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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 SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER: 0-2222209
PEREGRINE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3773312
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
12670 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(858) 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 October 30, 1999, was 50,955,610.
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PEREGRINE SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 (unaudited) and
March 31,1999................................................................................ 3
Condensed Consolidated Statements of Operations for the Three Months Ended
September 30, 1999 and 1998 (unaudited) .................................................... 4
Condensed Consolidated Statements of Operations for the Six Months Ended
September 30, 1999 and 1998 (unaudited)...................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1999 and 1998 (unaudited)...................................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited)............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 8
PART II. OTHER INFORMATION
- -------- -----------------
Item 2. Changes in Securities.................................................................... 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, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
----- ----
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash, cash equivalents, and short-term investments..................... $ 24,858 $ 23,545
Accounts receivable, net of allowance for doubtful accounts of $1,529
and $1,248, respectively......................................... 51,058 38,947
Other current assets................................................... 17,407 16,168
--------- ---------
Total current assets............................................. 93,323 78,660
Property and equipment, net............................................ 20,934 15,895
Intangible assets and other, net....................................... 140,665 113,158
--------- ---------
$ 254,922 207,713
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--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................... $ 9,018 $ 6,795
Accrued expenses.................................................... 25,576 26,460
Deferred revenue.................................................... 23,519 20,048
Current portion of long-term debt................................... 74 55
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Total current liabilities........................................ 58,187 53,358
Long-term debt, net of current portion................................. 687 594
Deferred revenue, net of current portion............................... 2,197 2,980
--------- ---------
Total liabilities................................................ 61,071 56,932
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Stockholders' Equity:
Preferred stock, $0.001 par value, 5,000 shares authorized, no
shares issued or outstanding..................................... - -
Common stock, $0.001 par value, 200,000 shares authorized, 50,809
and 48,553 shares issued and outstanding, respectively........... 51 49
Additional paid-in capital.......................................... 245,188 193,787
Accumulated deficit................................................. (46,868) (39,793)
Unearned portion of deferred compensation........................... (848) (1,019)
Cumulative translation adjustment................................... (662) (518)
Treasury stock, at cost............................................. (3,010) (1,725)
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Total stockholders' equity..................................... 193,851 150,781
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$ 254,922 $ 207,713
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
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PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses .......................................... $37,102 $ 17,375 $ 69,194 $ 31,257
Services .......................................... 20,705 12,279 40,218 20,147
------- -------- --------- --------
Total Revenues ................................. 57,807 29,654 109,412 51,404
------- -------- --------- --------
Costs and Expenses:
Cost of licenses .................................. 215 52 658 123
Cost of services .................................. 12,400 6,952 24,636 11,407
Sales and marketing ............................... 20,649 10,614 39,750 18,756
Research and development .......................... 7,441 3,206 12,891 5,599
General and administrative ........................ 4,671 2,334 8,549 4,121
Amortization of intangible assets ................. 7,778 4,936 15,569 6,520
Acquired in-process research and developments costs 2,852 21,866 7,046 21,866
------- -------- --------- --------
Total costs and expenses ....................... 56,006 49,960 109,099 68,392
------- -------- --------- --------
Income (loss) from operations ........................ 1,801 (20,306) 313 (16,988)
Interest income, net .............................. 7 193 93 453
------- -------- --------- --------
Income (loss) from operations before income taxes .... 1,808 (20,113) 406 (16,535)
Income taxes ......................................... 4,042 2,209 7,481 3,951
------- -------- --------- --------
Net loss .......................................... $(2,234) $(22,322) $ (7,075) $(20,486)
------- -------- --------- --------
------- -------- --------- --------
Net loss per share - basic and diluted:
Net loss per share ................................ $ (0.04) $ (0.52) $ ( 0.14) $ (0.50)
------- -------- --------- --------
------- -------- --------- --------
Shares used in computation ........................ 49,987 43,118 49,717 $ 41,012
------- -------- --------- --------
------- -------- --------- --------
</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>
SIX MONTHS ENDED SEPTEMBER 30,
-----------------------------
1999 1998
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<S> <C> <C>
Cash flow from operating activities:
Net loss................................................................................... $ (7,075) $ (20,486)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................................................ 18,138 7,645
Acquired in-process research and development costs........................................ 7,046 21,866
Increase (decrease) in cash resulting from changes, net of business acquired, in:
Accounts receivable.................................................................. (11,281) (5,125)
Deferred tax asset .................................................................. 1,340 -
Other current assets................................................................ (2,502) (3,276)
Accounts payable.................................................................... 1,710 1,289
Accrued expenses.................................................................... (7,946) (7,835)
Deferred revenue ................................................................... 1,948 (2,515)
Other assets........................................................................ (5,116) (166)
--------- ----------
Net cash used in operating activities ............................................ (3,738) (8,603)
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Cash flows from investing activities:
Purchases of short-term investments....................................................... - (25,000)
Maturities of short-term investments ..................................................... 2,000 29,027
Purchases of property and equipment....................................................... (7,003) (3,882)
Other investing activities ............................................................... 145 46
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Net cash provided by (used in) investing activities............................... (4,858) 191
--------- ----------
Cash flows from financing activities:
Repayments of long-term debt .............................................................. (43) (489)
Issuance of common stock................................................................... 13,226 7,257
Treasury stock purchased................................................................... (1,285) (809)
--------- ----------
Net cash provided by financing activities ........................................ 11,898 5,959
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Effect of exchange rate changes on cash ...................................................... 11 55
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Net increase (decrease) in cash and cash equivalents.......................................... 3,313 (2,398)
Cash and cash equivalents, beginning of period ............................................... 21,545 14,950
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Cash and cash equivalents, end of period...................................................... $ 24,858 $ 12,552
--------- ----------
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Cash paid during the period for:
Interest............................................................................ $ 13 $ 10
Income taxes........................................................................ $ 11 $ 45
Supplemental Disclosure of Non-Cash Investing and Financial Activities:
Stock issued and other non-cash consideration for acquisition ............................. $ 17,825 $ 86,421
</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
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of September
30, 1999, the condensed consolidated statements of operations for the three and
six month periods ended September 30, 1999, and 1998, and the condensed
consolidated statements of cash flows for the six month periods ended September
30, 1999, and 1998, have been prepared by Peregrine Systems, Inc. (unless
otherwise noted, "Peregrine," "we," "PSI," "us," or "our" (refers to Peregrine
Systems, Inc.) and have not been audited. These financial statements, in our
opinion, 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 our Annual Report on Form 10-K filed for the year ended March 31,
1999, which provides further information regarding Peregrine Systems, Inc.
significant accounting policies and other financial and operating information.
Interim operating results are not necessarily indicative of operating results
for the full year or any other future period. The consolidated condensed
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
NOTE 2. EARNINGS PER SHARE
Basic net loss per share is computed using the weighted average number
of common shares outstanding. Diluted net loss per share is computed using the
weighted average number of common shares and potentially dilutive securities
outstanding during the periods. Potentially dilutive securities consist of
employee stock options using the treasury stock and dilutive if-converted
methods.
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Numerator:
Net loss ................................................................ $ (2,234) $(22,322) $ (7,075) $(20,486)
-------- -------- -------- --------
-------- -------- -------- --------
Denominator:
Denominator for basic net loss per share, weighted average shares ....... 49,987 43,118 49,717 41,012
Effect of dilutive securities:
Employee stock options................................................... - - - -
-------- -------- -------- --------
Denominator for diluted net loss per share, dilutive potential
common shares............................................................ 49,987 43,118 49,717 41,012
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share - basic .............................................. $ (0.04) $ (0.52) $ (0.14) $ (0.50)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share - diluted ............................................ $ (0.04) $ (0.52) $ (0.14) $ (0.50)
-------- -------- -------- --------
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</TABLE>
6
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NOTE 3. ACQUISITIONS
The financial statements reflect our acquisition of Knowlix
Corporation ("Knowlix") effective September 1999. Knowlix is a developer of
knowledge management software. In connection with the acquisition we issued
352,984 shares of our common stock for all of the outstanding shares of
Knowlix for a total purchase price, including merger costs, of $17.8 million.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the assets, including acquired in-process research and
development costs, and liabilities, were recorded based on their fair values
at the date of acquisition. The results of Knowlix's operations have been
included in our financial statements for the period subsequent to acquisition
and did not have a material impact on our results of operations.
In April 1999, we completed the acquisition of F.Print UK Ltd.
("FPrint"), a developer of desktop inventory and asset discovery software. In
connection with the acquisition we issued 754,231 shares of our common stock and
$1.3 million in cash for all of the outstanding shares of FPrint for a total
purchase price, including merger costs, of $26.2 million. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
assets, including acquired in-process research and development costs, and
liabilities, were recorded based on their fair values at the date of
acquisition. The results of FPrint's operations have been included in our
financial statements for the period subsequent to acquisition.
NOTE 4. SENIOR CREDIT FACILITY
In July 1999, we entered into a $20 million senior credit facility for
a term of three years with a syndicate of financial institutions. Borrowings
under the credit facility will be secured by substantially all assets and shall
bear interest at a rate equal to LIBOR plus the applicable margin rate. The
proceeds of the senior credit facility shall be used for general corporate
purposes, including acquisitions.
7
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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
Peregrine develops, markets, and supports an integrated suite of
applications that automates the management of complex, enterprise-wide
information and infrastructure assets.
During fiscal 1998, we 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, we
refocused our marketing strategy and product positioning to focus on this
Infrastructure Management strategy. Our focus on the Infrastructure Management
strategy, rapid growth, and acquisitions have resulted in continuing efforts to
redefine the product development strategy, establish a comprehensive marketing
strategy, and strengthen our financial and budgeting processes.
Executing on that strategy, in September 1997 we acquired United
Software, Inc., including its wholly-owned subsidiary Apsylog S.A. ("Apsylog").
During fiscal 1999, we continued to execute on our Infrastructure Management
strategy, making several strategic acquisitions to expand our product offerings.
In July 1998, we acquired Innovative Tech Systems, Inc. ("Innovative") providing
us with software products and experience to address facilities infrastructure
management. In September 1998, we completed the acquisition of certain
technology and other assets and liabilities from International Software
Solutions and related persons and entities (collectively "ISS"), expanding our
information technology infrastructure management offerings. In March 1999, we
entered into the fleet infrastructure management market with the acquisition of
Prototype, Inc. ("Prototype"). In April 1999, we completed the acquisition of
Fprint, expanding our information technology infrastructure management offerings
to include desktop inventory and asset discovery software. In September 1999, we
acquired Knowlix, a developer of knowledge management software, to enhance the
ability of our products to manage our customers' infrastructure knowledge.
Peregrine's software products are currently available on most major
computer operating platforms, however for the past two years over 85% of our
license revenues have been attributable to UNIX and Windows NT platforms. Our
revenues are derived from product licensing and services. Services are
comprised of maintenance, professional services, and training. 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. We also provide
ongoing maintenance services, which include technical support and product
enhancements, for an annual fee.
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 the risk of concession is deemed remote, 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 Peregrine's products. Revenues from consulting and training
services are recognized as the respective services are performed.
A substantial portion of our license revenue is derived from the sale
of our Infrastructure Management applications and is expected to account for a
substantial portion of revenues for the foreseeable future. As a result, our
future operating results are dependent upon continued market acceptance of the
Infrastructure Management strategy and applications, including future product
enhancements and new product initiatives. Factors adversely affecting the
pricing
8
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of, demand for or market acceptance of the Infrastructure Management
applications, such as competition or technological change, could have a
material adverse effect on our business, operating results, and financial
condition.
We conduct business overseas in a number of foreign currencies,
principally in Europe. These currencies have been relatively stable against the
U.S. dollar for the past several years. Although we currently derive no material
revenues from highly inflationary economies, we are expanding our 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 our business, operating
results and financial condition. Currently, we mitigate our currency risks
through our foreign currency forward hedging program. The hedging program
consists primarily of using forward-rate currency contracts of approximately one
month in length to minimize the short-term impact of foreign currency
fluctuations. 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, our foreign operations remain
subject to the risks of future foreign currency fluctuations, and there can be
no assurances that our hedging activities will adequately protect Peregrine
against such risk.
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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
STATEMENT OF OPERATIONS DATA: 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses 64.2% 58.6% 63.2% 60.8%
Services............................................... 35.8 41.4 36.8 39.2
-------- -------- -------- --------
Total revenues....................................... 100.0 100.0 100.0 100.0
-------- -------- -------- --------
Costs and expenses:
Cost of licenses....................................... 0.4 0.2 0.6 0.2
Cost of services....................................... 21.4 23.4 22.5 22.2
Sales and marketing.................................... 35.7 35.8 36.3 36.5
Research and development............................... 12.9 10.8 11.8 10.9
General and administrative............................. 8.1 7.9 7.8 8.0
Amortization of intangible assets...................... 13.5 16.7 14.2 12.7
Acquired in-process research and development costs..... 4.9 73.7 6.4 42.5
-------- -------- -------- --------
Total costs and expenses............................. 96.9 168.5 99.6 133.0
-------- -------- -------- --------
Income (loss) from operations............................. 3.1 (68.5) 0.4 ( 33.0)
Interest income, net...................................... - 0.7 - 0.9
-------- -------- -------- --------
Income (loss) from operations before income taxes......... 3.1 (67.8) 0.4 (32.1)
Income taxes.............................................. 7.0 7.5 6.8 7.7
-------- -------- -------- --------
Net loss.................................................. (3.9)% (75.3)% (6.4)% (39.8)%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES
Total revenues were $57.8 million and $29.7 million in the second
quarter of fiscal 2000 and 1999, respectively, representing a period-to-period
increase of 95%. For the six month periods ended September 30, 1998 and 1999,
total revenues increased 113% from $51.4 million to $109.4 million. The reasons
for the revenue increases are more fully discussed below.
9
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LICENSES. License revenues were $37.1 million and $17.4 million in the
second quarter of fiscal 2000 and 1999, respectively, representing 64% and 59%
of total revenues in the respective periods and $69.2 million and $31.3 million
for the six months ended September 30, 1999 and 1998, respectively, representing
63% and 61% of total revenues for such periods. License revenues increased 114%
in the second quarter of fiscal 2000 compared to the second quarter of fiscal
1999. For the six months ended September 30, 1999, license revenues increased
121% compared to the six month period ended September 30, 1998. The increases in
license revenues are attributable to increased demand for new and additional
licenses of our Infrastructure Management applications from new and existing
customers, higher average transaction sizes, the expansion of our domestic and
international sales forces, and acquisitions.
SERVICES. Services revenues were $20.7 million and $12.3 million in the
second quarter of fiscal 2000 and 1999, respectively, representing 36% and 41%
of total revenues in the respective periods and $40.2 million and $20.1 million
for the six months ended September 30, 1999 and 1998, respectively, representing
37% and 39% of total revenues for such periods. Services revenues increased 69%
in the second quarter of fiscal 2000 compared to the second quarter of fiscal
1999. For the six months ended September 30, 1999, services revenues increased
100% compared to the six months ended September 30, 1998. The dollar increases
are attributable to maintenance agreements from our expanded installed base of
customers and an increase in consulting revenue related to the implementation of
our software from initial license agreements.
COSTS AND EXPENSES
COST OF LICENSES. Cost of licenses were $215,000 and $52,000 in the
second quarter of fiscal 2000 and 1999, respectively, each representing less
than 1% of total license revenues in the respective periods and $658,000 and
$123,000 for the six month periods ended September 30, 1999 and 1998,
respectively, again representing less than 1% of the total license revenues in
the respective periods.
COST OF SERVICES. Cost of services revenues was $12.4 million and
$7.0 million in the second quarter of fiscal 2000 and 1999, respectively,
representing 21% and 23% of total revenues in the respective periods and
$24.6 million and $11.4 million for the six months ended September 30, 1999
and 1998, respectively, representing 23% and 22% of total revenues for such
periods, respectively. The dollar increases in the second quarter of fiscal
2000 over 1999 and for the six months ended September 30, 1999 over the same
period in 1998 are attributable to an increase in professional services
personnel. Cost of services increased as a percentage of related revenues due
largely to a greater percentage growth in lower margin consulting revenue
compared to support revenue.
SALES AND MARKETING. Sales and marketing expenses were $20.6 million
and $10.6 million in the second quarter of fiscal 2000 and 1999,
respectively, representing 36% of total revenues in both periods and $39.8
million and $18.8 million for the six months ended September 30, 1999 and
1998, respectively, representing 36% and 37% 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, an increase in marketing personnel, the effect of
combining the sales and marketing operations of the acquisitions made during
fiscal 2000 and 1999, and the effect of operating expense increases. If we
experience a decrease in sales force productivity or for any other reason a
decline in revenues, it is likely that operating margins will decline as well.
RESEARCH AND DEVELOPMENT. Research and development expenses were $7.4
million and $3.2 million in the second quarter of fiscal 2000 and 1999,
respectively, representing 13% and 11% of total revenues in the respective
periods and $12.9 million and $5.6 million for the six months ended September
30, 1999 and 1998, respectively, representing 12% and 11% of total revenues in
such periods. The dollar increases in research and development from fiscal 1999
to 2000 are due primarily to an increase in the number of personnel conducting
research and development and quality assurance efforts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$4.7 million and $2.3 million in the second quarter of fiscal 2000 and 1999,
respectively, representing 8% of total revenues in both periods, and $8.5
million and $4.1 million for the six months ended September 30, 1999 and
1998, respectively, representing 8% of total revenues in both periods. The
dollar increases from fiscal 1999 to 2000 are attributable to costs
associated with administrative personnel additions and infrastructure
expansion to support our growth.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles of $7.8
million and $4.9 million were incurred in the second quarter of fiscal 2000 and
1999, respectively, representing 13% and 17% of total revenues in the respective
periods and $15.6 million and $6.5 million for the six months ended September
30, 1999 and 1998, respectively, representing 14% and 13% of total revenues in
such periods. The dollar and percentage increases are attributable to the
amortization of intangible assets related to acquisitions made during fiscal
2000 and 1999.
10
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ACQUIRED RESEARCH AND DEVELOPMENT COSTS. Acquired in-process research
and development costs of $2.9 million were incurred in the second quarter of
fiscal 2000 in connection with the acquisition of Knowlix. Acquired in-process
research and development costs of $18.9 million and $3.0 million were incurred
in the second quarter of fiscal 1999 in connection with the Innovative and ISS
acquisitions.
PROVISION FOR INCOME TAXES
Income tax expense for the second quarter of fiscal 2000 amounted
to $4.0 million compared with $2.2 million in the comparable quarter of fiscal
1999. This increase results from the $5.7 million dollar increase in operating
profits, before taxes and recognition of the acquired research and development
costs and the amortization of intangibles in the respective periods. Excluding
the effect of expensing the acquired in-process research and development costs
and the amortization of intangibles the effective tax rates for the second
quarter of fiscal 2000 and 1999 were 33% and 33%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our increase in cash from March 31, 1999 to September 30, 1999 was
primarily attributable to cash received as a result of common stock issuances
related to employee stock options. Separately, future lease commitments totaling
$124 million for our recently signed campus leases have commenced. The leases
and commitments cover an approximately twelve year period.
During July 1999 we entered into a $20 million senior credit facility
for a term of three years with a syndicate of financial institutions. The
facility is available for general corporate purposes including acquisitions. We
believe that our current cash, short-term investments, cash flow from
operations, and amounts available under our credit facility will be sufficient
to meet our working capital requirements for at least the next 12 months.
Although operating activities may provide cash in certain periods, to the extent
we experience growth in the future, our operating and investing activities may
use cash. Consequently, any such future growth may require us to obtain
additional equity or debt financing, which may not be available on commercially
reasonable terms or which may be dilutive. As of September 30, 1999, there were
no amounts outstanding with respect to the $20 million senior credit facility.
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.
We utilize third party equipment and software that may not be Year
2000 compliant and are 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, we have received
assurances from suppliers of all third party software that we deem material
to our 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 us to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on our
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 we were to experience delays implementing Year 2000 compliant
software products, we could incur substantial costs and disruption of our
business, which would potentially have a material adverse effect on our
results of operations and financial condition.
We are still assessing the impact the Year 2000 issue will have on
our proprietary software products and internal information systems and will
take appropriate corrective actions based on the results of such analyses.
Our management 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 our business, results of operations,
and financial condition.
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In the ordinary course of our business, we test and evaluate our own
software products and believe that our 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 our software
products with respect to four digit date dependent data or the ability of our
products to correctly create, store, process, and output information related
to this data. We cannot be certain, however, that we will not subsequently
learn that some of our 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, we have 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 our 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 our software products, which could have an adverse effect on our
business, results of operations, and financial condition.
Due to the general uncertainty inherent in the year 2000 problem, we
are unable to determine at this time whether year 2000 failures could harm
our business and financial results. However, a reasonable "worst-case
scenario" might include:
- delay or substantial losses of revenues;
- cancellation of customer orders;
- damage to our reputation;
- increased maintenance and warranty costs; or
- litigation costs.
Any of these could harm our business, financial condition and results of
operations. We have not developed, and we have no plans to develop a
contingency plan to deal with the effects of this worst case scenario.
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:
WE HAVE A HISTORY OF LOSSES, WE CANNOT PREDICT OUR FUTURE OPERATING RESULTS AND
WE CANNOT ASSURE OUR FUTURE PROFITABILITY.
Through September 30, 1999, we have recorded cumulative net losses of
approximately $46.9 million, including approximately $40.0 million related to
the write-off of acquired in-process research and development in connection with
acquisitions. Our applications have changed substantially since the mid-1990s.
In addition, we have acquired or developed a significant number of applications
in the last three years, bringing our total number of applications to more than
20. As a result, prediction of our future operating results is difficult, if not
impossible. Although we achieved profitability during the years ended March 31,
1998 and 1999 and the six months ended September 30, 1999 (excluding the impact
of the $40.0 million charge related to acquired in-process research and
development in connection with acquisitions), there can be no assurance that we
will be able to remain profitable on a quarterly or annual basis. In addition,
we do not believe that the growth in revenues we have experienced in recent
years is indicative of future revenue growth or future operating results.
FUTURE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS DUE TO A NUMBER OF
FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL, COULD ADVERSELY AFFECT OUR STOCK
PRICE.
Our 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 our control. These factors include, among others, our
ability to develop, introduce and market new and enhanced versions of our
software on a timely basis; market demand for our software; the size, timing and
contractual terms of significant orders; the timing and significance of new
software product announcements or releases by us or our competitors; changes in
our pricing policies or those of our competitors; changes in our business
strategies; budgeting cycles of our potential customers; changes in the mix of
software products and services sold; reliance on indirect sales forces like
systems integrators and channels; 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. We have often recognized a substantial portion of our
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
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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 our products may be deferred or canceled, which could have a
material adverse effect on our business, operating results and financial
condition.
OUR SALES CYCLE IS LONG AND UNPREDICTABLE, AND POTENTIAL DELAYS IN THE CYCLE
MAKE OUR REVENUES SUSCEPTIBLE TO FLUCTUATIONS.
The licensing of our software generally requires us 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 we may have little or no control, including the size of the transaction
and the level of competition which we encounter in our selling activities.
During the sales cycle, we typically provide a significant level of education to
prospective customers regarding the use and benefits of our products. Any delay
in the sales cycle of a large license or a number of smaller licenses could have
a material adverse effect on our business, operating results and financial
condition.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY AFFECT OUR QUARTERLY
OPERATING RESULTS.
Our business has experienced and is expected to continue to experience
seasonality. Our revenues and operating results in our 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 our
sales force to meet fiscal year-end sales quotas. In addition, we are currently
attempting to expand our presence in international markets, including Europe,
the Pacific Rim, and Latin America. International revenues comprise a
significant percentage of our total revenues, and we may experience additional
variability in demand associated with seasonal buying patterns in such foreign
markets.
OUR PAST ACQUISITIONS OF OTHER BUSINESSES AND POTENTIAL FUTURE ACQUISITIONS
PRESENT RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS.
Since September 1997, we have completed six acquisitions. In the
future, we 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.
Past acquisitions and any future acquisitions or investments that we may
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
- disruption of on-going businesses
- difficulty in realizing the potential financial and strategic
position of Peregrine 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 adding significant numbers of new employees,
including training, evaluation, and coordination of effort of
all employees towards our corporate mission
- diversion of management attention
- difficulty in obtaining preferred acquisition accounting
treatment for these types of transactions; likelihood that
future acquisitions will require purchase accounting resulting
in increased intangible assets and goodwill, substantial
amortization of such assets and goodwill, and a negative
impact on
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reported earnings
- potential dilutive effect on earnings
The risks described above, either individually or in the aggregate,
could result in decreases in our revenue and operating profits and could even
result in operating losses. Future acquisitions, if any, could provide for
consideration to be paid in cash, shares of our common stock, or a combination
of cash and our common stock. However, we may not be able to complete any such
future acquisitions.
IF THE MARKET FOR OUR INFRASTRUCTURE MANAGEMENT SOFTWARE SOLUTIONS DOES NOT
CONTINUE TO DEVELOP AS WE ANTICIPATE, OUR ABILITY TO GROW OUR BUSINESS AND SELL
OUR PRODUCTS WILL BE ADVERSELY AFFECTED.
Until recently, our product strategy has focused on integrating a
broad array of information technology management applications with other
traditional internal help desk applications to create an Enterprise Service
Desk capable of managing multiple aspects of an enterprise's information
technology structure. In recent years, we have broadened our product line
beyond traditional management of information technology assets to offer a
more comprehensive product suite capable of managing a business enterprise's
information technology infrastructure, physical plant and facilities,
communications infrastructure, distribution systems and fleets.
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, we believe that a market for integrated
enterprise-wide infrastructure management solutions, including applications for
information technology management, asset management, building and facilities
management, communications resource management, distribution systems management
and fleet management, is evolving from existing requirements for specific
information technology management solutions. However, the existence of such a
market is unproven. If such a market does not fully develop, this could impair
our business. In particular, it could result in decreases in our revenues and
operating profits. If these decreases are large, we could incur operating
losses. 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 our infrastructure management applications
could have a material adverse effect on our business, results of operations, and
financial condition.
IF WE DO NOT RESPOND ADEQUATELY TO OUR INDUSTRY'S EVOLVING TECHNOLOGY STANDARDS
OR DO NOT CONTINUE TO MEET THE SOPHISTICATED NEEDS OF OUR CUSTOMERS, SALES OF
OUR PRODUCTS MAY DECLINE.
As a result of rapid technological 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 depend in part upon our ability to
improve existing products and 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.
OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND
IF THEY CHOOSE TO LEAVE PSI, IT COULD HARM OUR BUSINESS.
Our success will depend to a significant extent on the continued
service of our senior management and certain other key employees, including
selected sales, consulting, technical and marketing personnel. Few of our
employees, including senior management, are bound by an employment or
noncompetition agreement. In addition, we do not generally maintain key man life
insurance on any employee. The loss of the services of one or more of our
executive officers or key employees or the decision of one or more such officers
or employees to join a competitor or otherwise compete directly or indirectly
with us could have a material adverse effect on our business, operating results
and financial condition.
WE WILL NEED TO RECRUIT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL TO
SUCCESSFULLY GROW OUR BUSINESS.
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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 succeed in attracting and
retaining such personnel. If we do not, our business, operating results, and
financial condition could be materially adversely affected.
FUTURE CHANGES IN THE FEDERAL IMMIGRATION LAWS COULD LIMIT OUR ABILITY TO
RECRUIT AND EMPLOY SKILLED TECHNICAL PROFESSIONALS FROM OTHER COUNTRIES, AND
THIS COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS.
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 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 visa. 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.
NEW PRODUCT INTRODUCTIONS AND THE ENHANCEMENT OF EXISTING PRODUCTS BY OUR
COMPETITORS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS.
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.
We have faced competition from a number of sources, including
- providers of internal help desk software applications such as
Remedy Corporation and Software Artistry (now a division of
Tivoli Systems)
- customer interaction software companies such as Clarify and
The Vantive Corporation, whose products include internal help
desk applications
- information technology and systems management companies such
as IBM, Computer Associates International, Network Associates,
and Hewlett-Packard Company
- providers of asset management and facilities management
software
- the internal information technology departments of those
companies with infrastructure management needs
Some of our current and many of our potential competitors have much
greater financial, technical, marketing, and other resources than PSI has. 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 against current and future competitors. In
addition, competitive pressures faced by PSI may materially adversely affect our
business, operating results, and financial condition.
NEW COMPETITORS AND ALLIANCES AMONG EXISTING COMPETITORS COULD IMPAIR OUR
ABILITY TO RETAIN AND EXPAND OUR MARKET SHARE.
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 our
smaller
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competitors. 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.
SYSTEM MANAGEMENT COMPANIES MAY ACQUIRE INFRASTRUCTURE MANAGEMENT AND/OR HELP
DESK SOFTWARE PROVIDERS AND CLOSE THEIR SYSTEMS TO OUR PRODUCTS, WHICH COULD
HURT OUR ABILITY TO SELL OUR PRODUCTS.
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 us. 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.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS, AND
OUR ABILITY TO MANAGE THIS GROWTH AND ANY FUTURE GROWTH WILL AFFECT OUR ABILITY
TO ACHIEVE AND MAINTAIN PROFITABILITY.
We have grown significantly in recent periods, with total revenues
increasing from $35.0 million in fiscal 1997, to $61.9 million in fiscal 1998,
and to $138.1 million in fiscal 1999.
If we achieve our growth plans, including the integration of technology
acquired in acquisitions, 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 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.
RISKS ASSOCIATED WITH CAPITAL COMMITMENT, CONSTRUCTION OVERSIGHT, AND MOVING OF
PERSONNEL AND FACILITIES ARISING OUT OF OUR JUNE 1999 LEASES FOR OFFICE SPACE
COULD RESULT IN PROBLEMS WHICH HARM OUR BUSINESS.
In June 1999, we entered into a series of leases providing
approximately 540,000 square feet of office space, including an option for
approximately 118,000 square feet of space. Even excluding the exercise of the
option, the leases require minimum lease payments of approximately $124 million
over the terms of the leases, approximately twelve years. This office space
(including the option) is intended for a five building campus setting in San
Diego, California. We took possession of the first building in October 1999.
Construction has commenced on the second building, and the final building is
scheduled for delivery in 2003. The capital commitments, construction oversight,
and moving of personnel and facilities involved in a transaction of this type
and magnitude present numerous risks involving estimation of future events and
execution of the transaction. Examples of the risks involved include: failure to
properly estimate the growth of our business in the future; inability to
sublease excess office space that may result; disruption of operations; and
inability to match substantially-fixed lease payments with fluctuating revenues.
WE WILL NEED TO EXPAND OUR DISTRIBUTION CHANNELS IN ORDER TO DEVELOP OUR
BUSINESS AND INCREASE REVENUE.
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,
original equipment manufacturers, and other channel partners. We may not be able
to attract channel partners that will
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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.
THE INTENDED EXPANSION OF OUR INTERNATIONAL OPERATIONS INVOLVES RISKS WHICH
COULD ADVERSELY AFFECT OUR BUSINESS.
International sales represented approximately 36% of our total revenue
both in fiscal 1998 and fiscal 1999. We currently have international sales
offices in Utrecht, Brussels, Stockholm, Copenhagen, Frankfurt, London, Paris,
Singapore, Tokyo, Milan, Rome and Sydney. 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. We have only limited experience in developing local-language versions
of our products and marketing and distributing our 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.
THE SUCCESS OF OUR INTERNATIONAL OPERATIONS IS DEPENDENT UPON MANY FACTORS WHICH
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS INTERNATIONALLY AND
COULD AFFECT OUR PROFITABILITY.
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. Furthermore, 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.
AS OUR EXPANDING INTERNATIONAL OPERATIONS IN EUROPE AND THE ASIA-PACIFIC REGION
ARE INCREASINGLY CONDUCTED IN CURRENCIES OTHER THAN THE U.S. DOLLAR,
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY
EXCHANGE LOSSES.
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
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.
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ISSUES RELATED TO THE INTRODUCTION OF THE EURO AS THE CURRENCY OF CERTAIN MEMBER
STATES OF THE EUROPEAN ECONOMIC COMMUNITY MAY ADVERSELY IMPACT OUR PRODUCTS.
On January 1, 1999, certain member states of the European Economic
Community, the EEC, fixed their respective currencies to a new currency, the
euro. On that date, the euro became 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
currencies, 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.
BECAUSE PSI'S OFFICERS AND DIRECTORS OWN A LARGE PORTION OF PSI COMMON STOCK,
THEY WILL BE ABLE TO CONTROL MOST MATTERS REQUIRING STOCKHOLDER APPROVAL, AND
THIS MAY PREVENT OR DISCOURAGE POTENTIAL BIDS TO ACQUIRE PSI.
Based on shares outstanding as of October 31, 1999, PSI's officers,
directors, and entities directly related to such individuals together
beneficially own approximately 21.44% of the outstanding shares of PSI common
stock. In particular, John J. Moores, Chairman of PSI's board of directors, owns
approximately 16.15% 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.
WE MAY EXPERIENCE DELAYS IN DEVELOPING OUR PRODUCTS THAT COULD ADVERSELY AFFECT
OUR ABILITY TO INTRODUCE NEW PRODUCTS, MAINTAIN OUR COMPETITIVE POSITION AND
GROW OUR BUSINESS.
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, for
technological or other reasons, we are unable to develop and introduce new and
improved products in a timely manner, our business, operating results, and
financial condition could be adversely affected.
ERRORS IN OUR PRODUCTS COULD RESULT IN SIGNIFICANT COSTS TO US AND COULD IMPAIR
OUR ABILITY TO SELL OUR PRODUCTS.
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.
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE
TO USE OUR TECHNOLOGY OR TRADEMARKS AND THIS COULD WEAKEN OUR COMPETITIVE
POSITION, REDUCE OUR REVENUE AND INCREASE COSTS.
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.
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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, and could materially adversely affect our business,
operating results, and financial condition.
THIRD PARTIES COULD ASSERT, FOR COMPETITIVE OR OTHER REASONS, THAT OUR PRODUCTS
INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, AND SUCH CLAIMS COULD INJURE OUR
REPUTATION, CONSUME TIME AND MONEY, AND ADVERSELY AFFECT OUR ABILITY TO SELL OUR
PRODUCTS.
While we are not aware that any of our software product offerings
infringe 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 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 licensing 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.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS TO US.
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.
PROVISIONS IN OUR CHARTER DOCUMENTS AND IN DELAWARE LAW MAY DISCOURAGE POTENTIAL
ACQUISITION BIDS FOR PSI AND PREVENT CHANGES IN OUR MANAGEMENT WHICH OUR
STOCKHOLDERS FAVOR.
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.
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.
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
19
<PAGE>
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.
OUR STOCK WILL LIKELY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS
WHICH MAY PREVENT STOCKHOLDERS FROM RESELLING THEIR SHARES AT OR ABOVE THE PRICE
AT WHICH THEY PURCHASED THEIR SHARES.
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 our common stock has varied greatly and the volume of
our common stock traded has fluctuated greatly as well. We expect such
fluctuation to continue. The fluctuation results from 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
- 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 price of our
common stock may experience significant fluctuations in the future.
20
<PAGE>
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
The financial statements reflect our acquisition of Knowlix
Corporation in September 1999. In connection with such acquisition, we issued
352,984 shares of our 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
The 1999 Annual Meeting of the Stockholders of the Company was held on
September 7, 1999 in San Diego, California. John J. Moores, Christopher A. Cole,
David A. Farley, Stephen P. Gardner, Richard A. Hosley, Charlie E. Noell, III,
Norris van den Berg and Thomas Watrous, Sr. were elected to the Board of
Directors. In addition, the following item was acted upon:
To ratify the Board's selection of Arthur Andersen as independent
public accountants for the Company for the fiscal year ending March 31, 2000.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
<S> <C> <C>
43,444,986 20,229 13,807
</TABLE>
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:
No reports on Form 8-K were filed during the quarter ended September
30, 1999.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this 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 12th day of November, 1999.
PEREGRINE SYSTEMS, INC.
By /s/ David A. Farley
-----------------------------------
David A. Farley
Senior Vice President, Finance and
Administration and Chief Financial
Officer (Principal Financial Officer)
By /s/ Matthew C. Gless
-----------------------------------
Matthew C. Gless
Vice President, Finance and Chief
Accounting Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 24,858
<SECURITIES> 0
<RECEIVABLES> 52,587
<ALLOWANCES> (1,529)
<INVENTORY> 0
<CURRENT-ASSETS> 93,323
<PP&E> 36,542
<DEPRECIATION> (15,608)
<TOTAL-ASSETS> 254,922
<CURRENT-LIABILITIES> 58,187
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 193,800
<TOTAL-LIABILITY-AND-EQUITY> 254,922
<SALES> 109,412
<TOTAL-REVENUES> 109,412
<CGS> 25,294
<TOTAL-COSTS> 109,099
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 99
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 406
<INCOME-TAX> 7,481
<INCOME-CONTINUING> (7,075)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,075)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
