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
15. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful
Page 11 of 11
<PAGE>
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
16. AGREEMENTS. Options shall be evidenced by written agreements in such
form as the Board shall approve from time to time.
17. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under Applicable Laws.
Page 12 of 11
<PAGE>
PEREGRINE SYSTEMS, INC.
1995 STOCK OPTION PLAN FOR FRENCH EMPLOYEES
1. PURPOSES OF THE PLAN. The purposes of this 1995 Stock Option Plan
for French Employees are:
- to attract and retain the best available personnel for positions
of substantial responsibility,
- to provide additional incentive to French Employees, and
- to promote the success of the Company's business and the business
of its French subsidiary.
This Plan is a sub-plan created under and pursuant to the Peregrine
Systems, Inc. 1994 Stock Option Plan, which has been approved by the
shareholders of Peregrine Systems, Inc., and which provides that French
employees may benefit under this Plan. Options shall be granted under the
Plan at the discretion of the Administrator and as reflected in terms of
written option agreements, and are intended to qualify for preferred
treatment under French tax laws. Unless otherwise defined herein, the terms
defined in the 1994 Stock Option Plan shall have the same defined meanings in
this Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "APPLICABLE LAWS" means the legal requirements relating to the
administration of stock option plans under French corporate, securities, and
tax laws.
(b) "DISABILITY" means total and permanent disability, as defined under
Applicable Laws.
(c) "EMPLOYEE" means any person employed by Subsidiary in a salaried
position, who does not own more than 10% of the voting power of all classes
of stock of the Company, or any Parent or Subsidiary, and who is a resident
of the Republic of France.
(d) "FAIR MARKET VALUE" means, as of any date, the dollar value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq Small Cap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the last market trading day prior to the time of determination and
reported in THE WALL STREET JOURNAL or such other source as the Administrator
deems reliable;
Page 1 of 9
<PAGE>
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common
Stock on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(e) "OPTION" means a stock option granted pursuant to the Plan which is
intended to qualify for preferred tax treatment under applicable French tax
laws.
(f) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(g) "OPTION PRICE" means the per share price for exercising an Option,
determined in accordance with subsection 9(a) of the Plan.
(h) "OPTIONED STOCK" means the Common Stock subject to an Option.
(i) "OPTIONEE" means a person eligible to participate in the Plan
pursuant to Section 5 and who holds an outstanding Option.
(j) "PLAN" means this Peregrine Systems, Inc. 1995 Stock Option Plan
for French Employees.
(k) "SUBSIDIARY" means any participating subsidiary of the Company
located in the Republic of France.
(l) "U.S. PLAN" means the Peregrine Systems, Inc. 1994 Stock Option
Plan, as amended.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of Shares that may be optioned and
sold under the Plan is that number of Shares of Common Stock which is
currently available for issuance under the U.S. Plan. However, at no time
shall the total number of Options outstanding which may be exercised for
newly issued Shares of Common Stock exceed that number equal to one-third of
the Company's voting stock, whether preferred stock of the Company or Common
Stock. The Shares may be authorized, but unissued, or reacquired Common
Stock. If any Optioned Stock is to consist of reacquired Shares, such
Optioned Stock must be purchased by the Company prior to the date of grant of
the corresponding Option and must be reserved and set aside for such purpose.
Page 2 of 9
<PAGE>
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant under the Plan (unless the Plan has
terminated).
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE. The Plan shall be administered by the Board or a
committee appointed by the Board.
(b RULE 16b-3 LIMITATIONS. Notwithstanding the provisions of
Subsection (a) of this Section 4, in the event that Rule 16b-3 promulgated
under the Exchange Act, or any successor provision ("Rule 16b-3") provides
specific requirements for the administrators of plans of this type, and Rule
16b-3 or such successor provision is applicable to the Plan, the Plan shall
be administered only by such a body and in such a manner as shall comply with
the applicable requirements of Rule 16b-3. Unless permitted by Rule 16b-3,
no discretion concerning decisions regarding the Plan shall be afforded to
any committee or person that is not "disinterested" as that term is used in
Rule 16b-3.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(c) of the Plan;
(ii) to select the Employees to whom Options may be granted
hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder. Such terms and
conditions may include, but are not limited to, the exercise price, the time
or times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the shares of Common
Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vii) to construe and interpret the terms of the Plan;
Page 3 of 9
<PAGE>
(viii) to prescribe, amend and rescind rules and regulations
relating to the Plan;
(ix) to modify or amend each Option (subject to Section 14(c) of
the Plan);
(x) to authorize any person to execute on behalf of the Company
or Subsidiary any instrument required to effect the grant of an Option
previously granted by the Administrator;
(xi) to determine the terms and restrictions applicable to
Options; and
(xii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(d) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions,
determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
(e) REPORTING TO THE SHAREHOLDERS' MEETING. In its annual proxy
statement to the shareholders, the Board shall inform the shareholders as to
the number and price of the Options granted hereunder, and as to the Shares
subscribed upon exercise of such Options.
5. ELIGIBILITY. Options may be granted only to Employees; provided,
however, that the PRESIDENT DIRECTEUR GENERAL, THE DIRECTEUR GENERAL and
other directors who are also Employees of a participating Subsidiary may be
granted Options. An individual who has been granted an Option may, if
otherwise eligible, be granted additional Options.
6. LIMITATIONS. Neither the Plan nor any Option shall confer upon any
Optionee any right with respect to continuing the Optionee's employment
relationship with the Company.
7. TERM OF PLAN. The Plan shall become effective as of the date of
its adoption by the Board. It shall continue in effect until the termination
of the U.S. Plan or the date five years from the date of adoption of the U.S.
Plan, whichever is sooner, unless terminated earlier under Section 14 of the
Plan.
8. TERM OF OPTION. The term of each Option shall be as stated in the
Option Agreement; provided, however, that subject to Section 10(d) hereof,
the maximum term of an Option shall not exceed nine and one-half (9 1/2) years
from the date of grant of the Option.
Page 4 of 9
<PAGE>
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) OPTION PRICE. The Option Price for the Shares to be issued
pursuant to exercise of an Option shall be determined by the Administrator
upon the date of grant of the Option and stated in the Option Agreement, but
in no event shall be lower than ninety-five percent (95%) of the Fair Market
Value on the date the Option is granted. This Option Price cannot be modified
while the Option is outstanding.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is
granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions which must be satisfied
before the Option may be exercised. In so doing, the Administrator may
specify that an Option may not be exercised until the completion of a service
period.
(c) FORM OF CONSIDERATION. The Administrator shall determine
the acceptable form of consideration for exercising an Option, including the
method of payment. Such consideration may consist of:
(i) cash or check (denominated in U.S. Dollars);
(ii) wire transfer (denominated in U.S. Dollars);
(iii) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and a broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of an amount of the sale or loan proceeds required to pay the
exercise price; or
(iv) any combination of the foregoing methods of payment.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when:
(i) the Company receives written notice of exercise (in
accordance with the Option Agreement and in the form attached hereto as
Exhibit A) from the person entitled to exercise the Option, and full payment
for the Shares with respect to which the Option is exercised;
Page 5 of 9
<PAGE>
(ii) the Subsidiary receives a written subscription
agreement to the Shares (in accordance with the Option Agreement and in the
form attached hereto as Exhibit B) from the person entitled to exercise the
Option.
Full payment may consist of any consideration and method of
payment authorized by the Administrator and permitted by the Option Agreement
and the Plan, and shall be deemed to be definitively made upon receipt of the
payment by the Subsidiary. Shares issued upon exercise of an Option shall be
issued in the name of the Optionee or, if requested by the Optionee, in the
name of the Optionee and his or her spouse.
Until the stock certificate evidencing such Shares is issued
(as evidenced by the appropriate entry on the books of the Company or of a
duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to
the Optioned Stock, notwithstanding the exercise of the Option. The Company
shall issue to the Optionee (or cause to be issued) a stock certificate
evidencing such Shares promptly after the Option is exercised and after full
payment, as indicated above, is received by the Company. No adjustment will
be made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in Section 12 of
the Plan.
Exercising an Option in any manner shall decrease the number
of Shares thereafter available, both for purposes of the Plan and for sale
under the Option, by the number of Shares as to which the Option is
exercised.
(b) TERMINATION OF EMPLOYMENT RELATIONSHIP. In the event that
an Optionee's Continuous Status as an Employee terminates (other than upon
the Optionee's death or Disability), the Optionee may exercise his or her
Option, but only within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Administrator), and only
to the extent that the Optionee was entitled to exercise it at the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). If, at the date of termination,
the Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option
within the time specified by the Administrator, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. In the event that an Optionee's
Continuous Status as an Employee terminates as a result of the Optionee's
Disability, the Optionee may exercise his or her Option at any time within
six (6) months from the date of such termination, but only to the extent that
the Optionee was entitled to exercise it at the date of such termination (but
in no event later than the expiration of the term of such Option as set forth
in the Option Agreement). If, at the date of termination, the Optionee is
not entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
Page 6 of 9
<PAGE>
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee
while an Employee, the Option may be exercised at any time within six (6)
months following the date of death by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at
the date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after death, the
Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance does not exercise the Option within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall immediately revert to the Plan.
11. NON-TRANSFERABILITY OF OPTIONS. An Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER,
ASSET SALE OR CHANGE OF CONTROL.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the shareholders of the Company, the number of shares of Common Stock
covered by each outstanding Option, and the number of shares of Common Stock
which have been authorized for issuance under the Plan but as to which no
Options have yet been granted or which have been returned to the Plan upon
cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be
deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Administrator, whose determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number or
price of shares of Common Stock subject to an Option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify the
Optionee at least fifteen (15) days prior to such proposed action. To the
extent it has not been previously exercised, the Option or Stock Purchase
Right shall terminate immediately prior to the consummation of such proposed
action.
(c) MERGER, SALE OF ASSETS, OR STOCK TRANSFER. In the event of
(i) a merger or consolidation of the Company with or into another corporation
resulting in the outstanding
Page 7 of 9
<PAGE>
voting securities of the Company immediately prior thereto representing
(either by remaining or by being converted into voting securities of the
surviving entity) less than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; (ii) the sale of
all or substantially all of the assets of the Company; or (iii) the sale or
other transfer by John Moores and any stockholder affiliated (within the
meaning of the Securities Act) with Mr. Moores, in a single transaction or a
series of related transactions, of shares of Common Stock constituting more
than fifty percent (50%) of the then outstanding Common Stock of the Company
to any person or entity not affiliated with Mr. Moores or the Company, the
Optionee shall fully vest in and have the right to exercise the Option as to
all of the Optioned Stock, including Shares as to which it would not
otherwise be vested or exercisable. Notwithstanding the provisions of clause
(iii) above, any such sale or other transfer by Mr. Moores or any stockholder
affiliated with Mr. Moores of shares of Common Stock through a registered
public offering of securities under the Securities Act, or in compliance with
the requirements of paragraphs (c), (d), (e), and (f) of Rule 144 under the
Securities Act, shall not cause the Option to become fully vested and
exercisable. If an Option becomes fully vested and exercisable in the event
of a merger or consolidation, or sale of assets, or sale or transfer of
Common Stock by Mr. Moores as provided above, the Administrator shall notify
the Optionee in writing or electronically that the Option shall be fully
vested and exercisable.
13. DATE OF GRANT. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination
granting such Option, or such other later date as is determined by the
Administrator. Notice of the determination shall be provided to each Optionee
within a reasonable time after the date of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Administrator may at any
time amend, alter, suspend or terminate the Plan.
(b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws. Such shareholder approval, if required, shall
be obtained in such a manner and to such a degree as is required by the
Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment,
alteration, suspension or termination of the Plan shall impair the rights of
any Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee
and a representative of the Administrator.
Page 8 of 9
<PAGE>
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to
the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares shall comply with Applicable Laws, including,
without limitation, the requirements of any stock exchange or quotation
system upon which the Shares may then be listed or quoted, and shall be
further subject to the approval of counsel for the Company with respect to
such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise
of an Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are
being purchased only for investment and without any present intention to sell
or distribute such Shares if, in the opinion of counsel for the Company, such
a representation is required under Applicable Laws.
16. LIABILITY OF COMPANY.
(a) INABILITY TO OBTAIN AUTHORITY. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
(b) GRANTS EXCEEDING ALLOTTED SHARES. If the Optioned Stock
covered by an Option exceeds, as of the date of grant, the number of Shares
which may be issued under the Plan without additional shareholder approval,
such Option shall be void with respect to such excess Optioned Stock, unless
shareholder approval of an amendment sufficiently increasing the number of
Shares subject to the Plan is timely obtained in accordance with Section
14(b) of the Plan. In the event more than one Option is granted which
exceeds, as of the date of grant, the number of Shares which may be issued
under the Plan without additional shareholder approval, such Options shall be
void as set forth in the preceding sentence on a pro rata basis.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
Page 9 of 9
<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> JUN-30-1998
<CASH> 13,216
<SECURITIES> 7,800
<RECEIVABLES> 18,474
<ALLOWANCES> (545)
<INVENTORY> 0
<CURRENT-ASSETS> 51,295
<PP&E> 14,258
<DEPRECIATION> (7,081)
<TOTAL-ASSETS> 60,690
<CURRENT-LIABILITIES> 23,945
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 34,397
<TOTAL-LIABILITY-AND-EQUITY> 60,690
<SALES> 21,750
<TOTAL-REVENUES> 21,750
<CGS> 4,526
<TOTAL-COSTS> 17,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 4,969
<INCOME-TAX> 1,742
<INCOME-CONTINUING> 3,227
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,227
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
</TABLE>
