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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER: 0-2222209
PEREGRINE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3773312
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
12670 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(619) 481-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such requirements for the past 90 days.
YES X NO ___
The number of issued and outstanding shares of the Registrant's
Common Stock, $0.001 par value, as of June 30, 1998 was 19,383,570.
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PEREGRINE SYSTEMS, INC.
EXPLANATORY NOTE
In October 1998, the Securities and Exchange Commission issued a
letter to the American Institute of Certified Public Accountants citing its
views on the proper procedures and practices that should be followed in
purchase accounting for acquired in-process research and development related
to corporate acquisitions. In this letter and in following public statements,
the Commission has affirmed its intention to require all companies to conform
to these announced views where purchase accounting for acquired in-process
research and development is involved.
As of the date of this amendment, the Company has completed five
corporate acquisitions which have been accounted for using the purchase
method of accounting and which have resulted in charges associated with the
valuation of acquired in-process research and development. These acquisitions
include United Software, Inc. during the second quarter of fiscal 1998,
Innovative Tech Systems, Inc. and certain technology and other assets and
liabilities of International Software Solutions, both in the second quarter
of fiscal 1999, Prototype, Inc. in the fourth quarter of fiscal 1999 and
FPrint UK Ltd. in the first quarter of fiscal 2000. The Company believes that
its periodic reports filed in fiscal 1998 and 1999, which include charges for
in-process research and development resulting from those acquisitions that
have been reported to date, were made in accordance with generally accepted
accounting principles and established industry practices at the time.
However, in response to and in conformance with the Commission's announced
guidelines on purchase accounting for acquired in-process research and
development, the Company is restating its financial results for all periods
extending back to the period ended September 30, 1997.
This amendment to the Company's Quarterly Report on Form 10-Q,
which sets forth the Company's restated financial results for the period,
does not otherwise attempt to update the information included herein beyond
the original filing date of the report.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<C> <S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
(unaudited) and March 31, 1998................................. 3
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 1998 and 1997 (unaudited).......... 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 1998 and 1997 (unaudited).......... 5
Notes to condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 9
PART II. OTHER INFORMATION
- -------- -----------------
Item 2. Changes in Securities........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders............. 21
Item 6. Exhibits and Reports on Form 8-K................................ 21
Signatures................................................................. 22
</TABLE>
2
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PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
RESTATED - SEE NOTE 1
---------------------
MARCH 31, JUNE 30,
1998 1998
--------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................ $14,950 $13,216
Short-term investments........................................... 7,027 7,800
Accounts receivable, net of allowance for doubtful accounts of
$485 and $545, respectively.................................... 16,761 17,929
Deferred tax assets.............................................. 7,297 7,297
Other current assets............................................. 2,905 5,053
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Total current assets........................................ 48,940 51,295
Property and equipment, net........................................... 5,455 7,177
Intangible assets and other........................................... 29,173 27,658
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$83,568 $86,130
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------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. $ 2,337 $ 4,351
Accrued expenses................................................. 11,103 10,914
Deferred revenue................................................. 11,570 10,222
Current portion of long-term debt................................ 151 251
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Total current liabilities.................................. 25,161 25,738
Long-term debt, net of current portion................................ 966 449
Deferred revenue, net of current portion.............................. 1,802 1,879
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Total liabilities.......................................... 27,929 28,066
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Stockholders' Equity:
Preferred stock, $0.001 par value, 5,000 shares authorized no
shares issued or outstanding................................... - -
Common Stock, $0.001 par value, 50,000 shares authorized,
18,790 and 19,384 shares issued and outstanding, respectively... 19 20
Additional paid-in capital...................................... 74,351 75,705
Accumulated deficit............................................. (16,423) (14,587)
Unearned portion of deferred compensation....................... (1,493) (1,404)
Cumulative translation adjustment............................... (553) (599)
Treasury stock (at cost)........................................ (262) (1,071)
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Total stockholders' equity............................... 55,639 58,064
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$83,568 $86,130
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
3
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PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
RESTATED - SEE NOTE 1
---------------------
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1998
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<S> <C> <C>
Revenues:
Licenses............................................... $ 6,328 $13,882
Maintenance and services............................... 4,687 7,868
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Total revenues...................................... 11,015 21,750
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Costs and Expenses:
Cost of licenses....................................... 59 71
Cost of maintenance and services....................... 1,781 4,455
Sales and marketing.................................... 4,317 8,142
Research and development............................... 1,644 2,393
General and administrative............................. 1,143 1,787
Amortization of intangible assets...................... - 1,584
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Total costs and expenses............................ 8,944 18,432
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Operating income.......................................... 2,071 3,318
Interest income and other, net............................ 178 260
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Income before income taxes................................ 2,249 3,578
Income tax expense........................................ 832 1,742
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Net Income.......................................... $ 1,417 $ 1,836
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Net income per share - basic:
Net income per share...................................... $ 0.10 $ 0.10
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Weighted average common shares outstanding................ 14,493 19,235
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Net income per share - diluted:
Net income per share...................................... $ 0.08 $ 0.09
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------- -------
Weighted average common and common equivalent shares
outstanding............................................... 17,567 20,478
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
RESTATED - SEE NOTE 1
---------------------
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1998
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<S> <C> <C>
Cash flow from operating activities:
Net income................................................. $ 1,417 $ 1,836
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 346 2,045
Increase (decrease) in cash resulting from changes in:
Accounts receivable................................... (74) (1,168)
Financed receivables.................................. 205 -
Deferred tax assets................................... 777 -
Other current assets.................................. (384) (2,148)
Accounts payable...................................... (222) 2,014
Accrued expenses...................................... (172) (189)
Deferred revenue...................................... 817 (1,271)
Other................................................. 537 28
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3,247 1,147
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Net cash used by discontinued business................ (170) -
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Net cash provided by operating activities......... 3,077 1,147
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Cash flows from investing activities:
Purchases of short-term investments........................ - (27,573)
Maturities of short-term investments....................... - 26,800
Purchases of property and equipment........................ (305) (2,191)
Proceeds from sale of product line......................... 250 -
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Net cash used in investing activities............. (55) (2,964)
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Cash flows from financing activities:
Repayment on bank line of credit........................... (1,974) -
Repayments of long-term debt............................... (1,666) (417)
Issuance of common stock................................... 18,126 1,356
Treasury stock purchased................................... (262) (809)
Principal payments under capital lease obligation.......... (108) -
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Net cash provided by financing activities............. 14,116 130
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Effect of exchange rate changes on cash....................... (49) (47)
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Net increase (decrease) in cash and cash equivalents.......... 17,089 (1,734)
Cash and cash equivalents, beginning of period................ 305 14,950
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Cash and cash equivalents, end of period...................... $17,394 $13,216
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------- -------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest............................................ $ 10 $ 5
Income taxes........................................ $ - $ 20
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of June 30,
1998, the condensed consolidated statements of operations for the three month
periods ended June 30, 1998 and 1997, and the condensed consolidated statements
of cash flows for the three month periods ended June 30, 1998 and 1997 have been
restated in the applicable period to reflect a change in the original accounting
or the purchase price allocation related to the September 1997 acquisition of
United Software, Inc. The 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/A filed for the
year ended March 31, 1998, which provides further information regarding the
Company's significant accounting policies and other financial and operating
information. Interim operating results are not necessarily indicative of
operating results for the full year or any other future period. The consolidated
condensed financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
The following table provides the effect of previously reported
condensed consolidated statements of operations for the three month period ended
June 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
STATEMENT OF OPERATIONS JUNE 30, 1998
----------------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS.)
JUNE 30, 1998 JUNE 30, 1998
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<S> <C> <C>
(As reported) (Restated)
Total revenues $ 21,750 $ 21,750
Costs and expenses 16,848 16,848
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Income from operations excluding acquired in-
process research and development costs and
amortization of purchased intangible assets 4,902 4,902
Amortization of purchased intangible assets 193 1,584
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Income from operations excluding acquired in-process
research and development costs 4,709 3,318
Acquired in-process research and development costs - -
-------- --------
Income from operations 4,709 3,318
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Other income, net 260 260
Income tax expense 1,742 1,742
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Net income $ 3,227 $ 1,836
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Basic net income per share $ 0.17 $ 0.10
Diluted net income per share $ 0.16 $ 0.09
</TABLE>
6
<PAGE>
NOTE 2. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS 128
replaced the previously reported primary and fully diluted income per share with
basic and diluted income per share. Unlike primary income per share, basic
income per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted income per share is similar to the previously
reported fully diluted income per share.
Basic income per share is computed using the weighted average number of
common shares outstanding. Diluted income per share is computed using the
weighted average number of common shares and common share equivalents
outstanding during the period. Dilutive common share equivalents consist of
employee stock options using the treasury method.
The following table sets forth the computation of basic and diluted
income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
--------------------------
1997 1998
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(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Numerator:
Net income.............................................................. $ 1,417 $ 1,836
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Denominator:
Denominator for basic income per share, weighted average shares.......... 14,493 19,235
Effective of dilutive securities:
Employee stock options................................................... 3,074 1,243
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Dilutive potential common shares......................................... 17,567 20,478
Denominator for diluted income per share................................. 17,567 20,478
------- -------
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Net income per share - basic............................................. $ 0.10 $ 0.10
------- -------
------- -------
Net income per share - diluted........................................... $ 0.08 $ 0.09
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</TABLE>
NOTE 3. REVENUE RECOGNITION
As of April 1, 1998, the Company adopted AICPA SOP 97-2, Software
Revenue Recognition, as amended by EITF 98-4 which was effective for
transactions that the Company entered into in the fiscal year 1998. Prior years
were not restated. The adoption of SOP 97-2 did not have a material adverse
effect on the revenues or income for the three months ended June 30, 1998.
NOTE 4. COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards 130 "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
statement had no material impact on the Company's net income or stockholders'
equity, therefore no adjustments will be reported in stockholders' equity.
7
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NOTE 5. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company will be required to adopt Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Statement 131 superseded
FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise
effective fiscal 1999. Statement 131 established standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. Statement 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of Statement 131 will not
affect the results of operations or financial position, but may affect the
disclosure of the segment information that will be disclosed in the Annual
Report on Form 10-K for the year ended March 31, 1999.
NOTE 6. ACQUISITION
On July 30, 1998, the Company completed the acquisition of Innovative
Tech Systems, Inc. The acquisition was completed as a stock-for-stock exchange
at the ratio of 0.2341 shares of Peregrine Systems Common Stock for each share
of Innovative Tech Common Stock. In addition, certain outstanding warrants to
acquire Innovative Tech Common Stock were exchanged for and converted into
shares of Peregrine Common on a net issuance basis, based on such exchange ratio
and the trading price of Peregrine Common Stock prior to the closing of the
acquisition. Based on the measurement date of the transaction, consideration
given for the acquisition is expected to be $72.9 million plus acquisition
related costs and net liabilities assumed. The acquisition will be accounted for
as a purchase, and the Company expects to take a charge related to the purchase
of in-process research and development in the quarter ending September 30, 1998,
of substantially all of the acquisition price.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THIS "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS REPORT.
OVERVIEW
The Company develops, markets, and supports an integrated suite of
software applications that automates the management of complex, enterprise-wide
information and infrastructure assets. In 1995, the Company commenced sales of
SERVICECENTER, the Company's Enterprise Service Desk product suite. During
fiscal 1998 the Company expanded the strategic concept of its product line
implementing its Infrastructure Management strategy and executing on that
strategy with its acquisition in September 1997 of United Software, Inc.,
including its wholly-owned subsidiary Apsylog, S.A. ("Apsylog Acquisition"). As
a result of the Apsylog Acquisition, the Company acquired its ASSETCENTER asset
management product suite. SERVICECENTER and ASSETCENTER are currently available
for the Windows NT and UNIX platforms, and SERVICECENTER continues to be
available for the MVS platform.
Since the release of SERVICECENTER in July 1995, and until the Apsylog
Acquisition, SERVICECENTER accounted for substantially all of the Company's
license revenues. Since the Apsylog Acquisition, SERVICECENTER and ASSETCENTER
together have accounted for substantially all of the Company's license revenues.
During fiscal 1998, the Company determined that customer needs required
a more comprehensive solution for control and management of their infrastructure
assets, including availability of assets, minimizing investments and expense,
consolidating data, and interfacing to enterprise applications. Accordingly, the
Company refocused its marketing strategy and product positioning to focus on
this Infrastructure Management strategy. The Company's focus on the
Infrastructure Management strategy, the Company's rapid growth, and the Apsylog
Acquisition have resulted in continuing efforts to rebuild the Company's senior
management team, redefine the product development strategy, establish a
comprehensive marketing strategy, and strengthen the Company's financial and
budgeting processes.
On July 30, 1998, the Company completed the acquisition of
Innovative Tech Systems, Inc., a provider of facilities management software
systems ("Innovative"). The Company acquired Innovative to further its
Infrastrusture Management strategy by coupling the Company's SERVICECENTER and
ASSETCENTER products, which focus on the users information technology
infrastructure, with Innovative's SPAN-FM product, which assist users to track
and manage their physical plant, facilities, and related assets.
The Company's revenues are derived from product licensing, maintenance
and services. License fees are generally due upon the granting of the license
and typically include a one-year maintenance period as part of the license
agreement. The Company also provides ongoing maintenance services, which include
technical support and product enhancements, for an annual fee based upon the
current price of the product. The Company has sold its original PNMS software to
a sizable installed base of customers, many of whom have recently transitioned
to SERVICECENTER. The Company's installed customer base has generated a
consistent level of maintenance revenues.
Revenues from license agreements are recognized currently, provided
that all of the following conditions are met: a noncancelable license agreement
has been signed, the product has been delivered, there are no material
uncertainties regarding customer acceptance, collection of the resulting
receivable is deemed probable, and no other significant vendor obligations
exist. Revenues from post-contract support services are recognized ratably over
the term of the support period, generally one year. Maintenance revenues which
are bundled with license agreements are unbundled using vendor-specific
objective evidence. Consulting revenues are primarily related to implementation
services most often performed on a time and material basis under separate
service agreements for the installation of the Company's products. Revenues from
consulting and training services are recognized as the respective services are
performed.
9
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The Company currently derives substantially all of its license revenues
from the sale of SERVICECENTER and ASSETCENTER and expects them to account for a
significant portion of the Company's revenues for the foreseeable future. As a
result, the Company's future operating results are dependent upon continued
market acceptance of the SERVICECENTER and ASSETCENTER product suites, including
future enhancements, as well as Span-FM. Factors adversely affecting the pricing
of, demand for or market acceptance of the SERVICECENTER, ASSETCENTER, or
SPAN-FM product suites, such as competition or technological change, could have
a material adverse effect on the Company's business, operating results, and
financial condition.
The Company conducts business overseas in a number of foreign
currencies, principally the British Pound, the Deutsche Mark and the French
Franc. These currencies have been relatively stable against the U.S. dollar for
the past several years. As a result, foreign currency fluctuations have not had
a significant impact on the Company's revenues or results of operations.
Although the Company currently derives no revenues from highly inflationary
economies, the Company is expanding its presence in international markets
outside Europe, including the Pacific Rim and Latin America, whose currencies
have tended to fluctuate more relative to the U.S. Dollar. There can be no
assurance that European currencies will remain stable relative to the U.S.
dollar or that future fluctuations in the value of foreign currencies will not
have a material adverse effect on the Company's business, operating results and
financial condition. The Company has implemented a foreign currency forward
hedging program. The hedging program consists primarily of using 30-day
forward-rate currency contracts. Currency contracts are in accordance with SFAS
No. 52 and receive hedge accounting treatment. Accordingly, to the extent
properly hedged by obligations denominated in local currencies, the Company's
foreign operations remain subject to the risks of future foreign currency
fluctuations, and there can be no assurances that the Company's hedging
activities will adequately protect the Company against such risk.
Although the Company has been expanding its presence in the Pacific Rim
over the last year, its Pacific Rim sales activity has not been material.
Accordingly, the Company's operations and financial conditions have not been
materially impacted by the recent Asian financial crisis.
10
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
consolidated statements of operations data as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1998
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses 57.4% 63.8%
Maintenance and services 42.6 36.2
----- -----
Total revenues 100.0 100.0
Costs and expenses:
Cost of licenses 0.5 0.4
Cost of maintenance and services 16.2 20.5
Sales and marketing 39.2 37.4
Research and development 14.9 11.0
General and administrative 10.4 8.2
Amortization of intangible assets - 7.3
----- -----
Total costs and expenses 81.2 84.8
----- -----
Operating income 18.8 15.2
----- -----
Interest income and other 1.6 1.2
----- -----
Income before income taxes 20.4 16.4
----- -----
Income tax expense 7.5 8.0
----- -----
Net income 12.9% 8.4%
----- -----
----- -----
</TABLE>
THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
REVENUES
Total revenues were $21.8 million and $11.0 million in the first
quarter of fiscal 1999 and 1998, respectively, representing a period-to-period
increase of 97%.
LICENSES. License revenues were $13.9 million and $6.3 million in the
first quarter of fiscal 1999 and 1998, respectively, representing 64% and 57% of
total revenues in the respective periods. The increases in license revenues are
attributable to increased demand for new licenses of SERVICECENTER (and
following the Apsylog Acquisition, licenses for ASSETCENTER), additional seats
purchased by existing SERVICECENTER customers, higher average transaction sizes,
more effective corporate marketing programs, improved sales force productivity,
expansion of the Company's domestic and international sales forces, and the
effect of combining Apsylog's operations since the Apsylog Acquisition in
September 1997.
MAINTENANCE AND SERVICES. Maintenance and services revenues were $7.9
million and $4.7 million in the first quarter of fiscal 1999 and 1998,
respectively, representing 36% and 43% of total revenues in the respective
periods. The dollar increases are attributable to renewals of maintenance
agreements from the Company's expanded installed base of customers, maintenance
revenues included as part of new licenses, and an increased number of consulting
engagements related to implementation of software from initial license
agreements.
COSTS AND EXPENSES
COST OF LICENSES. Cost of licenses was $71,000 and $59,000 in the first
quarter of fiscal 1999 and 1998, respectively, each representing less than 1% of
total license revenues in the respective periods.
COST OF MAINTENANCE AND SERVICES. Cost of maintenance and services
revenues was $4.5 million and $1.8 million in the first quarter of fiscal 1999
and 1998, respectively, representing 57% and 38% of total maintenance and
service revenues in
11
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the respective periods. The dollar increase in the first quarter of fiscal
1999 over 1998 is attributable to an increase in customer support personnel
and professional services personnel in connection with the corresponding
increase in professional services revenue and the effect of combining
Apsylog's operations since the Apsylog Acquisition in September 1997. Cost of
maintenance and services increased as a percentage of related revenues
because of increased labor costs.
SALES AND MARKETING. Sales and marketing expenses were $8.1 million and
$4.3 million in the first quarter of fiscal 1999 and 1998, respectively,
representing 37% and 39% of total revenues in the respective periods. The dollar
increase in sales and marketing expenses is attributable to the significant
expansion of both the North American and international sales forces, increase in
marketing personnel, the effect of combining Apsylog's operations since the
Apsylog Acquisition in September 1997, and the effect of moderate operating
expense increases. Sales and marketing have decreased as a percentage of total
revenues for the respective periods as a result of revenues increasing at a
faster rate. If the Company experiences a decrease in sales force productivity
or for any other reason a decline in revenues, it is likely that operating
margins will decline as well.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.4
million and $1.6 million in the first quarter of fiscal 1999 and 1998,
respectively, representing 11% and 15% of total revenues in the respective
periods. The dollar increase from the first quarter of fiscal 1998 to the first
quarter of fiscal 1999 is due primarily to the increased cost of product author
commissions, an increase in the number of personnel in the Research and
Development department, and effect of combining Apsylog's operations since the
Apsylog Acquisition in September 1997. Research and development expenses have
decreased as a percentage of total revenues from the first quarter of fiscal
1998 to the first quarter of fiscal 1999 as a result of revenues increasing at a
faster rate.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1.8 million and $1.1 million in the first quarter of fiscal 1999 and 1998,
respectively, representing 8% and 10% of total revenues in the respective
periods. The dollar increase from fiscal 1998 to 1999 are attributable primarily
to costs associated with administrative personnel additions to support the
Company's growth, management restructuring, and the effect of combining
Apsylog's operations since the Apsylog Acquisition in September 1997.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets of
$1.6 million was incurred in the first quarter of fiscal 1999 in connection with
the Apsylog Acquisition.
PROVISION FOR INCOME TAXES
Income tax expense for the first fiscal quarter of 1999 amounted to
$1.7 million compared with $0.8 million in the comparable quarter of fiscal
1998. This increase results from the $2.7 million dollar increase in income
before taxes. Excluding the effect of expensing amortization of intangible
assets, the effective tax rates for the first quarters of fiscal 1999 and fiscal
1998 were 34% and 37%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Until April 1997, Peregrine financed its operations through bank
borrowings and private sales of the Company's Common Stock. At June 30, 1998 the
Company had an aggregate cash and short-term investments balance of $21.0
million due primarily to the Company's April 1997 initial public offering
proceeds and cash generated by operations.
The Company believes that the net proceeds from its initial public
offering in April 1997, together with its current cash and short-term
investments balances, and cash flow from operations will be sufficient to meet
its working capital requirements for at least the next 12 months. Although
operating activities may provide cash in certain periods, to the extent
Peregrine experiences growth in the future, Peregrine anticipates that its
operating and investing activities may use cash. Consequently, any such future
growth may require Peregrine to obtain additional equity or debt financing,
which may not be available on commercially reasonable terms or which may be
dilutive.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING
STATEMENTS AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:
HISTORY OF OPERATING LOSSES. Through June 30, 1998, the Company has
recorded cumulative net losses of approximately $14.6 million, including
approximately $7.0 million related to the write-off of acquired in-process
research and development in connection with the Apsylog Acquisition. The Company
anticipates recognizing a significant net loss in the quarter ended September
30, 1998 related to the write-off of acquired in-process research and
development in connection with the acquisition of Innovative. In recent years,
the product lines of both the Company and Apsylog have changed substantially.
The Company's SERVICECENTER product, from which the Company derived
substantially all of its license revenues until the acquisition of ASSETCENTER,
only began shipping in mid-1995. Apsylog's ASSETCENTER product only began
shipping in mid-1996. As a result, prediction of the Company's future operating
results is difficult, if not impossible. Although the Company achieved
profitability during the years ended March 31, 1997 and 1998 (excluding the
impact of the $7.0 million charge related to acquired in-process research and
development in connection with the Apsylog Acquisition), there can be no
assurance that the Company will be able to remain profitable on a quarterly or
annual basis. In addition, the Company does not believe that the growth in
revenues it has experienced in recent years is indicative of future revenue
growth or future operating results.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; LENGTHY SALES CYCLE;
SEASONALITY. The Company's quarterly operating results have varied significantly
in the past and may vary significantly in the future depending upon a number of
factors, many of which are beyond the Company's control. These factors include,
among others, (i) the ability of the Company to develop, introduce and market
new and enhanced versions of its software on a timely basis; (ii) market demand
for the Company's software; (iii) the size, timing and contractual terms of
significant orders; (iv) the timing and significance of new software product
announcements or releases by the Company or its competitors; (v) changes in
pricing policies by the Company or its competitors; (vi) changes in the
Company's business strategies; (vii) budgeting cycles of its potential
customers; (viii) changes in the mix of software products and services sold;
(ix) changes in the mix of revenues attributable to domestic and international
sales; (x) the impact of acquisitions of competitors; (xi) seasonal trends;
(xii) the cancellations of licenses or maintenance agreements; (xiii) product
life cycles; (xiv) software defects and other product quality problems; (xv) and
personnel changes. The Company has historically operated with little or no
backlog and has often recognized a substantial portion of its revenues in the
last month or weeks of a quarter. As a result, license revenues in any quarter
are substantially dependent on orders booked and shipped in the last month or
weeks of that quarter. Due to the foregoing factors, quarterly revenues and
operating results are not predictable with any significant degree of accuracy.
In particular, the timing of revenue recognition can be affected by many
factors, including the timing of contract execution and delivery. The timing
between initial customer contact and fulfillment of criteria for revenue
recognition can be lengthy and unpredictable, and revenues in any given quarter
can be adversely affected as a result of such unpredictability. In the event of
any downturn in potential customers' businesses or the economy in general,
planned purchases of the Company's products may be deferred or canceled, which
could have a material adverse effect on the Company's business, operating
results and financial condition.
The license of the Company's software generally requires the Company to
engage in a sales cycle that typically takes approximately six to nine months to
complete. The length of the sales cycle may vary depending on a number of
factors over which the Company may have little or no control, including the size
of the transaction and the level of competition which the Company encounters in
its selling activities. In addition, the sales cycle is typically extended 90
days for product sales through indirect channels. During the sales cycle, the
Company typically provides a significant level of education to prospective
customers regarding the use and benefits of the Company's products. Any delay in
the sales cycle of a large license or a number of smaller licenses could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company's business has experienced and is expected to continue to
experience seasonality. The Company's revenues and operating results in its
December quarter typically benefit from purchase decisions made by the large
concentration of customers with calendar year-end budgeting requirements, while
revenues and operating results in the March quarter typically benefit from the
efforts of the Company's sales force to meet fiscal year-end sales quotas. In
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addition, the Company is currently attempting to expand its presence in
international markets, including Europe, the Pacific Rim and Latin America.
International revenues comprise a significant percentage of the Company's total
revenues, and the Company may experience additional variability in demand
associated with seasonal buying patterns in such foreign markets. In particular,
the quarter ended September 30 tends to reflect the effects of summer slowing of
international business activity, particularly in Europe.
PRODUCT CONCENTRATION. The Company currently derives substantially all
of its license revenues from the sale of its SERVICECENTER and ASSETCENTER
suites of applications and expects them to account for a significant portion of
the Company's revenues for the foreseeable future. The Company's future
operating results are dependent upon continued market acceptance of
SERVICECENTER and ASSETCENTER, including future enhancements as well as SPAN-FM.
Factors adversely affecting the pricing of, demand for, or market acceptance of
SERVICECENTER, ASSETCENTER, or SPAN-FM such as competition or technological
change, could have a material adverse effect on the Company's business, results
of operations, and financial condition.
DEPENDENCE ON MARKET ACCEPTANCE OF INFRASTRUCTURE MANAGEMENT SOFTWARE
SOLUTIONS. Until recently, the Company's product strategy has focused on
integrating a broad array of IT management applications with other traditional
internal help desk applications to create an Enterprise Service Desk capable of
managing multiple aspects of an enterprise's IT structure. In recent years, the
Company's license revenues have derived principally from sales of its
SERVICECENTER suite of IT management applications. In September 1997, the
Company broadened its IT infrastructure management product suite by acquiring
ASSETCENTER, an asset management product line, through the Apsylog Acquisition.
In addition, the Company has increased the functionality of SERVICECENTER to
manage aspects of the enterprise infrastructure not necessarily related to IT.
In July 1998, the Company acquired Innovative Tech Systems, Inc. ("Innovative"),
a provider of facilities management software. Innovative's product strategy has
focused on providing building and facilities management software applications,
and its license revenues have consisted entirely of sales of its SPAN-FM
applications suite. In acquiring Innovative, the Company intends to further
broaden its product line beyond traditional IT infrastructure management to
offer a more comprehensive product suite capable of managing a business
enterprise's IT infrastructure, its physical plant and facilities, its
communications infrastructure, and its distribution systems.
In recent years, the market for enterprise software solutions has been
characterized by rapid technological change, frequent new product announcements
and introductions, and evolving industry standards. In response to advances in
technology, customer requirements have become increasingly complex, resulting in
industry consolidation of product lines offering similar or related
functionality. In particular, the Company believes that a market for integrated
enterprise-wide infrastructure management solutions, including applications for
IT management, asset management, building and facilities management,
communications resource management, and distribution systems management, is
evolving from existing requirements for specific IT management solutions.
Nevertheless, the existence of such a market is unproven. Any failure of such a
market to develop would have a material adverse effect on the Company's
business, results of operations, or financial condition. Regardless of the
development of a market for integrated infrastructure management solutions,
factors adversely affecting the pricing of, demand for, or market acceptance of
one or more of SERVICECENTER or ASSETCENTER, or SPAN-FM could have a material
adverse effect on the Company's business, results of operations, and financial
condition.
INTEGRATION OF INNOVATIVE TECH SYSTEMS INTO THE COMPANY'S BUSINESS. The
acquisition of Innovative, which was completed in July 1998, will require
integration of two geographically separated companies that have previously
operated independently. The Company believes that the acquisition will further
its strategy to provide customers with a complete infrastructure management
software solution. Nevertheless, no assurance can be given that difficulties
will not be encountered in integrating the product offerings and operations of
Innovative Tech with those of the Company, that the Company and Innovative will
successfully complete and commercialize new products currently in development by
Innovative or develop any new products through Innovative, that the marketing,
distribution, or other operational benefits and efficiencies anticipated from
integration of the respective businesses and products of Innovative will be
achieved, or that Innovative employee morale will not be adversely affected as a
result of the acquisition and the resulting integration. Such integration could
result in a diversion of management's time and attention, which could have a
material adverse effect on revenues and results of operations of the Company.
The difficulties of integration may be increased by the necessity of
coordinating geographically separated organizations or of integrating personnel
with disparate business backgrounds and different corporate cultures. There can
be no assurance that the Company will retain its key personnel,
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that the combined engineering teams will successfully cooperate and realize
any technological benefits, that Innovative will benefit from the broader
distribution and marketing opportunities available through the Company or
that the Company will benefit from the broader product offerings available,
or that the Company will realize any of the other anticipated benefits of the
acquisition. Any failure to integrate the businesses and technologies of the
companies successfully or any failure to realize the anticipated benefits of
the acquisition could have a material adverse effect on the business, results
of operations, and financial condition of the Company.
In addition, the consummation of the acquisition could result in the
cancellation, termination, or nonrenewal of arrangements with Innovative's
suppliers, distributors, or customers, or the loss of certain key employees, or
the termination of negotiations or delays in ordering by prospective customers
of Innovative as a result of uncertainties that may be perceived to result from
the acquisition. For example, customers or potential customers of Innovative who
utilize enterprise service desk, asset management, or other infrastructure
management software, including help desk software, marketed by competitors of
Innovative could terminate or delay orders due to perceived uncertainties over
Innovative's continued commitment to provide products and enhancements or
support services for its products used in conjunction with such competing
enterprise software. Any significant amount of cancellations, terminations,
delays, or nonrenewals of arrangements with either company or loss of key
employees or termination of negotiations or delays in ordering could have a
material adverse effect on the business, results of operations, and financial
condition of the Company, particularly in the quarter ending September 30,1998
and other near-term quarters.
RISKS ASSOCIATED WITH OTHER PEREGRINE ACQUISITIONS. In addition to the
Apsylog Acquisition and the acquisition of Innovative, the Company may make
acquisitions of, or significant investments in, businesses that offer
complementary products, services, and technologies and that further the
Company's strategy of providing an integrated infrastructure management software
solution. There can be no assurances, however, that the Company will make any
additional acquisitions in the future. Any such future acquisitions or
investments would present risks commonly encountered in acquisitions of
businesses. Such risks include, among others, the difficulty of assimilating the
technology, operations, or personnel of the acquired business, the potential
disruption of the Company's on-going businesses, the inability of management to
maximize the financial and strategic position of the Company through the
successful incorporation of acquired personnel, clients, or technologies, the
maintenance of uniform standards, controls, procedures, and policies, and the
impairment of relationships with employees and clients as a result of any
integration of new businesses and management personnel. The Company expects that
future acquisitions, if any, could provide for consideration to be paid in cash,
shares of Company Common Stock, or a combination of cash and Company Common
Stock. In the event of such an acquisition or investment, the factors described
herein could have a material adverse effect on the Company's business, results
of operation, and financial condition.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL. The
Company's success will depend to a significant extent on the continued service
of its senior management and certain other key employees of the Company,
including selected sales, consulting, technical and marketing personnel. None of
the Company's employees, including its senior management, is bound by an
employment or non-competition agreement, and the Company does not maintain key
man life insurance on any employee. The loss of the services of one or more of
the Company's executive officers or key employees or the decision of one or more
of such officers or employees to join a competitor or otherwise compete directly
or indirectly with the Company could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
several of the Company's executive officers, including its President and Chief
Executive Officer, Chief Financial Officer, and certain operating vice
presidents, have been employed by the Company for a relatively short period of
time. Since joining the Company, the new management team has devoted substantial
effort in refocusing the Company's product, sales and marketing strategies. In
connection with such changes, the Company restructured its sales and marketing
departments, which resulted in the replacement of a significant number of
employees. Although management believes that this restructuring has benefited
the Company, many of the Company's current employees have been with the Company
for only a limited period of time.
In addition, the Company believes that its future success will depend
in large part on its ability to attract and retain additional highly skilled
technical, sales, management and marketing personnel. Competition for such
personnel in the computer software industry is intense, and the Company has at
times in the past experienced difficulty in recruiting qualified personnel. New
employees hired by the Company generally require substantial training in the use
and implementation of the Company's products. There can be no assurance that the
Company will be successful in attracting and retaining such
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personnel, and the failure to do so could have a material adverse effect on
the Company's business, operating results and financial condition.
The Company's ability to achieve anticipated revenues is also dependent
in part upon its ability to recruit and employ skilled technical professionals
from other countries. Any future shortage of qualified technical personnel who
are either United States citizens or otherwise eligible to work in the United
States could increase their reliance on foreign professionals. Many technology
companies have already begun to experience shortages of such personnel. Any
failure to attract and retain qualified personnel as necessary, including as a
result of limitations imposed by federal immigration laws and the availability
of visas issued thereunder, could have a material adverse effect on the business
and results of operations of the Company.
In particular, foreign computer professionals such as the type utilized
by the Company typically become eligible for employment by obtaining a
nonimmigrant visa commonly known as an H-1B. The Immigration Act of 1990 limits
the number of available H-1B visas to 65,000 per year. This limitation was
reached for the first time approximately one month prior to the federal
government's fiscal year ending September 30, 1997. In a notice published on May
11, 1998, the Immigration and Naturalization Service announced that the 65,000
annual limitation on H-1B visas had already been reached for the federal
government's fiscal year ending September 30, 1998. As a result, computer
professionals from other countries who need an H-1B visa in order to be eligible
for employment will not be eligible for employment in the United States until
after October 1, 1998 at the earliest. Currently, legislation is pending in the
United States Congress which, if passed in its present form, would increase the
number of H-1B visas available. It is impossible to predict whether such
legislation will ultimately become law. Likewise, it is impossible to predict
what effect any future changes in the federal immigration laws will have on the
business, results of operations, or financial condition of the Company.
COMPETITION. The market for the Company's products is highly
competitive, fragmented and subject to rapid technological change and frequent
new product introductions and enhancements. Competitors vary in size and in the
scope and breadth of the products and services offered. The Company encounters
competition from a number of sources, including (i) providers of internal help
desk software applications such as Remedy Corporation and Software Artistry,
Inc. (now a division of Tivoli Systems, Inc.); (ii) customer interaction
software companies such as Clarify Inc. and The Vantive Corporation, whose
products include internal help desk applications; (iii) information technology
and systems management companies such as IBM, Computer Associates International,
Inc., Network Associates, Inc. (recently formed as a result of the business
combination of McAfee Associates, Inc. and Network General Corporation), and
Hewlett-Packard Company through its acquisition of PROLIN; (iv) providers of
asset management and facilities management software; and (v) the internal
information technology departments of those companies with Infrastructure
Management requirements. Because barriers to entry in the software market are
relatively low, the Company anticipates additional competition from other
established and emerging companies as the market for enterprise infrastructure
management applications expands. In addition, current and potential competitors
have established or may in the future establish cooperative relationships among
themselves or with third parties, or large software companies could acquire or
establish alliances with smaller competitors of the Company. The Company expects
software industry consolidation to continue in the future, and it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. For example, the Company's ability to sell its
products depends in part on their compatibility with and support by providers of
system management products, including Tivoli, Computer Associates, and
Hewlett-Packard. Both Tivoli and Hewlett-Packard have recently acquired
providers of help desk software products. The decision of one or more providers
of system management products to close their systems to competing vendors like
the Company, or to bundle their infrastructure management and/or help-desk
software products with other products for enterprise licenses for promotional
purposes or as part of a long-term pricing strategy, could have an adverse
effect on the Company's ability to sell its products. Increased competition,
including increased competition as a result of acquisitions of help desk and
other infrastructure management software vendors by system management companies,
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, results of operations, and financial condition. Some of the Company's
current and many of its potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion, and sale of their products than the Company. There can
be no assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not have a material adverse effect on the Company's business,
results of operations, and financial condition.
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MANAGEMENT OF GROWTH. The Company's business has grown substantially in
recent periods, with total revenues increasing from $19.6 million in fiscal 1995
to $23.8 million in fiscal 1996 and to $35.0 million in fiscal 1997, and to
$61.9 million in fiscal 1998. If the Company is successful in achieving its
growth plans, including the integration of Apsylog and Innovative, such growth
is likely to place a significant burden on the Company's operating and financial
systems, resulting in increased responsibility for senior management and other
personnel within the Company. The Company's ability to compete effectively and
to manage future growth, if any, and its future operating results will depend in
part on the ability of its officers and other key employees to implement and
expand operational, customer support and financial control systems and to
expand, train and manage its employee base. In particular, in connection with
the acquisitions, the Company will be required to integrate additional personnel
and to augment or replace Innovative's existing financial and management
systems. Such integration could result in a disruption of operations of the
Company and could adversely affect the financial results of the Company. There
can be no assurance that the Company's existing management or any new members of
management will be able to augment or improve existing systems and controls or
implement new systems and controls in response to future growth, if any. The
Company's failure to do so could have a material adverse effect on the Company's
business, operating results and financial condition.
EXPANSION OF DISTRIBUTION CHANNELS. The Company has historically sold
its products through its direct sales force and a limited number of distributors
and has provided maintenance and support services through its technical and
customer support staff. In addition to continuing to invest in its direct sales
force, particularly in North America where it has recently opened several new
sales offices, the Company is currently investing and intends to continue to
invest significant resources in developing additional sales and marketing
channels through system integrators and original equipment manufacturers
("OEMs") and other channel partners. There can be no assurance that the Company
will be able to attract channel partners that will be able to market the
Company's products effectively and will be qualified to provide timely and
cost-effective customer support and service. To the extent the Company
establishes distribution through such indirect channels, its agreements with
channel partners may not be exclusive and such channel partners may also carry
competing product lines. Any failure by the Company to establish and maintain
such distribution relationships could have a material adverse effect on the
Company's business, operating results and financial condition.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. International sales
represented approximately 29% and 36% of the Company's total revenues in both
fiscal 1997 and fiscal 1998, respectively. The Company currently has
international sales offices in London, Paris, Frankfurt, Munich, Amsterdam and
Copenhagen. The Company believes that its continued growth and profitability
will require continued expansion of its international operations, particularly
in Europe, Latin America and the Pacific Rim. Accordingly, the Company intends
to expand its international operations and enter additional international
markets, which will require significant management attention and financial
resources. In addition, the Company's international operations are subject to a
variety of risks associated with conducting business internationally, including
fluctuations in currency exchange rates, longer payment cycles, difficulties in
staffing and managing international operations, problems in collecting accounts
receivable, seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world, increases in tariffs, duties, price
controls or other restrictions on foreign currencies, and trade barriers imposed
by foreign countries, any of which could have a material adverse effect on the
Company's business, results of operations, and financial condition. In
particular, recent instability in the Asian-Pacific economies and financial
markets, could have an adverse effect on the Company's operating results in
future quarters. In addition, the Company has only limited experience in
developing localized versions of its products and marketing and distributing its
products internationally and there can be no assurance that the Company will be
able to successfully localize, market, sell and deliver its products
internationally. The inability of the Company to expand its international
operations successfully and in a timely manner could have a material adverse
effect on the Company's business, results of operations and financial condition.
A significant portion of the Company's business is conducted in
currencies other than the U.S. dollar. Foreign currency transaction gains and
losses arising from normal business operations are credited to or charged
against earnings in the period incurred. As a result, fluctuations in the value
of the currencies in which the Company conducts its business relative to the
U.S. dollar have caused and will continue to cause currency transaction gains
and losses. Due to the substantial volatility of currency exchange rates, among
other factors, the Company cannot predict the effect of exchange rate
fluctuations upon future operating results. There can be no assurance that the
Company will not experience currency losses in the future. The Company has
recently implemented a foreign exchange hedging program, consisting principally
of purchases of one month forward-rate currency contracts. Notwithstanding such
a program, there can be no assurances
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that the Company's hedging activities will adequately protect the Company
against the risks associated with foreign currency fluctuations.
ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION. On January 1, 1999,
certain member states of the European Economic Community (the "EEC") will fix
their respective currencies to a new currency, the euro. On that day, the euro
will become a functional legal currency within these countries. During the next
three years, business in these EEC member states will be conducted in both the
existing national currency, such as the French Franc or Deutsche Mark, and the
euro. As a result, companies operating in or conducting business in EEC member
states will need to ensure that their financial and other software systems are
capable of processing transactions and properly handling these currencies,
including the euro. The Company's ASSETCENTER product was originally developed
for the European market and is capable of managing currency data measured in
euros. The Company is still assessing the impact that the euro will have on its
internal systems and the other products it sells, however. The Company will take
appropriate corrective actions based on the results of such assessment. The
Company has not yet determined the costs related to addressing this issue, and
there can be no assurance that this issue and its related costs will not have a
material adverse affect on the Company's business, results of operations, and
financial condition.
RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT RISKS. The markets
for the Company's products are subject to rapid technological change, changing
customer needs, frequent new product introductions, and evolving industry
standards that may render existing products and services obsolete. As a result,
the Company's position in its existing markets or other markets that it may
enter could be eroded rapidly by product advances. The life cycles of the
Company's products are difficult to estimate. The Company's growth and future
financial performance will depend in part upon its ability to enhance existing
applications, develop and introduce new applications that keep pace with
technological advances, meet changing customer requirements and respond to
competitive products. The Company's product development efforts are expected to
continue to require substantial investments. There can be no assurance that the
Company will have sufficient resources to make the necessary investments. The
Company has in the past experienced development delays, and there can be no
assurance that the Company will not experience such delays in the future. There
can be no assurance that the Company will not experience difficulties that could
delay or prevent the successful development, introduction or marketing of new or
enhanced products. In addition, there can be no assurance that such products
will achieve market acceptance, or that the Company's current or future products
will conform to industry requirements. The inability of the Company, for
technological or other reasons, to develop and introduce new and enhanced
products in a timely manner could have a material adverse effect on business,
results of operations, and financial condition of the Company.
Software products as complex as those offered by the Company may
contain errors that may be detected at any point in a product's life cycle. The
Company has in the past discovered software errors in certain of its products
and has experienced delays in shipment of products during the period required to
correct these errors. There can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found,
resulting in loss of, or delay in, market acceptance and sales, diversion of
development resources, injury to their reputation, or increased service and
warranty costs, any of which could have a material adverse effect on the
business, results of operations, and financial condition of the Company.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT. The
success of the Company will be, heavily dependent upon proprietary technology.
The Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary rights. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which provide
only limited protection. Despite precautions taken by the Company, it may be
possible for unauthorized third parties to copy aspects of its current or future
products or to obtain and use information that either regards as proprietary. In
particular, the Company may provide its respective licensees with access to its
data model and other proprietary information underlying its licensed
applications. There can be no assurance that such means of protecting their
proprietary rights will be adequate or that their competitors will not
independently develop similar or superior technology. Policing unauthorized use
of software is difficult and, while the Company is able to determine the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem. In addition, the laws of some foreign countries do
not protect the proprietary rights of the Company to the same extent as do the
laws of the United States. Litigation may be necessary in the future to enforce
their intellectual property rights, to protect trade
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secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the business, results
of operations, and financial condition of any or all of the Company.
The Company is not aware that any of its software product offerings
infringes the proprietary rights of third parties. There can be no assurance,
however, that third parties will not claim infringement with respect to current
or future products of the Company. The Company expects that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in their industry segment grows and the functionality
of products in different industry segments overlaps. Any such claims, with or
without merit, could be time consuming, result in costly litigation, cause
product shipment delays, or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on acceptable terms or at all, which could have a material adverse
effect on the business, results of operations, and financial condition of the
Company.
PRODUCT LIABILITY. The license agreements which the Company enters with
its customers typically contain provisions designed to limit exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in such license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of their
products may entail the risk of such claims, and there can be no assurance that
the Company will not be subject to such claims in the future. A product
liability claim brought against the Company could have a material adverse effect
on its respective businesses, results of operations, and financial condition.
CONTROL BY EXISTING STOCKHOLDERS. Based on shares outstanding as of May
31, 1998, the Company's officers, directors and their affiliates together
beneficially own approximately 58.6% of the outstanding shares of the Company
Common Stock. In particular, John J. Moores, Chairman of the Company Board, owns
approximately 49.4% of the outstanding shares of the Company Common Stock. As a
result, these stockholders will be able to control most matters requiring
stockholder approval, including the election of directors and the approval of
mergers, consolidations and sales of all or substantially all of the assets of
the Company. This may prevent or discourage potential bids to acquire the
Company unless the terms of acquisition are approved by such stockholders.
EFFECT OF CERTAIN COMPANY CHARTER PROVISIONS; LIMITATION OF LIABILITY
OF DIRECTORS; ANTITAKEOVER EFFECTS OF DELAWARE LAW. The Company is authorized to
issue 5,000,000 shares of undesignated Preferred Stock. The Company Board has
the authority to issue Preferred Stock in one or more series and to fix the
price, rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting a series or the designation of such series, without any further
vote or action by Peregrine's stockholders. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of delaying, deferring, or
preventing a change in control of the Company without further action by the
stockholders and may adversely affect the market price of the Common Stock and
the voting and other rights of the holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no current plans to issue any shares of
Preferred Stock.
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws eliminate the right of stockholders to act by written
consent without a meeting and specify certain procedures for nominating
directors and submitting proposals for consideration at stockholder meetings.
Such provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Company Board and in the policies formulated
by the Company Board and to discourage certain types of transactions which may
involve an actual or threatened change of control of the Company. Such
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal and, accordingly, could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. Such provisions are also intended to discourage certain tactics that
may be used in proxy fights but could, however, have the effect of discouraging
others from making tender offers for the Company's shares and, consequently, may
also inhibit fluctuations in the market price of the Company's Common Stock that
could result from actual or rumored takeover attempts. These provisions may also
have the effect of preventing changes in the management of the Company.
19
<PAGE>
The Company is subject to Section 203 of the Delaware General
Corporation Law (the "Antitakeover Law"), which regulates corporate
acquisitions. The Antitakeover Law prevents certain Delaware corporations,
including those whose securities are listed for trading on the Nasdaq National
Market, from engaging, under certain circumstances, in a "business combination"
with any "interested stockholder" for three years following the date that such
stockholder became an interested stockholder. For purposes of the Antitakeover
Law, a "business combination" includes, among other things, a merger or
consolidation involving Peregrine and the interested stockholder and the sale of
more than 10% of the Company's assets. In general, the Antitakeover Law defines
an "interested stockholder" as any entity or person beneficially owning 15% or
more of the outstanding voting stock of the Company and any entity or person
affiliated with or controlling or controlled by such entity or person. A
Delaware corporation may "opt out" of the Antitakeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from amendments approved
by the holders of at least a majority of the company's outstanding voting
shares. The Company has not "opted out" of the provisions of the Antitakeover
Law.
VOLATILITY OF TRADING PRICES. The Company completed its initial public
offering of Common Stock in April 1997, prior to which time no public market
existed for the Company's Common Stock. The market price of the Company's Common
Stock has been subject to significant price and volume fluctuations and is
expected to continue to be subject to significant price and volume fluctuations
as a result of a number of factors. These factors include any shortfall in
revenues or net income from revenues or net income expected by securities
analysts; announcements of new products by the Company or its competitors;
quarterly fluctuations in financial results or the results of other software
companies, including those of direct competitors of the Company; changes in
analysts' estimates of the Company's financial performance, the financial
performance of competitors, or the financial performance of software companies
in general; general conditions in the software industry; changes in prices for
products of the Company or products of competitors; changes in revenue growth
rates for the Company or its competitors; sales of large blocks of the Company's
Common Stock; and conditions in the financial markets in general. In addition,
the stock market may from time to time experience extreme price and volume
fluctuations, which particularly affect the market price for the securities of
many technology companies and which have often been unrelated to the operating
performance of the specific companies. There can be no assurance that market
prices of the Company's Common Stock will not experience significant
fluctuations in the future.
20
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibits Exhibit Title
-------- -------------
10.3* 1994 Stock Option Plan, as amended through July 1998,
including 1995 Stock Option Plan for French employees.
27.1 Financial Data Schedule.
*Filed with the Company's original Report on Form 10-Q for the quarter
ended June 30, 1998.
b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June 30,
1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to its quarterly report on Form
10-Q to be signed on its behalf by the undersigned thereunto duly authorized in
the City of San Diego, California, this 21st day of April, 1999.
PEREGRINE SYSTEMS, INC.
By /s/ David A. Farley
------------------------------------
David A. Farley
Senior Vice President, Finance and
Administration Chief Financial Officer
(Principal Financial Officer)
By /s/ Matthew C. Gless
------------------------------------
Matthew C. Gless
Vice President, Finance and Chief
Accounting Officer
22
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