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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 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: 000-22209
PEREGRINE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3773312
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
12670 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(619) 481-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK,
$.001 PAR VALUE
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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K
or any amendment to this Form 10-K.
----
The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing sale price of the
Common Stock on May 31, 1998, as reported on the Nasdaq National Market, was
approximately $186,241,113. Shares of Common Stock held by each executive
officer and director and by each person who may be deemed to be an affiliate
of the Registrant have been excluded from this computation. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of May 31, 1998, the Registrant had
19,264,932 shares of Common Stock, $.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form 10-K
portions of its Proxy Statement for the 1998 Annual Meeting of Stockholders.
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PEREGRINE SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I.............................................................................. 3
ITEM 1. BUSINESS............................................................ 3
ITEM 2. PROPERTIES.......................................................... 10
ITEM 3. LEGAL PROCEEDINGS................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 11
PART II............................................................................. 13
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................... 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA................................ 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......... 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................. 28
PART III............................................................................ 29
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................. 29
ITEM 11. EXECUTIVE COMPENSATION.............................................. 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................ 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 29
PART IV............................................................................. 30
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.... 30
SIGNATURES.......................................................................... 33
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PART I
ITEM 1. BUSINESS
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" UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT.
OVERVIEW
Pregrine Systems, The Infrastructure Management Company,
provides enterprise infrastructure management application software. The
objective of the Company's infrastructure management strategy is to provide
organizations control over their infrastructure assets and related information
throughout the asset life cycle based on maximizing the availability of assets,
minimizing investments and expenses, consolidating enterprise data, and
interfacing to enterprise applications. The Company develops, markets, and
supports, an integrated suite of applications that automates the management of
complex, enterprise-wide information and infrastructure assets. SERVICECENTER
and ASSETCENTER are designed to address the Consolidated Service Desk and asset
management requirements of large organizations and can be deployed across all
major hardware platforms and network operating systems and protocols. Each
utilizes advanced client/server and intelligent agent technologies and a modular
architecture. The SERVICECENTER and ASSETCENTER product suites are intended to
provide organizations a single view of all the elements of their infrastructure,
in order to optimize performance and minimize costs.
The Company was incorporated in California in 1981 and reincorporated
in Delaware in 1994. Unless the context otherwise requires, references in this
report to "Peregrine" and the "Company" refer to Peregrine Systems, Inc., a
Delaware corporation, its predecessor, Peregrine Systems, Inc., a California
corporation, and its subsidiaries. The Company's executive offices are located
at 12670 High Bluff Drive, San Diego, California 92130 and its telephone number
is (619) 481-5000.
The development of the market for the Company's products reflects an
increasingly competitive business environment in which information technology
and control over corporate infrastructure have become important sources of
competitive advantage. Organizations rely heavily on information technology in
efforts to improve operational efficiency, react more quickly to changes in the
marketplace, and better understand and respond to customer needs. Information
Technology ("IT") is an integral part of many core business functions, including
plant management, inventory management, and customer billing, and is critical to
many new tactical and strategic initiatives such as business process
reengineering, supply chain management, and enhanced customer care.
Most traditional IT management solutions have been designed to
address a limited set of problems, principally problem tracking and problem
resolution. These applications have been deployed on a departmental or
divisional level or have otherwise taken a segmented approach to IT
management that requires a specific and separate application to manage each
component or system within the IT infrastructure and creates difficulty in
integration with other third party IT applications. Similarly, management of
infrastructure is limited to tools that assist in managing events or asset
portfolios. The Company believes that its infrastructure management
applications offer the first application suite with the capability to unite
these two disciplines. SERVICECENTER provides an integrated and automated
suite of seven applications, consisting of problem management, problem
resolution, change management, inventory/configuration management, request
management, work management and service level agreements. ASSETCENTER
provides an integrated and automated suite of four applications, consisting
of asset management (comprised of asset, warranty, and financial management),
lease management, procurement management, and cost management.
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The Company believes that its future growth and profitability will
depend on a number of factors, including, among others, factors relating to the
quality of its products and to its ability to further penetrate existing markets
and to penetrate new markets. In that regard, the Company's strategy is focused
on maintaining and enhancing its technological position and the functionality of
its products; developing an integrated product line of software applications to
manage all aspects of the enterprise infrastructure, including management of IT,
plant and facilities, communication resources and distribution systems; creating
organizational awareness of the benefits to be obtained from an integrated
approach to infrastructure management; broadening its target markets from the
Fortune 500 to include smaller organizations worldwide comprising the Global
2000; expanding international sales; leveraging a product authorship model that
rewards individual product developers based on sales of products developed by
them; expanding its direct sales force and locations and increasing indirect
sales opportunities; implementing and expanding existing programs aimed at
improving customer relationships through information exchanges among the
Company, existing customers, and prospective customers; and expanding its
distribution channels through relationships with third party distributors,
system integrators, and original equipment manufacturers.
PRODUCTS
The Company's principal products are SERVICECENTER, a Consolidated
Service Desk software solution that integrates seven management applications, or
modules, on a common platform and ASSETCENTER, an asset management software
solution that integrates four management applications on a common platform.
SERVICECENTER and ASSETCENTER support most major computing platforms, including
UNIX, Microsoft Windows 3.1, Windows 95, Windows NT, and Apple Macintosh.
SERVICECENTER continues to be available on MVS. Each can be implemented readily
without modification, or users can customize the applications, screen formats,
databases or reports using the Company's Rapid Application Development ("RAD")
environment, a fourth generation application language for SERVICECENTER or
ASSETCENTER'S customization capabilities.
SERVICECENTER APPLICATIONS
PROBLEM MANAGEMENT. The problem management application automates the process of
reporting and tracking specific problems or classes of problems associated with
an enterprise network computing environment. Help desk personnel open problem
tickets using templates specific to the class of problem reported.
PROBLEM RESOLUTION. The problem management application works together with the
Company's IR EXPERT, a text search expert system that employs advanced
technology to allow network operators to retrieve relevant information. This
application assists in problem solving, based on prior solutions. The IR EXPERT
reduces a user's question, or query, to a number of "terms," refining the query
to fit knowledge in the database and can then search resolution databases using
related terms. This application is self-learning, so the customer does not have
to perform any work to keep the knowledge base up to date.
CHANGE MANAGEMENT. The change management application provides a functional
framework for proposing, accepting, scheduling, approving, reviewing and
coordinating network changes. Change management permits end-users to enter
proposed changes to the production environment and then circulate those changes
electronically for review and action. Change requests can be tracked and details
can be added at any time to the initial specifications.
INVENTORY/CONFIGURATION MANAGEMENT. The inventory/configuration management
application provides the service desk with a central repository of information
about an organization's IT environment, including inventories of networked
devices and applications as well as information concerning end-users. Easy
access to inventory information permits the service desk to respond to end-user
problems, to plan changes and services, and to create accurate reports about the
network's status and environmental trends.
REQUEST MANAGEMENT. The request management application automates and tracks an
organization's equipment and services ordering process from initial request
through installation and follow-up. Using SERVICECENTER, an end-user identifies
and orders products or services from a catalog of items. SERVICECENTER then
consolidates requests, forwards
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orders through an organization's standard approval and order processing
procedures, and consolidates orders by vendor. End-users can track the status
of requests through SERVICECENTER at all times.
SERVICE LEVEL AGREEMENT MANAGEMENT. Service Level Agreement (SLA) Management is
designed to simplify the task of SLA management by providing an automated,
real-time view of SLA performance. It provides a single, centralized repository
of SLA information and automated data feeds in network health and technician
performance. It can also help prioritize problem resolution to ensure that SLA
metrics are achieved.
WORK MANAGEMENT. Work Management is designed to help managers better balance the
demands for service and support based on the priority of tasks and the skill set
of the workforce. Work Management will automatically allocate unassigned or
incomplete problem tickets to individuals. The manager can also assign new work,
view progress on assigned items, or reassign work based on changing properties
using the drag and drop interface.
ASSETCENTER is an application suite that of manages the portfolio of
investments contained within an organization's infrastructure. ASSETCENTER
automatically retrieves technical data and alarms/alerts from the most common
network inventory and administration tools including Microsoft SMS, Tally
Systems NetCensus, Hewlett Packard OpenView, and IBM Tivoli. ASSETCENTER also
includes interfaces with enterprise resource planning (ERP) systems such as
SAP AG, Oracle Corporation, PeopleSoft, Inc., and J.D. Edwards & Company.
ASSETCENTER is a client/server, multi-platform and multi-database system,
integrating advanced workflow functionality. ASSETCENTER manages financial
information in any currency or currencies, including the euro.
ASSETCENTER APPLICATIONS
ASSET MANAGEMENT. The Asset Management application provides a comprehensive
inventory of an organization's equipment, users, suppliers, and contracts. The
application provides detailed descriptions of software licenses acquired and
their associated rights in order to reconcile them with the software actually
installed. Asset Management allows users to track assets throughout their life
cycle, from the initial purchase request to retirement.
LEASE MANAGEMENT. Lease Management manages the contractual aspects of leasing
and rental by returning, updating and renewing equipment through alarm and
messaging features. The application also includes a wide range of methods for
calculating lease terms and permits users to evaluate different financing
alternatives.
PROCUREMENT MANAGEMENT. This application manages the acquisition of IT products
including assets, consumables and services. Procurement Management covers the
entire purchasing cycle: request, approval, estimate, issuance of purchase
orders, delivery and receipt. The application allows users to set up
authorization procedures as well as automatic reordering based on user-defined
restocking criteria.
COST MANAGEMENT. Cost Management features analytic and budgetary functions
that allow tracking, control, and allocation of IT related expenses. The
application allows users to track costs related to each asset, including both
capital and operational expenses (E.G., training, service calls) and to measure
the costs of ownership for each asset. The application also allows users to
compare accounting and physical inventories to determine the correct valuation
of balance sheet assets.
OTHER NETWORK MANAGEMENT PRODUCTS
The Company's network management solutions provide network
information on a real-time basis. OPENSNA permits users to manage IBM SNA
networks graphically from a SNMP-based management console, to determine
network status, and to issue commands. STATIONVIEW and SERVERVIEW manage
Novell NetWare, Microsoft Windows NT, and Compaq Insight Manager-based
servers and workstations from SNMP-based management platforms.
PRODUCT DEVELOPMENT; PRODUCT AUTHORSHIP MODEL
The Company believes that attracting and retaining talented software
developers is an important component of the Company's product development
activities. To this end, the Company has instituted a product authorship
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incentive program that rewards the Company's developers individually with
commissions based on the market success of the applications designed, written,
marketed and supported by them. The Company's product authorship program is
designed to encourage the Company's developers to evaluate the effectiveness of
a product in the actual user environment.
The Company believes that the ability to deliver new and enhanced
products to customers is a key success factor. The Company has historically
developed its products through a consultative process with existing and
potential customers. The Company expects that continued dialogue with such
existing and potential customers may result in enhancements to existing products
and the development of new products, including product suites designed for a
specific market segment. The Company has in the past devoted and expects in the
future to continue to devote a significant amount of resources to developing new
and enhanced products. The Company currently has a number of product development
initiatives underway. There can be no assurance that any enhanced products, new
products or product suites will be embraced by existing or new customers. The
failure of these products to achieve market acceptance would have a material
adverse effect on the Company's business, results of operations, and financial
condition.
The Company's research and development expenditures in fiscal 1996,
1997, and 1998 were $7.7 million, $5.9 million, and $8.4 million, respectively,
representing 33%, 17%, and 14% of total revenues in the respective periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The market for the Company's products is 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 on 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 by the Company. 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 the Company's business, results of operations, and
financial condition.
TECHNOLOGY
The Company's products rely on a number of standard, commercially
available technologies for relational database storage and retrieval and
client/server communications. The Company's products are designed to support a
range of implementations of infrastructure management applications and the
Consolidated Service Desk within medium sized organizations to large
enterprises. The Company has developed other technologies designed to provide a
comprehensive environment to build, deploy, and customize a range of
applications.
The Company commenced integration of the SERVICECENTER and ASSETCENTER
product suites shortly after completion of the acquisition of Apsylog. The
Company has a phased plan for converging the technologies. The first phase,
completed in 1998, integrates SERVICECENTER and ASSETCENTER using a replication
scheme called the Peregrine Repository Interface Manager ("PRIM"). PRIM allows
SERVICECENTER and ASSETCENTER to manage simultaneously data describing
infrastructure assets as though they were in the same database. The Company's
product objective is to merge the technologies of the two product suites,
retaining the best technology from each and maintaining an upgrade path for
current customers.
THREE-TIERED ARCHITECTURE. The Company's database, business rules, and
presentation technologies create a three-tiered client/server architecture
intended to provide scalability and flexibility. The tiers are logically
separated, allowing
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changes to the database design or the graphical interface to be made without
requiring changes to the business rules or other related tiers.
EASY CUSTOMIZATION/EXTENSION. In order to make the software fit the
customers' needs, the Company's products provide a number of tools that
enable customers to customize and extend SERVICECENTER and ASSETCENTER. The
design of the database, the contents and appearance of the user interface,
and the business rules can be modified using the Company's standard tools
provided with the system.
RAPID APPLICATION DEVELOPMENT ENVIRONMENT. The Company has created a
"fill-in-the-blanks" development environment for building and deploying
applications. All SERVICECENTER applications are implemented using the
Company's RAD environment. If a customer requires more extensive
modification, the system can be customized by changing the applications
provided by the Company or implementing new applications using the RAD
environment.
DISTRIBUTED SERVICES. The Company has distributed a database technology that
provides replication services and the capability to move work from one
SERVICECENTER system to another. These services are database vendor
independent and contain knowledge of the application schema.
ADAPTERS. The Company provides adapters to industry standard APIs, such as
SMTP e-mail, and leading vendors products. These adapters expand the reach of
the Company's products by allowing them to interact with other products
currently in the customer's environment. The Company has also created
adapters that permit the system to communicate using e-mail, beeper, fax and
Lotus Notes. The adapters also provide communication with third party network
management tools such as Hewlett Packard's OpenView, CA-Unicenter, Tivoli's
TME, Cabletron Spectrum, Sun's SunNet Manager and others. In addition, the
Company has created an open API permitting software developed by third
parties, end-users or the Company's Professional Services group to be
integrated into the system.
INTELLIGENT AGENTS. The Company provides intelligent agents that gather and
feed information to SERVICECENTER. The agents provide automated inventory
gathering and problem determination data for use in problem resolution and
management of an IT environment. The agents permit help desk personnel to
open, update, and close trouble tickets based on criteria provided by the
customers.
JAVA CLIENT The Company plans to introduce a Jave-based SERVICECENTER GUI
client this year. The Java client duplicates the functionality of the
SERVICECENTER GUI, allowing access to the entire SERVICECENTER system via the
internet (world wide web).
SALES AND MARKETING
The Company sells its software and services in both North America
and internationally primarily through a direct sales force. In addition to
the Company's San Diego headquarters, the North American sales force is
located in the metropolitan areas of Atlanta, Chicago, Houston, San
Francisco, New York, and Washington, D.C. The international sales force is
located in the metropolitan areas of Amsterdam, Copenhagen, Frankfurt,
London, Munich, and Paris. The Company's sales model focuses on telephone and
network communications for product demonstrations and product sales. When
necessary, however, the Company's sales force will also travel to customer
locations and pursue a consultative sales process. In addition to its direct
sales strategy, the Company is continuing to pursue indirect distribution
channels. In the Pacific Rim and Latin America, the Company has established a
network of channel partners. In North America, the Company has established a
network of regional, national and strategic integrators. When sold through
direct channels, the sales cycle for the product is typically six to nine
months depending on a number of factors, including the size of the
transaction and the level of competition which the Company encounters in its
selling activities. This sales cycle is typically extended 90 days for
product sales through indirect channels.
In the last year, the Company has devoted significant resources to
restructuring and building its marketing organization. In the course of this
restructuring, the marketing organization has launched a new corporate marketing
strategy emphasizing the Company's objective to be the leading infrastructure
management solution worldwide. As part of its marketing strategy, the Company
has implemented the infrastructure management strategy throughout its
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marketing programs such as seminars, monthly executive briefings, direct
mailings, industry trade shows, advertising and public relations. The Company
plans to continue to expand its marketing organization in an effort to
broaden the Company's market presence.
The Company has significantly increased the size of its sales force
over the last year and expects to continue hiring sales personnel, both
domestically and internationally, over the next twelve months. Competition for
qualified sales personnel is intense in the software industry. The Company also
expects to increase the number of its regional, national, and strategic
integrators, domestically and internationally. Any failure by the Company to
expand its direct sales force or other distribution channels could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company believes that its continued growth and profitability
will require expansion of its international operations, particularly in
Europe, Latin America, and the Pacific Rim. The Company intends to expand its
international operations and enter additional international markets, either
directly or through international distribution or similar arrangements, which
will require significant management attention and financial resources.
Competition for suitable distribution partners is intense in many markets
outside North America. There can be no assurance that the Company will be
successful in attracting and retaining qualified international distributors
or that it will be successful in implementing direct sales programs in
selected international markets. If the Company is unable to obtain qualified
international distribution partners or is otherwise unable to successfully
penetrate important international markets, the Company's business, results of
operations, and financial condition could be materially and adversely
affected.
In addition, continued international expansion poses a number of risks
associated with conducting business outside the United States, including
fluctuations in currency exchange rates, longer payment cycles, difficulties in
staffing and managing international operations, problems in collecting accounts
receivable, seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world, increases in tariffs, duties, price
controls, or other restrictions on foreign currencies, and trade barriers
imposed by foreign countries, any of which could have a material adverse effect
on the Company's business, operating results and financial condition. In
addition, the Company has only limited experience in developing localized
versions of its products and marketing and distributing its products
internationally. There can be no assurance that the Company will be able to
successfully localize, market, sell, and deliver its products internationally.
The inability of the Company to expand its international operations successfully
and in a timely manner could have a material adverse effect on the Company's
business, results of operations, and financial condition.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
The Company's Professional Services group provides technical consulting
and training to assist customers in implementing its products.
The Company provides a range of consulting services. Basic consulting
services include analyzing user requirements and providing the customer with a
starter system that will quickly demonstrate significant benefits of its
products. More advanced consulting services include providing turn-key
implementations using the Company's Advanced Implementation Methodology, which
begins with a structured analysis to map the customer's business rules onto the
Company's service desk tools, continues with the technical design and
construction, and finishes with system roll out. Implementation assistance
frequently involves process reengineering and the development of interfaces
between the Company's products and legacy systems and other tools or systems.
The Company offers training courses in the implementation and
administration of its products for a fee. On a periodic basis, the Company
offers product training at its facilities in San Diego and London for customers
and channel partners. Customer-site training is also available.
The Company maintains a staff of customer service personnel, who
provide technical support and training, and periodic software updates to the
Company's customers and partners. The Company offers technical support
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services 24 hours a day, seven days a week through its local offices in Europe
and San Diego via toll free lines. In addition to telephone support, the Company
provides support via fax, e-mail, and a Web server.
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. ("Tivoli"));
(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
International Business Machines Corporation ("IBM"), Computer Associates
International, Inc. ("Computer Associates"), Network Associates, Inc.
(recently formed as a result of the business combination of McAfee
Associates, Inc. and Network General Corporation), and Hewlett-Packard
Company ("Hewlett-Packard") through its recent acquisition of PROLIN; (iv)
providers of asset management software; and (v) the internal information
technology departments of those companies with help desk 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 occur 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 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, operating
results and financial condition. Some of the Company's current and many of
its potential competitors have significantly greater financial, technical,
marketing and other resources than the Company. As a result, they may be able
to respond more quickly to new or emerging technologies and changes in
customer requirements or to devote greater resources to the development,
promotion and sale of their products than the Company. There can be no
assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not have a material adverse effect on the Company's business,
operating results and financial condition.
The Company believes that the principal competitive factors affecting
its market include product features such as adaptability, scalability, ability
to integrate with third party products, functionality, ease of use, product
reputation, quality, performance, price, customer service and support,
effectiveness of sales and marketing efforts and company reputation. Although
the Company believes that it currently competes favorably with respect to such
factors, there can be no assurance that the Company can maintain its competitive
position against current and potential competitors, especially those with
greater financial, marketing, service, support, technical, and other resources
than the Company. In addition, the Company believes that its future financial
performance will depend in large part on its success in developing an integrated
product line of software applications to manage all aspects of the enterprise
infrastructure, including management of IT, plant and facilities, communication
systems, and distribution systems, and to create organizational awareness of the
benefits to be obtained from an integrated approach to infrastructure
management.
INTELLECTUAL PROPERTY
The Company's success is 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
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protect its proprietary rights. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford 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 the
Company regards as proprietary. In particular, the Company may provide its
licensees with access to its data model and other proprietary information
underlying its licensed applications. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar or superior
technology. Policing unauthorized use of the Company's software is difficult
and, while the Company is unable 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
Company's proprietary rights to the same extent as do the laws of the United
States. Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's 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 Company's business, results of
operations and financial condition.
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 by the Company with
respect to current or future products. The Company expects that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
EMPLOYEES
As of March 31, 1998, the Company employed 340 persons, including 110
in sales and marketing, 49 in research and development, 32 in customer support,
69 in professional services, and 80 in finance and administration. Of the
Company's employees, 118 are located in Europe and the remainder are located in
North America. The Company believes that its future success will depend in part
on its continued ability to attract, hire and retain qualified personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to identify, attract, and retain such personnel in the
future. None of the Company's employees is represented by a labor union (other
than statutory unions required by law in certain European countries). The
Company has not experienced any work stoppages and considers its relations with
its employees to be good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, support,
research and development and training functions are located at its headquarters
facility in San Diego, California. The Company currently occupies 95,110 square
feet of space in the San Diego facility, and the underlying leases extend
through August 2003. Management believes that its current facilities are
adequate to meet its needs through the next twelve months. An additional 13,310
square feet of leased space at the San Diego headquarters is subleased to JMI
Services, Inc., an affiliate of the Company.
The Company also leases office space for sales, marketing, and
professional services staff in the metropolitan areas of Atlanta, Chicago,
Houston, New York, San Francisco, and Washington, D.C. In Europe, the Company
leases space in the metropolitan areas of Amsterdam, Copenhagen, Frankfurt,
London, Munich, and Paris for European sales, customer support, professional
services, and administration.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to various legal proceedings
or proceedomgs claims, either asserted or unasserted, which arise in the
ordinary course of business. Management has reviewed pending legal matters and
10
<PAGE>
believes that the resolution of such matters will not have a significant
adverse effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of the year ended March 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Company's executive officers as of March 31, 1998.
<TABLE>
<CAPTION>
<S> <C>
NAME AGE POSITION
---- --- ---------
Stephen P. Gardner (1)......................... 44 President, Chief Executive Officer and
Director
David A. Farley................................ 42 Vice President, Finance, Chief Financial
Officer and Director
David G. Fisher (2)............................ 40 Vice President, Marketing
William G. Holsten............................. 61 Vice President, Professional Services
Gary A. Hughes (3)............................ 34 Vice President, Worldwide Customer Support
Frederic B. Luddy.............................. 43 Vice President, North American Research and
Development
Richard T. Nelson............................. 38 Vice President, Secretary, and General
Counsel
Douglas S. Powanda............................ 41 Vice President, Worldwide Sales
Gilles Queru (4).............................. 39 Vice President, Corporate Development
Steven S. Spitzer............................. 39 Vice President, Channel Sales
</TABLE>
(1) Mr. Gardner commenced acting as President and Chief Executive Officer
and a member of the Board of Directors in April 1998.
(2) Mr. Fisher resigned from such position in April 1998.
(3) Mr. Hughes commenced acting as Vice President, Worldwide Customer
Support in April 1998.
(4) Mr. Queru commenced acting as Vice President, Corporate Development in
April 1998.
STEPHEN P. GARDNER has served as the Company's President and Chief
Executive Officer and a member of the Board of Directors since April 1998. From
January 1998 until April 1998, Mr. Gardner served as Executive Vice President
and the Company's Principal Executive Officer. From May 1997 until January 1998,
Mr. Gardner served as Vice President, Strategic Acquisitions. From May 1996
until May 1997, Mr. Gardner served as president of Thunder & Lightning Company,
an internet software start-up company. From March 1995 until May 1996, Mr.
Gardner served as president of Alpharel, Inc., a document management software
company. From March 1993 until March 1995, Mr. Gardner served as a vice
president of Data General Corporation, a manufacturer of multiuser computer
systems, peripheral equipment, communications systems, and related products.
From October 1988 until March 1993, Mr. Gardner served in various capacities
with Groupe Bull, and most recently as founder and president of its Integris
Business Unit, a systems integration and software company owned by Groupe Bull
of France.
DAVID A. FARLEY has served as the Company's Vice President, Finance,
and Chief Financial Officer and as a member of the Board of Directors since
October 1995. Mr. Farley served as Secretary of the Company from October 1995
until February 1997. From November 1994 to November 1995, Mr. Farley was Vice
President, Finance, and Chief Financial Officer and a director of XVT
Software Inc. ("XVT"), a development tools software company. From December
1984 until October 1994, Mr. Farley held various accounting and financial
positions at BMC Software, Inc., a vendor of software utilities for IBM
mainframe computing environments, most recently as Chief Financial Officer
and as a director.
DAVID G. FISHER served as the Company's Vice President, Marketing from
April 1996 until April 1998. From March 1993 to April 1996, Mr. Fisher was Vice
President of Sales and Marketing for Restrac, Inc., a developer and vendor of
recruitment and staffing software applications. From February 1991 to March
1993, Mr. Fisher was Vice
11
<PAGE>
President of Worldwide Marketing for Continuum, Inc., a developer and vendor
of insurance and banking software applications.
WILLIAM G. HOLSTEN has served as the Company's Vice President,
Professional Services since November 1995. From July 1994 until November
1995, Mr. Holsten was Director of Professional Services for XVT. From August
1992 until June 1994, he was a consultant with Engineering Software
Solutions, a consulting firm co-owned by Mr. Holsten and a partner, which
provided consulting services to XVT from May 1993 to June 1994. From October
1984 to July 1992, Mr. Holsten held a variety of positions with Precision
Visuals, Inc., a graphics software company, most recently as Director of
Professional Services.
GARY A. HUGHES has served as the Company's Vice President, Worldwide
Customer Support since April 1998. From January 1998 until April 1998 Mr.
Hughes served as Director of Worldwide Customer Support. From August 1997
until January 1998 Mr. Hughes served as Manager, Systems Engineers. Mr.
Hughes served as Alternate Channels Manager from October 1995 until August
1997, Development Manager from December 1994 until October 1995, and Vice
President, Customer Support from December 1993 until December 1994. Mr.
Hughes joined the Company in July 1989 as a customer support representative
and held various positions in the customer support department until December
1994.
FREDERIC B. LUDDY has served as the Company's Vice President, North
American Research and Development and Chief Technology Officer since January
1998. From October 1995 until January 1998, Mr. Luddy served as Product
Architect for the Company's SERVICECENTER product suite. From April 1990 until
October 1995, Mr. Luddy served as a Product Author for the Company's
SERVICECENTER product suite.
RICHARD T. NELSON has served as the Company's General Counsel since
November 1995, as Vice President since October 1996 and as Secretary since
February 1997. From August 1991 until November 1995, Mr. Nelson was an associate
in the Houston, Texas office of Jackson & Walker LLP, a law firm.
DOUGLAS S. POWANDA has served as the Company's Vice President,
Worldwide Sales since January 1998. From September 1995 until January 1998, Mr.
Powanda served as Vice President, International Sales. From June 1994 until
September 1995, he served as the Company's Vice President, North American Sales.
He was the Company's Director of Sales for Europe from September 1993 until June
1994, Regional Sales Manager from December 1992 to August 1993, and Senior
Accounts Manager from February 1992 until December 1992.
GILLES QUERU has served as the Company's Vice President, Corporate
Development since April 1998. Mr Queru joined the Company as President of
Apsylog S.A. ("Apsylog") in September 1997 as a result of the Apsylog
Acquisition. Mr. Queru founded Apsylog in 1987 and served as its Chief Executive
Officer and Chairman of its Board of Directors until the Apsylog Acquisition.
Prior to forming Apsylog, Mr. Queru held several management positions with
Hewlett-Packard, a developer and manufacturer of computer and imaging product
hardware.
STEVEN S. SPITZER has served as the Company's Vice President, Channel
Sales since August 1997. From 1986 until August 1997, Mr. Spitzer held various
positions with FileNet Corporation, a provider of workflow, document- imaging,
and electronic document management software solutions, most recently as Vice
President, Channel Sales.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq National
Market under the symbol "PRGN" since the Company's initial public offering in
April 1997. The following table sets forth for the periods indicated, the
high and low closing sales prices reported on the Nasdaq National Market.
Prior to April 1997, there was no established public trading market for the
Company's Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year Ended March 31, 1999:
First Quarter (through June 26, 1998). . . $28.000 $18.250
Fiscal Year Ended March 31, 1998:
Fourth Quarter . . . . . . . . . . . . . . $19.125 $12.500
Third Quarter. . . . . . . . . . . . . . . 17.500 12.000
Second Quarter . . . . . . . . . . . . . . 20.250 14.000
First Quarter. . . . . . . . . . . . . . . 15.625 8.500
</TABLE>
As of May 31, 1998, the Company had issued and outstanding
19,264,932 shares of its Common Stock held by 275 stockholders of record. The
Company estimates that there are approximately 1,800 beneficial stockholders.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital
stock. The Company currently expects to retain future earnings, if any, for
use in the operation and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In November 1997, the Company issued an aggregate of 50,000 shares
of Common Stock pursuant to a restricted stock agreement. The shares under
this agreement vest incrementally over ten years, subject to earlier vesting
over six years contingent upon the Company's achieving certain financial
milestones. Those shares were subsequently registered for resale on Form
S-8/S-3 in January 1998.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company
presented below as of March 31, 1994, 1995, 1996, 1997, and 1998 and for each
of the years in the five-year period ended March 31, 1998, are derived from
the consolidated financial statements of Peregrine Systems, Inc. and its
subsidiaries, which financial statements have been audited by Arthur Andersen
LLP, independent public accountants. The consolidated financial statements as
of March 31, 1997 and 1998 and for each of the years in the three-year period
ended March 31, 1998, and the report of independent public accountants
thereon, are included elsewhere in this report. The selected consolidated
financial data set forth below is qualified in its entirety by, and should be
read in conjunction with, the Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses .......................................... $ 6,714 $ 9,137 $ 11,642 $ 20,472 $ 38,791
Maintenance and services .......................... 9,046 10,491 12,124 14,563 23,086
-------- -------- -------- -------- --------
Total revenues ................................. 5,760 19,628 23,766 35,035 61,877
Costs and expenses:
Cost of licenses .................................. 322 393 415 215 326
Cost of maintenance and services .................. 3,457 3,573 3,526 4,661 10,326
Sales and marketing ............................... 6,118 9,549 11,820 15,778 22,728
Research and development .......................... 4,670 7,089 7,742 5,877 8,394
General and administrative ........................ 1,898 2,943 4,529 3,816 6,463
Acquired in-process research and development ...... -- -- -- -- 34,775
-------- -------- -------- -------- --------
Total costs and expenses ...................... 16,465 23,547 28,032 30,347 83,012
-------- -------- -------- -------- --------
Operating income (loss) ........................... (705) (3,919) (4,266) 4,688 (21,135)
Interest income (expense) and other ............... (30) 3,970 (286) (478) 839
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
income taxes ..................................... (735) 51 (4,552) 4,210 (20,296)
Income tax expense (benefit) ...................... -- -- -- (1,592) 5,358
-------- -------- -------- -------- --------
Income (loss) from continuing operations .......... (735) 51 (4,552) 5,802 (25,654)
Loss from discontinued operations:
Loss from operations ........................... -- -- 781 -- --
Loss on disposal ............................... -- -- 1,078 -- --
-------- -------- -------- -------- --------
Loss from discontinued operations ........... -- -- (1,859) -- --
-------- -------- -------- -------- --------
Net income (loss) ................................. $ (735) $ 51 $ (6,411) $ 5,802 $(25,654)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) per share - diluted ............. $ (0.52) $ 0.39 $ (1.48)
-------- -------- --------
-------- -------- --------
Shares used in per share calculation .............. 12,331 14,964 17,380
-------- -------- --------
-------- -------- --------
<CAPTION>
MARCH 31,
------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term investments.. $ 587 $ 57 $ 437 $ 305 $21,977
Working capital (deficit) .......................... (3,045) (4,118) (9,697) (4,065) 25,572
Total assets ....................................... 6,689 9,787 13,817 19,738 56,737
Total debt ......................................... 1,319 1,540 5,208 3,866 1,117
Stockholders' equity (deficit) ..................... (2,859) (2,197) (8,450) (2,849) 30,601
</TABLE>
14
<PAGE>
ITEM 7. 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" UNDER "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS REPORT.
OVERVIEW
The Company develops, markets, and supports an integrated suite of
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 continue
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. In addition, for the year ended March 31, 1998, over 85% of
the Company's license sales of SERVICECENTER and ASSETCENTER have been
attributable to UNIX and Windows NT platforms.
In the latter half of fiscal 1996 and the beginning of fiscal 1997,
the Company implemented an internal restructuring to capitalize on the market
opportunity for products addressing the requirements of the Enterprise
Service Desk. This restructuring included rebuilding the Company's senior
management team, redefining the product development strategy, initiating a
comprehensive marketing strategy and strengthening the Company's financial
and budgeting processes. In addition, in April 1996, the Company
substantially reorganized its sales force and instituted new sales management
procedures.
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.
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. In fiscal 1996, 1997,
and 1998, maintenance and services revenues represented 51%, 42%, and 37% of
total revenues, respectively. 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. In fiscal 1996, 1997,
and 1998, more than 90% of the Company's customers renewed their maintenance
agreements.
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
15
<PAGE>
uncertainties regarding customer acceptance, collection of the resulting
receivable is deemed probable, and no other significant vendor obligations
exist. Revenues from post-contract support services are recognized ratably
over the term of the support period, generally one year. Maintenance revenues
which are bundled with license agreements are unbundled using vendor-specific
objective evidence. Consulting revenues are primarily related to
implementation services most often performed on a time and material basis
under separate service agreements for the installation of the Company's
products. Revenues from consulting and training services are recognized as
the respective services are performed.
The Company currently derives substantially all of its license
revenues from the sale of SERVICECENTER and ASSETCENTER and expects them to
account for a significant portion of the Company's revenues for the
foreseeable future. As a result, the Company's future operating results are
dependent upon continued market acceptance of the SERVICECENTER and
ASSETCENTER product suites, including future enhancements. Factors adversely
affecting the pricing of, demand for or market acceptance of the
SERVICECENTER and ASSETCENTER 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.
To date the Company's 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.
16
<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>
MARCH 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses.................................. 49.0% 58.4% 62.7%
Maintenance and services ................. 51.0 41.6 37.3
------ ------ ------
Total revenues ........................ 100.0 100.0 100.0
Costs and expenses:
Cost of licenses ......................... 1.7 0.6 0.5
Cost of maintenance and services ......... 14.9 13.3 16.7
Sales and marketing ...................... 49.7 45.0 36.7
Research and development ................. 32.6 16.8 13.6
General and administrative ............... 19.1 10.9 10.4
Acquired in-process research and
development ............................. -- -- 56.2
------ ------ ------
Total costs and expenses ............. 118.0 86.6 134.1
------ ------ -------
Operating income (loss) .................. (18.0) 13.4 (34.1)
Interest income (expense) and other, net . (1.2) (1.4) 1.3
------ ------ ------
Income (loss) from continuing operations
before income taxes...................... (19.2) 12.0 (32.8)
Income tax expense (benefit) ............. -- (4.5) 8.7
------ ------ ------
Income (loss) from continuing operations . (19.2) 16.5 (41.5)
Loss from discontinued operations:
Loss from operations ................... (3.3) -- --
Loss on disposal ....................... (4.5) -- --
------ ------ ------
Loss from discontinued operations .... (7.8) -- --
------ ------ ------
Net income (loss) ........................ (27.0)% 16.5% (41.5)%
------ ------ ------
------ ------ ------
</TABLE>
FISCAL YEARS ENDED MARCH 31, 1996, 1997, AND 1998
REVENUES
Total revenues were $23.8 million, $35.0 million, and $61.9 million
in fiscal 1996, 1997, and 1998, respectively, representing year-to-year
increases of 47% between 1996 and 1997 and 77% between 1997 and 1998.
LICENSES. License revenues were $11.6 million, $20.5 million, and $38.8
million in fiscal 1996, 1997, and 1998, respectively, representing 49%, 58%,
and 63% 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 $12.1
million, $14.6 million, and $23.1 million in fiscal 1996, 1997, and 1998,
respectively, representing 51%, 42%, and 37% of total revenues in the
respective periods. The dollar increases are attributable to renewals of
maintenance agreements from the Company's expanded installed base of
customers and maintenance revenues included as part of new licenses and an
increased number of consulting engagements related to implementation of
software from initial license agreements.
17
<PAGE>
COSTS AND EXPENSES
COST OF LICENSES. Cost of licenses revenues was $415,000, $215,000, and
$326,000 for fiscal 1996, 1997, and 1998, respectively, representing 2%, 1%,
and 1% of total license revenues in the respective periods.
COST OF MAINTENANCE AND SERVICES. Cost of maintenance and services revenues
was $3.5 million, $4.7 million, and $10.3 million in fiscal 1996, 1997, and
1998, respectively, representing 29%, 32%, and 45% of total maintenance and
services revenues in the respective periods. The dollar and percentage
increases in 1998 are attributable to an increase in customer 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 $11.8 million, $15.8
million, and $22.7 million in fiscal 1996, 1997, and 1998, respectively,
representing 50%, 45%, and 37% of total revenues in the respective periods.
The dollar increases are attributable to the significant expansion of both
the North American and international sales forces, increases in marketing
personnel, the effect of combining Apsylog's operations since the Apsylog
Acquisition in September 1997, and to moderate operating expense increases.
Sales and marketing expenses have decreased as a percentage of total revenues
from fiscal 1996 through fiscal 1998 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 $7.7
million, $5.9 million, and $8.4 million in fiscal 1996, 1997, and 1998,
respectively, representing 33%, 17%, and 14% of total revenues in the
respective periods. The dollar and percentage decreases from fiscal 1996 to
fiscal 1997 are due primarily to the full year effect of the Company's
divestiture of the entire mainframe software development portion of its
business in October 1995. The dollar increase from fiscal 1997 to fiscal 1998
is due primarily to the increased dollar amount of product author
commissions, an increase in the number of personnel in the Research and
Development department, and the 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 fiscal 1996
through fiscal 1998 as a result of revenues increasing at a faster rate.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $4.5
million, $3.8 million, and $6.5 million in fiscal 1996, 1997, and 1998,
respectively, representing 19%, 11%, and 10% of total revenues in the
respective periods. The dollar increase from 1997 to 1998 is attributable
primarily to costs associated with administrative personnel additions to
support growth and, management restructuring, and the effect of combining
Apsylog's operations since the Apsylog Acquisition in September 1997. The
decrease from fiscal 1996 to 1997 was attributable to the costs incurred in
the fiscal 1996 management restructuring.
PROVISION FOR INCOME TAXES/INCOME TAX BENEFIT
The Company did not incur any significant income taxes during fiscal
1996 due to operating losses. In fiscal 1997, the Company recorded an income
tax benefit of $1.6 million resulting from the utilization of a portion of
the Company's available net operating loss carryforwards as an offset against
taxable income. In fiscal 1998, the Company recorded an income tax expense of
$5.4 million. As of March 31, 1997 and 1998, the Company had net operating
loss carryforwards of approximately $290,000 and $8.5 million, respectively,
for federal income tax purposes which expire beginning in 2004. Utilization
of the net operating losses may be subject to annual limitations resulting
from certain changes in ownership of the Company. At March 31, 1998, the
Company also has foreign net operating loss carryforwards of approximately
$5.8 million. The Company has recorded a valuation allowance to partially
offset the carrying value of its net deferred tax assets due to uncertainty
surrounding its realization. Management evaluates on a quarterly basis the
recoverability of the deferred tax assets and the amount of the valuation
allowance. At such time as it is determined that it is more likely than not
that all or part of the deferred tax assets are realizable, the valuation
allowance will be reduced accordingly. Any future decrease in the valuation
allowance will be recorded as a reduction in goodwill.
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DISCONTINUED OPERATIONS
During fiscal 1996, the Company acquired XVT Software Inc. ("XVT"),
substantially all of the outstanding equity of which was owned by the
majority stockholder of the Company. In January 1996, the Company determined
that maintaining an interest in XVT was not consistent with the Company's
business strategy and adopted a plan to discontinue the operations of XVT.
The Company incurred a loss from discontinued operations of XVT in fiscal
1996 of $1.9 million.
IMPACT OF INFLATION
The effect of inflation on the Company's financial position has not
been significant to date.
LIQUIDITY AND CAPITAL RESOURCES
Until April 1997, the Company financed its operations through bank
borrowings and private sales of Common Stock. In fiscal 1996, the Company
received net proceeds from bank borrowings of $3.7 million. In fiscal 1997,
the Company's net repayments totaled $1.3 million. In fiscal 1997, the
Company received proceeds of $700,000 from the sale of a product line. In
fiscal 1996 and 1997, the Company invested cash in the amounts of $3.5
million and $566,000, respectively, for purchases of property and equipment
including computer hardware and software to support the Company's growing
employee base and to relocate to its new San Diego headquarters and training
facility. In fiscal 1996, the Company generated $584,000 in cash from
operations, but a net cash use of $738,000 by a discontinued business
resulted in an overall cash use by the Company of $154,000 in connection with
operating activities. In fiscal 1997, the Company generated $3.2 million in
cash from operations, which was reduced by a net cash use of $1.3 million by
a discontinued business resulting in $1.9 million net cash provided from
operations. In fiscal 1998, the Company generated $1.7 million in cash from
operations, which was reduced by a net cash use of $170,000 by a discontinued
business resulting in $1.5 million net cash provided by operations.
In April 1997, the Company completed the initial public offering of
its Common Stock, which resulted in net proceeds to the Company of $19.3
million.
The Company has a $5.0 million revolving credit line which expires
July 31, 1998, pursuant to which there is no outstanding balance at March 31,
1998. Borrowings under the line of credit bear interest at the bank's prime
rate (8.5% at March 31, 1998). The line of credit is secured by accounts
receivable, equipment, and certain other assets of the Company. The borrowing
facility also provides for a foreign exchange facility, under which the
maximum principal amount of foreign exchange transactions which may mature
during any two day period is $2.0 million.
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, cash available under its bank facilities and cash flow
from operations will be sufficient to meet its working capital requirements
for at least the next 12 months. Although operating activities may provide
cash in certain periods, to the extent the Company experiences growth in the
future, the Company anticipates that its operating and investing activities
may use cash. Consequently, any such future growth may require the Company to
obtain additional equity or debt financing, which may not be available on
commercially reasonable terms or which may be dilutive.
YEAR 2000 RISKS
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, many companies' software
and computer systems may need to be upgraded or replaced in order to comply
with such Year 2000 requirements. Significant uncertainty exists in the
software industry concerning the potential effects associated with such
compliance.
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The Company utilizes third party equipment and software that may not
be Year 2000 compliant and is conducting an internal audit of products
provided by outside vendors to determine if such third party products are
Year 2000 compliant. Although such audit is not yet completed, the Company
has received assurances from suppliers of all third party software that the
Company deems material to its business that such software is Year 2000
compliant. Failure of such third party equipment or software to operate
properly with regard to the Year 2000 and thereafter could require the
Company to incur unanticipated expenses to remedy any problems, which could
have a material adverse effect on its business, results of operations, and
financial condition. If key systems, or a significant number of systems, were
to fail as a result of Year 2000 problems or if the Company was to experience
delays implementing Year 2000 compliant software products, the Company could
incur substantial costs and disruption of its business, which would
potentially have a material adverse effect on its results of operations and
financial conditions.
The Company is still assessing the impact the Year 2000 issue will
have on its proprietary software products and internal information systems
and will take appropriate corrective actions based on the results of such
analyses. Management of the Company has not yet determined the costs related
to achieving Year 2000 compliance but does not believe such costs will be
material. To the extent the cost of achieving Year 2000 compliance are
material, such costs will have a material adverse effect on its business,
results of operations, and financial condition.
In the ordinary course of its business, the Company tests and
evaluates its own software products and believes that its software products
are generally Year 2000 compliant, meaning that the use or occurrence of
dates on or after January 1, 2000 will not materially affect the performance
of such software products with respect to four digit date dependent data or
the ability of such products to correctly create, store, process, and output
information related to such data. There can be no assurances, however, that
the Company will not subsequently learn that certain of its software products
do not contain all necessary software routines and codes necessary for the
accurate calculation, display, storage, and manipulation of data involving
dates. In addition, in certain circumstances, the Company has warranted that
the use or occurrence of dates on or after January 1, 2000 will not adversely
affect the performance of its products with respect to four digit date
dependent data or the ability to create, store, process, and output
information related to such data. If any licensees experience Year 2000
problems, such licensees could assert claims for damages.
In addition, the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues. Many companies are expending
significant resources to correct their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase software products such as those offered by the Company, which could
have an adverse effect on the business, results of operations, and financial
condition of the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING
STATEMENT AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:
HISTORY OF OPERATING LOSSES. Through March 31, 1998, the Company has
recorded cumulative net losses of approximately $41.5 million, including
approximately $34.8 million related to the write-off of acquired in-process
research and development in connection with the Apsylog Acquisition. 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
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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 market
acceptance of SERVICECENTER and ASSETCENTER, including future enhancements.
Factors adversely affecting the pricing of, demand for, or market acceptance
of SERVICECENTER or ASSETCENTER, 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 May 1997, the Company announced that it had
entered a definitive agreement to acquire Innovative Tech Systems, Inc., a
provider of facilities management software ("Innovative"). 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 application 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, if the acquisition of Innovative is completed, 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 is anticipated to close in the Company's
September 1998 quarter, subject to approval by shareholders of Innovative and
certain other conditions. The acquisition 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. No assurance can be given that difficulties will not be
encountered in integrating the product offerings and operations of the
Company, that the Company will successfully complete and commercialize new
products currently in development or develop any new products, that the
marketing, distribution, or other operational benefits and efficiencies
anticipated from integration of the respective businesses and products of the
Company will be achieved, or that 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 at either or both 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 either
Company will retain its key personnel, that the combined engineering teams
will successfully cooperate and realize any technological benefits, that they
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 public announcement or 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 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 Innovative's business, results of operations, and
financial condition of either company, particularly in the quarter ending
July 31, 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
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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 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); (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, Network Associates, Inc. (recently formed as a result of the
business combination of McAfee Associates, Inc. and Network General
Corporation), and Hewlett Packard through its acquisition of PROLIN; (iv)
providers of asset management software; and (v) the internal information
technology departments of those companies with help desk 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
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integration of Apsylog and Innovative Tech, 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 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.
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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.
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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 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,
27
<PAGE>
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 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
26
<PAGE>
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
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 are expected to continue to be subject to significant price
and volume fluctuations pending the anticipated acquisition of Innovative. In
addition, following the acquisition, the Company Common Stock can be expected
to be subject to significant price and volume fluctuations. A number of
factors could affect the market price of the respective Companies' securities
before the acquisition and the market price of Company Common Stock after the
acquisition. These factors include any shortfall in revenues or net income
from revenues or net income expected by securities analysts; announcements of
new products by one of the Companies or its competitors; quarterly
fluctuations in financial results or the results of other software companies,
including those of direct competitors of the Company or Innovative; 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 Company 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 Common Stock will not
experience significant fluctuations in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in the Company's
Financial Statements and Notes thereto beginning at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item concerning the Company's directors
is incorporated by reference from the section captioned "Election of
Directors" contained in the Company's Proxy Statement related to the 1998
Annual Meeting of Stockholders, which will be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the
Company's fiscal year pursuant to General Instruction G(3) of Form 10-K (the
"Proxy Statement"). The information required by this item concerning
executive officers of the Registrant is set forth in Part I of this report.
The information required by this item concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference
from the section of the Proxy Statement captioned "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to the information under the section captioned "Executive Compensation"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
to the information under the section captioned "Security Ownership of
Management and Certain Beneficial Owners" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
to the information under the sections captioned "Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" contained in
the Proxy Statement.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following statements are filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Public Accountants. . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity (Deficit) . . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . F-8
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in
the financial statements or notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
----------- -------------
<S> <C>
2.1 (h) Agreement and Plan of Reorganization by and among
Peregrine Systems, Inc., Homer Acquisition Corporation
and Innovative Tech Systems, Inc., dated as of May 7,
1998.
3.1 (c) Amended and Restated Certificate of Incorporation filed
with the Secretary of State of Delaware on February 11,
1997.
3.2 (c) Bylaws, as amended.
4.1 (c) Specimen Common Stock Certificate.
9.1 (h) Form of Voting Agreement between Peregrine Systems, Inc.
and certain shareholders of Innovative Tech Systems,
Inc., dated as of May 7, 1998.
10.1 (c) Nonqualified Stock Option Plan, as amended, and
forms of Stock Option Agreement and Stock Buy-Sell
Agreement.
10.2 (c) 1991 Nonqualified Stock Option Plan, as amended, and
forms of Stock Option Agreement and Stock Buy-Sell
Agreement.
10.3 (d) 1994 Stock Option Plan, as amended through
February 6, 1997, including 1995 Stock Option Plan
for French Employees.
10.4 (d) Form of Stock Option Agreement under 1994 Stock
Option Plan, as amended through February 6, 1997.
10.5 (d) 1997 Employee Stock Purchase Plan and forms of
participation agreement thereunder.
10.6 (d) 1997 Director Option Plan.
10.7 (c) Form of Indemnification Agreement for directors and
officers.
10.8 (e) Loan Agreement dated November 13, 1995 by and
between the Registrant and NationsBank of Texas,
N.A., as amended through December 16, 1996.
10.9 (c) Sublease between the Registrant and JMI Services, Inc.
10.10 (c) Lease between the Registrant and the Mutual Life
Insurance Company of New York dated October 26, 1994,
as amended in August 1995, and Notifications of
Assignment dated June 14, 1996 and December 9, 1996
for the Registrant's headquarters at 12670 High Bluff
Drive, San Diego, CA.
10.11 (c) Lease between the Registrant and the Mutual Life
Insurance Company of New York dated October 26, 1994,
as amended in August 1995, and Notification of
Assignment dated December 9, 1996 for the
Registrant's headquarters at 12680 High Bluff Drive,
San Diego, CA.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.14 (c) XVT Stock Option Agreement dated January 18, 1995
between the Registrant and Christopher Cole, as
amended on October 3, 1996.
10.15 (d) Restricted Stock Agreement dated November 1, 1995
between the Registrant and Alan Hunt.
10.16 (d) Restricted Stock Agreement dated November 1, 1995
between the Registrant and David Farley.
10.17 (c) Stock Option Agreement dated as of December 7,
1990 between the Registrant and Christopher Cole as
amended on October 26, 1995.
10.18 (c) Form of Stock Option Agreement under 1995 Stock Option
Plan for French Employees.
10.19 (c) Form of Stock Option Agreement under 1997 Director
Option Plan.
10.20 (h) Nonsolicitation and Non-Hiring Agreement between
the Registrant and Douglas F. Garn, dated January 8,
1998.
10.21 (g) Certificate of Amendment, dated November 3, 1997,
for amendment of the 1994 Stock Option Plan.
10.22 (b) Executive Officer Incentive Program and Form of
Restricted Stock Agreement.
10.23 (f) Severance Settlement Agreement and Release of Claims
between the Registrant and Alan H. Hunt, dated January
30, 1998.
11.1 (a) Calculation of earnings per share.
21.1 (b) List of Subsidiaries of the Registrant.
23.1A (a) Consent of Arthur Andersen, LLP, Independent Public
Accountants
24.1 (a) Power of Attorney
27.1 (a) Financial Data Schedule.
</TABLE>
- -----------------
(a) Filed herewith.
(b) Incorporated by reference to the exhibit bearing the same number filed
with the Registrant's Registration Statement on Form S-1 (Registration
No. 333-39891), which the Securities and Exchange Commission declared
effective on November 19,1997.
(c) Incorporated by reference to the exhibit bearing the same number filed
with the Registrant's Registration Statement on Form S-1 (Registration
No. 333-21483), which the Securities and Exchange Commission declared
effective on April 8, 1997.
(d) Incorporated by reference to the exhibit bearing the same number filed
with the Registrant's Annual Report on Form 10-K for the Year ended
March 31, 1997.
(e) Incorporated by reference to the exhibit bearing the same number filed
with the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997.
(f) Incorporated by reference to the exhibit bearing the same number field
with the Registrant's Quarterly report on Form 10-Q for the quarter
ended December 31, 1997.
(g) Incorporated by reference to Exhibit 10.23 filed with the Registrant's
Registration Statement on Form S08, which became effective upon its
filing on January 22, 1998.
(h) Incorporated by reference to the exhibit bearing the same number filed
with the Registrant's Registration Statement on Form S-4 (Registration
Statement 333-57459), which the Securities and Exchange Commission
declared effective on June 23, 1998.
- -----------------
(b) REPORTS ON FORM 8-K
The Company did not file a Current Report on Form 8-K during the last
quarter of the period covered by this report.
(c) EXHIBITS
See Item 14(a)(3) above.
32
<PAGE>
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 29th day of June, 1998.
PEREGRINE SYSTEMS, INC.
By /s/ STEPHEN P. GARDNER
----------------------------
Stephen P. Gardner
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS STEPHEN P. GARDNER AND DAVID A.
FARLEY AND EACH OF THEM ACTING INDIVIDUALLY, AS HIS OR HER ATTORNEY-IN-FACT,
EACH WITH FULL POWER OF SUBSTITUTION, FOR HIM OR HER IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THIS REPORT ON FORM 10-K, AND
TO FILE THE SAME, WITH ALL EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION
THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT ON FORM 10-K HAS BEEN SIGNED ON BEHALF OF THE REGISTRANT BY THE
FOLLOWING PERSONS AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ STEPHEN P. GARDNER President, Chief Executive Officer, June 29, 1998
------------------------- and Director (Principal Executive
(Stephen P. Gardner) Officer)
/s/ DAVID A. FARLEY Vice President, Finance, Chief June 29, 1998
------------------------- Financial Officer (Principal
(David A. Farley) Financial and Accounting Officer)
/s/ JOHN J. MOORES Chairman of the Board of Directors June 29, 1998
-------------------------
(John J. Moores)
/s/ CHRISTOPHER A. COLE Director June 29, 1998
-------------------------
(Christopher A. Cole)
/s/ RICHARD A. HOSLEY II Director June 29, 1998
-------------------------
(Richard A. Hosley II)
/s/ CHARLES E. NOELL III Director June 29, 1998
-------------------------
(Charles E. Noell III)
/s/ NORRIS VAN DEN BERG Director June 29, 1998
-------------------------
(Norris van den Berg)
</TABLE>
34
<PAGE>
PEREGRINE SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Public Accountants. . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity (Deficit) . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Peregrine Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
Peregrine Systems, Inc. (a Delaware corporation) and subsidiaries as of March
31, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Peregrine
Systems, Inc. and subsidiaries as of March 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Diego, California
April 22, 1998 (except with respect to the matter
in Note 10, as to which the date is May 7, 1998)
F-2
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 305 $14,950
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . -- 7,027
Accounts receivable, net of allowance for doubtful accounts of $220
and $485, respectively . . . . . . . . . . . . . . . . . . . . . . . 10,191 16,761
Financed receivables . . . . . . . . . . . . . . . . . . . . . . . . . 1,182 --
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . 1,752 7,297
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 924 2,905
-------- --------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . 14,354 48,940
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . 4,364 5,455
Goodwill and other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,020 2,342
-------- --------
$ 19,738 $ 56,737
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank line of credit. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,974 $ --
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 916 2,337
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 6,249 9,310
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 8,419 11,570
Current portion of long-term debt. . . . . . . . . . . . . . . . . . 497 151
Current portion of capital lease obligation. . . . . . . . . . . . . 364 --
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 18,419 23,368
Long-term debt, net of current portion . . . . . . . . . . . . . . . 1,395 966
Deferred revenue, net of current portion . . . . . . . . . . . . . . 2,773 1,802
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 22,587 26,136
-------- --------
Stockholders' Equity (Deficit):
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,
12,920,000 and 18,790,000 shares issued and outstanding,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 19
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 15,081 74,351
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . (15,807) (41,461)
Unearned portion of deferred compensation. . . . . . . . . . . . . (1,748) (1,493)
Cumulative translation adjustment. . . . . . . . . . . . . . . . . (388) (553)
Treasury stock (at cost) . . . . . . . . . . . . . . . . . . . . . -- (262)
-------- --------
Total stockholders' equity (deficit) . . . . . . . . . . . . . (2,849) 30,601
-------- --------
$ 19,738 $56,737
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Revenues:
Licenses .............................................. $ 11,642 $ 20,472 $ 38,791
Maintenance and services .............................. 12,124 14,563 23,086
-------- -------- --------
Total revenues ...................................... 23,766 35,035 61,877
-------- -------- --------
Costs and Expenses:
Cost of licenses ...................................... 415 215 326
Cost of maintenance and services ...................... 3,526 4,661 10,326
Sales and marketing ................................... 11,820 15,778 22,728
Research and development .............................. 7,742 5,877 8,394
General and administrative ............................ 4,529 3,816 6,463
Acquired in process research and development .......... -- -- 34,775
-------- -------- --------
Total costs and expenses ............................ 28,032 30,347 83,012
-------- -------- --------
Operating income (loss) ............................. (4,266) 4,688 (21,135)
Interest income (expense) and other ..................... (286) (478) 839
-------- -------- --------
Income (loss) from continuing operations before income...
taxes.................................................. (4,552) 4,210 (20,296)
Income tax expense (benefit) ............................ -- (1,592) 5,358
-------- -------- --------
Income (loss) from continuing operations ................ (4,552) 5,802 (25,654)
-------- -------- --------
Loss from discontinued business:
Loss from operations .................................. 781 -- --
Loss from disposal .................................... 1,078 -- --
-------- -------- --------
Loss from discontinued business ......................... (1,859) -- --
-------- -------- --------
Net Income (loss) ..................................... $ (6,411) $ 5,802 $(25,654)
-------- -------- --------
-------- -------- --------
Net income (loss) per share - basic:
Income (loss) from continuing operations ................ $ (0.37) $ 0.45 $ (1.48)
Loss from discontinued operations ....................... (0.15) -- --
-------- -------- --------
-------- -------- --------
Net income (loss) per share ............................. $ (0.52) $ 0.45 $ (1.48)
-------- -------- --------
-------- -------- --------
Weighted average common shares outstanding .............. 12,331 12,920 17,380
-------- -------- --------
-------- -------- --------
Net income (loss) per share - diluted:
Income (loss) from continuing operations ................ $ (0.37) $ 0.39 $ (1.48)
Loss from discontinued operations ....................... (0.15) -- --
-------- -------- --------
Net income (loss) per share ............................. $ (0.52) $ 0.39 $ (1.48)
-------- -------- --------
-------- -------- --------
Weighted average common and common equivalent
shares outstanding..................................... 12,331 14,964 17,380
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-4
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNEARNED
NUMBER OF ADDITIONAL PORTION OF
SHARES COMMON PAID-IN ACCUMULATED DEFERRED
OUTSTANDING STOCK CAPITAL DEFICIT COMPENSATION
----------- ------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1995 .................................... 10,237 $ 10 $ 9,044 $(11,273) $ --
Net loss ................................................. -- -- -- (6,411) --
Issuance of shares for XVT ............................... 2,018 2 3,923 (3,925) --
Issuance of common stock ................................. 43 -- 43 -- --
Restricted stock shares granted .......................... 600 1 1,403 -- (1,404)
Equity adjustment from foreign currency translation ...... -- -- -- -- --
------ ------- ------- -------- -------
Balance, March 31, 1996 .................................... 12,898 13 14,413 (21,609) (1,404)
Net income ............................................... -- -- -- 5,802 --
Issuance of common stock ................................. 22 -- 37 -- --
Compensation expense related to restricted
stock and options........................................ -- -- -- -- 287
Deferred compensation related to options granted.......... -- -- 631 -- (631)
Equity adjustment from foreign currency translation....... -- -- -- -- --
------ ------- ------- -------- -------
Balance, March 31, 1997 .................................... 12,920 13 15,081 (15,807) (1,748)
Net loss ................................................. -- -- -- (25,654) --
Issuance of common stock in IPO, net of issuance
costs of $1,181 ......................................... 2,300 2 18,069 -- --
Stock options exercised and restricted stock granted (net) 1,654 2 2,792 -- --
Stock issued for Apsylog acquisition ..................... 1,916 2 30,504 -- --
Stock option tax benefit ................................. -- -- 7,905 -- --
Compensation expense related to restricted stock
and options ............................................. -- -- -- -- 414
Deferred compensation related to options granted.......... -- -- -- -- (159)
Stock repurchased ........................................ -- -- -- -- --
Equity adjustment from foreign currency translation ...... -- -- -- -- --
------ ------- ------- -------- -------
Balance, March 31, 1998 .................................... 18,700 $ 19 $74,351 $(41,461) $(1,493)
------ ------- ------- -------- -------
------ ------- ------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
CUMULATIVE STOCKHOLDERS'
TRANSLATION TREASURY EQUITY
ADJUSTMENT STOCK (DEFICIT)
---------- ---------- -------------
<S> <C> <C> <C>
Balance, March 31, 1995 .................................... $ 22 $ -- $ (2,197)
Net loss ................................................. -- -- (6,411)
Issuance of shares for XVT ............................... -- -- --
Issuance of common stock ................................. -- -- 43
Restricted stock shares granted .......................... -- -- --
Equity adjustment from foreign currency translation ...... 115 -- 115
-------- -------- ---------
Balance, March 31, 1996 .................................... 137 -- (8,450)
Net income ............................................... -- -- 5,802
Issuance of common stock ................................. -- -- 37
Compensation expense related to restricted
stock and options........................................ -- -- 287
Deferred compensation related to options granted.......... -- -- --
Equity adjustment from foreign currency translation....... (525) -- (525)
-------- -------- ---------
Balance, March 31, 1997 .................................... (388) -- (2,849)
Net loss ................................................. -- -- (25,654)
Issuance of common stock in IPO, net of issuance
costs of $1,181 ......................................... -- -- 18,071
Stock options exercised and restricted stock granted (net) -- -- 2,794
Stock issued for Apsylog acquisition ..................... -- -- 30,506
Stock option tax benefit ................................. -- -- 7,905
Compensation expense related to restricted stock
and options ............................................. -- -- 414
Deferred compensation related to options granted.......... -- -- (159)
Stock repurchased ........................................ -- (262) (262)
Equity adjustment from foreign currency translation ...... 165 -- (165)
-------- -------- ---------
Balance, March 31, 1998 .................................... $ (553) $(262) $ 30,601
-------- ------- ---------
-------- ------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1996 1997 1998
------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................................... $(6,411) $ 5,802 (25,654)
Adjustments to reconcile net income (loss) to net cash, excluding
effects of acquisitions, provided by (used in) operating activities:
Depreciation and amortization ........................................ 1,540 1,838 2,119
Loss from discontinued business ...................................... 1,859 -- --
Gain on sale of fixed assets ......................................... (93) -- --
Charge for acquired research and development ......................... -- -- 34,775
Increase (decrease) in cash resulting from changes in:
Accounts receivable ................................................ (2,416) (3,936) (7,164)
Financed receivables ............................................... -- (1,182) 1,182
Deferred tax assets ................................................ -- (1,752) (5,545)
Other current assets ............................................... 311 (163) (1,116)
Accounts payable ................................................... 714 (499) 674
Accrued expenses ................................................... 2,464 2,458 512
Deferred revenue ................................................... 2,364 1,381 1,361
Other .............................................................. 252 (705) 534
------- -------- ---------
584 3,242 1,678
------- -------- ---------
Net cash used by discontinued business ............................. (738) (1,303) (170)
------- -------- ---------
Net cash provided by (used in) operating activities .............. (154) 1,939 1,508
------- -------- ---------
Cash flows from investing activities:
Purchases of short-term investments ..................................... -- -- (45,732)
Maturities of short-term investments .................................... -- -- 38,705
Purchases of property and equipment ..................................... (3,516) (566) (2,427)
Proceeds from sale of product line ...................................... -- 700 --
Proceeds from sale of subsidiary and fixed assets, net .................. 653 -- --
Cash acquired in acquisition ............................................ -- -- 582
------- -------- ---------
Net cash provided by (used in) investing activities .............. (2,863) 134 (8,872)
------- -------- ---------
Cash flows from financing activities:
Proceeds (repayment) on bank line of credit, net ........................ 1,514 (855) (3,387)
Proceeds from long-term debt ............................................ 3,508 287 --
Repayments of long-term debt ............................................ (1,354) (774) (2,541)
Issuance of common stock ................................................ 15 37 28,770
Treasury stock purchased ................................................ -- -- (262)
Principal payments under capital lease obligation ....................... (401) (375) (406)
------- -------- ---------
Net cash provided by (used in) financing activities ................ 3,282 (1,680) 22,174
------- -------- ---------
Effect of exchange rate changes on cash ................................... 115 (525) (165)
------- -------- ---------
Net increase (decrease) ................................................... 380 (132) 14,645
Cash and cash equivalents, beginning of year .............................. 57 437 305
------- -------- ---------
Cash and cash equivalents, end of year .................................... $ 437 $ 305 $ 14,950
------- -------- ---------
------- -------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest ................................................................ $ 389 $400 $ 38
Income taxes ............................................................ $ 36 $ 27 $ 622
Supplemental Disclosure of Noncash Investing and Financing Activities:
Stock issued and other noncash consideration for acqusition ............... $3,925 $ -- $38,617
Realization of the benefit of certain Apsylog net operating loss carryforwards
through the reduction of goodwill .......................................... -- -- $ 1,794
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Peregrine Systems, Inc. ("Peregrine" or the "Company") is a leading
provider of Infrastructure Management solutions. Infrastructure Management
unites the unique disciplines of the Consolidated Service Desk and Enterprise
Asset Management through utilizing common shared data. The Company develops,
markets, and supports SERVICECENTER and ASSETCENTER. SERVICECENTER is an
integrated suite of applications that automates the management of complex,
enterprise-wide information technology ("IT") infrastructures. ASSETCENTER is
an application suite that adds the essential dimension of managing the portfolio
of investments contained within an organization's infrastructure. These product
suites are designed to meet the IT infrastructure management requirements of
large organizations and are distinguished by their breadth of functionality and
their ability to be deployed across all major hardware platforms and network
operating systems and protocols. The Company sells its software and services in
both North America and internationally through both a direct sales force and
through business partnerships.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Peregrine
Systems, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company generates revenues from licensing the rights to use its
software products primarily to end users. The Company also generates revenues
from post-contract support (maintenance), consulting and training services
performed for customers who license its products.
Revenues from software license agreements are recognized currently,
provided that all of the following conditions are met: a noncancelable license
agreement has been signed, the software 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 maintenance services are recognized ratably
over the term of the maintenance 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 performed on a time and material basis under separate
service agreements for the installation of the Company's software products.
Revenues from consulting and training services are recognized as the respective
services are performed.
Cost of license revenues consists primarily of amounts paid to third-party
vendors, product media, manuals, packaging materials, personnel and related
shipping costs. Cost of maintenance and services revenues consists primarily of
salaries, benefits, and allocated overhead costs incurred in providing telephone
support, consulting services, and training to customers.
F-8
<PAGE>
Deferred revenue primarily relates to customer support fees, which have been
paid by customers in advance of the performance of these services.
BUSINESS RISK AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of trade and other
receivables. The Company performs ongoing credit evaluations of its customers
financial condition. Management believes that the concentration of credit risk
with respect to trade receivables is further mitigated as the Company's customer
base consists primarily of Fortune 1000 companies. The Company maintains
reserves for credit losses and such losses historically have been within
management expectations.
A significant portion of the Company's revenues are from its SERVICECENTER
and ASSETCENTER products and related services. Any factor adversely affecting
the pricing of, demand for or market acceptance of these products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
See "Factors that May Affect Future Results" in Management's Discussion and
Analysis of Financial Condition and Results of Operations for a more complete
analysis of risks affecting the Company's business.
CASH AND CASH EQUIVALANTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
primarily consist of overnight repurchase agreements and money market accounts.
The carrying amount reported for cash and cash equivalents approximates its fair
value.
SHORT-TERM INVESTMENTS
The company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115). Short-term
investments consist of tax-exempt municipal auction rate preferred stock with
original maturities at date of purchase beyond three months and less than twelve
months. These securities are classified as held-to-maturity and are carried at
amortized cost. The amount of gross unrealized gains or gross unrealized losses
were not significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its notes payable, capital lease obligations and borrowings under the
Company's line of credit approximates fair value.
FINANCED RECEIVABLES
Financed receivables represent trade accounts receivable for which the
original payment terms extend beyond the Company's customary net 45 payment
terms. These receivables are substantially all due within the next twelve
months. Amounts due greater than one year from the balance sheet date are
included in other assets in the accompanying consolidated financial statements.
The majority of these long-term receivables relate to items included in
long-term deferred revenues.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over estimated useful lives,
generally three to five years for furniture and equipment. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the useful lives of the assets or the terms of the related leases.
F-9
<PAGE>
Maintenance and repairs are charged to operations as incurred. When assets
are sold, or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
operations for the applicable period.
LONG-LIVED ASSETS
The Company evaluates potential impairment of long-lived assets and
long-lived assets to be disposed of in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes procedures
for review of recoverability, and measurement of impairment if necessary, of
long-lived assets and certain identifiable intangibles held and used by an
entity. SFAS No. 121 requires that those assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be fully recoverable. SFAS No. 121 also requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less estimated selling
costs. As of March 31, 1998, management believes that there has not been any
impairment of the Company's long-lived assets or other identifiable intangibles.
GOODWILL
Goodwill is carried at cost less accumulated amortization, which is being
provided on a straight line basis over five years.
CAPITALIZED COMPUTER SOFTWARE
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", software development costs are capitalized from the time the
product's technological feasibility has been established until the product is
released for sale to the general public. During the three years in the period
ended March 31, 1998, no software development costs were capitalized as the
costs incurred between achieving technological feasibility and product release
were minimal. Research and development costs, including the design of product
enhancements, are expensed as incurred.
FOREIGN CURRENCY TRANSLATION AND RISK MANAGEMENT
Assets and liabilities of the Company's foreign operations are translated
into United States dollars at the exchange rate in effect at the balance sheet
date, and revenue and expenses are translated at the average exchange rate for
the period. Translation gains or losses of the Company's foreign subsidiaries
are not included in operations but are reported as a separate component of
stockholders' equity (deficit). The functional currency of those subsidiaries is
the primary currency in which the subsidiary operates. Gains and losses on
transactions in denominations other than the functional currency of the
Company's foreign operations, while not significant in amount, are included in
the results of operations.
The Company enters into forward exchange contracts to minimize the
short-term impact of foreign currency fluctuations on assets and liabilities
denominated in currencies other than the functional currency of the reporting
entity.
All foreign exchange forward contracts are designated as and effective as a
hedge and are inversely correlated to the hedged item as required by generally
accepted accounting principles.
Gains and losses on the contracts are included in other income and offset
foreign exchange gains or losses from the revaluation of intercompany balances
or other current assets and liabilities denominated in currencies other than the
functional currency of the reporting entity.
F-10
<PAGE>
INCOME TAXES
Deferred taxes are provided utilizing the liability method as prescribed by
SFAS No. 109, "Accounting for Income Taxes," whereby deferred tax assets are
recognized for deductible temporary differences and operating loss
carryforwards, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
Effective fiscal year 1998, the Company retroactively adopted the
provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), "Earnings per share." SFAS No.128 requires companies to compute net
income (loss) per share under two different methods, basic and diluted per
share data for all periods for which an income statement is presented. Basic
earnings per share was computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if the
income were divided by the weighted-average number of common shares and
potential common shares from outstanding stock options for the year ended March
31, 1997. Potential common shares were calculated using the treasury stock
method and represent incremental shares issuable upon exercise of the Company's
outstanding options. For the years ended March 31, 1998 and March 31, 1996, the
diluted loss per share calculation excludes effects of outstanding stock options
as such inclusion would be anti-dilutive. The following table provides
reconciliation of numerators and denominators used in calculating basic and
diluted earnings per share for the prior three years.
<TABLE>
<CAPTION>
For the Years Ended March 31,
--------------------------------------
1996 1997 1998
---------- -------- ---------
<S> <C> <C> <C>
Net income (loss)............................................... $ (6,411) $ 5,802 $(25,654)
--------- -------- --------
--------- -------- --------
BASIC EARNINGS PER SHARE:
Income (loss) available to common shareholders............ $ (6,411) $ 5,802 $(25,654)
Weighted average common shares outstanding................ 12,331 12,920 17,380
--------- -------- --------
Basic earnings (loss) per share................................. $ ( 0.52) $ 0.45 $ (1.48)
--------- -------- --------
--------- -------- --------
DILUTED EARNINGS PER SHARE:
Income (loss) available to common shareholders............ $ (6,411) $ 5,802 $(25,654)
--------- -------- --------
--------- -------- --------
Weighted average common shares outstanding................ 12,331 12,920 17,380
Common stock options outstanding (unless anti-dilutive)... - 2,044 -
--------- -------- --------
Total weighted average common shares and equivalants............ 12,331 14,964 17,380
--------- -------- --------
Diluted earnings (loss) per share............................... $ ( 0.52) $ 0.39 $ (1.48)
--------- -------- --------
--------- -------- --------
</TABLE>
DISCONTINUED OPERATIONS
During fiscal 1996, the Company acquired XVT Software Inc. ("XVT"),
substantially all of the outstanding equity of which was owned by the majority
stockholder of the Company. In January 1996, the Company determined that
maintaining an interest in XVT was not consistent with the Company's business
strategy and adopted a plan to discontinue the operations of XVT. The Company
incurred a loss from discontinued operations of XVT in fiscal 1996 of $1.9
million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenue, expense, gains, and losses) in a full set of
general-purpose financial statements. The Company will adopt SFAS No. 130 in
fiscal year 1999.
F-11
<PAGE>
Management believes the adoption of SFAS No. 130 will not have a material effect
on its consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," regarding operating segments. SFAS No.
131, which is based on the management approach to segment reporting, establishes
requirements to report entity-wide disclosures about products and services,
major customers, and material countries in which the entity holds assets and
reports revenue. SFAS No. 131 requires limited segment data on a quarterly
basis. The Company will adopt SFAS No. 131 in the first quarter in fiscal year
1999. Management believes the adoption of SFAS No. 131 will not have a material
effect on its consolidated financial statements.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The Company will adopt SOP 97-2
in its fiscal year 1999. The Company anticipates that SOP 97-2 will not have a
material impact on its consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants,
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance
concerning the capitalization of costs related to such software. The Company
will adopt SOP 98-1 in its fiscal year 2000. The Company anticipates that SOP
98-1 will not have a material impact on its consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." This Statement provides guidance on the financial
reporting of start-up costs and organization costs and requires that such costs
of start-up activities be expensed as incurred. The Company will adopt SOP 98-5
in its fiscal year 2000. The Company has not yet determined the impact, if any,
the adoption of the accounting and disclosure provisions of SOP 98-5 will have
on the Company's financial statements, results of operations or related
disclosure thereto.
2. ACQUISITION
In September 1997, the Company completed the acquisition of all of the
outstanding stock of United Software, Inc., a developer of decision software
solutions designed for asset management. The consideration given for the stock
of United Software included 1,916,220 shares of Peregrine Systems common stock
valued at $15.92 per share or $ 30,506,000 plus an additional $8,111,000 of
expenses directly related to the acquisition and assumption of net liabilities
of United Software.
The acquisition was accounted for as a purchase. Accordingly, the purchase
price was allocated to the net liabilities assumed based on their estimated fair
market values. In connection with the acquisition, the Company received an
appraisal of the intangible assets, which indicated that approximately $34.8
million represented in-process research and development. The acquired
in-process research and development was expensed in the quarter ended September
30, 1997. In addition, the company recorded goodwill of $2.1 million that is
being amortized on a straight line basis over five years.
The following table presents the unaudited pro forma results assuming the
Company had acquired United Software at the beginning of fiscal years 1997 and
1998, respectively. Net income and diluted earnings per share amounts have
been adjusted to exclude the write-off of acquired in process research and
development of $34.8 million and include the goodwill amortization of $420,000
for the twelve months ended March 31, 1997 and 1998. This information may not
necessarily be indicative of the future combined results of the Company.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED MARCH 31,
1997 1998
---------- ---------
<S> <C> <C>
Revenues........................... $ 41,503 $ 63,171
Net income......................... $ 670 $ 8,340
F-12
<PAGE>
Diluted earnings per share......... $ 0.04 $ 0.40
Basic earnings per share........... $ 0.05 $ 0.43
</TABLE>
3. BALANCE SHEET COMPONENTS
Other current assets consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Prepaid expenses and other.................... $ 326 $ 2,661
Employee advances............................. 198 244
Receivable from sale of product line.......... 400 -
-------- --------
$ 924 $ 2,905
-------- --------
-------- --------
</TABLE>
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
------- -------
<S> <C> <C>
Furniture and equipment...................... $7,319 $10,219
Leasehold improvements....................... 1,963 2,249
------- -------
9,282 12,468
Less accumulated depreciation................ (4,918) (7,013)
------- -------
$4,364 $ 5,455
------- -------
------- -------
</TABLE>
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
------- -------
<S> <C> <C>
Employee compensation........................ $1,631 $ 2,745
Commissions.................................. 2,499 3,494
Other........................................ 2,119 3,071
------- -------
$6,249 $ 9,310
------- -------
------- -------
</TABLE>
4. DEBT
LINE OF CREDIT
Effective July 1, 1997, the Company entered into an agreement for a line of
credit facility that provides for maximum borrowings of $5.0 million and expires
on July 31, 1998. Borrowings under the line of credit bear interest at the
bank's prime rate (8.5% at March 31, 1998). The line of credit is
collateralized by the Company's accounts receivable, equipment, and certain
other assets. In addition, the debt agreement contains certain covenants, the
most significant of which places certain restrictions on future borrowings and
acquisitions above specified levels. The Company is required to maintain
certain financial ratios and minimum equity balances. The agreement also
provides for a foreign exchange facility, under which the maximum principal
amount of foreign exchange transactions which may mature during any two day
period is $2.0 million. The Company did not have an outstanding balance on the
line of credit at March 31, 1998.
LONG-TERM DEBT
F-13
<PAGE>
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1998
------- --------
<S> <C> <C>
Note payable to bank. Note secured by trade receivables,
fixed assets and guaranteed by the majority stockholder.
Interest at prime (8.5% as of March 31, 1997). Equal
monthly installments of principal of $37 plus interest,
repaid in 1998......................................... $1,612 $ -
Note payable to lessor. Unsecured; interest at 8%.
Monthly payments of principal and interest of $4.2
through November 2003.................................. 234 227
French Government Agency loans. Interest of up to 6.55%,
due in 2000............................................ - 762
Other.................................................... 46 128
------- --------
1,892 1,117
Less current portion..................................... (497) (151)
------- --------
$1,395 $ 966
------- --------
------- --------
</TABLE>
Scheduled principal payments on long-term debt due as of March 31, 1998
are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................... $ 151
2000........................................................... 808
2001........................................................... 39
2002........................................................... 43
2003........................................................... 47
2004........................................................... 29
-------
$1,117
-------
-------
</TABLE>
5. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1997 1998
---------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 1,356 $ 5,497
Deferred maintenance revenue................. 1,148 1,452
Other........................................ 960 1,324
---------- ---------
3,464 8,273
Deferred tax liabilities:
Depreciation................................. (295) (168)
Deferred revenue............................. (160) -
---------- ---------
3,009 8,105
Valuation allowance............................... (1,257) (808)
---------- ---------
Net deferred tax assets........................... $ 1,752 $ 7,297
---------- ---------
---------- ---------
</TABLE>
As of March 31, 1998, the Company had net operating loss carryforwards of
approximately $8.5 million for domestic federal and state income tax reporting
purposes, which expire beginning in 2004. In certain circumstances, as specified
in the Internal Revenue Code, a fifty percent or more ownership change by
certain combinations of the Company's stockholders during any three year period
could result in a limitation on the Company's ability to utilize portions of its
domestic net operating loss carryforwards. The Company currently has net
operating loss carryforwards of approximately $1.2 million that may be subject
to these limitations. As of March 31, 1998, the Company also has foreign net
operating loss carryforwards of approximately $5.8 million. See Note 9 for a
table of foreign and domestic components of operating income (loss).
F-14
<PAGE>
A valuation allowance in the amount set forth in the table above has been
recorded to properly reflect a portion of the deferred tax assets due to
uncertainties surrounding its realization. The current valuation allowance
relates to assets acquired in the Company's acquisition of United Software, Inc.
Management evaluates on a quarterly basis the recoverability of the deferred tax
assets and the amount of the valuation allowance. At such time as it is
determined that it is more likely than not that the deferred tax assets are
realizable, the valuation allowance will be reduced. Any future decrease in the
valuation allowance will be recorded as a reduction to goodwill.
A reconciliation of expected income taxes using the statutory federal
income tax rate to the effective income tax provision is as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------
1996 1997 1998 RATE
-------- --------- ------- -------
<S> <C> <C> <C> <C>
Federal tax at the statutory rate... $(2,180) $ 980 $ 4,923 34.00 %
State tax, net of federal benefit... (385) 173 869 6.00 %
Foreign losses (not benefited)...... 418 - - -
Other............................... 227 140 16 0.11 %
Change in valuation allowance....... 1,920 (2,885) (449) (3.10)%
-------- --------- ------- -------
Total income tax provision.......... $ - $ (1,592) $ 5,359 37.01 %
-------- --------- ------- -------
-------- --------- ------- -------
</TABLE>
The amounts stated in the table above for the year ended March 31, 1998
exclude a $34,775,000 expense for acquired in-process research and development
relating to the Company's acquisition of United Software, Inc.
The income tax provision (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1997 1998
--------- ---------
<S> <C> <C>
Current
Federal....................................... $ 76 $5,197
State......................................... 84 1,017
--------- ---------
Total current..................................... 160 6,214
--------- ---------
Deferred
Federal...................................... (1,523) (728)
State........................................ (229) (128)
--------- ---------
Total deferred.................................... (1,752) (856)
--------- ---------
Total provision (benefit)......................... $(1,592) $5,358
--------- ---------
--------- ---------
</TABLE>
The Company realizes an income tax benefit from the exercise or early
disposition of certain stock options. This benefit results in a decrease in
current income taxes payable and an increase in additional paid-in capital. The
amount of this benefit for the year ended March 31, 1998 was $7,905,000.
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain buildings and equipment under noncancelable
operating lease agreements. The leases generally require the Company to pay all
executory costs such as taxes, insurance and maintenance related to the leased
assets. Certain of the leases contain provisions for periodic rate escalations
to reflect cost-of-living increases. Rent expense for such leases totaled
approximately $1,961,000, $2,051,000 and $2,565,000 in fiscal 1996, 1997, and
1998, respectively.
F-15
<PAGE>
Future minimum lease payments under noncancelable operating leases, at
March 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1999.................................................. $ 2,407
2000.................................................. 2,286
2001.................................................. 2,278
2002.................................................. 2,381
2003.................................................. 2,448
Thereafter............................................ 1,543
----------
Total minimum lease payments..................... $ 13,343
----------
----------
</TABLE>
The Company subleases office space at its corporate headquarters to an
affiliated company. The term of the sublease is from June, 1996 to October, 2003
and requires monthly rental payments of approximately $17,000.
The Company pays commissions to employees who have authored certain of the
Company's products based on a percentage of the respective product's sales.
Commissions paid under such agreements are included in research and development
expense in the accompanying consolidated statements of operations and were
approximately $600,000, $1,100,000, and $1,700,000 for fiscal 1996, 1997, and
1998, respectively.
The Company is involved in various legal proceedings and claims arising in
the ordinary course of business, none of which, in the opinion of management, is
expected to have a material adverse effect on the Company's consolidated
financial position or results of operations.
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 5,000,000, $0.001 par value, undesignated
preferred shares, none of which were issued or outstanding at March 31, 1997 and
1998. The Board of Directors has the authority to issue the preferred stock in
one or more series and to fix the price, rights, preferences, privileges, and
restrictions, including dividend rights and rates, conversion and voting rights,
and redemption terms and pricing without any further vote or action by the
Company's stockholders.
STOCK OPTIONS
The Company has three stock option plans, the Nonqualified Stock Option
Plan ("1990 Plan"), the 1991 Nonqualified Stock Option Plan ("1991 Plan"), and
the 1994 Stock Option Plan ("1994 Plan").
The Company may no longer grant options under the 1990 and 1991 Plans. The
Company may grant up to 4,990,000 options under the 1994 Plan. Under the Plans,
the option exercise price is determined by the Board of Directors on a per-grant
basis, but shall not be less than fair market value. Option grants under all
three stock option plans generally vest over four years. During December 1996,
the Company recorded $631,000 in deferred compensation related to the grant of
185,000 options. This deferred compensation is being amortized on a straight
line basis to expense over the options' four year vesting period.
A summary of the status of the Company's three stock option plans at
March 31, 1996, 1997, and 1998 as well as changes during the periods then ended
is as follows:
F-16
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
----------- -------------- ----------- --------------- ----------- --------------
MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
---------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.... 3,041.2 $1.42 3,597.4 $1.79 4,061.3 $ 2.08
------- ----- ------- ----- ------- -------
Granted........................... 1,440.4 2.37 989.9 3.24 1,628.8 13.59
Exercised......................... (30.0) 1.01 (22.8) 1.64 (1,806.2) 1.50
Canceled.......................... (854.2) 1.18 (503.2) 1.4 (285.5) 12.25
------- ----- ------- ----- ------- -------
-------
Outstanding, end of year.......... 3,597.4 $1.79 4,061.3 $2.08 3,598.4 $ 6.77
------- ----- ------- ----- ------- -------
------- ----- ------- ----- ------- -------
Exercisable, end of year.......... 1,786.0 $1.34 2,171.7 $1.48 1,160.5 $ 2.07
------- ----- ------- ----- ------- -------
------- ----- ------- ----- ------- -------
Weighted average fair value
of options granted.............. $ - $ - $ 7.64
----- ----- -------
----- ----- -------
</TABLE>
Because certain of the options awarded to date have been granted at
significant premiums, under the minimum value pricing model the options were
determined to collectively have no value. As a result, had compensation cost for
stock options granted during the years ended March 31, 1996 and 1997 been
determined consistent with SFAS No. 123, the Company's net income (loss) and
related per share amounts on a pro forma basis would not be materially different
as the per share amounts reported in the accompanying consolidated statements of
operations for the years ended March 31, 1996 and 1997.
Compensation cost for stock options granted during the year ended March 31,
1998 determined consistent with SFAS No. 123 would have reduced the Company's
net income and related per share amounts on a pro-forma basis by $1.3 million
and $0.07, respectively. The fair value of each option grant is estimated using
the minimum value method of option pricing model with the following assumptions
used in fiscal 1998: weighted average risk-free interest rate of 6.11 percent;
volatility of 63.06 percent; expected dividend yields of 0.00 percent; and an
expected life of 4 years.
RESTRICTED STOCK
During fiscal 1996, the Company granted 600,000 shares of nontransferable
common stock under restricted stock agreements to certain employees. These
shares were valued at a fair value of $2.34. The restrictions lapse on the
shares ten years from the date of grant or, if the Company achieves certain
objectives for earnings growth from fiscal 1997 through fiscal 2002, or, on a
change in control of the Company. The unearned portion of restricted stock is
included in stockholders' deficit and is being amortized as compensation expense
on a straight-line basis over the vesting period. During fiscal 1998, 202,000
of the above shares were canceled.
During the fiscal year 1998, the Company granted an additional 50,000
shares of nontransferrable common stock under restricted stock agreements valued
at $12.625. These shares vest over a six-year term and are currently being
amortized as compensation expense over this term.
1997 EMPLOYEE STOCK PURCHASE PLAN
In February 1997, the Board adopted, and the stockholders approved, the
1997 Employee Stock Purchase Plan ("Purchase Plan"). The Company has reserved
250,000 shares of common stock for issuance under the Purchase Plan. The
Purchase Plan enables eligible employees to purchase common stock at 85% of the
lower of the fair market value of the Company's common stock on the first or
last day of each option purchase period, as defined. No shares were issued under
the Purchase Plan during fiscal 1997 and 35,000 shares were issued under the
Purchase Plan during fiscal 1998.
DIRECTOR OPTION PLAN
In February 1997, the Board adopted, and the stockholders approved, the
1997 Director Option Plan ("Director Plan"). The Company has reserved
150,000 shares of common stock for issuance under the Director Plan.
F-17
<PAGE>
The Director Plan provides an initial grant of options to purchase 25,000 shares
of common stock to each new eligible outside director of the Company upon
election to the Board. In addition, commencing with the 1998 Annual Stockholders
meeting, such eligible outside directors are granted an option to purchase 5,000
shares of common stock at each annual meeting. The exercise price per share of
all options granted under the Director Plan will be equal to the fair market
value of the Company's common stock on the date of grant. Options may be granted
for periods up to ten years and generally vest over four years. No grants were
made under the Director Plan in fiscal 1997 and 1998.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Employee Savings Plan ("Plan") covering
substantially all employees. The Plan provides for savings and pension benefits
and is subject to the provisions of the Employee Retirement Income Security Act
of 1974. Those employees who participate in the Plan are entitled to make
contributions of up to 20 percent of their compensation, limited by IRS
statutory contribution limits. In addition to employee contributions, the
Company also contributes to the Plan by matching 25% of employee contributions.
Amounts contributed to the Employee Savings Plan by the Company during fiscal
1996, 1997 and 1998 were $203,000, $189,000, and $200,000 respectively.
9. GEOGRAPHIC OPERATIONS
The Company operates exclusively in the computer software industry. A
summary of the Company's continuing operations by geographic area is presented
below:
<TABLE>
<CAPTION>
UNITED EUROPE &
STATES OTHER CONSOLIDATED
--------- ----------- ------------
<S> <C> <C> <C>
Year ended March 31, 1996
Revenues................................... $16,818 $ 6,948 $23,766
Operating profit (loss).................... (5,010) 458 (4,552)
Identifiable assets........................ 9,427 4,390 13,817
Year ended March 31, 1997
Revenues................................... $24,925 $10,110 $35,035
Operating profit (loss).................... 3,513 697 4,210
Identifiable assets........................ 14,353 5,385 19,738
Year ended March 31, 1998
Revenues................................... $39,512 $22,365 $61,877
Operating profit (loss).................... (26,649) 5,514 (21,135)
Identifiable assets........................ 45,603 11,134 56,737
</TABLE>
10. SUBSEQUENT EVENT
On May 7, 1998, the Company announced a definitive merger agreement with
Innovative Tech Systems, Inc. to acquire all its outstanding common stock. The
merger has been approved by the Board of Directors of both companies and is
subject to approval by the shareholders of Innovative Tech Systems. Under the
agreement, Innovative Tech Systems shareholders will receive 0.2341 shares of
Peregrine stock for each share of Innovative stock. Based on market values of
the outstanding stock values of both companies on May 7, consideration given for
the acquisition would be $72.9 million plus acquisition related costs. 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, of
substantially all of the acquisition price. It is anticipated that the
transaction will be completed during the quarter ending September 30, 1998.
F-18
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated April 22, 1998 included in this Form 10-K into the Company's
previously filed Registration Statements on Form S-8/S-3 filed on October 3,
1997 and January 22, 1998.
ARTHUR ANDERSEN LLP
San Diego, California
April 22, 1998
