<PAGE>
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER: 0-2222209
PEREGRINE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3773312
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
12670 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(619) 481-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such requirements for the past 90 days.
YES X NO
------ ----
The number of issued and outstanding shares of the Registrant's Common
Stock, $0.001 par value, as of December 31, 1997 was 18,039,030.
- -------------------------------------------------------------------------------
1
<PAGE>
PEREGRINE SYSTEMS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997
AND MARCH 31, 1997.............................................. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996................... 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE
MONTHS ENDED DECEMBER 31, 1997 AND 1996......................... 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996.................... 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............ 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 10
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES........................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 20
SIGNATURES................................................................. 21
2
<PAGE>
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
-------- ------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 305 $ 15,503
Accounts receivable, net of allowance for doubtful
accounts of $220 and $462, respectively................ 10,191 17,325
Financed receivables.................................... 1,182 968
Deferred tax assets..................................... 1,752 -
Other current assets.................................... 924 2,109
------- -------
Total current assets................................ 14,354 35,905
Property and equipment, net............................... 4,364 4,855
Goodwill.................................................. - 3,650
Other assets.............................................. 1,020 552
------- -------
$19,738 $44,962
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable........................................ $ 916 $ 2,368
Accrued expenses........................................ 6,079 12,024
Bank line of credit..................................... 1,974 -
Deferred revenue........................................ 8,419 8,954
Current portion of long-term debt....................... 497 197
Current portion of capital lease obligation............. 364 32
Net liabilities of discontinued operation............... 170 -
------- -------
Total current liabilities............................... 18,419 23,575
Long-term debt, net of current portion.................... 1,395 921
Deferred revenue, net of current portion.................. 2,773 2,691
------- -------
Total liabilities................................... 22,587 27,187
------- -------
Stockholders' Equity (Deficit):
Preferred stock......................................... - -
Common stock............................................ 13 18
Additional paid-in capital.............................. 15,081 64,642
Accumulated deficit..................................... (15,807) (44,605)
Unearned portion of deferred compensation............... (1,748) (1,482)
Cumulative translation adjustment....................... (388) (536)
Treasury stock, at cost................................. - (262)
------- -------
Total stockholders' equity (deficit)................ (2,849) 17,775
------- -------
$19,738 $44,962
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1996 1997
-------- ----------
<S> <C> <C>
Revenues:
Licenses................................................ $ 6,076 $ 12,374
Maintenance and services................................ 3,451 6,135
------- --------
Total revenues....................................... 9,527 18,509
------- --------
Costs and Expenses:
Cost of licenses........................................ 50 98
Cost of maintenance and services........................ 1,144 2,839
Sales and marketing..................................... 3,895 6,797
Research and development................................ 1,568 2,467
General and administrative.............................. 1,095 2,101
------- --------
Total costs and expenses............................. 7,752 14,302
------- --------
Operating income..................................... 1,775 4,207
Interest and other income (expense), net.................. (137) 204
------- --------
Income before income taxes................................ 1,638 4,411
Income tax expense........................................ - 1,632
------- --------
Net income................................................ $ 1,638 $ 2,779
------- --------
------- --------
Earnings per share: diluted
Net earnings per share.................................... $ 0.11 $ 0.14
------- --------
------- --------
Weighted average common and common equivalent
shares outstanding....................................... 14,519 20,110
------- --------
------- --------
Earnings per share: basic
Net earnings per share.................................... $ 0.13 $ 0.15
------- --------
------- --------
Weighted average common and common equivalent
shares outstanding....................................... 12,904 18,039
------- --------
------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
------------------------------
1996 1997
-------- ----------
<S> <C> <C>
Revenues:
Licenses............................................... $ 13,932 $ 25,741
Maintenance and services............................... 10,595 15,986
-------- --------
Total revenues...................................... 24,527 41,727
-------- --------
Costs and Expenses:
Cost of licenses........................................ 155 226
Cost of maintenance and services........................ 3,423 6,715
Sales and marketing..................................... 11,217 15,722
Research and development................................ 4,368 5,770
General and administrative.............................. 2,780 4,413
Acquired research and development costs................. - 34,775
-------- --------
Total costs and expenses............................. 21,943 67,621
-------- --------
Operating income (loss).............................. 2,584 (25,894)
Interest and other income (expense), net.................. (366) 608
-------- --------
Income before income taxes................................ 2,218 (25,286)
Income tax expense........................................ - 3,512
-------- --------
Net income (loss)......................................... $ 2,218 $(28,798)
-------- --------
-------- --------
Earnings (loss) per share: diluted
Net earnings (loss) per share............................. $ 0.15 $ (1.86)
-------- --------
-------- --------
Weighted average common and common equivalent
shares outstanding....................................... 14,438 15,510
-------- --------
-------- --------
Earnings (loss) per share: basic
Net earnings (loss) per share............................. $ 0.17 $ (1.86)
-------- --------
-------- --------
Weighted average common and common
equivalent shares outstanding............................ 12,901 15,510
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
------------------------------
1996 1997
-------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net income............................................. $ 2,218 $ (28,798)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 1,373 1,594
Charge for acquired in process research
and development....................................... - 34,775
Increase (decrease) in cash resulting
from changes, net of business acquired, in:
Accounts receivable.................................. (5,407) (7,728)
Financed receivables................................. - 214
Deferred tax asset................................... - 1,752
Other current assets................................. 74 (320)
Other long-term assets............................... (641) 468
Accounts payable..................................... (397) 705
Accrued expenses..................................... 1,605 1,228
Deferred revenue..................................... 1,854 (366)
-------- ----------
679 3,524
-------- ----------
Net cash used by discontinued business............... (973) (170)
-------- ----------
Net cash provided by (used in) operating activities (294) 3,354
-------- ----------
Cash flows from investing activities:
Purchases of property and equipment.................... (382) (1,291)
Proceeds from sale of product line..................... 700 -
Cash acquired in acquisition........................... - 582
-------- ----------
Net cash provided by (used in) investing
activities........................................ 318 (709)
-------- ----------
Cash flows from financing activities:
Proceeds (repayment) on bank line of credit, net....... 1,485 (3,387)
Repayments of long-term debt, net...................... (96) (2,336)
Issuance of common stock............................... 15 19,060
Treasury stock purchased............................... - (262)
Principal payments under capital lease obligation...... (269) (374)
-------- ----------
Net cash provided by (used in) financing
activities......................................... 1,135 12,701
-------- ----------
Effect of exchange rate changes on cash.................. (325) (148)
-------- ----------
Net increase in cash..................................... 834 15,198
Cash and equivalents, beginning of period................ 437 305
-------- ----------
Cash and equivalents, end of period...................... $ 1,271 $ 15,503
-------- ----------
-------- ----------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................. $ 337 $ 34
Income taxes......................................... $ - $ 567
Supplemental disclosures of noncash investing and
financing activities:
Stock issued and other noncash consideration for
acquisition........................................... $ - $ 38,617
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements have
been prepared by Peregrine Systems, Inc. (the "Company") and have not been
audited. These financial statements, in the opinion of management, include
all adjustments (consisting only of normal recurring accruals) necessary for
a fair presentation of the financial position, results of operations and cash
flows for all periods presented. These financial statements should be read
in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K filed for the year ended March 31,
1997, which provides further information regarding the Company's significant
accounting policies and other financial and operating information. Interim
operating results are not necessarily indicative of operating results for the
full year. The consolidated condensed financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
NOTE 2. USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. The
Company's cash management and investment policies restrict investments to
investment quality, highly liquid securities.
NOTE 4. COMPUTATION OF NET INCOME PER SHARE
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). The statement specifies
the computation, presentation, and disclosure requirements for earnings per
share (EPS). All prior periods have been restated to conform to current
year presentation. See Exhibit 11.1 for a reconciliation of the numerators
and denominators used in the EPS calculations.
NOTE 5. LINE OF CREDIT
Effective July 1, 1997, the Company entered into an agreement to provide 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 December 31, 1997). 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.
NOTE 6. 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 for the stock of
United Software included 1,916,220 shares of Peregrine Systems common stock
valued at $15.92 per share or
8
<PAGE>
$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 assets acquired based on their estimated fair
market values. The excess of the purchase price over the estimated fair values
of net assets acquired amounted to approximately $3.8 million, which has been
accounted for as goodwill and is being amortized over five years using the
straight line method. The acquisition accounting included a charge against
earnings of $34.8 million for acquired research and development costs.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE
SET FORTH UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THIS
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, AND ELSEWHERE IN, OR INCORPORATED BY
REFERENCE INTO, THIS REPORT. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.
OVERVIEW
The Company develops, markets and supports SERVICECENTER, a suite of
software applications for managing the Enterprise Service Desk. The Company
was founded in 1981 primarily to provide consulting services for IT
management software. In 1987, the Company launched its first software
product, PNMS, a product designed to manage and monitor complex mainframe
computer networks. In 1995, the Company commenced sales of SERVICECENTER,
the Company's solution for the Enterprise Service Desk. SERVICECENTER is
currently available for the Windows NT, UNIX, and MVS platforms. Since the
release of SERVICECENTER in July 1995, SERVICECENTER has accounted for
substantially all of the Company's license revenues. In addition, for the
year ended March 31, 1997, over 80% of the Company's license sales of
SERVICECENTER were attributable to UNIX and Windows NT platforms.
In September 1997, the Company acquired United Software, Inc., including
its operating subsidiary Apsylog S.A. of France ("Apsylog"). Apsylog
develops, markets, and supports an asset management software product which
the Company has renamed ASSETCENTER. The Company's result of operations for
the quarter ended December 31, 1997 reflect the first full quarter to include
the operations (revenue and expenses) of Apsylog. The Company's results of
operations for the nine month period ended December 31, 1997 include results
of operations for Apsylog subsequent to September 19, 1997.
The Company's revenues are derived from product licensing, maintenance and
services. License fees are generally due upon the granting of the license and
typically include a one-year maintenance period as part of the license
agreement. The Company also provides ongoing maintenance services, which
include technical support and product enhancements, for an annual fee based
upon the current price of the product.
Revenues from license agreements are recognized currently, provided that
all of the following conditions are met: a noncancelable license agreement or
other legally binding agreement has been signed, the product has been
delivered, there are no material uncertainties regarding customer acceptance,
collection of the resulting receivable is deemed probable, and no other
significant vendor obligations exist. Revenues from post-contract support
services are recognized ratably over the term of the support period,
generally one year. Maintenance revenues which are bundled in license fees
are unbundled and recognized using vendor-specific evidence. Consulting
revenues are primarily related to implementation services most often
performed on a time and material basis under separate service agreements for
the installation of the Company's products. Revenues from consulting and
training services are recognized as the respective services are performed.
The Company currently derives substantially all of its license revenues
from the sale of SERVICECENTER and expects SERVICECENTER to account for a
significant portion of the Company's revenues for the foreseeable future. The
Company's future operating results are dependent upon continued market
acceptance of SERVICECENTER, including future enhancements, as well as
acceptance of ASSETCENTER, Apsylog's asset management product. 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, operating
results and financial condition.
The Company conducts business overseas in a number of foreign currencies,
principally the British Pound, Deutsche Mark, French Franc, and Danish Krone.
These currencies have been relatively stable against the U.S. dollar
10
<PAGE>
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 foreign currency exchange rates will
not prove more volatile 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 recently
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 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 he 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 condition have not been
impacted by the recent Asian financial crisis.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
consolidated statements of operations data as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1996 1997 1996 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses..................................... 63.8% 66.9% 56.8% 61.7%
Maintenance and services..................... 36.2 33.1 43.2 38.3
----- ----- ----- -----
Total revenues............................. 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of licenses............................. 0.5 0.5 0.6 0.5
Cost of maintenance and services............. 12.0 15.3 14.0 16.1
Sales and marketing.......................... 40.9 36.7 45.7 37.7
Research and development..................... 16.5 13.4 17.8 13.8
General and administrative................... 11.5 11.4 11.4 10.6
Acquired research and development costs...... - - - 83.3
----- ----- ----- -----
Total costs and expenses................... 81.4 77.3 89.5 162.0
----- ----- ----- -----
Operating and other income................... 18.6 22.7 10.5 (62.0)
Interest and other income (expense), net..... (1.4) 1.1 (1.5) 1.4
----- ----- ----- -----
Income before income taxes................... 17.2 23.8 9.0 (60.6)
Income tax expense - 8.8 - 8.4
----- ----- ----- -----
Net income................................ 17.2% 15.0% 9.0% (69.0)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
THREE MONTH AND NINE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996 REVENUES
Total revenues were $18.5 million and $9.5 million in the third quarter
of fiscal 1998 and 1997, respectively, representing a period-to-period
increase of 94%. For the nine month periods ended December 31, 1997 and
1996, total revenue increased 70% to $41.7 million.
LICENSES. License revenues were $12.4 million and $6.1 million in the
third quarter of fiscal 1998 and 1997, respectively, representing 67% and 64%
of total revenues in the respective periods and $25.7 million and $13.9
million
11
<PAGE>
for the nine months ended December 31, 1997 and 1996, respectively,
representing 62% and 57% of total revenues for such periods. License
revenues increased 104% in the third quarter of the fiscal 1998 compared to
the third quarter of fiscal 1997. For the nine months December 31, 1997,
license revenues increased 85% compared to the nine month period ended
December 31, 1997. The increases in license revenues are attributable to
increased demand for new licenses of SERVICECENTER and the first quarterly
effect of ASSETCENTER revenue, additional seats purchased by existing
SERVICECENTER and ASSETCENTER customers, more effective corporate marketing
programs, improved sales force productivity, and expansion of the Company's
sales force.
MAINTENANCE AND SERVICES. Maintenance and services revenues were $6.1
million and $3.5 million in the third quarter of fiscal 1998 and 1997,
respectively, representing 33% and 36% of total revenues in the respective
periods and $16.0 million and $10.6 million for the nine months ended
December 31, 1997 and 1996 respectively, representing 38% and 43% of the
total revenues for such periods. Maintenance and services revenues increased
78% in the third quarter of the fiscal 1998 compared to the third quarter of
fiscal 1997. For the nine months ended December 31, 1997, maintenance and
service revenues increased 51% compared to the nine months ended December 31,
1996. The dollar increases are attributable to renewals of maintenance
agreements from the Company's expanded installed base of customers and
maintenance revenues included as part of new licenses and an increased number
of consulting engagements related to implementation of software from initial
license agreements.
COSTS AND EXPENSES
COST OF LICENSES. Cost of license revenues was $98,000 and $50,000 in
the third quarter of fiscal 1998 and 1997, respectively, each representing 1%
of total license revenues in the respective periods and $226,000 and $155,000
for the nine month periods ended December 31, 1997 and 1996, respectively,
again representing 1% of total license revenues in the respective periods.
COST OF MAINTENANCE AND SERVICES. Cost of maintenance and services
revenues was $2.8 million and $1.1 million in the third quarter of fiscal
1998 and 1997, respectively, representing 46% and 33% of total maintenance
and service revenues in the respective periods and $6.7 million and $3.4
million for the nine months ended December 31, 1997 and 1996, respectively,
representing 42% and 32% of total maintenance and services revenues for such
periods respectively. The dollar increase in the third quarter of fiscal
1998 over 1997 and in the nine months ended December 31, 1997 over the same
period in 1996 are attributable to an increase in customer support personnel
and professional services personnel in connection with the corresponding
increase in professional services revenue.
SALES AND MARKETING. Sales and marketing expenses were $6.8 million and
$3.9 million in the third quarter of fiscal 1998 and 1997, respectively,
representing 37% and 41% of total revenues in the respective periods and
$15.7 million and $11.2 million for the nine months ended December 31, 1997
and 1996, respectively, representing 38% and 46% of the total revenues in
such periods. The dollar increase in sales and marketing expenses is
attributable to expansion of both the North American and international sales
forces, the increase in personnel in the marketing department, the first
quarterly effect of Apsylog sales and marketing expenses, and to moderate
increases in operating expenses. If the Company experiences a decrease in
sales force productivity or for any other reason a decline in revenues, it is
likely that operating margins will decline as well. The decrease in sales
and marketing expenses as a percentage of total revenues is attributable to
increased revenues, particularly increased license revenues, economies of
scale, and the delayed hiring of additional sales staff.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.5
million and $1.6 million in the third quarter of fiscal 1998 and 1997,
respectively, representing 13% and 17% of total revenues in the respective
periods and $5.8 million and $4.4 million for the nine months ended December
31, 1997 and 1996, respectively, representing 14% and 18% of total revenues
in such periods. The dollar increase from fiscal 1997 to fiscal 1998 is due
primarily to the hiring of additional software developers and the first
quarterly effect of Apsylog research and development expenses. The decrease
as a percentage of total revenues is due to increased revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2.1 million and $1.1 million in the third quarter of fiscal 1998 and 1997,
respectively, representing 11% and 12% of total revenues in the respective
periods and $4.4 million and $2.8 million for the nine months ended December
31, 1997 and 1996, respectively,
12
<PAGE>
representing 11% of the total revenues in each period. The dollar increase
from fiscal 1997 to 1998 are attributable primarily to administrative
personnel additions to support the Company's growth, including Apsylog, and
the additional administrative expenses associated with becoming a publicly
traded company.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. Acquired in-process
research and development costs of $34.8 million were incurred in the second
quarter of the fiscal 1998 in connection with the Apsylog Acquisition and are
therefore reflected in the nine months ended December 31, 1997.
INCOME TAX EXPENSE. Income tax expense for the third fiscal quarter of
1998 amounted to $1.6 million compared with zero in the comparable quarter of
1997. This increase results from the $2.8 million dollar increase in
operating profits, before taxes and recognition of the acquired research and
development costs during the period. Excluding the effect of expensing the
acquired research and development costs, the effective tax rate for the third
quarter of fiscal 1998 and for the nine months ended December 31, 1997 was
37%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $15.5 million in cash and cash equivalents at December
31, 1997 compared to $0.3 million at March 31, 1997. The increase is
primarily attributable to the Company's completion of its initial public
offering in April 1997. The Company offered and sold 2.3 million shares of
its common stock at an initial public offering price of $9.00 per share,
raising $19.3 million after underwriting discounts and commissions.
At March 31, 1997, the Company had a $4.5 million revolving bank credit
scheduled to expire by its own terms November 30, 1997, and a term loan from
the same bank. The term loan was secured by trade receivables and fixed
assets of the Company and the revolving credit line secured by accounts
receivable, equipment and certain other assets of the Company. Both
facilities were personally guaranteed by the Company's majority stockholder.
Both the credit line and term loan were repaid from proceeds of the Company's
April 1997 initial public offering.
Effective July 1, 1997, the Company entered into a new agreement to
replace the above line of credit. The new agreement allows up to $5.0
million in borrowing and is generally secured by the same collateral as the
old line. There is no personal guarantee associated with the new line. There
are however, certain covenants, the most significant of which places cetain
restrictions on future borrowings and acquisitions above specified levels.
In addition, the Company is required to maintain certain financial ratios and
minimum equity balances. The agreement also provides for a foreign exchange
facility of up to $2.0 million in any two day period.
The Company believes that its current cash balances, cash available
under its bank facilities, and cash flow from operations will be sufficient
to meet its working capital requirements for at least the next 12 months.
Although operating activities may provide cash in certain periods, to the
extent the Company experiences growth in the future, the Company anticipates
that its operating and investing activities may use cash. Consequently, any
such future growth may require the Company to obtain additional equity or
debt financing, which may not be available on commercially reasonable terms
or which may be dilutive.
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:
LIMITED PROFITABILITY; HISTORY OF OPERATING LOSSES. Through December 31,
1997, the Company has recorded cumulative net losses of approximately $44.6
million, including approximately $34.8 million related to the write-off of
acquired in-process research and development in connection with the
acquisition of United Software, Inc. including its wholly-owned operating
subsidiary Apsylog S.A., a corporation organized under the laws of France
("Apysylog") in September 1997 (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
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Company derived substantially all of its license revenues for the fiscal year
ended March 31, 1997 and for the nine months ended December 31, 1997, 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 year ended March 31, 1997 and for the nine
months ended December 31, 1997 (excluding the impact of the $34.8 million
charge related to acquired in-process research and development in connection
with the Apsylog Acquisition), there can be no assurance that the Company
will be able to remain profitable on a quarterly or annual basis. In
addition, the Company does not believe that the growth in revenues it has
experienced in recent years is indicative of future revenue growth or future
operating results. See "--Product Concentration; Dependence on Market
Acceptance of Enterprise Service Desk Software" and "--Risks Associated with
Apsylog Acquisition and Future Acquisitions."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company's
quarterly operating results have varied significantly in the past and may
vary significantly in the future depending upon a number of factors, many of
which are beyond the Company's control. These factors include, among others,
the ability of the Company to develop, introduce and market new and enhanced
versions of its software on a timely basis; market demand for the Company's
software; the size, timing and contractual terms of significant orders; the
timing and significance of new software product announcements or releases by
the Company or its competitors; changes in pricing policies by the Company or
its competitors; changes in the Company's business strategies; budgeting
cycles of its potential customers; changes in the mix of software products
and services sold; changes in the mix of revenues attributable to domestic
and international sales; the impact of acquisitions of competitors; the
impact of acquisitions by the Company, including the Apsylog Acquisition;
seasonal trends; the cancellations of licenses or maintenance agreements;
product life cycles; software defects and other product quality problems; and
personnel changes. The Company has often recognized a substantial portion of
its revenues in the last month or weeks of a quarter. As a result, license
revenues in any quarter are substantially dependent on orders booked and
shipped in the last month or weeks of that quarter. Due to the foregoing
factors, quarterly revenues and operating results are not predictable with
any significant degree of accuracy. In particular, the timing of revenue
recognition can be affected by many factors, including the timing of contract
execution and delivery. The timing between initial customer contact and
fulfillment of criteria for revenue recognition can be lengthy and
unpredictable, and revenues in any given quarter can be adversely affected as
a result of such unpredictability. In the event of any downturn in potential
customers' businesses, or the domestic economy in general, or in
international economies in which the Company derives substantial revenues,
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 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 and economic
conditions 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. See "--International Operations;
Currency Fluctuations."
PRODUCT CONCENTRATION; DEPENDENCE ON MARKET ACCEPTANCE OF ENTERPRISE SERVICE
DESK SOFTWARE. The Company currently derives substantially all of its
license revenues from the sale of the SERVICECENTER suite of applications
and expects SERVICECENTER 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, including future enhancements, as well as market acceptance of
ASSETCENTER. 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, operating results and financial condition.
The Company's product strategy has focused on integrating a broad array of IT
management applications with other traditional internal help desk
applications to create an Enterprise Service Desk. The market for Enterprise
Service
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Desk software is relatively new and is characterized by ongoing technological
developments, frequent new product announcements and introductions, evolving
industry standards and changing customer requirements. The Company's future
financial performance will depend in part on continued growth in the number
of organizations implementing Enterprise Service Desk solutions.
RISKS ASSOCIATED WITH APSYLOG ACQUISITION AND FUTURE ACQUISITIONS. The
Apsylog Acquisition involves a significant amount of integration of two
companies that have previously operated independently. The principal
operations of Apsylog, including most of its employees, are located in Paris,
France. No assurance can be given that difficulties will not be encountered
in integrating certain products, technologies or operations of Apsylog with
those of the Company or that the benefits expected from such integration will
be realized or that Apsylog employee morale will not be adversely affected by
the integration process. 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. 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 engineering teams of Apsylog
and the Company will successfully cooperate and realize any technological
benefits or that Apsylog or the Company will realize any of the other
anticipated benefits of the Apsylog Acquisition. Apsylog's ASSETCENTER
product has traditionally been sold into an organization's finance or
procurement departments as opposed to SERVICECENTER, which is typically
purchased by the IT Department. There can be no assurance that the Company
will be successful in continuing to sell to such constituencies or that it
can successfully persuade customers and potential customers that an
integrated approach to managing IT assets is desirable.
The success of the Company's efforts to integrate Apsylog's products and
technologies will depend in significant part upon the continued service of
its key technical, development, sales and senior management personnel
following the Apsylog Acquisition. Only certain of these individuals
(including Apsylog's Chief Executive Officer and seven additional employees)
will be bound by non-competition agreements. In addition, in connection with
the Apsylog Acquisition, all repurchase restrictions on shares of restricted
Apsylog Common Stock held by Apsylog stockholders lapsed, and all unvested
options in respect to Apsylog's Common Stock vested and became immediately
exercisable. The loss of the services of one or more of Apsylog's
development personnel or other key employees or the decision of one or more
of such personnel or key 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 to the Apsylog Acquisition and as part of its business strategy,
the Company may make acquisitions of, or significant investments in,
businesses that offer complementary products, services and technologies.
There can be no assurances 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 businesses, the potential disruption
of the Company's on-going business, 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 stock or a combination of cash and 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, financial condition and
results of operations.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL The Company's
ability to achieve anticipated revenues is substantially dependent on its
ability to attract and retain skilled personnel, especially sales, service
and implementation personnel. Other than certain employees of Apsylog, 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
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the Company's business, operating results and financial condition. In
January 1998, the Company's President and Chief Executive Officer resigned.
The Company has appointed Stephen P. Gardner, its Executive Vice President,
to act as interim Chief Executive Officer, until such time as a permanent
Chief Executive Officer is identified. Although the Company believes it will
be able to identify and retain a permanent Chief Executive Officer, any
delays in hiring such an individual or market uncertainty concerning the
Company's management could have an adverse effect on results of operations in
a particular quarter or result in volatility in the Company's stock price.
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. In
particular, a number of the Company's sales personnel have been with the
Company for only a limited period of time. There can be no assurance that
the Company will be successful in attracting, training and retaining
qualified personnel, and the failure to do so could have a material adverse
effect on the Company's business, operating results and financial condition.
COMPETITION. The market for the Company's products is highly competitive,
fragmented and subject to rapid technological change and frequent new product
introductions and enhancements. Competitors vary in size and in the scope
and breadth of the products and services offered. The Company encounters
competition from a number of sources, including (i) providers of internal
help desk software applications such as Remedy Corporation and Software
Artistry, Inc. (recently acquired by 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"), McAfee Associates, Inc. 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 Service Desk applications
expands. In addition, current and potential competitors have established or
may in the future establish cooperative relationships among themselves or
with third parties. The Company expects software industry consolidation to
occur in the future, and it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
For example, the Company's ability to sell its Enterprise Service Desk
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 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 software vendors by
systems 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, operating results and
financial condition. Some of the Company's current and many of its potential
competitors have significantly greater financial, technical, marketing and
other resources than the Company. As a result, they may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their products than the Company. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not have
a material adverse effect on the Company's business, operating results and
financial condition.
MANAGEMENT OF GROWTH. The Company's business has grown substantially in
recent periods, with total revenues increasing from $19.6 million in fiscal
1995 to $23.8 million in fiscal 1996 and to $35.0 million in fiscal 1997 and
to $41.7 million in the first nine months of fiscal 1998. If the Company is
successful in achieving its growth plans, including the integration of
Apsylog, 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
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expand operational, customer support and financial control systems and to
expand, train and manage its employee base. In particular, in connection
with the Apsylog Acquisition, the Company will be required to integrate
additional personnel and to augment or replace Apsylog's existing financial
and management systems. Such integration could result in a disruption of
operations of the Company or Apsylog and could adversely affect the Company's
financial results. 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. See "--Dependence on Key Personnel; Ability to
Recruit Personnel" and "--Risks Associated with Apsylog Acquisition and
Future Acquisitions."
LENGTHY SALES CYCLES. 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 delays in the sales
cycles 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. See "--Potential Fluctuations in Quarterly Results;
Seasonality."
EXPANSION OF DISTRIBUTION CHANNELS. The Company has historically sold its
products through its direct sales force and a limited number of distributors
and has provided maintenance and support services through its technical and
customer support staff. The Company is currently investing and intends to
continue to invest significant resources in developing additional sales and
marketing channels through system integrators and original equipment
manufacturers ("OEMs") and other channel partners. There can be no assurance
that the Company will be able to attract channel partners that will be able
to market the Company's products effectively and will be qualified to provide
timely and cost-effective customer support and service. To the extent the
Company establishes distribution through such indirect channels, its
agreement 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. See "--Management of Growth" and "--International
Operations; Currency Fluctuations."
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. International sales
represented approximately 29% and 32% of the Company's total revenues in
fiscal 1996 and fiscal 1997, respectively, and 36% for the nine months ended
December 31, 1997. The Company currently has international sales offices in
London, Paris, Frankfurt, Amsterdam, and Copenhagen. Apsylog currently has
international offices in Paris and Munich. 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, operating results 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. There can be no
assurance that the Company will be able to successfully localize, market,
sell and deliver its products internationally. The inability of the Company
to expand its international operations successfully and in a timely manner
could have a material adverse effect on the Company's business, operating
results and financial condition.
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A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar. Foreign currency transaction gains and losses
arising from normal business operations are credited to or charged against
earnings in the period incurred. As a result, fluctuations in the value of
the currencies in which the Company conducts its business relative to the
U.S. dollar have caused and will continue to cause currency transaction gains
and losses. Due to the substantial volatility of currency exchange rates,
among other factors, the Company cannot predict the effect of exchange rate
fluctuations upon future operating results. There can be no assurance that
the Company will not experience currency losses in the future. The Company
has recently implemented a foreign exchange hedging program, consisting
principally of purchases of one month forward-rate currency contracts.
Notwithstanding such a program, there can be no assurances that the Company's
hedging activities will adequately protect the Company against the risks
associated with foreign currency fluctuations. See "--Management of Growth."
YEAR 2000 IMPACT ON INFORMATION TECHNOLOGY BUDGETS. 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, in less than three years, computer systems and/or software used
by many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance.
The Company believes that 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.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT. The Company's
success is 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 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, operating
results 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
its 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,
operating results and financial condition.
RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT RISKS. The market for the
Company's products is subject to rapid technological change, changing
customer needs, frequent new product introductions and evolving industry
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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 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, operating results and financial condition.
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in a product's life cycle. The
Company has in the past discovered software errors in certain of its products
and has experienced delays in shipment of products during the period required
to correct these errors. There can be no assurance that, despite testing by
the Company and by current and potential customers, errors will not be found,
resulting in loss of, or delay in, market acceptance and sales, diversion of
development resources, injury to the Company's reputation, or increased
service and warranty costs, any of which could have a material adverse effect
on the Company's business, results of operations and financial condition.
PRODUCT LIABILITY. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's 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 products by the Company 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 the Company's
business, operating results and financial condition.
VOLATILITY OF STOCK PRICE. 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 since the initial public offering and is expected to continue
to be subject to significant fluctuations in the future based on a number of
factors, including any shortfall in the Company's revenues or net income from
revenues or net income expected by securities analysts; announcements of new
products by the Company or its competitors; quarterly fluctuations in the
Company's financial results or the results of other software companies,
including those of direct competitors of the Company; changes in analysts'
estimates of the Company's financial performance, the financial performance
of competitors, or the financial performance of software companies in
general; general conditions in the software industry; changes in prices for
the Company's products or competitors' products; changes in revenue growth
rates for the Company or its competitors; sales of large blocks of Common
Stock by holders whose ability to sell has been limited by restrictions under
applicable securities laws and conditions in the financial markets. 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 the market price of the Company's Common Stock will not
experience significant fluctuations in the future.
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PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBITS EXHIBIT TITLE
-------- -------------
10.23 Severance Settlement Agreement and Release of Claims between
Alan H. Hunt and the Company, dated January 30, 1998.
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule
b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized in the City of San Diego, California,
this 17th day of February, 1998.
PEREGRINE SYSTEMS, INC.
By /S/ DAVID A. FARLEY
----------------------------------------
Vice President, Finance, Chief Financial
Officer (Principal Financial and
Accounting Officer)
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EXHIBIT 10.23
SEVERANCE SETTLEMENT AGREEMENT
AND RELEASE OF CLAIMS
This Severance Settlement Agreement and Release of Claims (the
"Agreement ) is made by and between Alan H. Hunt ("Hunt") and Peregrine
Systems, Inc. ("PSI") and effective this January 30, 1998.
RECITALS
A. Hunt was an employee and a Director of PSI until his resignation on
January 20, 1998, from all such positions and from any and all positions he
may have held with PSI and any of its foreign or domestic affiliates or
subsidiaries.
B. PSI and Hunt are parties to an Option Agreement dated November 1,
1995 pursuant to which Hunt was granted the right to acquire 400,000 shares
of PSI's Common Stock at an exercise price of $2.34 per share (the "Hunt
Option"). PSI and Hunt are parties to a Restricted Stock Agreement of
November 1, 1995 pursuant to which Hunt was granted the right to acquire
400,000 shares of PSI's Common Stock (the "Hunt Restricted Stock").
C. In connection with his resignation, Hunt and PSI have discussed
certain terms and conditions relating to the termination of the employment
relationship and the commencement of a consulting relationship.
D. It is the intent of the parties in entering this Agreement to set
forth all agreements between the parties and resolve all pending matters
between the parties.
NOW, THEREFORE, in consideration of the promises and mutual
agreements hereinafter set forth, it is hereby agreed by and among the
parties as follows:
I. COMPENSATION TO HUNT
1.1.1 HUNT OPTION. Notwithstanding any provisions of the Hunt
Option agreement to the contrary, and subject to termination as set forth in
paragraph 1.3.10 hereof, Hunt and PSI agree that as of January 31, 1999, all
vesting of the Hunt Option shall cease. The Hunt Options shall remain
exercisable until ninety days beyond January 31, 1999 pursuant to the terms
of the Hunt Option.
1.1.2 Hunt and PSI agree that the Hunt Option is hereby amended in a
manner that limits the change of control provision under the 1994 Stock Plan
and Hunt's stock option agreement in such a manner that the change of control
provision will not apply to any of the Hunt Option shares that will not vest
on the vesting schedule prior the January 31, 1999 cessation of vesting set
forth in the above paragraph.
Page 1 of 10
<PAGE>
1.2.1 HUNT RESTRICTED STOCK. Notwithstanding any provisions of the
Hunt Restricted Stock agreement to the contrary, and subject to termination
as set forth in paragraph 1.3.10 hereof, Hunt and PSI agree that as of March
31, 1999, all vesting of the Hunt Restricted Stock shall cease.
1.2.2 Effective with the execution of this Agreement the 202,000
shares of Hunt Restricted Stock scheduled to lapse restriction after March
31, 1999 shall be immediately returned to PSI and Hunt hereby renounces all
right, title, and ownership of such shares.
1.3 CONSULTING AGREEMENT
1.3.1 Hunt agrees to act as a consultant to PSI and shall
provide such advice and assistance to PSI as the Chairman of the Board shall
reasonably request. Such advice and assistance shall include without
limitation the transition of the Chief Executive Office, and cooperation in
responding to requests for testimony, documentation or other information and
analysis relating to any litigation now pending, threatened, or in the future
arising against PSI and relating to actions or events occurring during Hunt's
tenure as an employee, director or officer of PSI.
1.3.2 The term of such consultancy shall commence on the date
hereof and shall continue for a period ending January 31, 1999.
1.3.3 During the term of his consultancy, PSI agrees to pay
Hunt at rate equal to his pro rata annual base salary at the level at the
time of his resignation (the "Annual Consulting Rate"). PSI agrees to pay
such amounts on the fifth (5th) day of each month during the consultancy term
at the rate of 1/12th of the Annual Consulting Rate.
1.3.4 PSI agrees to pay Hunt's COBRA payment for continuation
of his employee benefit plans for 12 months beyond his January 1998
termination. Such payment shall cease upon Hunt's taking employment within
the 12 months.
1.3.5 Hunt will not accrue any vacation benefits as a result of
this consulting arrangement.
1.3.6 PSI shall be under no obligation to provide Hunt with an
office or secretarial assistance during the term of his consultancy.
1.3.7 INDEPENDENT CONTRACTOR. The parties expressly intend
and agree that Hunt will act as an independent contractor and not as an
employee of PSI. Hunt understands and agrees that he shall not be entitled
to any of the rights and privileges established for PSI's employees. Hunt
understands and agrees that PSI will not pay or withhold from the
compensation paid to him pursuant to this Agreement any sums customarily paid
or withheld
Page 2 of 10
<PAGE>
for or on behalf of employees for income tax, unemployment insurance, social
security, workers' compensation or any other withholding tax, insurance, or
payment pursuant to any law or governmental regulation, and all such payments
as may be required by law are the sole responsibility of Hunt.
1.3.8 NONDISPARAGEMENT. Hunt agrees that he will not make
any statements, written or verbal, disparaging the performance or business
reputation of PSI (including its officers, directors, employees, agents and
any related entities), or the personal or business reputation or character of
any employees of PSI.
1.3.9 COOPERATION. In the event of any claims, disputes or
litigation against PSI in which Hunt is named as a party or in which Hunt is
a witness or can be of assistance to PSI, Hunt agrees to make himself
available upon reasonable notice to meet with representatives of PSI and
provide them with such information and documents as he may have. Hunt shall
also make himself available, upon reasonable notice, to give sworn testimony
and statements, affidavits, depositions, trial testimony, declarations or
other such disclosures as may be necessary in connection with such
litigation. Nothing herein is intended or should be construed as requiring
anything other than Hunt's cooperation in providing truthful and accurate
information.
1.3.10 Hunt acknowledges that in the course of his prior
employment with PSI, and during the term of his consultancy, he has become
and will continue to become familiar with trade secrets and with other
confidential information concerning PSI and its affiliates and subsidiaries.
Therefore, Hunt agrees that, during the initial term of his consultancy and
any renewal term, and for one year (1) year thereafter, he shall not,
directly or indirectly, or through another entity, undertake any conduct, or
induce or attempt to induce any other person or entity to undertake any
conduct, not in the best of PSI. PSI reserves the right to determine, at the
sole discretion of its Board of Directors as comprised at the time of such
determination, whether the conduct as issue is in the best interest of PSI.
A breach of the obligations in any of section 1.3, 1.4, or 1.5 by Hunt shall
cause immediate termination of the Hunt Option and the Hunt Restricted Stock.
1.4 AGREEMENT NOT TO SOLICIT EMPLOYEES. Hunt agrees that during the
term of his consulting agreement herein and thereafter until February 1,
2001, he will not:
a. Induce or attempt to induce, any employee of PSI to leave
employment with PSI;
b. Interfere with or disrupt PSI's relationship with any of its
employees, consultants, customers, suppliers, or vendors; or
c. Solicit any employee of PSI to come to work for Hunt or Hunt's
subsequent employer(s).
1.5 NONCOMPETITION AND COVENANT NOT TO COMPETE
1.5.1 As a significant portion of the compensation paid to Hunt
pursuant to this
Page 3 of 10
<PAGE>
Agreement, Hunt agrees that during the term of his consulting agreement
herein and thereafter until February 1, 2001 thereafter, he will not compete
with PSI. This noncompetition agreement is made in recognition of the
extraordinary skills and experience of Hunt in the industry in which PSI does
business, and PSI's exposure to Hunt of its most confidential and
competitively sensitive information, including, but not limited to PSI's
technical product information, pricing information, customer lists, patents,
engineering data, research and development plans, business methods, operating
procedures, and other such highly valuable trade secret information.
1.5.2 Hunt agrees that during the term of his consulting
agreement herein and thereafter until February 1, 2001 thereafter, he will
not act as an officer, director, employee, consultant, or agent for any of
PSI's competitors. In addition, for a similar period of time, Hunt agrees
that he will not directly or indirectly, alone or with others, engage in or
have any interests in, any business, firm, partnership, or corporation,
whether as an employee, officer, director, agent, creditor, consultant or
otherwise that engages in any activity that is the same or similar to, or in
competiton with, any activity engaged in by PSI.
1.5.3 In furtherance of his consulting agreement herein, Hunt
agrees to execute PSI's standard Invention and Non-disclosure Agreement, and
Arbitration Agreement. Hunt further agrees that, should he at any time
during the term of this Agreement seek to be become employed by or a
consultant for any competitor of PSI, PSI shall have the right to inform each
such company of this Agreement, as well as PSI's Invention and Non Disclosure
Agreement, and that disclosure of this information and any other necessary
and related communications by PSI shall not provide the basis for any legal
claim by Hunt against PSI.
1.5.4 This entire Agreement, including Noncompetition and
Covenant not to Compete paragraph, has been reviewed by legal counsel for
both parties. The parties intend and presume that this noncompetition
agreement is enforceable and intend that this Noncompetition and Covenant not
to Compete paragraph be given the fullest force and effect allowable by law.
In the event of nay alleged breach of this provision, PSI shall be entitled,
if it so elects, to institute and prosecute proceedings in any court of
competent jurisdiction, either in law or in equity, to enjoin Hunt from
violating this noncompetition provision, and to enforce the specific
performance of Hunt to the terms of this Agreement, and to obtain damages, or
nay of them, but nothing herein shall be construed to prevent such remedy or
combination of remedies as PSI may elect.
1.5.5 If for any reason an arbitrator or court of competent
jurisdiction finds that this Noncompetition and Covenant not to Compete
paragraph is not enforceable, in whole or in part, then the parties agree
that Hunt shall pay to Company one half of the amount of compensation paid by
PSI to Hunt to the date of such finding, not to exceed the sum of $50,000,
since a significant portion of the consideration being paid by PSI to Hunt is
for this Noncompetition and Covenant Not to Compete agreement.
Page 4 of 10
<PAGE>
1.5.6 For purposes of this Section 1.5, PSI competitors shall
be any entity or organization involved in the development or implementation
of software which functions in the help desk industry.
II. GENERAL RELEASE OF CLAIMS.
2.1 Nothing contained in this Section 2 shall release or diminish
Hunt's obligations set forth in Section 1 of this Agreement.
2.2 Hunt, for himself, his wife, and for his heirs, assigns, executors,
affiliates, successors and each of them hereby acknowledges full and complete
satisfaction of releases and forever discharges PSI, its subsidiary
corporations, affiliates, and any and all of its past or present owners,
officers, directors, agents, shareholders, employees, attorneys, heirs,
assigns, executors, administrators and successors (hereinafter collectively
referred to as "PSI") from any and all claims, demands, actions, causes of
action, in law or in equity, suits, liabilities, demands, losses, costs or
expenses known or unknown, suspected or unsuspected, of any kind or nature
that Hunt now has or may have against PSI related including costs, expenses
and attorneys' fees. This full and complete release includes, but is not
limited to, claims relating to Hunt's employment with PSI. Hunt reserves,
and by this sentence expressly excepts from this release, Hunt's right to
seek indemnification from PSI against expenses, judgements, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding initiated by a third-party against Hunt for Hunt's
authorized conduct within the scope of his employment, including acts of
commission, during his employment by PSI.
2.3 Hunt acknowledges that he is aware of and is familiar with the
provisions of Section 1542 of the California Civil Code which provides as
follows:
A GENERAL RELEASE DOES NOT EXEND TO CLAIMS
WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT
TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTELEMENT WITH THE
DEBTOR.
Hunt hereby waives and relinquishes all rights and benefits which he may
have under Section 1542 of the California Civil Code, or the law of any other
state or jurisdiction, or common law principle, to the same or similar effect.
2.4 Hunt acknowledges that he may discover facts or law different from,
or in addition to, the facts or law that he knows or believes to be true with
respect to the claims released in this Agreement and agrees, nonetheless,
that this Agreement and the releases contained in it shall be and remain
effective in all respects notwithstanding such different or additional facts
or the discovery of them.
2.5 Hunt declares and represents that he is executing this Agreement
with full
Page 5 of 10
<PAGE>
advice from his legal counsel, and that he intends that this Agreement shall
be complete and shall not be subject to any claim of mistake, and that the
release herein expresses a full and complete release and, regardless of the
adequacy or inadequacy of the consideration, he intends the release herein to
be final and complete. Hunt and PSI execute this release with the full
knowledge that this release covers all possible claims, except as provided in
Section 2.1 above, and the right to enforce the provisions of this Agreement
as set forth herein.
2.6 Hunt irrevocably and absolutely agrees that he will not prosecute
nor allow to be prosecuted on his behalf, in any administrative agency,
whether federal, state or local, or in any court, whether federal, state, or
local, any claim or demand of any type related to the matters released in
this Agreement, it being his intention that with the execution of this
Agreement, PSI (as defined above) will be absolutely, unconditionally and
forever discharged of and from all obligations related in any way to the
matters discharged herein, subject only to the exception in Section 2.1
above.
III. GENERAL PROVISIONS
3.1 Hunt further agrees that he shall not directly or indirectly
disclose or use any trade secrets or other confidential or proprietary
information of PSI which came into, or will come into, Hunt's possession
during his employment and/or consulting relationship with PSI; provided, that
confidential information shall not include any information known generally to
the public, generally known to industry or in the public domain.
3.2 AGREEMENT TO RETURN PSI PROPERTY AND INFORMATION. Hunt agrees that
immediately upon his resignation from PSI, he shall return to the Company all
property of PSI including, but not limited to information stored on his
computer, product and pricing information, customer lists, research and
development plans, business plans, credit cards, keys and computers,
excepting his PSI-issued notebook computer.
3.3 Hunt and PSI agree that the terms and conditions of this Agreement,
and events which have lead to the parties entering into this Agreement, shall
remain confidential. The parties will make every effort to avoid disclosure,
directly or indirectly, of any of the terms, conditions, facts or
allegations, to any other person or entity. It is understood that the
parties may, if necessary, disclose information concerning this Agreement and
settlement or its terms, to their attorneys and accountants and /or as
required by law. Such disclosure shall not be a violation of this Agreement.
3.4 Hunt agrees that he will not voluntarily participate in, be an
expert witness in, be a party, or otherwise voluntarily involve himself in
any other litigation against PSI, its related corporations, divisions,
partners, officers, employees (past or present), agents, shareholders,
representatives, heirs, assigns, executives, administrators and successors,
or any of them. Hunt further agrees that he will not voluntarily assist in
any manner whatsoever any other party or litigant, in any action, against
PSI, its related corporations, divisions, partners, officers, employees (past
or present), agents, shareholders, representatives, heirs, assigns,
executives, administrators and successors, or any of them. Hunt agrees to
cooperate with and
Page 6 of 10
<PAGE>
to assist PSI in the event any claims are made against PSI where his
assistance would be of value to PSI.
3.5 This Agreement has been reviewed by the parties hereto and their
respective attorneys, and the parties have had full opportunity to negotiate
the contents hereof. The parties hereto expressly waive any common law or
statutory rule of construction that ambiguity shall be construed against the
drafter of this Agreement, and acknowledge that both parties contributed
equally to the drafting of this Agreement.
3.6 The parties agree that this Agreement constitutes a compromise of,
and full accord and satisfaction of, doubtful and disputed claims and shall
not be treated as an admission of liability by anyone, at any time, for any
purpose.
3.7 All parties to this Agreement agree that they will bear their own
attorneys' fees, costs and all other expenses.
3.8 Any dispute or controversy arising between PSI (and its directors,
officers, or employees) and Hunt including, but not limited to, all potential
claims arising out of the consultancy relationship, such as breach of
contract, tort, discrimination, termination, compensation, and claims for any
violation of any law, statute, regulation, or ordinance, unless prohibited by
law shall be resolved by final and binding arbitration under the commercial
arbitration rules of the American Arbitration Association in effect at that
time. The arbitration shall be governed by California law. Judgment upon
the arbitrator's decision may be entered in any court of competent
jurisdiction. The arbitration fee shall be divided equally between Employee
and PSI.
3.8.1 At any time prior to the setting of a date for
arbitration, either party may elect in writing to submit the case to
nonbinding mediation. Mediation, if elected by either party, shall be in
advance of and not in substitution of the arbitration required by this
section. The mediation fee shall be divided equally between Employee and PSI.
3.8.2 In any action at law or equity between the parties
seeking enforcement of any of the terms and provisions of this Agreement, the
prevailing party in such action shall be awarded, in addition to damages or
other relief, his or its reasonable attorneys' fees. Such recovery shall
also include out-of-pocket expenses and attorneys' fees on appeal, if any.
The court shall determine the prevailing party pursuant to California Civil
Code Section 1717.
3.9 Should any court of competent jurisdiction determine that any term
or provision of this Agreement is unenforceable, such term or provision shall
be deemed to be deleted as though it had never been a part of this Agreement,
and the validity, legality and
Page 7 of 10
<PAGE>
enforceability of the remaining terms and provisions shall not be in any way
affected or imperiled thereby.
3.10 Any and all notices and other communications that are required
or permitted to be given pursuant to this Agreement shall be in writing and
shall be deemed to have been duly given if hand-delivered or if mailed,
postage prepaid, by registered or certified return mail, to the respective
parties as follows:
If to Hunt:
Alan H. Hunt
P.O. Box 17108
Snowmass Village, CO 81615
If to PSI:
Peregrine Systems, Inc
Attn: President
12670 High Bluff Drive
San Diego, CA 92130
or to such other address or the attention of such other person as any such
party may direct by written notice delivered to other party pursuant to the
provisions of this Section and shall be effective upon receipt.
3.11 No waiver by any party hereto of any breach of this Agreement by
other party shall operate or be construed as a waiver of any other or
subsequent breach. No waiver by any party hereto of any breach of this
Agreement by any other party hereto shall be effective unless it is in
writing and signed by the party claimed to have waived such breach.
3.12 This Agreement may be amended only by a written instrument executed
by all parties hereto.
3.13 Subject to the exception set forth in Section 2.1 above (which has
no application to this paragraph), this Agreement is intended by the parties
to release and discharge any and all claims of Hunt, including any possible
claims arising under the Age Discrimination in Employment Act, 29 U.S.C.
Section 621, ET SEQ. It is the intent of the parties that this Agreement
satisfy the requirements of the Older Worker Benefit Protection Act, 29
U.S.C. Section 626(f). The following general provisions, along with the
other provisions of this Agreement, are agreed to for this purpose:
3.13.1 Hunt acknowledges and agrees that he has read and he
understands the terms of this Agreement;
3.13.2 Hunt acknowledges that he has been given a full
opportunity to consult
Page 8 of 10
<PAGE>
with his lawyer with respect to the matters referenced in this Agreement, and
that Hunt has obtained and considered such legal counsel as he deems
necessary, such that Hunt is entering into this Agreement freely, knowingly,
and voluntarily;
3.13.3 Hunt acknowledges that he has been given at least
twenty-one (21) days in which to consider whether or not to into this
Agreement; and
3.13.4 This Agreement shall not become effective or enforceable
until seven (7) days after Hunt signs this Agreement.
3.13.5 This Agreement may be executed in counterparts by the
parties in order to expedite the execution of same.
3.14 In order to expedite the execution of this Agreement, the parties
agree that facsimile signatures are an acceptable means of expressing their
agreement to the terms and conditions of this Agreement and for all purposes
facsimile signatures shall have the same effect as original signatures. Any
party providing a facsimile signature further agrees, however, that within
five (5) days of execution of the Agreement, that party will provide their
signature on an original signature page to the other parties by overnight
commercial delivery service.
3.15 This Agreement shall be construed in accordance with the laws of the
State of California.
3.16 The agreements and releases contained in this Agreement bind and
inure to the benefit of the principals, agents, representatives, heirs,
successors and assigns of Hunt and PSI.
3.17 This Agreement contains the entire agreement and understanding
concerning the subject matter herein and supersedes and replaces any prior
negotiations or agreements between the parties hereto, or any of them,
whether written or oral, except as expressly provided herein. Each of the
parties acknowledges that neither party nor any agent or attorney of either
party has made any promise, representation or warranty, express or implied,
not contained in this Agreement to induce the other party to execute this
Agreement in reliance upon any such promise, representation or warranty not
contained herein.
3.18 All parties agree to cooperate fully and to execute any and all
supplementary documents and to take all additional actions that may be
necessary or appropriate to give full force to the basic terms and intent of
this Agreement and which are not inconsistent with its terms.
(signatures on following page)
Page 9 of 10
<PAGE>
DATED: 2/5/98 /s/ ALAN H. HUNT
----------------------------- ------------------------
Alan H. Hunt
DATED: 2/5/98 PEREGRINE SYSTEMS, INC.
-----------------------------
By: /s/ RICHARD T. NELSON
----------------------------------
Richard T. Nelson
Its: Vice President
Page 10 of 10
<PAGE>
EXHIBIT 11.1
PEREGRINE SYSTEMS, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------- --------
1996 1997
-------- --------
<S> <C> <C>
Diluted:
Net income................................................. $ 1,638 $ 2,779
-------- --------
Weighted average number of shares and equivalent
shares outstanding:
Weighted average number of shares outstanding.......... 12,904 18,039
Effect of stock options................................ 1,615 2,071
-------- --------
14,519 20,110
-------- --------
Net income per share...................................... $ 0.11 $ 0.14
-------- --------
-------- --------
Basic:
Net income................................................ $ 1,638 $ 2,779
-------- --------
Weighted average number of shares outstanding............. 12,904 18,039
-------- --------
Net income per share...................................... $ 0.13 $ 0.15
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------- --------
1996 1997
-------- --------
<S> <C> <C>
Diluted:
Net income (loss)......................................... $ 2,218 $(28,798)
-------- --------
Weighted average number of shares and equivalent
Shares outstanding:
Weighted average number of shares outstanding........... 12,901 15,510
Effect of stock options................................. 1,537 -
-------- --------
14,438 15,510
-------- --------
Net income (loss) per share............................... $ 0.15 $ (1.86)
-------- --------
-------- --------
Basic:
Net income................................................ $ 2,218 $(28,798)
-------- --------
Weighted average number of shares outstanding............. 12,901 15,510
-------- --------
Net income (loss) per share............................... $ 0.17 $ (1.86)
-------- --------
-------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,503
<SECURITIES> 0
<RECEIVABLES> 17,325
<ALLOWANCES> (462)
<INVENTORY> 0
<CURRENT-ASSETS> 35,905
<PP&E> 11,332
<DEPRECIATION> (6,477)
<TOTAL-ASSETS> 44,962
<CURRENT-LIABILITIES> 23,575
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 17,757
<TOTAL-LIABILITY-AND-EQUITY> 44,962
<SALES> 41,727
<TOTAL-REVENUES> 41,727
<CGS> 6,941
<TOTAL-COSTS> 67,621
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 242
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> (25,286)
<INCOME-TAX> 3,512
<INCOME-CONTINUING> (28,798)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,798)
<EPS-PRIMARY> (1.86)
<EPS-DILUTED> (1.86)
</TABLE>
