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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER: 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 December 31, 1998 was 23,534,855.
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PEREGRINE SYSTEMS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31,
1998 (unaudited) and March 31, 1998......................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended December 31, 1998 and 1997 (unaudited)... 4
Condensed Consolidated Statements of Operations for the
Nine Months Ended December 31, 1998 and 1997 (unaudited).... 4
condensed Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 1998 and 1997 (unaudited).... 5
Notes to condensed Consolidated Financial Statements
(unaudited)................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities....................................... 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
Item 6. Exhibits and Reports on Form 8-K............................ 24
Signatures................................................................ 25
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXPECT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1998
--------- -----------
(AUDITED) (UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................... $14,950 $15,209
Short-term investments............................................. 7,027 5,000
Accounts receivable, net of allowance for doubtful accounts of
$485 and $1,145, respectively................................... 16,761 33,545
Deferred tax assets................................................ 7,297 7,297
Other current assets............................................... 2,905 8,358
------- -------
Total current assets.......................................... 48,940 69,409
Property and equipment, net........................................... 5,455 11,039
Goodwill and other, net............................................... 2,342 11,297
------- -------
$56,737 $91,745
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................... $ 2,337 $ 6,010
Accrued expenses and other......................................... 9,310 20,368
Deferred revenue................................................... 11,570 14,159
Current portion of long-term debt.................................. 151 35
------- -------
Total current liabilities....................................... 23,368 40,572
Long-term debt, net of current portion................................ 966 716
Deferred revenue, net of current portion.............................. 1,802 2,045
------- -------
Total liabilities............................................. 26,136 43,333
------- -------
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 and 200,000 shares
authorized, respectively, and 18,790 and 23,535 issued and 19 24
outstanding, respectively.......................................
Additional paid-in capital......................................... 74,351 172,069
Accumulated deficit................................................ (41,461) (120,347)
Unearned portion of deferred compensation.......................... (1,493) (1,153)
Cumulative translation adjustment.................................. (553) (456)
Treasury stock, at cost........................................... (262) (1,725)
------- -------
Total stockholders' equity.................................... 30,601 48,412
------- -------
$56,737 $91,745
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
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PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DEC. 31, NINE MONTHS ENDED DEC. 31,
--------------------------- --------------------------
1997 1998 1997 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Licenses............................................... $12,374 $26,064 $ 25,741 $ 57,321
Services .............................................. 6,135 14,485 15,986 34,632
------- ------- -------- --------
Total revenues...................................... 18,509 40,549 41,727 91,953
------- ------- -------- --------
Costs and Expenses:
Cost of licenses....................................... 98 306 226 429
Cost of services....................................... 2,839 9,486 6,715 20,893
Sales and marketing.................................... 6,797 15,144 15,722 33,900
Research and development............................... 2,467 3,723 5,770 9,322
General and administrative............................. 2,101 3,506 4,413 8,163
Acquired in-process research and development costs..... - - 34,775 91,765
------- ------- -------- --------
Total costs and expenses............................ 14,302 32,165 67,621 164,472
------- ------- -------- --------
Operating income (loss)................................... 4,207 8,384 (25,894) (72,519)
Interest income and other................................. 204 100 608 553
------- ------- -------- --------
Income (loss) from operations before income taxes......... 4,411 8,484 (25,286) (71,966)
Income tax expense........................................ 1,632 2,969 3,512 6,920
------- ------- -------- --------
Net income (loss)......................................... $ 2,779 $ 5,515 $(28,798) $(78,886)
------- ------- -------- --------
------- ------- -------- --------
Net income (loss) per share - basic:
Net income (loss) per share........................... $ 0.15 $ 0.24 $ (1.86) $ (3.69)
------- ------- -------- --------
------- ------- -------- --------
Weighted average common shares outstanding............ 18,039 23,299 15,510 21,359
------- ------- -------- --------
------- ------- -------- --------
Net income (loss) per share - diluted:
Net income (loss) per share........................... $ 0.14 $ 0.22 $ (1.86) $ (3.69)
------- ------- -------- --------
------- ------- -------- --------
Weighted average common shares outstanding............ 20,110 25,038 15,510 21,359
------- ------- -------- --------
------- ------- -------- --------
</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
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------------------
1997 1998
----------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net loss........................................... $(28,798) $(78,886)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization...................... 1,594 3,821
Charge for acquired research and development....... 34,775 91,765
Increase (decrease) in cash resulting from changes in:
Accounts receivable........................... (7,728) (14,165)
Financed receivables.......................... 214 -
Deferred tax asset............................ 1,752 -
Other current assets.......................... (320) (5,201)
Other assets.................................. 468 (116)
Accounts payable.............................. 705 2,307
Accrued expenses.............................. 1,228 (3,327)
Deferred revenue.............................. (366) (128)
-------- --------
3,524 (3,930)
-------- --------
Net cash used by discontinued business..... (170) -
-------- --------
Net cash provided by (used in) operating
activities.............................. 3,354 (3,930)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment................ (1,291) (6,758)
Purchases of short-term investments................ - (38,000)
Maturities of short-term investments............... - 40,027
Cash acquired in acquisition....................... 582 46
-------- --------
Net cash used in investing activities...... (709) (4,685)
-------- --------
Cash flows from financing activities:
Repayment on bank line of credit, net.............. (3,387) -
Repayments of long-term debt....................... (2,336) (1,063)
Issuance of common stock........................... 19,060 11,303
Treasury stock purchased.......................... (262) (1,463)
Principal payments under capital lease obligation.. (374) -
-------- --------
Net cash provided by financing activities.. 12,701 8,777
-------- --------
Effect of exchange rate changes on cash............... (148) 97
-------- --------
Net increase in cash.................................. 15,198 259
Cash and cash equivalents, beginning of period........ 305 14,950
-------- --------
Cash and cash equivalents, end of period.............. $ 15,503 $ 15,209
-------- --------
-------- --------
</TABLE>
5
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<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest........................................ $ 34 $ 22
Income taxes.................................... $ 567 $ 64
Supplemental disclosure of noncash investing and
financing activities:
Stock issued and other noncash consideration
for acquisitions............................. $ 38,617 $ 86,421
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED ONSOLIDATED FINANCIAL STATEMENTS.
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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 December
31, 1998, the condensed consolidated statements of operations for the three and
nine month periods ended December 31, 1998 and 1997, and the condensed
consolidated statements of cash flows for the nine month periods ended December
31, 1998 and 1997 have been prepared by Peregrine Systems, Inc. (the "Company")
and have not been audited. These financial statements, in the opinion of
management, include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows for all periods presented. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K filed for the year
ended March 31, 1998, which provides further information regarding the Company's
significant accounting policies and other financial and operating information.
Interim operating results are not necessarily indicative of operating results
for the full year or any other future period. The consolidated condensed
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
Recently, the Securities and Exchange Commission (the "Commission")
has publicly commented on concerns it has regarding the valuation methodology
used by several public companies within the Company's industry for valuing
in-process research and development and related charges. Although the Company
has not been contacted by the Commission regarding any of its valuations of
acquired in-process research and development, the Company is examining the
impact of the recent informal guidance promulgated by the Commission in
determining the value of acquired in-process research and development charges.
Based on the Company's current understanding of the Commission's
position, it may be necessary for the Company to adjust its valuation
methodology in order to reflect the Commission's recently promulgated guidance
on valuing its acquired in-process research and development. The Company is
currently assessing what impact an adjustment to this valuation methodology may
have as it is applied to technology acquired in three acquisitions undertaken in
fiscal 1999 and 1998. In connection with these acquisitions, the Company
recorded acquired in-process research and development charges in the amount of
$91.8 million in the second quarter of fiscal 1999, and $34.8 million in the
second quarter of fiscal 1998.
The Company believes that these purchase price allocations were
recorded in accordance with generally accepted accounting principles and were
appropriate based on the information available at the time, including
independent third party appraisals confirming the value assigned to acquired
in-process research and development and related charges. However, the Company is
evaluating the impact of the recent guidance promulgated by the Commission and
cannot predict the outcome this evaluation will have on previously recorded
acquired in-process research and development charges.
In the event that the Company concludes, as a result of this
evaluation, that a material portion of the amount of the in-process research and
development charges previously recorded should be capitalized, the Company would
be required to restate previously issued financial statements. Such a
restatement would decrease the net loss for the fiscal years ending March 31,
1999 and 1998 including the related quarters and the carrying value of purchased
intangibles. In addition, future annual amortization expense associated with the
purchased intangibles would increase over the remaining portion of the purchased
intangibles' original five year amortization period.
NOTE 2. NET INCOME (LOSS) PER SHARE
Effective fiscal year 1998, the Company retroactively adopted the
provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), "Earnings per share." SFAS No. 128 requires companies to
7
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compute net income (loss) per share under two different methods, basic and
diluted, for all periods for which a statement of operations is presented.
Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share reflects the potential dilution
that could occur if the income were divided by the weighted-average number of
common shares and potential common shares from outstanding stock options for
the period. Potential common shares are calculated using the treasury stock
method and represent incremental shares issuable upon exercise of the
Company's outstanding options. For the nine month periods reflected in the
table below the diluted loss per share calculation excludes effects of
outstanding stock options as such inclusion would be anti-dilutive. The
following table provides reconciliation of numerators and denominators used
in calculating basic and diluted income (loss) per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DEC. 31 NINE MONTHS ENDED DEC.31
-------------------------- ------------------------
1997 1998 1997 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE - BASIC:
Net income (loss)............................... $ 2,779 $ 5,515 $(28,798) $(78,886)
Weighted average common shares outstanding...... 18,039 23,299 15,510 21,359
-------- -------- -------- --------
Basic net income (loss) per share................. $ 0.15 $ 0.24 $ (1.86) $ (3.69)
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME (LOSS) PER SHARE - DILUTED:
Net income (loss)............................... $ 2,779 $ 5,515 $(28,798) $(78,886)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding...... 18,039 23,299 15,510 21,359
Common stock options outstanding
(unless anti-dilutive)........................ 2,071 1,739 - -
-------- -------- -------- --------
Total weighted average common shares and
equivalents..................................... 20,110 25,038 15,510 21,359
-------- -------- -------- --------
Diluted net income (loss) per share............... $ 0.14 $ 0.22 $ (1.86) $ (3.69)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
NOTE 3. ACCOUNTING STANDARDS
Statement of Financial Accounting Standards Board's SFAS No. 130,
"Reporting Comprehensive Income" is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenue, expense, gains, and losses)
in a full set of general-purpose financial statements. The adoption of this
statement had no impact on the Company's net income or stockholders' equity;
therefore, no adjustments are reflected in stockholders' equity.
Statement of Financial Accounting Standards Board's SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, major customers, and material countries
in which the entity holds assets and reports revenue. The adoption of SFAS No.
131 did not affect the results of operations or financial position of the
Company, but may require the Company to disclose segment information in its
Annual Report on Form 10-K for the year ending March 31, 1999.
Statement of Financial Accounting Standards Board's SFAS No. 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits" is
effective for fiscal years beginning after December 15, 1997. SFAS No. 132
established standards for employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. The adoption of SFAS No.132 had no material impact on the
Company's financial statements or related disclosures thereto.
Statement of Financial Accounting Standards Board's SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" is effective for
fiscal years beginning after June 15, 1999. SFAS No. 133 establishes standards
for companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses
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resulting from changes in the values of those derivatives would be accounted
for depending on the use of the derivatives and whether they qualify for
hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. The Company has not yet determined what impact, if any,
the adoption of SFAS No. 133 will have on the Company's consolidated
financial statements, results of operations, or related disclosures thereto.
9
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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. THE FOLLOWING
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT.
OVERVIEW
The Company (alternatively "PSI" or "We") develops, markets, and
supports an integrated suite of software applications that automates the
management of complex, enterprise-wide information and infrastructure assets. In
1995, the Company commenced sales of SERVICECENTER, the Company's Enterprise
Service Desk product suite. During fiscal 1998 the Company expanded the
strategic concept of its product line by implementing its Infrastructure
Management strategy and executing on that strategy with its acquisition in
September 1997 of United Software, Inc., including its wholly-owned subsidiary
Apsylog, S.A. ("Apsylog Acquisition"). As a result of the Apsylog Acquisition,
the Company acquired its ASSETCENTER asset management product suite.
SERVICECENTER and ASSETCENTER are currently available for the Windows NT and
UNIX platforms, and SERVICECENTER continues to be available for the MVS
platform.
Since the release of SERVICECENTER in July 1995, and until the
Apsylog Acquisition, SERVICECENTER accounted for substantially all of the
Company's license revenues. From the Apsylog Acquisition until July 1998,
SERVICECENTER and ASSETCENTER together have accounted for substantially all
of the Company's license revenues.
During fiscal 1998, the Company determined that customer needs required
a more comprehensive solution for control and management of their infrastructure
assets, including availability of assets, minimizing investments and expense,
consolidating data, and interfacing to enterprise applications. Accordingly, the
Company refocused its marketing strategy and product positioning to focus on
this Infrastructure Management strategy. The Company's focus on the
Infrastructure Management strategy, the Company's rapid growth, and the Apsylog
Acquisition have resulted in continuing efforts to rebuild the Company's senior
management team, redefine the product development strategy, establish a
comprehensive marketing strategy, and strengthen the Company's financial and
budgeting processes.
On July 30, 1998, the Company completed the acquisition of Innovative
Tech Systems, Inc., a provider of facilities management software systems
("Innovative"). The Company acquired Innovative to further its Infrastructure
Management strategy by coupling the Company's SERVICECENTER and ASSETCENTER
products, which focus on the users information technology infrastructure, with
Innovative's SPAN-FM product, which assist users to track and manage their
physical plant, facilities, and related assets.
On September 23, 1998, the Company completed the acquisition of certain
technology and other assets and liabilities of International Software Solutions
and related persons and entities ("ISS"). The Company acquired these assets to
further its Infrastructure Management strategy by extending its ability to
provide enterprise remote control activities.
The Company's revenues are derived from product licensing 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. Services
revenues consist of consulting and support fees. The Company has sold its
original PNMS software to a sizable installed base of customers, many of whom
have transitioned to SERVICECENTER. The Company's installed customer base has
generated a consistent level of maintenance revenues.
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
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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 its SERVICECENTER, ASSETCENTER, and SPAN-FM product suites 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, the French Franc,
and the euro. 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 in place 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.
11
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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 DEC. 31 NINE MONTHS ENDED DEC.31
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses .................................. 66.9 % 64.3% 61.7% 62.3%
Services .................................. 33.1 35.7 38.3 37.7
----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of licenses........................... 0.5 0.8 0.5 0.5
Cost of services........................... 15.3 23.4 16.1 22.7
Sales and marketing........................ 36.7 37.3 37.7 36.9
Research and development................... 13.4 9.2 13.8 10.1
General and administrative.............. 11.4 8.6 10.6 8.9
Acquired research and development costs.... - - 83.3 99.8
----- ----- ----- -----
Total costs and expenses................. 77.3 79.3 162.0 178.9
----- ----- ----- -----
Operating income (loss)....................... 22.7 20.7 (62.0) (78.9)
Interest income and other..................... 1.1 0.2 1.4 0.6
----- ----- ----- -----
Income (loss) before income taxes............. 23.8 20.9 (60.6) (78.3)
Income tax expense............................ 8.8 7.3 8.4 7.5
----- ----- ----- -----
Net income (loss)............................. 15.0% 13.6% (69.0)% (85.8)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
THREE MONTH AND NINE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
The Company's results of operations for the three month and nine month
periods ended December 31, 1998 include results of operation for (i) Innovative
subsequent to July 30, 1998 and (ii) subsequent to September 23, 1998, activity
related to the assets and liabilities acquired from ISS.
REVENUES
Total revenues were $40.5 million and $18.5 million in the third
quarter of fiscal 1999 and 1998, respectively, representing a period-to-period
increase of 119%. For the nine month periods ended December 31, 1998 and 1997,
total revenues increased 120% from $41.7 million to $92.0 million. The reasons
for the revenue increases are more fully discussed below.
LICENSES. License revenues were $26.1 million and $12.4 million in the
third quarter of fiscal 1999 and 1998, respectively, representing 64% and 67% of
total revenues in the respective periods and $57.3 million and $25.7 million for
the nine months ended December 31, 1998 and 1997, respectively, representing 62%
of total revenues for each period. License revenues increased 111% in the third
quarter of fiscal 1999 compared to the third quarter of fiscal 1998. For the
nine months ended December 31, 1998, license revenues increased 123% compared to
the nine month period ended December 31, 1997. The increases in license revenues
are attributable to increased demand for new licenses, additional seats
purchased by existing customers, higher average transaction sizes, more
effective corporate marketing programs, improved sales force productivity,
expansion of the Company's domestic and international sales forces, and the
effects of combining Innovative's operations since the Innovative acquisition in
July 1998.
SERVICES. Services revenues, consisting of consulting and support fees,
were $14.5 million and $6.1 million in the third quarter of fiscal 1999 and
1998, respectively, representing 36% and 33% of total revenues in the respective
periods and $34.6 million and $16.0 million for the nine months ended December
31, 1998 and 1997, respectively, representing 38% of total revenues for each
period. Services revenues increased 136% in the third quarter of fiscal 1999
compared to the third quarter of fiscal 1998. For the nine months ended December
31, 1998, services revenues increased 117% compared to the nine months ended
December 31, 1997. The dollar increases are attributable to renewals of
maintenance agreements from the Company's expanded installed base of customers,
maintenance revenues included as
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part of new licenses, an increased number of consulting engagements related
to implementation of software from initial license agreements, and the
effects of combining Innovative's operations since the Innovative acquisition
in July 1998.
COSTS AND EXPENSES
COST OF LICENSES. Cost of licenses was $306,000 and $98,000 in the
third quarter of fiscal 1999 and 1998, respectively, each representing less than
1% of total license revenues in the respective periods and $429,000 and $226,000
for the nine month periods ended December 31, 1998 and 1997, respectively, again
representing less than 1% of the total license revenues in the respective
periods.
COST OF SERVICES. Cost of services revenues was $9.5 million and $2.8
million in the third quarter of fiscal 1999 and 1998, respectively, representing
65% and 46% of total service revenues in the respective periods and $20.9
million and $6.7 million for the nine months ended December 31, 1998 and 1997,
respectively, representing 60% and 42% of total services revenues for such
periods, respectively. The dollar increases in the third quarter of fiscal 1999
over 1998 and in the nine months ended December 31, 1998 over the same period in
1997 are attributable to an increase in customer support personnel and
professional services personnel in connection with the corresponding increase in
professional services revenue, and the effects of combining Innovative's
operations since the Innovative acquisition in July 1998. Cost of maintenance
and services increased as a percentage of related revenues because of increased
labor and associated recruiting costs.
SALES AND MARKETING. Sales and marketing expenses were $15.1 million
and $6.8 million in the third quarter of fiscal 1999 and 1998, respectively,
representing 37% of total revenues in each of the respective periods and $33.9
million and $15.7 million for the nine months ended December 31, 1998 and 1997,
respectively, representing 37% and 38% of total revenues in such periods. The
dollar increases in sales and marketing expenses are attributable to the
significant expansion of both the North American and international sales forces,
increase in marketing personnel, the effect of moderate operating expense
increases, and the effects of combining Innovative's operations since the
Innovative acquisition in July 1998. Sales and marketing have decreased as a
percentage of total revenues for the respective periods as a result of revenues
increasing at a faster rate. If the Company experiences a decrease in sales
force productivity or for any other reason a decline in revenues, it is likely
that operating margins will decline as well.
RESEARCH AND DEVELOPMENT. Research and development expenses were $3.7
million and $2.5 million in the third quarter of fiscal 1999 and 1998,
respectively, representing 9% and 13% of total revenues in the respective
periods and $9.3 million and $5.8 million for the nine months ended December 31,
1998 and 1997, respectively, representing 10% and 14% of total revenues in such
periods. The dollar increases in research and development from fiscal 1998 to
1999 are due primarily to the increased cost of product author commissions, the
hiring of additional software developers, an increase in the number of personnel
in the Research and Development department, and the effects of combining
Innovative's operations since the Innovative acquisition in July 1998. Research
and development expenses have decreased as a percentage of total revenues from
the third quarter of fiscal 1998 to the third quarter of fiscal 1999 as a result
of revenues increasing at a faster rate.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$3.5 million and $2.1 million in the third quarter of fiscal 1999 and 1998,
respectively, representing 9% and 11% of total revenues in the respective
periods, and $8.2 million and $4.4 million for the nine months ended December
31, 1998 and 1997, respectively, representing 9% and 11% of total revenues in
such periods. The dollar increases from fiscal 1998 to 1999 are attributable
primarily to costs associated with administrative personnel additions to support
the Company's growth, amortization of goodwill, management restructuring, and
the effects of combining Innovative's operations since the Innovative
acquisition in July 1998 while the decreases as a percentage of total revenues
reflect the fact that revenues grew at a faster rate than general and
administrative expenses.
ACQUIRED RESEARCH AND DEVELOPMENT COSTS. Acquired in-process research
and development costs of $91.8 million were incurred in the second quarter of
fiscal 1999 in connection with the Innovative and ISS acquisitions. Acquired
in-process research and development costs of $34.8 million were incurred in the
second quarter of fiscal 1998 in connection with the acquisition of United
Software, Inc.
INCOME TAX EXPENSE. Income tax expense for the third fiscal
quarter of 1999 amounted to $3.0 million compared with $1.6 million in the
comparable quarter of fiscal 1998 and $6.9 million and $3.5 million for the
nine months ended December 31, 1998 and 1997, respectively. This increase
results from the $4.2 million dollar increase in operating profits, before
taxes in the respective periods. Excluding the effect of expensing the
acquired in-
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process research and development costs, the effective tax rate for the three
and nine month periods ended December 31, 1998 was 35%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $20.2 million in cash, cash equivalents, and short-term
investments at December 31, 1998 compared to $22.0 million at March 31, 1998.
The decrease in cash, cash equivalents, and short-term investments is primarily
attributable to acquisition related costs incurred during the nine month period.
The Company believes that its current cash 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 the Company experiences growth in the future, the
Company anticipates that its operating and investing activities may use cash.
Consequently, any such future growth may require the Company to obtain
additional equity or debt financing, which may not be available on commercially
reasonable terms or which may be dilutive.
YEAR 2000 RISKS
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such Year
2000 requirements. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance.
The Company utilizes third party equipment and software that may not be
Year 2000 compliant and is conducting an internal audit of products provided by
outside vendors to determine if such third party products are Year 2000
compliant. Although such audit is not yet completed, the Company has received
assurances from suppliers of all third party software that the Company deems
material to its business that such software is Year 2000 compliant. Failure of
such third party equipment or software to operate properly with regard to the
Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
its business, results of operations, and financial condition. If key systems, or
a significant number of systems, were to fail as a result of Year 2000 problems
or if the Company was to experience delays implementing Year 2000 compliant
software products, the Company could incur substantial costs and disruption of
its business, which would potentially have a material adverse effect on its
results of operations and financial conditions.
The Company is still assessing the impact the Year 2000 issue will have
on its proprietary software products and internal information systems and will
take appropriate corrective actions based on the results of such analyses.
Management of the Company has not yet determined the costs related to achieving
Year 2000 compliance but does not believe such costs will be material. To the
extent the cost of achieving Year 2000 compliance are material, such costs will
have a material adverse effect on its business, results of operations, and
financial condition.
In the ordinary course of its business, the Company tests and evaluates
its own software products and believes that its software products are generally
Year 2000 compliant, meaning that the use or occurrence of dates on or after
January 1, 2000 will not materially affect the performance of such software
products with respect to four digit date dependent data or the ability of such
products to correctly create, store, process, and output information related to
such data. There can be no assurances, however, that the Company will not
subsequently learn that certain of its software products do not contain all
necessary software routines and codes necessary for the accurate calculation,
display, storage, and manipulation of data involving dates. In addition, in
certain circumstances, the Company has warranted that the use or occurrence of
dates on or after January 1, 2000 will not adversely affect the performance of
its products with respect to four digit date dependent data or the ability to
create, store, process, and output information related to such data. If any
licensees experience Year 2000 problems, such licensees could assert claims for
damages.
In addition, the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues. Many companies are expending
significant resources to correct their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
software products such as those offered by the Company, which could have an
adverse effect on the business, results of operations, and financial condition
of the Company.
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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
STATEMENT AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. IN
PARTICULAR, FISCAL 1999 ANNUAL AND FOURTH QUARTER RESULTS AND PREVIOUSLY
REPORTED RESULTS FOR PRIOR PERIODS MAY DIFFER OR CHANGE MATERIALLY DUE TO
POTENTIAL PRIOR PERIOD ADJUSTMENTS AND RELATED RESTATEMENT(S) RELATED TO
ACCOUNTING FOR PRIOR MERGER AND ACQUISITION TRANSACTIONS. THE COMPANY'S
INDEPENDENT ACCOUNTANTS HAVE ADVISED THE COMPANY THAT SUCH ADJUSTMENTS OR
RESTATEMENT(S) MAY BE REQUIRED BASED ON RECENT PUBLIC STATEMENTS BY THE
SECURITIES AND EXCHANGE COMMISSION CONCERNING SUCH TRANSACTIONS. SIMILARLY,
RESULTS FOR FUTURE PERIODS MAY BE IMPACTED BY THESE POTENTIAL ADJUSTMENTS AND
RELATED RESTATEMENT(S). 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:
ACQUISITION ACCOUNTING. In August 1997 the Company acquired Apsylog
S.A., a French corporation based in Paris, France, through the acquisition of
all the outstanding shares of United Software, Inc., a Delaware corporation
and the parent corporation of Apsylog, in a stock-for-stock transaction
accounted for by the purchase method of accounting (the "Apsylog
Acquisition"). In connection with the Apsylog Acquisition the Company
recorded a one-time charge for acquired in-process research and development
costs of $34.8 million. In July 1998, the Company acquired Innovative Tech
Systems, Inc. (the "Innovative Acquisition") in a stock-for-stock transaction
accounted for by the purchase method of accounting. In connection with the
Innovative Acquisition the Company incurred a one-time charge for acquired
in-process research and development costs of $81.7 million. In September 1998
the Company completed the acquisition of certain technology and other assets
and liabilities from International Software Solutions and related persons and
entities (the "ISS Acquisition"). The Company issued stock to the sellers in
exchange for certain assets and liabilities. In connection with the ISS
Acquisition, the Company incurred a one-time charge for in-process research
and development costs of $10.1 million. In each instance the Company's
charges for in-process research and development costs were made based on
valuations provided by an independent appraiser and the Company believes its
charges were in accordance with established industry practice at the time.
Recently the Securities and Exchange Commission ("SEC") has
increased the level of scrutiny given to acquisition accounting, including
the methodology used for the determination of charges for acquired in-process
research and development costs, and many companies that engaged in
acquisitions over the last several years have received comment letters. It
has been reported that the SEC has issued 150 letters to issuers highlighting
the fact that their future filings will be closely reviewed in connection
with such acquisition accounting issues. In addition, a number of companies
have restated their financial statements in order to revise their acquisition
accounting, including adjusting charges for acquired in-process research and
development costs and related goodwill. To date, the Company has not received
a comment letter. The financial results for the September 1997 and September
1998 quarters may need to be restated depending on final resolution of the
application of acquisition accounting by the SEC and the accounting standards
makers, resulting in changes to charges for acquired in-process research and
development and goodwill, including related amortization for affected
periods. Any required restatement would result in noncash charges. The
aggregate amount of acquired in-process research and development costs
written off in connection with the three acquisitions was approximately
$126.6 million. Any restatement could have a material adverse effect on the
Company's business, operating results and financial condition.
HISTORY OF OPERATING LOSSES. We have recorded cumulative net losses of
approximately $120.3 million through December 31, 1998. This amount includes
approximately $34.8 million related to the write-off of acquired in-process
research and development in connection with our acquisition of United Software,
Inc. including its Apsylog S.A. subsidiary ("Apsylog") which was completed in
September 1997, $81.7 million related to the write-off of acquired in-process
research and development in connection with our July 1998 acquisition of
Innovative Tech Systems, Inc. ("Innovative"), and $10.1 million related to the
write-off of acquired in-process research and development in connection with our
September 1998 acquisition of certain remote control technology from
International Software Solutions ("ISS"). Our main product lines have changed
substantially in recent years. For example, our SERVICECENTER product only began
shipping in mid-1995 and our ASSETCENTER product only began shipping in
mid-1996. As a result, prediction of our future operating results is difficult,
if not impossible. Although our operating results were positive during the years
ended March 31, 1997 and 1998 (excluding the impact of the $34.8 million charge
related to acquired
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in-process research and development in connection with our acquisition of
Apsylog), we may not remain profitable on a quarterly or annual basis. In
addition, we do not believe that the growth in our revenues that we have
experienced in recent years is indicative of future revenue growth or future
operating results.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; LENGTHY SALES CYCLE;
SEASONALITY. The Company's quarterly operating results have varied significantly
in the past and may vary significantly in the future depending upon a number of
factors, many of which are beyond the Company's control. These factors include,
among others, the ability of the Company to develop, introduce and market new
and enhanced versions of its software on a timely basis; market demand for the
Company's software; the size, timing and contractual terms of significant
orders; the timing and significance of new software product announcements or
releases by the Company or its competitors; changes in pricing policies by the
Company or its competitors; changes in the Company's business strategies;
budgeting cycles of its potential customers; changes in the mix of software
products and services sold; changes in the mix of revenues attributable to
domestic and international sales; the impact of acquisitions of competitors;
seasonal trends; the cancellations of licenses or maintenance agreements;
product life cycles; software defects and other product quality problems; and
personnel changes. The Company has often recognized a substantial portion of its
revenues in the last month or weeks of a quarter. As a result, license revenues
in any quarter are substantially dependent on orders booked and shipped in the
last month or weeks of that quarter. Due to the foregoing factors, quarterly
revenues and operating results are not predictable with any significant degree
of accuracy. In particular, the timing of revenue recognition can be affected by
many factors, including the timing of contract execution and delivery. The
timing between initial customer contact and fulfillment of criteria for revenue
recognition can be lengthy and unpredictable, and revenues in any given quarter
can be adversely affected as a result of such unpredictability. In the event of
any downturn in potential customers' businesses or the economy in general,
planned purchases of the Company's products may be deferred or canceled, which
could have a material adverse effect on the Company's business, operating
results and financial condition.
The license of the Company's software generally requires the Company to
engage in a sales cycle that typically takes approximately six to nine months to
complete. The length of the sales cycle may vary depending on a number of
factors over which the Company may have little or no control, including the size
of the transaction and the level of competition which the Company encounters in
its selling activities. In addition, the sales cycle is typically extended 90
days for product sales through indirect channels. During the sales cycle, the
Company typically provides a significant level of education to prospective
customers regarding the use and benefits of the Company's products. Any delay in
the sales cycle of a large license or a number of smaller licenses could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company's business has experienced and is expected to continue to
experience seasonality. The Company's revenues and operating results in its
December quarter typically benefit from purchase decisions made by the large
concentration of customers with calendar year-end budgeting requirements, while
revenues and operating results in the March quarter typically benefit from the
efforts of the Company's sales force to meet fiscal year-end sales quotas. In
addition, the Company is currently attempting to expand its presence in
international markets, including Europe, the Pacific Rim, and Latin America.
International revenues comprise a significant percentage of the Company's total
revenues, and the Company may experience additional variability in demand
associated with seasonal buying patterns in such foreign markets.
PRODUCT CONCENTRATION. Almost all of our license revenues results from
the sale of our SERVICECENTER and ASSETCENTER products. We expect these products
to continue to account for a large portion of our revenues for the foreseeable
future. Our future operating results are dependent upon continued market
acceptance of SERVICECENTER and ASSETCENTER, including future enhancements. In
addition, our operating results will be affected by customer acceptance of
SPAN-FM as a PSI product suite. We acquired SPAN-FM, a facilities automation
software application, through our July 1998 acquisition of Innovative. Any
factors adversely affecting the pricing of, demand for, or market acceptance of
SERVICECENTER, ASSETCENTER, or SPAN-FM, such as competition or technological
change, could materially adversely affect our business, operating results, and
financial condition.
DEPENDENCE ON MARKET ACCEPTANCE OF INFRASTRUCTURE MANAGEMENT SOFTWARE
SOLUTIONS AND RAPID TECHNOLOGY CHANGE. Until recently, we have focused on
developing software products to help manage many aspects of a business's
information technology ("IT") systems. In September 1997, we broadened our IT
infrastructure management product suite by acquiring ASSETCENTER, an asset
management product line, through our acquisition of
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Apsylog. In addition, we have increased the functionality of SERVICECENTER to
manage aspects of the enterprise infrastructure not necessarily related to
IT. In July 1998, we acquired Innovative, a provider of facilities management
software. Innovative's product strategy has focused on providing building and
facilities management and fire safety and inspection software applications,
including SPAN-FM. In acquiring Innovative, we intend to further broaden our
product line beyond traditional IT infrastructure management. We are seeking
to offer a more comprehensive product suite capable of managing a business's
IT infrastructure, its physical plant and facilities, its communications
infrastructure, and its distribution systems.
In recent years, the market for enterprise software solutions has been
characterized by rapid technological change, frequent new product announcements
and introductions, and evolving industry standards. In response to advances in
technology, customer requirements have become increasingly complex, resulting in
industry consolidation of product lines offering similar or related
functionality. We believe that a market for integrated enterprise-wide
infrastructure management solutions is evolving from existing requirements for
specific IT management solutions. Such enterprise-wide solutions would include
applications for IT management, asset management, building and facilities
management, communications resource management, and distribution systems
management. However, the existence of such a market is unproven. If such a
market does not fully develop, this would materially adversely affect our
business, operating results, and financial condition.
As a result of rapid technology change in our industry, our position in
existing markets or other markets that we may enter can be eroded rapidly by
product advances. The life cycles of our products are difficult to estimate. Our
growth and future financial performance depends in part upon our ability to
improved existing products, develop and introduce new products that keep pace
with technological advances, meet changing customer needs, and respond to
competitive products. Our product development efforts will continue to require
substantial investments. We may not have sufficient resources to make the
necessary investments.
INTEGRATION OF INNOVATIVE TECH SYSTEMS INTO PSI'S BUSINESS. Our
acquisition of Innovative, which was completed in July 1998, will require
integrating Innovative into PSI. Prior to the acquisition, Innovative and PSI
were two geographically separated companies that had been operated
independently. We believe that the acquisition of Innovative will further our
strategy to provide customers with a complete infrastructure management software
solution. However, difficulties may be encountered in integrating the product
offerings, operations and technology of Innovative with those of PSI. We may not
be able to successfully complete technology development or market new products
currently in development or develop any new products that relate to the
Innovative products. Anticipated marketing, distribution, or other operational
benefits and efficiencies from the acquisition of Innovative may not be
achieved. The morale of PSI and Innovative employees may be adversely affected
as a result of the acquisition and the resulting integration.
Integrating Innovative into our existing business may prove difficult
given that the two companies were geographically separated, have different
corporate cultures and have personnel with different business backgrounds. We
may not be able to retain a sufficient number of Innovative's key employees.
Additionally, we may have problems combining the engineering teams from
Innovative with our existing teams so that such teams will successfully
cooperate and realize any technological benefits from the combined businesses.
Sales of Innovative products may not be markedly enhanced by the broader
distribution and marketing opportunities available through PSI. We may not be
able to benefit from the broader product offerings available as a result of the
acquisition or from any other anticipated benefits. Any failure to integrate the
businesses and technologies of the companies successfully or any failure to
realize the anticipated benefits of the acquisition could materially adversely
affect our business, results of operations, and financial condition.
In addition, if our management devotes too much time and attention to
the integration of Innovative into our existing business, this also could
materially adversely affect our business, operating results, and financial
condition. In addition, certain of Innovative's suppliers, distributors, or
customers may end their agreements with Innovative as a result of the
acquisition. In addition, prospective customers of Innovative may delay their
orders as a result of uncertainties resulting from the acquisition. For example,
customers or potential customers of Innovative could terminate or delay orders
with PSI because they may feel that we are not committed to providing products
and enhancements or support services for Innovative products. If a significant
number of Innovative customers or potential customers cancel or do not renew
their arrangements with Innovative or PSI or delay their orders of our products,
this could have materially adversely affect our business, results of operations,
and financial condition. We expect any such affects to be felt most strongly in
near-term quarters.
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INTEGRATION OF INTERNATIONAL SOFTWARE SOLUTIONS INTO PSI'S PRODUCTS.
Our acquisition of remote control technology from International Software
Solutions and related entities and persons (collectively "ISS"), which was
completed in September 1998, will require integrating the ISS technology with
SERVICECENTER and ASSETCENTER. Difficulties may be encountered in this
integration process. In addition, we may not be able to successfully complete
and market new products that use the ISS technology. The marketing,
distribution, or other operational benefits and efficiencies anticipated from
the acquisition of the ISS technology may not be achieved. We plan to continue
to work with employees of ISS to integrate the ISS technology with our products.
However, there may be problems combining the engineering teams from ISS with our
existing teams. As a result, we may not fully realize the expected technological
benefits from the acquired ISS technology. Any failure to integrate the ISS
technology into our products could materially adversely affect our business,
operating results, and financial condition.
RISKS ASSOCIATED WITH PSI ACQUISITIONS. We have recently completed our
acquisitions of Apsylog, Innovative, and the ISS technology. In the future PSI
may make acquisitions of, or large investments in, other businesses that offer
products, services, and technologies that further our goal of providing
integrated infrastructure management software solutions to businesses. Our
acquisitions of Apsylog, Innovative, and the ISS technology and any future
acquisitions or investments that PSI were to complete present risks commonly
encountered with these types of transactions. The following are examples of such
risks:
- difficulty in combining the technology, operations, or work force of
the acquired business o disruption of the Company's on-going
businesses
- difficulty in realizing the potential financial and strategic
position of PSI through the successful integration of the acquired
business
- difficulty in maintaining uniform standards, controls, procedures,
and policies - possible impairment of relationships with employees
and clients as a result of any integration of new businesses and
management personnel
- difficulty in obtaining preferred acquisition accounting treatment
for these types of transactions o diversion of management attention
The risks described above, either individually or in the aggregate,
could materially adversely affect our business, operating results, and financial
condition. We expect that future acquisitions, if any, could provide for
consideration to be paid in cash, shares of PSI common stock, or a combination
of cash and PSI common stock. However, we may not be able to complete any such
additional acquisitions in the future.
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend to a
significant extent on the continued service of its senior management and certain
other key employees of the Company, including selected sales, consulting,
technical and marketing personnel. Few of the Company's employees, including its
senior management, are bound by an employment or noncompetition agreement. In
addition, the Company does not generally maintain key man life insurance on any
employee. The loss of the services of one or more of the Company's executive
officers or key employees or the decision of one or more of such officers or
employees to join a competitor or otherwise compete directly or indirectly with
the Company could have a material adverse effect on the Company's business,
operating results and financial condition.
In addition, several of the Company's executive officers, including its
President and Chief Executive Officer, Chief Financial Officer, and certain
operating vice presidents, have been employed by the Company for a relatively
short period of time. Since joining the Company, the new management team has
devoted substantial effort in refocusing the Company's product, sales and
marketing strategies. In connection with such changes, the Company restructured
its sales and marketing departments, which resulted in the replacement of a
significant number of employees. Although management believes that this
restructuring has benefited the Company, many of the Company's current employees
have been with the Company for only a limited period of time. The ultimate
results of such restructuring is impossible to predict.
ABILITY TO RECRUIT PERSONNEL.
EXECUTIVE OFFICERS AND KEY PERSONNEL. Our future success will likely
depend in large part on our ability to attract and retain additional highly
skilled technical, sales, management, and marketing personnel. Competition for
such personnel in the computer software industry is intense, and in the past we
have experienced difficulty in recruiting qualified personnel. New employees
generally require substantial training in the use of our products. We may not
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succeed in attracting and retaining such personnel. If we do not, our business,
operating results, and financial condition could be materially adversely
affected.
FOREIGN EMPLOYEES. To achieve our business objectives we must be able
to recruit and employ skilled technical professionals from other countries. Any
future shortage of qualified technical personnel who are either United States
citizens or otherwise eligible to work in the United States could increase our
reliance on foreign professionals. Many technology companies have already begun
to experience shortages of such personnel. Any failure to attract and retain
qualified personnel as necessary, including as a result of limitations imposed
by federal immigration laws and the availability of visas issued thereunder,
could materially adversely affect our business and operating results. Foreign
computer professionals such as those employed by us typically become eligible
for employment in the United States by obtaining a nonimmigrant visas. The
number of nonimmigrant visas is limited by federal immigration law. Currently,
Congress is considering approving an increase in the number of visas available.
We cannot predict whether such legislation will ultimately become law. We also
cannot predict what effect any future changes in the federal immigration laws
will have on our business, operating results, or financial condition.
COMPETITION. The market for our products is highly competitive and
diverse. The technology for infrastructure management software products can
change rapidly. New products are frequently introduced and existing products are
continually enhanced. Competitors vary in size and in the scope and breadth of
the products and services offered.
EXISTING COMPETITION. We have faced competition from a number of
sources, including:
- providers of internal help desk software applications such as Remedy
Corporation and Software Artistry, Inc. (now a division of Tivoli
Systems, Inc.)
- customer interaction software companies such as Clarify Inc. and The
Vantive Corporation, whose products include internal help desk
applications
- information technology and systems management companies such as IBM,
Computer Associates International, Inc., Network Associates, Inc.
(recently formed as a result of the business combination of McAfee
Associates, Inc. and Network General Corporation), and
Hewlett-Packard Company through its acquisition of PROLIN
- providers of asset management and facilities management software
- the internal information technology departments of those companies
with infrastructure management needs
FUTURE COMPETITION. Because competitors can easily penetrate the
software market, we anticipate additional competition from other established and
new companies as the market for enterprise infrastructure management
applications develops. In addition, current and potential competitors have
established or may in the future establish cooperative relationships among
themselves or with third parties. Large software companies may acquire or
establish alliances with smaller competitors of PSI. We expect that the software
industry will continue to consolidate. It is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.
Our ability to sell our products depends in part on their compatibility
with and support by providers of system management products, including Tivoli,
Computer Associates, and Hewlett-Packard. Both Tivoli and Hewlett-Packard have
recently acquired providers of help desk software products. These providers of
system management products may decide to close their systems to competing
vendors like PSI. They may also decide to bundle their infrastructure management
and/or help-desk software products with other products for enterprise licenses
for promotional purposes or as part of a long-term pricing strategy. If that
were to happen, our ability to sell our products could be adversely affected.
Increased competition may result from acquisitions of help desk and other
infrastructure management software vendors by system management companies. The
results of increased competition including price reductions of our products,
reduced gross margins, and reduction of market share, could materially adversely
affect our business, operating results, and financial condition.
GENERAL COMPETITION. Some of our current and many of our potential
competitors have much greater financial, technical, marketing, and other
resources than PSI. As a result, they may be able to respond more quickly to new
or emerging technologies and changes in customer needs. They may also be able to
devote greater resources to the development, promotion, and sale of their
products than we can. We may not be able to compete successfully
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against current and future competitors. In addition, competitive pressures
faced by PSI may materially adversely affect our business, operating results,
and financial condition.
MANAGEMENT OF GROWTH. We have grown greatly in recent periods, with
total revenues increasing from $19.6 million in fiscal 1995 to $23.8 million in
fiscal 1996, to $35.0 million in fiscal 1997, and to $61.9 million in fiscal
1998. Total revenues in the first nine months of fiscal 1999 increased to $92.0
million.
If we achieve our growth plans, including the integration of Apsylog,
Innovative, and the technology acquired from ISS, such growth may burden our
operating and financial systems. This burden will require large amounts of
senior management attention and will require the use of other PSI resources. Our
ability to compete effectively and to manage future growth (and our future
operating results) will depend in part on our ability to implement and expand
operational, customer support, and financial control systems and to expand,
train, and manage our employees. In particular, in connection with the
acquisitions, we will be required to integrate additional personnel and to
augment or replace existing financial and management systems. Such integration
could disrupt our operations and could adversely affect our financial results.
We may not be able to augment or improve existing systems and controls or
implement new systems and controls in response to future growth, if any. Any
failure to do so could materially adversely affect our business, operating
results, and financial condition.
EXPANSION OF DISTRIBUTION CHANNELS. We sell our products through our
direct sales force and a limited number of distributors and we provide
maintenance and support services through our technical and customer support
staff. We plan to continue to invest large amounts of resources to our direct
sales force, particularly in North America where we have recently opened several
new sales offices. In addition, we are developing additional sales and marketing
channels through system integrators and original equipment manufacturers and
other channel partners. We may not be able to attract channel partners that will
be able to market our products effectively or that will be qualified to provide
timely and cost-effective customer support and service. If we establish
distribution through such indirect channels, our agreements with channel
partners may not be exclusive. As a result, such channel partners may also carry
competing product lines. If we do not establish and maintain such distribution
relationships, this could materially adversely affect our business, operating
results, and financial condition.
INTERNATIONAL OPERATIONS. International sales represented approximately
29% of our total revenues in fiscal 1997 and 36% of our total revenue in fiscal
1998. We currently have international sales offices in London, Paris, Frankfurt,
Amsterdam, and Copenhagen. Our continued growth and profitability will require
continued expansion of our international operations, particularly in Europe,
Latin America, and the Pacific Rim. Accordingly, we intend to expand our current
international operations and enter additional international markets. Such
expansion will require significant management attention and financial resources.
Our international operations are subject to a variety of risks associated with
conducting business internationally, including the following:
- fluctuations in currency exchange rates
- longer payment cycles
- difficulties in staffing and managing international operations
- problems in collecting accounts receivable
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world
- increases in tariffs, duties, price controls, or other restrictions
on foreign currencies trade barriers imposed by foreign countries
These factors could materially adversely affect our business, operating
results, and financial condition. We have only limited experience in developing
local-language versions of our products and marketing and distributing its
products internationally. We may not be able to successfully translate, market,
sell and deliver our products internationally. If we are unable to expand our
international operations successfully and in a timely manner, our business,
operating results, and financial condition could be adversely affected.
Recent instability in the Asian-Pacific economies and financial markets could
adversely affect our business, operating results, and financial condition in
future quarters as well.
CURRENCY FLUCTUATION. A large portion of our business is conducted in
foreign currencies. Fluctuations in the value of foreign currencies relative to
the U.S. dollar have caused and will continue to cause currency transaction
gains and losses. We cannot predict the effect of exchange rate fluctuations
upon future operating
20
<PAGE>
results. We may experience currency losses in the future. We currently
maintain a foreign exchange hedging program, consisting principally of
purchases of one month forward-rate currency contracts. However, our hedging
activities may not adequately protect us against the risks associated with
foreign currency fluctuations.
ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION. On January 1, 1999,
certain member states of the European Economic Community (the "EEC") will fix
their respective currencies to a new currency, the euro. On that day, the euro
will become a functional legal currency within these countries. During the three
years beginning on January 1, 1999, business in these EEC member states will be
conducted in both the existing national currency, such as the French franc or
deutsche mark, and the euro. Companies operating in or conducting business in
EEC member states will need to ensure that their financial and other software
systems are capable of processing transactions and properly handling the
existing currencies, as well as the euro. Our ASSETCENTER product was originally
developed for the European market and is capable of managing currency data
measured in euros. We are still assessing the impact that the euro will have on
our internal systems and our other products. We will take corrective actions
based on the results of such assessment. We have not yet determined the costs
related to this problem. Issues related to the introduction of the euro may
materially adversely affect our business, operating results, and financial
condition.
CONTROL BY EXISTING STOCKHOLDERS. Based on shares outstanding as of
December 31, 1998, PSI's officers, directors, and entities directly related to
such individuals together beneficially own approximately 38.4% of the
outstanding shares of PSI common stock. In particular, John J. Moores, Chairman
of PSI's board of directors, owns approximately 31.7% of the outstanding shares.
As a result, PSI's officers and directors will be able to control most matters
requiring stockholder approval, including the election of directors and the
approval of mergers, consolidations, and sales of all or substantially all of
the assets of PSI. Such concentrated share ownership may prevent or discourage
potential bids to acquire PSI unless the terms of acquisition are approved by
such officers and directors.
PRODUCT DEVELOPMENT DELAYS. We have experienced product development
delays in the past and may experience delays in the future. Difficulties in
product development could delay or prevent the successful introduction or
marketing of new or improved products. Any such new or improved products may not
achieve market acceptance. Our current or future products may not conform to
industry requirements. If we are unable, for technological or other reasons, to
develop and introduce new and improved products in a timely manner, our
business, operating results, and financial condition could be adversely
affected.
Because our software products are complex, these products may contain
errors that could be detected at any point in a product's life cycle. In the
past we have discovered software errors in certain of our products and have
experienced delays in shipment of our products during the period required to
correct these errors. Despite testing by PSI and by current and potential
customers, errors in our products may be found in the future. Detection of such
errors may result in, among other things, loss of, or delay in, market
acceptance and sales of our products, diversion of development resources, injury
to our reputation, or increased service and warranty costs. If any of these
results were to occur, our business, operating results, and financial condition
could be materially adversely affected.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. Our success will be heavily
dependent upon proprietary technology. We rely primarily on a combination of
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect our proprietary rights. Such laws provide only
limited protection. Despite precautions that we take, it may be possible for
unauthorized third parties to copy aspects of our current or future products or
to obtain and use information that we regard as proprietary. In particular, we
may provide our licensees with access to our data model and other proprietary
information underlying our licensed applications. Such means of protecting our
proprietary rights may not be adequate. Additionally, our competitors may
independently develop similar or superior technology. Policing unauthorized use
of software is difficult and, while we do not expect software piracy to be a
persistent problem, some foreign laws do not protect our proprietary rights to
the same extent as United States laws. Litigation may be necessary in the future
to enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. Litigation
could result in substantial costs and diversion of resources to PSI and could
materially adversely affect our business, operating results, and financial
condition.
RISKS OF INFRINGEMENT. While we are not aware that any of our software
product offerings infringes the proprietary rights of third parties, third
parties may claim infringement with respect to our current or future products.
We expect that software product developers will increasingly be subject to
infringement claims as the number of
21
<PAGE>
products and competitors in the software industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time consuming, result in costly
litigation, cause product shipment delays, or require us to enter into
royalty or licensing agreements. Royalty or license agreements may not be
available on acceptable terms or at all. As a result, infringement claims
could have a material adverse affect on our business, operating results, and
financial condition.
PRODUCT LIABILITY. Our license agreements with our customers typically
contain provisions designed to limit exposure to potential product liability
claims. Such limitation of liability provisions may, however, not be effective
under the laws of certain jurisdictions. Although we have not experienced any
product liability claims to date, the sale and support of our products entails
the risk of such claims. We may be subject to such claims in the future. A
product liability claim could materially adversely affect our business,
operating results, and financial condition.
UNDESIGNATED PREFERRED STOCK. PSI's board of directors has the
authority to issue up to 5,000,000 shares of preferred stock in one or more
series. The board of directors can fix the price, rights, preferences,
privileges, and restrictions of such preferred stock without any further vote or
action by PSI's stockholders. The issuance of preferred stock allows PSI to have
flexibility in connection with possible acquisitions and other corporate
purposes. However, the issuance of shares of preferred stock may delay or
prevent a change in control transaction without further action by the PSI
stockholders. As a result, the market price of the PSI common stock and the
voting and other rights of the holders of PSI common stock may be adversely
affected. The issuance of preferred stock may result in the loss of voting
control to others. PSI has no current plans to issue any shares of preferred
stock.
CHARTER PROVISIONS. Certain provisions of PSI's charter documents
eliminate the right of stockholders to act by written consent without a meeting
and specify certain procedures for nominating directors and submitting proposals
for consideration at stockholder meetings. Such provisions are intended to
increase the likelihood of continuity and stability in the composition of the
PSI board of directors and in the policies set by the board. These provisions
also discourage certain types of transactions which may involve an actual or
threatened change of control transaction. These provisions are designed to
reduce the vulnerability of PSI to an unsolicited acquisition proposal. As a
result, these provisions could discourage potential acquisition proposals and
could delay or prevent a change in control transaction. These provisions are
also intended to discourage certain tactics that may be used in proxy fights.
However, they could have the effect of discouraging others from making tender
offers for PSI's shares. As a result, these provisions may prevent the market
price of PSI common stock from reflecting the effects of actual or rumored
takeover attempts. These provisions may also prevent changes in the management
of PSI.
ANTITAKEOVER EFFECTS OF DELAWARE LAW. PSI is subject to the
antitakeover provisions of the Delaware General Corporation Law, which regulates
corporate acquisitions. The Delaware law prevents certain Delaware corporations,
including PSI, from engaging, under certain circumstances, in a "business
combination" with any "interested stockholder" for three years following the
date that such stockholder became an interested stockholder. For purposes of
Delaware law, a "business combination" includes, among other things, a merger or
consolidation involving PSI and the interested stockholder and the sale of more
than 10% of PSI's assets. In general, Delaware law defines an "interested
stockholder" as any entity or person beneficially owning 15% or more of the
outstanding voting stock of a company and any entity or person affiliated with
or controlling or controlled by such entity or person. Under Delaware law, a
Delaware corporation may "opt out" of the antitakeover provisions. PSI has not
"opted out" of the antitakeover provisions of Delaware Law.
VOLATILITY OF TRADING PRICES. We completed the initial public offering
of PSI common stock in April 1997. Prior to April 1997 no public market existed
for PSI common stock. In the past, the market price of PSI common stock has
varied greatly and the volume of PSI common stock traded has fluctuated greatly
as well. We expect such fluctuation to continue. The fluctuation result due to a
number of factors including:
- any shortfall in revenues or net income from revenues or net income
expected by securities analysts
- announcements of new products by PSI or our competitors
- quarterly fluctuations in our financial results or the results of
other software companies, including those of our direct competitors
- changes in analysts' estimates of our financial performance, the
financial performance of our competitors, or the financial
performance of software companies in general
- general conditions in the software industry - changes in prices for
our products or the products of our competitors
22
<PAGE>
- changes in our revenue growth rates or the growth rates of our
competitors
- sales of large blocks of the PSI common stock conditions in the
financial markets in general
In addition, the stock market may from time to time experience extreme
price and volume fluctuations. Many technology companies in particular have
experienced such fluctuations. Often such fluctuations have been unrelated to
the operating performance of the specific companies. The market prices of PSI's
common stock may experience significant fluctuations in the future.
23
<PAGE>
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
On September 23, 1998, the Company completed the acquisition of certain
technology and other assets and liabilities from International Software
Solutions and related entities and persons (collectively "ISS") pursuant to an
Asset Purchase Agreement dated September 23, 1998. In connection with such
acquisition, the Company issued 392,080 shares of its Common Stock to the
sellers in reliance on the exemptions from the registration requirements of the
Securities Act of 1933, as amended, set forth in Section 4(2) of and Regulation
D under the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
<TABLE>
<CAPTION>
Exhibits Exhibit Title
-------- -------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
b) Reports on Form 8-K:
None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized in the City of San Diego, California, this
9th day of February, 1999.
PEREGRINE SYSTEMS, INC.
By /s/ David A. Farley
--------------------------------------------------
Senior Vice President, Finance and Administration,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,209
<SECURITIES> 5,000
<RECEIVABLES> 34,690
<ALLOWANCES> (1,145)
<INVENTORY> 0
<CURRENT-ASSETS> 69,409
<PP&E> 23,776
<DEPRECIATION> (12,737)
<TOTAL-ASSETS> 91,745
<CURRENT-LIABILITIES> 40,572
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 48,388
<TOTAL-LIABILITY-AND-EQUITY> 91,745
<SALES> 91,953
<TOTAL-REVENUES> 91,953
<CGS> 21,322
<TOTAL-COSTS> 164,472
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (71,966)
<INCOME-TAX> 6,920
<INCOME-CONTINUING> (78,886)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (78,886)
<EPS-PRIMARY> (3.69)
<EPS-DILUTED> (3.69)
</TABLE>
