<PAGE>
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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 JUNE 30, 2000
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)
3611 VALLEY CENTRE 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 June 30, 2000, was 139,886,874.
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<PAGE>
PEREGRINE SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
------- --------------------- --------
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
March 31, 2000 (audited) ................................................................. 3
Condensed Consolidated Statements of Operations for the Three Months Ended
June 30, 2000 and 1999 (unaudited) ....................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
June 30, 2000 and 1999 (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
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 21
PART II. OTHER INFORMATION
-------- -----------------
Item 1. Legal Proceedings ........................................................................ 22
Item 2. Changes in Securities .................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders....................................... 23
Item 6. Exhibits and Reports on Form 8-K ......................................................... 23
Signatures ....................................................................................... 24
</TABLE>
2
<PAGE>
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
--------------- ---------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash, cash equivalents, and short-term investments....................... $ 69,493 $ 33,511
Accounts receivable, net of allowance for doubtful accounts of $10,789
and $2,179, respectively.............................................. 127,845 69,940
Other current assets..................................................... 34,204 22,826
--------------- ---------------
Total current assets.................................................. 231,542 126,277
Property and equipment, net.............................................. 65,658 29,537
Intangible assets, investments and other, net............................ 1,750,058 367,616
--------------- ---------------
$ 2,047,258 $ 523,430
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................................... $ 55,502 $ 19,850
Accrued expenses...................................................... 164,186 49,064
Deferred revenue...................................................... 59,056 36,779
Current portion of long-term debt..................................... - 74
--------------- ---------------
Total current liabilities.......................................... 278,744 105,767
Long-term debt, net of current portion................................... - 1,257
Deferred revenue, net of current portion................................. 5,226 4,556
--------------- ---------------
Total liabilities........................................................ 283,970 111,580
--------------- ---------------
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, 139,887 and
109,501 shares issued and outstanding, respectively................... 140 110
Additional paid-in capital............................................... 1,971,111 480,957
Accumulated deficit...................................................... (159,988) (64,863)
Unearned portion of deferred compensation................................ (38,784) (678)
Cumulative translation adjustment........................................ (562) (666)
Treasury stock, at cost.................................................. (8,629) (3,010)
--------------- ---------------
Total stockholders' equity............................................... 1,763,288 411,850
--------------- ---------------
$ 2,047,258 $ 523,430
=============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Licenses....................................................... $ 62,442 $ 32,092
Services....................................................... 31,882 19,513
----------- ---------
Total revenues ............................................. 94,324 51,605
----------- -----------
Costs and Expenses:
Cost of licenses .............................................. 478 443
Cost of services............................................... 16,898 12,236
Sales and marketing ........................................... 39,240 19,101
Research and development ...................................... 11,300 5,450
General and administrative .................................... 8,445 3,878
Acquisition costs ............................................. 107,200 11,985
----------- -----------
Total costs and expenses ................................... 183,561 53,093
----------- -----------
Loss from operations ............................................. (89,237) (1,488)
Interest income, net ............................................. 75 86
----------- -----------
Loss from operations before income taxes ......................... (89,162) (1,402)
Income taxes ..................................................... 5,963 3,439
----------- -----------
Net loss ...................................................... $ (95,125) $ (4,841)
=========== ===========
Net loss per share - basic and diluted:
Net loss per share ............................................ $ (0.83) $ (0.05)
=========== ===========
Shares used in computation .................................... 114,424 99,292
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE>
PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Cash flow from operating activities:
Net loss...................................................................... $ (95,125) $ (4,841)
Adjustments to reconcile net (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................................... 31,364 8,473
Acquired in-process research and development costs....................... 64,100 4,194
Increase (decrease) in cash resulting from changes, net of business
acquired, in:
Accounts receivable................................................. (27,175) (4,143)
Deferred tax asset ................................................. (1,746)
Other current assets................................................ (6,735) (2,230)
Accounts payable.................................................... 12,611 108
Accrued expenses.................................................... 13,054 (7,032)
Deferred revenue ................................................... 4,487 680
Other assets........................................................ (3,216) (1,035)
---------------- ---------------
Net cash provided by (used in) operating activities .............. (8,381) (5,826)
---------------- ---------------
Cash flows from investing activities:
Equity investments purchased .............................................. (13,017) -
Maturities of short-term investments ...................................... - 2,000
Purchases of property and equipment........................................ (15,335) (2,551)
Other investing activities ................................................ - (451)
Cash acquired in business combination ..................................... 73,243 -
---------------- ---------------
Net cash provided by (used in) investing activities............... 44,891 (1,002)
---------------- ---------------
Cash flows from financing activities:
Repayments of long-term debt .............................................. (1,331) (43)
Issuance of common stock................................................... 6,318 4,965
Treasury stock purchased................................................... (5,619) (1,285)
---------------- ---------------
Net cash provided by (used in) financing activities .............. (632) 3,637
---------------- ---------------
Effect of exchange rate changes on cash ...................................... 104 (257)
---------------- ---------------
Net (decrease) increase in cash and cash equivalents.......................... 35,982 (3,448)
Cash and cash equivalents, beginning of period ............................... 33,511 21,545
---------------- ---------------
Cash and cash equivalents, end of period...................................... $ 69,493 $ 18,097
================ ===============
Cash paid during the period for:
Interest................................................................... $ 134 $ 7
Income taxes............................................................... $ 11 $ 84
Supplemental Disclosure of Noncash Investing and Financial Activities:
Stock issued and other noncash consideration for acquisitions ............. $ 1,445,778 $ 22,823
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of June 30,
2000, condensed consolidated statements of operations for the three month
periods ended June 30, 2000, and 1999, and condensed consolidated statements of
cash flows for the three month periods ended June 30, 2000, and 1999, have been
prepared by Peregrine Systems, Inc. (unless otherwise noted, "Peregrine
Systems," "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, 2000, which
provides further information regarding our significant accounting policies and
other financial and operating information. Interim operating results are not
necessarily indicative of operating results for the full year or any other
future period. The consolidated condensed financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
The preparation of our financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions that may affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
Our net loss for the three month periods ended June 30, 2000 and
1999 approximates comprehensive loss, as defined by SFAS 130, for both
periods.
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, if any, outstanding during the periods. Potentially dilutive
securities consist of employee stock options using the treasury stock and
dilutive if-converted methods. For the three month periods ended June 30,
2000 and 1999, the diluted loss per share calculation excludes the effect of
outstanding stock options as inclusion would be anti-dilutive.
The following table sets forth the computation of basic and diluted
net loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------------
2000 1999
------------- --------------
<S> <C> <C>
Numerator:
Net loss................................................... $ (95,125) $ (4,841)
============= ==============
Denominator:
Denominator for basic net loss per share, weighted
average shares.......................................... 114,424 99,292
Dilutive effect of employee stock options.................. - -
------------- --------------
Denominator for diluted net loss per share, dilutive
potential common shares.................................... 114,424 99,292
============= ==============
Net loss per share - basic................................. $ (0.83) $ (0.05)
============= ==============
Net loss per share - diluted............................... $ (0.83) $ (0.05)
============= ==============
</TABLE>
6
<PAGE>
NOTE 3. ACQUISITION
On June 16, 2000 we completed the acquisition of Harbinger
Corporation ("Harbinger"), a provider of electronic business connectivity
software and services. We issued approximately 30,157,000 shares of our
Common Stock (excluding approximately 6.0 million shares of Peregrine Common
Stock issuable upon exercise of options and warrants assumed in connection
with the acquisition) in exchange for all of the outstanding shares of
Harbinger for a total purchase price, including merger related costs, of
approximately $1.5 billion.
In accordance with Interpretation No. 44 of APB 25, we have recorded
deferred compensation of $31.9 million related to the unvested intrinsic
value of Harbinger options exchanged for our options in the above
transaction. This deferred compensation charge will be amortized to expense
over the remaining vesting period of approximately three years.
The Harbinger acquisition was accounted for under the purchase
method of accounting and, accordingly, the assets, including in-process
research and development, and liabilities, were recorded based on their fair
values, as determined by an independent appraisal, at the date of
acquisition. The results of operations of Harbinger have been included in the
financial statements for the period subsequent to acquisition.
We allocated the $1,519.3 million purchase price of Harbinger
between acquired in-process research and development of $64.1 million, the
fair value of the net assets acquired of $82.8 million, and purchase price in
excess of the acquired assets of $1,372.4 million.
The value of the Harbinger acquisition's acquired in-process technology
was computed using a discounted cash flow analysis on the anticipated income
stream of the related product sales. The value assigned to acquired in-process
technology was determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from the projects and discounting the net cash flows to
their present value. With respect to the acquired in-process technology, the
calculations of value were adjusted to reflect the value creation efforts of
Harbinger prior to the close.
The nature of the efforts required to develop acquired in-process
technology into commercially viable products principally relates to the
completion of all planning, designing and testing activities that are necessary
to establish that the products can be produced to meet their design
requirements, including functions, features and technical performance
requirements. If the research and development project and technologies are not
completed as planned, they will neither satisfy the technical requirements of a
changing market nor be cost effective.
No assurance can be given, however, that the underlying assumptions
used to estimate expected product sales, development costs or profitability, or
the events associated with such projects, will transpire as estimated. Because
we do not account for expenses by product, it is not possible to determine the
actual expenses associated with any of the acquired technologies. However, we
believe that expenses incurred to date associated with the development and
integration of the acquired in-process research and development projects are
substantially consistent with our previous estimates.
We continue to work toward the completion of these projects. The
majority of the projects are on schedule, but delays may occur due to changes in
technological and market requirements for our products. The risks associated
with these efforts are still considered high and no assurance can be made that
any upcoming products will meet with market acceptance. Delays in the
introduction of certain products may adversely affect our revenues and earnings
in future quarters.
With respect to acquisition related liabilities at June 30, 2000, we
have both approved and preliminary plans of integration and consolidation.
These plans include the steps we believe will be necessary within the year to
integrate the operations of the associated acquisitions. The plans provide
for the consolidation of duplicate facilities and infrastructure assets and
the elimination of duplicative efforts and positions within the combined
company. In connection with the integration plans we have accrued
approximately $86.0 million in merger related costs comprised principally of
the following components (in thousands):
<TABLE>
<CAPTION>
ESTIMATED LIABILITY
-------------------
<S> <C>
Estimated advisory fees....................................................... $22,770
Employee severance and relocation............................................. 26,445
Duplicative facilities, equipment and efforts................................. 22,140
Other merger related costs.................................................... 14,612
-------
$85,967
=======
</TABLE>
This accrual represents our best estimate, based on information
available as of June 30, 2000, of the identifiable and quantifiable charges
that we may incur as a result of the acquisition and integration plans, however
these estimates may change. Any changes in the estimates during the next year
will increase or decrease goodwill as appropriate. We believe substantially all
of the above costs will be paid for within the next year.
In addition to the costs included in the accrual for our acquisition
and integration plans we will incur other incremental costs as a direct
result of our integration efforts. These costs will be accounted for as
incurred in future periods. To the extent these costs become significant they
could have a material adverse effect on our future operating results.
Acquisition costs for the first quarter of fiscal year 2001 and
2000, respectively, consist of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
Amortization of intangibles
and other acquisition
related costs $ 43,100 $ 7,791
Acquired in-process research
and development 64,100 4,194
--------- ---------
$ 107,200 $ 11,985
========= ==========
</TABLE>
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities Exchange Commission ("SEC") staff
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," as
amended by SAB No. 101A and SAB No. 101B, to provide guidance on the
recognition, presentation and disclosure of revenue in financial statements.
SAB No. 101 explains the SEC staff's general framework for revenue
recognition, stating that certain criteria be met in order to recognize
revenue. SAB No. 101 also addresses gross versus net revenue presentation and
financial statement and Management's Discussion and Analysis disclosures
related to revenue recognition. We have not yet adopted SAB No. 101 but we do
not anticipate that the adoption of this bulletin will result in a material
effect on our financial statements.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THIS "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND 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.
PLEASE NOTE THAT WE COMPLETED THE ACQUISITION OF HARBINGER
CORPORATION IN JUNE 2000. REFERENCES TO OUR HISTORICAL RESULTS OF OPERATIONS
REFER ONLY TO THE HISTORIC BUSINESS OF PEREGRINE. REFERENCES TO OUR RESULTS
OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2000 INCLUDE THE RESULTS OF
OPERATIONS OF PEREGRINE AND HARBINGER AS A COMBINED COMPANY BEGINNING JUNE
16, 2000.
OVERVIEW
Peregrine Systems, Inc. is a leading provider of infrastructure
management and e-infrastructure software products and solutions. Our products
help businesses to procure, deploy, maintain, and dispose of numerous aspects
of their corporate infrastructure. Using common shared data, our products
help to manage information technology assets as well as assets relating to
corporate facilities and vehicle fleets. In addition, we have recently
introduced products for rail management and Internet-based asset procurement.
Until late 1997, our product offerings focused principally on managing
information technology assets through a consolidated enterprise service desk
that provided support to users of our customers' information technology systems
and networks. During fiscal 1998, we determined that our customers required a
more comprehensive solution to control and manage their infrastructure assets,
including information technology assets as well as the numerous other assets
that make up business infrastructures. Among other things, we determined that
businesses needed to be able to manage the availability of their assets,
minimize their investments and expense, consolidate data about infrastructure
assets, and interface their asset management solutions to enterprise
applications. Accordingly, we refocused our product development and marketing
strategies to focus on an "infrastructure resource management" strategy.
In order to execute on our infrastructure resource management strategy,
we have completed a number of acquisitions since late 1997. These acquisitions
have been designed to broaden our infrastructure resource management product
suite.
- In September 1997, we acquired Apsylog S.A., a provider of asset
management software focused principally on managing information
technology assets.
- In July 1998, we acquired Innovative Tech Systems, a provider of
software products that address management of corporate facilities.
- In September 1998, we acquired technologies and other assets from
related entities operating as International Software Solutions. These
technologies expanded the ability of our products to help manage
information technology assets by permitting network help desk analysts
to interface with users over the corporate network.
- In March 1999, we acquired Prototype, a provider of software products
for managing corporate vehicle fleets.
- In April 1999, we acquired fPrint, a British provider of software used
to discover and inventory software located on the computers of
individual users on a corporate network.
- In September 1999, we acquired Knowlix, a developer of knowledge
management software that assists network help desk analysts by
managing the intangible technical information and know-how required to
assist callers.
- In March 2000, we acquired Telco Research, a provider of software
products that help manage telecommunications assets, and Barnhill
Management Group, a services and solutions delivery partner of
Peregrine with extensive experience in the telecommunications
industry.
- In June 2000, we completed the acquisition of Harbinger
Corporation. Harbinger's business focused historically on providing
electronic commerce software that facilitates the exchange of
electronic data between businesses. Although a significant portion
of Harbinger's revenues derived from the license and support of
these software products, Harbinger had more recently begun to focus
on providing e-commerce enablement services, particularly
e-commerce products and services intended to automate the cycle of
transactions required in the electronic procurement of goods and
services. The acquisition of Harbinger was our most substantial to
date, and we have only recently begun the process of integrating
Harbinger's business and operations with our own. Peregrine
acquired Harbinger because it believes that Harbinger's electronic
procurement products and services will complement Peregrine's
infrastructure resource management products and services. Relative
to its legacy electronic commerce software business, however,
Harbinger's electronic procurement and other internet-based
businesses represented a relatively small percentage of Harbinger's
total revenues. In addition, revenue growth of Harbinger's legacy
business had slowed in recent periods as Harbinger changed its
strategic focus. In addition, Harbinger's overall growth rates have
been substantially less than Peregrine's historic growth rates.
While Peregrine believes that the acquisition offers the potential
for many attractive product and business synergies, it is difficult
to predict the effect of the acquisition on our business and
results of operations, and we encourage you to review the
discussions of acquisition-related risks under the
caption "Factors That May Affect Future Results."
Our software products are currently available on most major computer
operating platforms; however, for the past several years, over 85% of
Peregrine's license sales have been attributable to the UNIX and Windows NT
platforms.
8
<PAGE>
Our revenues are derived principally from product licensing and
services. Services are comprised of maintenance, professional services,
network fees, and training. License fees are generally due upon the granting
of the license and typically include a one-year warranty period as part of
the license agreement. We also provide ongoing maintenance services, priced
and sold separately from our other products, which include technical support
and product enhancements, for an annual fee based upon the current price of
the product. Network fees consist of monthly access charges and transaction
based usage charges. We also derive revenues from transaction fees,
subscription fees, and maintenance fees associated with electronic commerce
portals that were part of the businesses accquired with Harbinger.
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
maintenance services are recognized ratably over the term of the support
period, generally one year. 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 our products.
Revenues from consulting and training services are recognized as the
respective services are performed. Network fees are recognized monthly as
services are provided.
We currently derive a substantial portion of our license revenues
from the sale of our infrastructure resource management applications, our
e-infrastructure solutions and our e-connectivity solutions. We expect these
products to account for a substantial portion of our revenues for the
foreseeable future. In addition, we expect revenues from Harbinger's legacy
electronic commerce software business to account for a significant portion of
our revenues in future periods although we anticipate revenues from sales and
maintenance of these products to decline gradually as a percentage of total
revenues as we focus more on providing solutions for both acquiring and
managing infrastructure assets. As a result, our future operating results are
dependent upon continued market acceptance of our infrastructure resource
management and e-connectivity strategies and applications, including future
product enhancements, and on the development of a market for our asset
procurement products. Substantially all of our license revenues are derived
from granting a non-exclusive perpetual license to use our products. Factors
adversely affecting the pricing of, demand for or market acceptance of the
infrastructure procurement and resource management applications, such as
competition or technological change, manner of distribution or licensing, and
related method of revenue recognition could have a material adverse effect on
our business, operating results, and financial condition.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
consolidated statements of operations data as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Statement of Operations Data:
Revenues:
Licenses................................................ 66.2% 62.2%
Services................................................ 33.8 37.8
---------- ----------
Total revenues......................................... 100.0 100.0
---------- ----------
Costs and Expenses:
Cost of licenses......................................... 0.5 0.9
Cost of services......................................... 17.9 23.7
Sales and marketing...................................... 41.6 37.0
Research and development................................. 12.0 10.6
General and administrative............................... 9.0 7.5
Acquisition costs........................................ 113.6 23.2
---------- ----------
Total costs and expenses............................... 194.6 102.9
---------- ----------
Loss from operations....................................... (94.6) (2.9)
Interest income, net....................................... 0.1 0.2
---------- ----------
Loss from operations before income taxes................... (94.5) (2.7)
Income taxes............................................... 6.3 6.7
---------- ----------
Net loss................................................... (100.8)% (9.4)%
========== ==========
</TABLE>
9
<PAGE>
THREE MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
REVENUES. Total revenues were $94.3 million and $51.6 million in the
first quarter of fiscal 2001 and 2000, respectively, representing a
period-to-period increase of 83%. The reasons for the revenue increases are more
fully discussed below.
LICENSES. License revenues were $62.4 million and $32.1 million in
the first quarter of fiscal 2001 and 2000, respectively, representing 66% and
62% of total revenues in the respective periods. License revenues increased
95% in the first quarter of fiscal 2001 compared to the first quarter of
fiscal 2000. The increase in license revenues is attributable to increased
demand for new and additional licenses of our Infrastructure Management
applications from new and existing customers, larger transaction sizes,
expansion of our domestic and international sales forces, and the revenue
contribution from acquired companies and from Harbinger for the short
post-acquisition period.
SERVICES. Services revenues were $31.9 million and $19.5 million in
the first quarter of fiscal 2001 and 2000, respectively, representing 34% and
38% of total revenues in the respective periods. Services revenues increased
63% in the first quarter of fiscal 2001 compared to the first quarter of
fiscal 2000. The dollar increase is attributable to maintenance agreements
from our expanded installed base of customers, an increase in consulting
revenue related to the implementation of our software from initial license
agreements, and the revenue contribution from acquired companies and from
Harbinger for the short post-acquisition period. Services revenues may
prospectively account for a larger percentage of total revenues for the
combined company as Harbinger's services revenues have historically accounted
for a majority of Harbinger's total revenues.
COSTS AND EXPENSES
COST OF LICENSES. Cost of licenses were $478,000 and $443,000 in the
first quarter of fiscal 2001 and 2000, respectively, each representing less than
1% of total revenues in the respective periods.
COST OF SERVICES. Cost of services were $16.9 million and $12.2 million
in the first quarter of fiscal 2001 and 2000, respectively, representing 18% and
24% of total revenues in the respective periods. The dollar increases in the
first quarter of fiscal 2001 over 2000 is 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 $39.2 million
and $19.1 million in the first quarter of fiscal 2001 and 2000, respectively,
representing 42% and 37% of total revenues in the respective 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 general and product specific marketing expenses, the effect of combining the
sales and marketing operations of the acquisitions made during fiscal 2001 and
2000, and the effect of moderate 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 $11.3
million and $5.5 million in the first quarter of fiscal 2001 and 2000,
respectively, representing 12% and 11% of total revenues in the respective
periods. The dollar increase in research and development in fiscal 2001 from
fiscal 2000 is 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
$8.4 million and $3.9 million in the first quarter of fiscal 2001 and 2000,
respectively, representing 9% and 8% of total revenues in the respective
periods. The dollar increase in fiscal 2001 from fiscal 2000 is attributable
to costs associated with administrative personnel additions and
infrastructure expansion to support our growth.
ACQUISITION COSTS. Acquisitions costs were $107.2 million and $12.0
million in the first quarter of fiscal 2001 and 2000, respectively, representing
114% and 23% of total revenues in the respective periods. Acquisition costs
consist of the amortization of intangibles, acquired in-process research and
development costs and other acquisition related items. The dollar and percentage
increases are attributable to additional acquisitions made during fiscal 2001.
PROVISION FOR INCOME TAXES
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Income tax expense for the first quarter of fiscal 2001 amounted
to $6.0 million compared with $3.4 million in the comparable quarter of fiscal
2000. This increase results from the $7.5 million dollar increase in operating
profits, before taxes and acquisition costs in the respective periods. Excluding
the effect of acquisition costs on net income, the effective tax rate for the
first quarter of fiscal 2001 and 2000 was 33.1% and 32.5%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and marketable equity securities increased
to $69.5 million as of June 30, 2000 from $33.5 million as of March 31, 2000.
This increase is primarily attributable to the cash, cash equivalents and
marketable equity securities obtained as a result of the Harbinger acquisition.
Our quarterly days sales outstanding in accounts receivable, net of allowances,
was 123 as of June 30, 2000 as compared with 84 as of March 31, 2000. The
increase is quarterly days sales outstanding is attributable to the effects of
the acquisition method of purchase accounting by which all balance sheet items
of Harbinger were consolidated as of June 30, 2000 while consolidating only the
short post-acquisition period's Harbinger derived revenue. Since March 31, 2000,
we have expended significant funds to strengthen our operating infrastructure,
including payments related to our lease commitments for our recently signed
campus leases. Also since the announcement of the Harbinger acquisition in early
April 2000, we have expended significant funds associated with this acquisition.
In particular, in addition to printing and other costs associated
with separate proxy solicitations, both Peregrine and Harbinger incurred
costs resulting from the financial advisory fees of each of their investment
banking advisors and the legal and accounting fees of their separate legal
and accounting advisors. These third party expenses were significant although
comparable to the fees and costs of transactions of similar valuation,
magnitude, and complexity. Because the transaction closed immediately prior
to the end of our quarter, most of these third party expenses will become
payable during our quarter ending September 30, 2000. In addition, we have
incurred substantial one-time cash expenditures associated with integration
related activities since June 30, 2000. These third party expense payments
and integration expenditures will effect a reduction in our available cash
and cash equivalents as of September 30, 2000. We do not expect these
payments and expenditures to have a material adverse effect on our financial
condition. See Note 3 to Condensed Consolidated Financial Statements.
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 June 30, 2000, there were no
amounts outstanding with respect to our $20 million senior credit facility.
In connection with the acquisition of Harbinger, we have assumed the
defense of an outstanding shareholder class action lawsuit against Harbinger and
several of its former officers and directors. Although Harbinger is defending
this lawsuit vigorously, we cannot predict its outcome. Defense and settlement
of the lawsuit, however, could require substantial cash expenditures. If not
settled, Harbinger could be subject to a substantial judgement. Harbinger did
not maintain directors' and officers' liability insurance to cover any liability
resulting from this lawsuit, and Peregrine's insurance will not cover any
liability of Harbinger or its former officers or directors resulting from the
lawsuit. Please refer to "Factors That May Effect Future Results" for a more
detailed description of the risks associated with this lawsuit.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
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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 AND CANNOT ASSURE OUR FUTURE PROFITABILITY.
IN ADDITION, OUR MANAGEMENT DOES NOT BELIEVE OUR HISTORIC REVENUE GROWTH RATES
ARE NECESSARILY SUSTAINABLE.
Prediction of our future operating results is difficult, if not
impossible, and we have incurred substantial losses in recent years. If we
continue to incur losses, if our revenues decline or grow at a slower rate, or
if our expenses increase without commensurate increases in revenues, our
operating results will suffer and our stock price may fall. Through June 30,
2000, we had recorded cumulative net losses of approximately $160.0 million,
including approximately $220.6 million related to the write-off of acquired
in-process research and development and the amortization of goodwill and other
intangible assets in connection with several acquisitions completed since late
1997. We have also incurred, and expect to continue to incur, substantial
expenses associated with the amortization of intangible assets. In addition, our
management does not believe our recent growth rates are necessarily sustainable
in the future or indicative of future growth rates. If our revenue growth rates
slow or our revenues decline, our operating results could be seriously impaired
because many of our expenses are fixed and cannot be easily or quickly changed.
OUR RECENT ACQUISITION OF HARBINGER CORPORATION COULD RESULT IN SLOWER
REVENUE GROWTH RATES FOR THE COMBINED COMPANY THAN THOSE APPLICABLE TO US PRIOR
TO THE MERGER, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Because Harbinger's revenue growth rates were substantially less than
our growth rates, we may not be able to maintain our recent revenue growth
rates, which could have an adverse effect on our operating results and could
lead to a decline in our stock price. Our revenues grew from $62 million in
fiscal 1998 to $138 million in fiscal 1999 to $253 million in fiscal 2000.
Harbinger experienced substantially slower growth rates than we did in recent
periods, with revenues growing from $118 million in fiscal 1997 to $135 million
in fiscal 1998 to $156 million in fiscal 1999. If the acquisition does not
create product or financial synergies, our revenue growth rates could be
substantially lower than our recent growth rates.
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THE ACQUISITION MAY MAKE PREDICTION OF FUTURE REVENUES AND OPERATING
RESULTS MORE DIFFICULT IN FUTURE PERIODS AS WE INTEGRATE HARBINGER'S BUSINESS
AND OPERATIONS AND ATTEMPT TO FOCUS THE BUSINESS AND STRATEGIC MODEL OF THE
COMBINED COMPANY.
The acquisition of Harbinger could make predicting our future revenues
and operating results more difficult in future periods, particularly near-term
periods. Our business model has focused historically on the license and sale of
our infrastructure resource management products and related services. By
acquiring Harbinger, we are attempting to extend our product line to offer
customers products and services to manage the complete cycle of asset
procurement, maintenance, management, and disposition. As we integrate the
business of Harbinger, we expect to refine, change, and focus both our
historical business and revenue models and strategies as well as those of
Harbinger. This process could have an adverse effect on our revenues or
operating results in a particular quarter or over a series of quarters. In
addition, we could experience integration costs and expenditures that we have
not currently anticipated, and these costs could be substantial. As a result,
our results of operations in future periods could reflect a substantially
different business than the historical businesses of Peregrine and Harbinger,
and we may not be able to accurately predict how that business will evolve. If
we are unsuccessful in integrating these businesses and developing a successful
integrated strategy, or if we experience substantial unanticipated integration
costs, our revenues or operating earnings could decline, we could experience
substantial losses, and our stock price could decline.
OUR REVENUES VARY SIGNIFICANTLY FROM QUARTER TO QUARTER FOR NUMEROUS
REASONS BEYOND OUR CONTROL. QUARTER-TO-QUARTER VARIATIONS COULD RESULT IN
SUBSTANTIAL DECREASES IN OUR STOCK PRICE IF OUR REVENUES OR OPERATING RESULTS
ARE LESS THAN MARKET ANALYSTS ANTICIPATE.
Our revenues or operating results in a given quarter could be
substantially less than anticipated by market analysts, which could result in
substantial declines in our stock price. In addition, quarter-to-quarter
variations could create uncertainty about the direction or progress of our
business, which could also result in stock price declines. Our revenues and
operating results will vary from quarter to quarter for many reasons beyond our
control. As a result, our quarterly revenues and operating results are not
predictable with any significant degree of accuracy. Reasons for variability of
our revenues and operating results include the following:
- SIZE, TIMING, AND CONTRACTUAL TERMS OF ORDERS. Our revenues in
a given quarter could be adversely affected if we are unable
to complete one or more large license agreements, if the
completion of a large license agreement is delayed, or if the
contract terms prevent us from recognizing revenue during that
quarter. In addition, when negotiating large software
licenses, many customers tend to time their negotiations until
quarter-end in an effort to improve their ability to negotiate
more favorable pricing terms. As a result, we tend to
recognize a substantial portion of our revenues in the last
month or weeks of a quarter, and license revenues in a given
quarter will substantially depend on orders booked during the
last month or weeks of a quarter. Our revenue growth in recent
periods has been attributable in part to an increase in the
number of large license transactions we completed in a given
period. We expect our reliance on these large transactions to
continue for the foreseeable future. If we are unable to
complete a large license transaction in a particular quarter,
our revenues and operating results could be materially below
the expectations of market analysts, and our stock price could
fall.
- CHANGES IN METHOD OF SALE. Our profit margins will tend to
vary based on whether a sale was made through our direct sales
force or through a reseller or other strategic partner. Sales
through indirect channels tend to be less profitable, and if
sales through indirect channels increased relative to direct
sales, our operating results could be harmed. Sales through
indirect channels, including distributors, third party
resellers, and system integrators, represent a substantial
percentage of our total sales. We expect this trend to
continue in the future. As a result, we could experience a
shortfall in our revenues, or a substantial decline in our
rate of revenue growth, if sales through our indirect channels
were to decrease or were to increase at a slower rate. We have
less ability to manage our sales through indirect channels and
less visibility about our channel partners' success in selling
our products. As a result, we could experience unforeseen
variability in our revenues and operating results for a number
of reasons, including the following: inability of our channel
partners to sell our products; a decision by our channel
partners to favor products that compete with Peregrine's;
or our inability to increase the number of channel partners
that sell our products and to maintain relationships with
existing channel partners.
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- ANNOUNCEMENTS BY PEREGRINE OR OUR COMPETITORS. Announcements
of new products or releases by us or our competitors could
cause customers to delay purchases pending the introduction of
the new product or release. In addition, announcements by us
or our competitors concerning pricing policies could have an
effect on our revenues in a given quarter.
- CUSTOMER BUDGETING CYCLES. Our quarter-to-quarter revenues
will depend on customer budgeting cycles. If customers change
their budgeting cycles, or reduce their capital spending on
technology, our revenues could decline.
- CHANGES IN PRODUCT MIX. Changes in our product mix could
adversely affect our operating results because some products
provide higher margins than others. For example, margins on
software licenses tend to be higher than margins on
maintenance services.
- CANCELLATION OF LICENSES OR MAINTENANCE AGREEMENTS.
Cancellations of licenses or maintenance contracts could
reduce our revenues and harm our operating results. In
particular, our customers tend to renew their maintenance
contracts on an annual basis. Substantial cancellations of
maintenance agreements, or a substantial failure to renew
maintenance contracts, would reduce our revenues and harm our
operating results.
THE LONG SALES CYCLE FOR OUR PRODUCTS MAY CAUSE SUBSTANTIAL
FLUCTUATIONS IN OUR REVENUES AND OPERATING RESULTS.
Delays in customer orders could result in our revenues being
substantially below the expectations of market analysts. In addition, we may
incur substantial sales and marketing expenses during a particular period in an
effort to obtain orders. If we are unsuccessful in generating offsetting
revenues during that period, our revenues and earnings could be substantially
reduced or we could experience a large loss. We are likely to experience delays
in customer orders because the sales cycle for our products is long and
unpredictable. Specifically, our customers' planning and purchase decisions
involve a significant commitment of resources and a lengthy evaluation and
product qualification process. The sales cycle for our products requires us to
engage in a sales cycle that, if it results in a sale, takes six to nine months
to complete. The length of the sales cycle may be extended beyond six or nine
months due to factors over which we have little or no control, including the
size of the transaction and the level of competition we encounter in our sales
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 an adverse effect on our results of operation and financial
condition.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY RESULT IN A
PERIODIC REDUCTION IN OUR REVENUES AND IMPAIRMENT OF OUR OPERATING RESULTS.
Seasonality in our business could result in our revenues in a given
period being less than market estimates. Seasonality could also result in
quarter-to-quarter decreases in our revenues. In either of these events,
seasonality could have an adverse impact on our results of operations.
Historically, our revenues and operating results in our December quarter have
tended to benefit, relative to our June and September quarters, from purchase
decisions made by the large concentration of customers with calendar year-end
budgeting requirements. Our June and September quarters tend to be our weakest.
Revenues and operating results in our March quarter have tended to benefit from
the efforts of our sales force to meet fiscal year-end sales quotas. These
historical patterns may change over time, however, particularly as our
operations become larger and the sources of our revenue change or become more
diverse. For example, our international operations have expanded significantly
in recent years, particularly in Europe. We also have an international presence
in the Pacific Rim and Latin America. We may experience variability in demand
associated with seasonal buying patterns in these foreign markets. As an
example, the September quarter is typically weaker in Europe for many technology
companies, including Peregrine, due to the European summer holiday season.
IF OUR CUSTOMER MARKETS DO NOT PERCEIVE BENEFITS FROM INTEGRATING
PEREGRINE'S INFRASTRUCTURE MANAGEMENT PRODUCTS WITH HARBINGER'S E-BUSINESS AND
INTERNET PROCUREMENT SOLUTIONS, OUR FUTURE REVENUES MAY NOT GROW, OUR BUSINESS
WOULD BE ADVERSELY AFFECTED, AND OUR STOCK PRICE COULD DECLINE.
The success of our recent acquisition of Harbinger depends on market
acceptance of our strategic initiative to integrate Peregrine's infrastructure
management software products with Harbinger's e-business and Internet
procurement offerings. If customers do not perceive benefits from combining our
product lines, we will not realize the principal strategic benefit that
Peregrine's management anticipated from the acquisition. As a result, we would
not experience increased incremental revenues as a result of the acquisition and
could experience declining revenues or substantially slower revenue growth than
either company experienced prior to our acquisition of Harbinger. Any of these
events would have an adverse effect on our combined operating results and could
lead to a decline in Peregrine's stock price.
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BOTH PEREGRINE'S AND HARBINGER'S EXISTING BUSINESSES ARE RELATIVELY
NEW, AND A MARKET FOR THE INTEGRATED ASSET PROCUREMENT AND MANAGEMENT PRODUCT
LINE WE HOPE TO DEVELOP IS STILL DEVELOPING.
Because each of the independent businesses of Peregrine and Harbinger
was still developing at the time of the acquisition, it is hard to predict how
the business of Peregrine and Harbinger as a combined company will evolve or
whether it will achieve market acceptance. In particular, if a market for
products and services that address the acquisition, management, maintenance, and
disposition of infrastructure assets does not develop and grow, our business and
operating results would be adversely affected, and our financial condition could
deteriorate.
In addition, without reference to the development of an integrated
product line and business strategy, Peregrine's and Harbinger's independent
markets prior to the acquisition are each new, developing, and relatively
unproven. Until recently, Peregrine's product strategy focused on providing
software products that help to manage business computer networks and other
information technology assets. Beginning in late 1997, through acquisitions and
internal product development, Peregrine expanded its product line in an effort
to develop a market for infrastructure resource management software solutions
that help companies manage the various assets in their corporate
infrastructures, including their computer networks and other information
technology assets. More recently, Peregrine further expanded its product line to
offer products that help manage assets that are not purely technology assets.
These additional products help manage diverse corporate assets such as corporate
car and truck fleets, rail fleets, and physical plant and facilities. In
addition, in the second half of fiscal 2000, Peregrine introduced GET.IT!, a
line of employee self-service products that facilitate the acquisition and use
of infrastructure assets, services, and information. Harbinger historically
focused on providing electronic commerce software products and network servers
and has recently shifted its strategy toward creating and supporting
Internet-based trading solutions. In connection with this strategic shift,
Peregrine now offers Harbinger's products on a subscription basis over the
internet for a recurring fee in lieu of a one-time license payment. As a result,
a market for the integrated product line Peregrine intends to develop as a
result of the acquisition does not currently exist, and the markets for the
independent products of Peregrine and Harbinger are still relatively new and
unproven. If a market for our software solutions and services fails to develop,
or develops in ways we do not anticipate, our business would be seriously
impaired. In particular, our revenues and operating results would decrease, we
could experience substantial losses, and our stock price could decline.
HARBINGER AND SOME OF ITS FORMER OFFICERS AND DIRECTORS ARE DEFENDANTS
IN SHAREHOLDER LITIGATION FOR WHICH HARBINGER IS NOT INSURED. THE OUTCOME OF
THIS LITIGATION, IF DETERMINED ADVERSELY TO HARBINGER, COULD HAVE A MATERIAL
ADVERSE EFFECT ON PEREGRINE'S FINANCIAL CONDITION.
If outstanding shareholder litigation against Harbinger were decided
adversely to Harbinger, or we were required to settle this litigation for a
substantial sum, our financial condition could be materially and adversely
affected. In September 1999, a complaint was filed against Harbinger and some of
its current and former officers and directors in the United States District
Court for the Northern District of Georgia. The complaint alleges causes of
action for misrepresentation and violations of federal securities laws. An
amended complaint was filed in March 2000, alleging additional causes of action,
including allegations relating to accounting improprieties. The complaints
relate to alleged actions by Harbinger during the period from February 1998 to
October 1998. Harbinger did not maintain directors' and officers' liability
insurance during this period. As a result, Peregrine is not insured with respect
to any potential liability of Harbinger or any officer or director of Harbinger.
Harbinger was, however, obligated under agreements with each of its officers and
directors to indemnify them for the costs incurred in connection with defending
themselves against this litigation and is obligated to indemnify them to the
maximum extent permitted under applicable law if they are held liable. In
connection with the acquisition, Peregrine agreed to honor these contractual
arrangements. The pending litigation is still in the early stages. As a result,
we are unable to estimate the damages, or range of damages, that Peregrine might
incur in connection with this litigation. In addition, defending the litigation
will involve substantial direct expenses and will likely result in a diversion
of management's time and attention away from business operations, which could
have an adverse effect on our results of operations.
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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 DECREASE.
As a result of rapid technological change in our industry, our
competitive position in existing markets, or in markets we may enter in the
future, can be eroded rapidly by product advances and technological changes. We
may be unable to improve the performance and features of our products as
necessary to respond to these developments. In addition, the life cycles of our
products are difficult to estimate. Our growth and future financial performance
depend in part on 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 these investments. In addition, if we are required
to expend substantial resources to respond to specific technological or product
changes, our operating results would be adversely affected.
IF WE CANNOT ATTRACT EXPERIENCED SALES PERSONNEL, SOFTWARE DEVELOPERS,
AND HIGHLY-TRAINED CUSTOMER SERVICE PERSONNEL, WE WILL NOT BE ABLE TO SELL AND
SUPPORT OUR PRODUCTS.
If we are not successful in attracting and retaining qualified sales
personnel, software developers, and customer service personnel, our revenue
growth rates could decrease, or our revenues could decline, and our operating
results could be materially harmed. Our products and services require a
sophisticated selling effort targeted at several key people within our
prospective customers' organizations. This process requires the efforts of
experienced sales personnel as well as specialized consulting professionals. In
addition, the complexity of our products, and issues associated with installing
and maintaining them, require highly trained customer service and support
personnel. We intend to hire a significant number of these personnel in the
future and train them in the use of our products. We believe our success depends
in large part on our ability to attract and retain these key employees.
Competition for these employees is intense, and we have in the past experienced
difficulty recruiting qualified employees.
OUR BUSINESS WOULD BE HARMED IF ONE OR MORE MEMBERS OF OUR SENIOR
MANAGEMENT TEAM CHOSE TO LEAVE US.
The loss of the services of one or more our executive officers or key
employees, or the decision of one or more of these individuals to join a
competitor, could adversely affect our business and harm our operating results
and financial condition. Our success depends to a significant extent on the
continued service of our senior management and other key sales, consulting,
technical, and marketing personnel. None of our senior management is bound by an
employment agreement. In addition, only a few employees who were significant
shareholders of businesses we acquired are bound by noncompetition agreements.
We do not maintain key man life insurance on any of our employees.
IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, THIS WILL PLACE A
SIGNIFICANT STRAIN ON OUR MANAGEMENT AND OPERATIONAL RESOURCES.
Our recent growth rates have placed a significant strain on our
management and operational resources. We have expanded our operations rapidly in
recent years and intend to continue to expand in order to pursue market
opportunities that our management believes are attractive. Our customer
relationships could be strained if we are unable to devote sufficient resources
to them as a result of our growth, which could have an adverse effect on our
future revenues and operating results.
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NEW PRODUCT INTRODUCTIONS OR ENHANCEMENTS OF EXISTING PRODUCTS BY OUR
COMPETITORS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS.
If we cannot compete effectively in our market by offering products
that are comparable in functionality, ease of use, and price to those of our
competitors, our revenues will decrease, and our operating results would be
adversely affected. The market for our products is highly competitive and
diverse, and the technologies for infrastructure management software products
can change rapidly. New products are introduced frequently and existing products
are continually enhanced.
We face competition from a number of sources in the markets for our
infrastructure resource management and e-procurement software solutions.
- In the markets for our infrastructure resource management
solutions, we face competition from providers of internal help
desk software applications for managing information technology
service desks, such as Remedy Corporation and Tivoli Systems,
that compete with our enterprise service desk software;
providers of asset management software, including Remedy,
MainControl, and Janus Technologies; providers of facilities
management software, including Archibus, Facilities
Information Systems, and Assetworks (a division of
CSI-Maximus); providers of transportation management software
that competes with our fleet management and rail management
software, including Control Software (a division of
CSI-Maximus) and Project Software and Development Inc.;
information technology and systems management companies such
as IBM, Computer Associates, Network Associates,
Hewlett-Packard, and Microsoft; numerous start-up and other
entrepreneurial companies offering products that compete with
the functionality offered by one or more of our infrastructure
management products; and the internal information technology
departments of those companies with infrastructure management
needs.
- In the markets for procurement and e-procurement solutions, we
have experienced competition from established competitors in
the business-to-business internet commerce solution market,
such as Ariba and CommerceOne and established providers of
enterprise resource planning software that are entering the
market for procurement and e-procurement solutions, including
Oracle and SAP.
Many of our current and potential competitors have substantially
greater financial, technical, marketing, and other resources than we have. 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
than we can to the development, promotion, and sale of their products. We may
not be able to compete successfully against current and future competitors,
which could have an adverse effect on our future revenues and operating results.
NEW COMPETITORS AND ALLIANCES AMONG EXISTING COMPETITORS COULD IMPAIR
OUR ABILITY TO RETAIN AND EXPAND OUR MARKET SHARE.
Additional competition from new entrepreneurial companies or
established companies entering our markets could have an adverse effect on our
business, revenues, and operating results. In addition, alliances among
companies that are not currently direct competitors could create new competitors
with substantial market presence. Because few barriers to entry exist in the
software industry, we anticipate additional competition from new and established
companies as well as business alliances. We expect that the software industry
will continue to consolidate. In particular, we expect that large software
companies will continue to acquire or establish alliances with our smaller
competitors, thereby increasing the resources available to these competitors.
These new competitors or alliances could rapidly acquire significant market
share at our expense.
SYSTEM MANAGEMENT COMPANIES MAY ACQUIRE INFRASTRUCTURE MANAGEMENT
AND/OR HELP DESK SOFTWARE COMPANIES AND CLOSE THEIR SYSTEMS TO OUR PRODUCTS,
HARMING OUR ABILITY TO SELL OUR PRODUCTS.
If large system management providers close their systems to our
products, our revenues and operating results would be seriously harmed. Our
ability to sell our products depends in large part on our products'
compatibility with and support by providers of system management products,
including Tivoli, Computer Associates, and Hewlett-Packard. Both Tivoli and
Hewlett-Packard have acquired providers of help desk software products. These
large, established providers of system management products and services may
decide to close their systems to competing vendors like us. They may also decide
to bundle the products that compete with our 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. Increased competition could result in price reductions, reductions in
our gross margins, or reductions in our market share. Any of these events would
adversely affect our business and operating results.
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WE MAY BE UNABLE TO EXPAND OUR BUSINESS AND INCREASE OUR REVENUES IF WE
ARE UNABLE TO EXPAND OUR DISTRIBUTION CHANNELS.
If we are unable to expand our distribution channels effectively, our
business, revenues, and operating results could be harmed. In particular, we
will need to expand our direct sales force and establish relationships with
additional system integrators, original manufacturers, and other third party
channel partners who market and sell our products. If we cannot establish these
relationships, or if our channel partners are unable to market our products
effectively or provide cost-effective customer support and service, our revenues
and operating results will be harmed. Even where we are successful in
establishing a new third-party relationship, our agreement with the third party
may not be exclusive. As a result, our partner may carry competing product
lines.
IF WE ARE UNABLE TO EXPAND OUR BUSINESS INTERNATIONALLY, OUR BUSINESS,
REVENUES, AND OPERATING RESULTS COULD BE HARMED.
In order to grow our business, increase our revenues, and improve our
operating results, we believe we must expand internationally. If we expend
substantial resources pursuing an international strategy and are not successful,
our revenues would be less than we or market analysts anticipate, and our
operating results would suffer. International revenues represented approximately
36.0% of Peregrine's business in each of fiscal 1998 and 1999 and approximately
41.0% of Peregrine's business in fiscal 2000. We have several international
sales offices in Europe as well as offices in Japan, Singapore, and Australia.
International expansion will require significant management attention and
financial resources, and we may not be successful expanding our international
operations. We have limited experience in developing local language versions of
our products or in marketing our products to international customers. We may not
be able to successfully translate, market, sell, and deliver our products
internationally.
CONDUCTING BUSINESS INTERNATIONALLY POSES RISKS THAT COULD AFFECT OUR
FINANCIAL RESULTS.
Even if we are successful in expanding our operations internationally,
conducting business outside North America poses many risks that could adversely
affect our operating results. These include the following:
- gains and losses resulting from fluctuations in currency
exchange rates, for which hedging activities may not
adequately protect us;
- longer payment cycles;
- difficulties in staffing and managing international
operations;
- problems in collecting accounts receivable; and
- the adverse effects of tariffs, duties, price controls, or
other restrictions that impair trade.
IF IMMIGRATION LAWS LIMIT OUR ABILITY TO RECRUIT AND EMPLOY SKILLED
TECHNICAL PROFESSIONALS FROM OTHER COUNTRIES, OUR BUSINESS AND OPERATING RESULTS
COULD BE HARMED.
Limitations under United States immigration laws could prevent us from
recruiting skilled technical personnel from foreign countries, which could harm
our business if we do not have sufficient personnel to develop new products and
respond to technological changes. This inability to hire technical personnel
could lead to future decreases in our revenues, or decreases in our revenue
growth rates, either of which would adversely affect our operating results.
Because of severe shortages for qualified technical personnel in the United
States, many companies, including Peregrine, have recruited engineers and other
technical personnel from foreign countries. Foreign computer professionals such
as those we have employed typically become eligible for employment in the United
States by obtaining a nonimmigrant visa. The number of nonimmigrant visas is
limited annually by federal immigration laws. In recent years, despite increases
in the number of available visas, the annual allocation has been exhausted well
before year end.
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<PAGE>
WE HAVE MADE SUBSTANTIAL CAPITAL COMMITMENTS THAT COULD HAVE AN ADVERSE
EFFECT ON OUR OPERATING RESULTS AND FINANCIAL CONDITION IF OUR BUSINESS DOES NOT
GROW.
We have made substantial capital commitments as a result of recent
growth in our business that could seriously harm our financial condition if our
business does not grow and we do not have adequate resources to satisfy our
obligations. In June 1999, we entered into a series of leases providing us with
approximately 540,000 square feet of office space and an option to lease 118,000
square feet. Even excluding the exercise of the option, the leases require a
minimum aggregate lease payment of approximately $124.0 million over the twelve
year term of the leases. The office space (including the option) is intended for
a five building campus in San Diego, California. We have relocated our San Diego
operations to three of these buildings and intend for the present time to
sublease the remaining two buildings. The capital commitments, construction
oversight, and movement of personnel and facilities involved in a transaction of
this type and magnitude present numerous risks, including: o failure to properly
estimate the future growth of our business; o inability to sublease excess
office space if we underestimate future growth; o disruption of operations; and
o inability to match fixed lease payments with fluctuating revenues, which could
impair our earnings or result in losses.
PRODUCT DEVELOPMENT DELAYS COULD HARM OUR COMPETITIVE POSITION AND
REDUCE OUR REVENUES.
If we experience significant product development delays, our position
in the market would be harmed, and our revenues could be substantially reduced,
which would adversely affect our operating results. We have experienced product
development delays in the past and may experience delays in the future. In
particular, we may experience product development delays associated with the
integration of recently acquired products and technologies. Delays may occur for
many reasons, including an inability to hire sufficient number of developers,
discovery of bugs and errors, or a failure of our current or future products to
conform to industry requirements.
ERRORS OR OTHER SOFTWARE BUGS IN OUR PRODUCTS COULD RESULT IN
SIGNIFICANT EXPENDITURES TO REMEDY OR CORRECT THE ERRORS OR BUGS.
If we are required to expend significant amounts to correct software
bugs or errors, our revenues could be harmed as a result of our inability to
deliver the product, and our operating results could be impaired as we incur
additional costs without offsetting revenues. Errors can be detected at any
point in a product's life cycle. We have experienced errors in the past that
resulted in delays in product shipment and increased costs. Discovery of errors
could result in any of the following:
- loss of or delay in revenues and loss of customers or market
share;
- failure to achieve market acceptance;
- diversion of development resources and increased development
expenses;
- increased service and warranty costs;
- legal actions by our customers; and
- increased insurance costs.
WE COULD EXPERIENCE LOSSES AS A RESULT OF OUR STRATEGIC INVESTMENTS.
If our strategic investments in other companies are not successful, we
could incur losses. We have made and expect to continue to make minority
investments in companies with businesses or technologies that we consider to be
complementary with our business or technologies. These investments have
generally been made by issuing shares of our common stock or to a lesser extent
with cash. Many of these investments are in companies where operations are not
yet sufficient to establish them as profitable concerns. Adverse changes in
market conditions or poor operating results of underlying investments could
result in our incurring losses or an inability to recover the carrying value of
its investments.
WE COULD BE COMPETITIVELY DISADVANTAGED IF WE WERE UNABLE TO PROTECT
OUR INTELLECTUAL PROPERTY.
If we fail to adequately protect our proprietary rights, our
competitors could offer similar products relying on technologies developed by
us, potentially harming our competitive position and decreasing our revenues. We
attempt to protect our intellectual property rights by limiting access to the
distribution of our software, documentation, and other proprietary information
and by relying on a combination of copyright, trademark, and trade secret laws.
In addition, we enter into confidentiality agreements with our employees and
certain customers, vendors, and strategic partners. In some circumstances,
however, we may, if required by a business relationship, provide our licensees
with access to our data model and other proprietary information underlying our
licensed applications.
19
<PAGE>
Despite precautions that we take, it may be possible for unauthorised
third parties to copy aspects of our current or future products or to obtain and
use information that we regard as proprietary. Policing unauthorised use of
software is difficult, and 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
other. If we are required to pursue litigation to enforce our proprietary
rights, we could incur substantial costs, and management attention could be
diverted, either of which could adversely affect our revenues and operating
results.
IF WE BECOME INVOLVED IN A PROTRACTED INTELLECTUAL PROPERTY DISPUTE, OR
ONE WITH A SIGNIFICANT DAMAGES AWARD, OR WHICH REQUIRES US TO CEASE SELLING OUR
PRODUCTS, WE COULD BE SUBJECT TO SIGNIFICANT LIABILITY AND THE TIME AND
ATTENTION OF OUR MANAGEMENT COULD BE DIVERTED.
In recent years, there has been significant litigation in the United
States involving intellectual property rights, including companies in the
software industry. Intellectual property claims against us and any resulting
lawsuit, if successful, could subject us to significant liability for damages
and invalidate what we currently believe are our proprietary rights. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and could divert management's time and attention. Any
potential intellectual property litigation could also force us to do one or more
of the following:
- cease selling, incorporating, or using products or services
that incorporate the infringed intellectual property;
- obtain from the holder of the infringed intellectual property
a license to sell or use the relevant technology, which
license may not be available on acceptable terms, if at all;
or
- redesign those products or services that incorporate the
disputed technology, which could result in substantial
unanticipated development expenses.
If we are subject to a successful claim of infringement and we fail to
develop noninfringing technology or license the infringed technology on
acceptable terms and on a timely basis, our revenues could decline or our
expenses could increase.
We may in the future initiate claims or litigation against third
parties for infringement of our proprietary rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of technical
and management personnel's attention.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN
SIGNIFICANT COSTS.
If we are held liable for damages incurred as a result of our products,
our operating results could be significantly impaired. Our license agreements
with our customers typically contain provisions designed to limit exposure to
potential product liability claims. These limitations may not be effect under
the laws of some jurisdictions, however. Although we have not experienced any
product liability claims to date, the sale and support of our products entails
the risks of these claims.
CONTROL BY OUR OFFICERS AND DIRECTORS MAY LIMIT OUR STOCKHOLDERS'
ABILITY TO INFLUENCE MATTERS REQUIRING STOCKHOLDER APPROVAL AND COULD DELAY OR
PREVENT A CHANGE IN CONTROL, WHICH COULD PREVENT OUR STOCKHOLDERS FROM REALIZING
A PREMIUM IN THE MARKET PRICE OF THEIR COMMON STOCK.
The concentration of ownership of our common stock by our officers and
directors could delay or prevent a change in control or discourage a potential
acquirer from attempting to obtain control of us. This could cause the market
price of our common stock to fall or prevent the stockholders from realizing a
premium in the market price of our common stock in the event of an acquisition.
As of June 30, 2000, our officers and directors owned approximately 15,881,480
shares of our common stock (including shares issuable upon exercise of options
exercisable within 60 days of June 30, 2000), representing approximately 11.1%
of our total shares outstanding.
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<PAGE>
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DISCOURAGE
POTENTIAL ACQUISITION BIDS FOR US AND MAY PREVENT CHANGES IN OUR MANAGEMENT THAT
OUR STOCKHOLDERS OTHERWISE WOULD APPROVE.
Some provisions of our charter documents eliminate the right of
stockholders to act by written consent without a meeting and impose specific
procedures for nominating directors and submitting proposals for consideration
at a stockholder meeting. These provisions are intended to increase the
likelihood of continuity and stability in the composition of our board of
directors and the policies established by the board of directors. These
provisions also discourage some types of transactions, which may involve an
actual or threatened change of control. These provisions are designed to reduce
our vulnerability to an unsolicited acquisition proposal. As a result, these
provisions could discourage potential acquisition proposals and could delay or
prevent a change of control transaction. These provisions are also intended to
discourage common tactics that may be used in proxy fights. As a result, they
could have the effect of discouraging third parties from making tender offers
for our shares. These provisions may prevent the market price of our common
stock from reflecting the effects of actual or rumoured take-over attempts.
These provisions may also prevent changes in our management.
Our 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, preference, privileges, and restrictions of this preferred
stock without any further vote or action by our stockholders. The issuance of
preferred stock allows us to have flexibility in connection with possible
acquisitions and for other corporate purposes. The issuance of preferred stock,
however, may delay or prevent a change in control transaction. As a result, the
market price of our common stock and other rights of holders of our common stock
may be adversely affected, including the loss of voting control to others.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than forward-rate currency contracts described below, which
are used for hedging our foreign currency risk, we do not use derivative
financial instruments in our investment portfolio. Our financial instruments
consist of cash and cash equivalents, short-term investments, trade accounts
and contracts receivable, accounts payable, and long-term obligations. We
consider investments in highly liquid instruments purchased with a remaining
maturity of 90 days or less at the date of purchase to be cash equivalents.
Our exposure to market risk for changes in interest rates relates primarily
to our short-term investments and short-term obligations. As a result, we do
not expect fluctuations in interest rates to have a material impact on the
fair value of these securities.
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. As a result, foreign currency
fluctuations have not had a material impact historically on our revenues or
results of operations. 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, revenues and financial condition. Currently, we attempt to mitigate
our transaction currency risks through our foreign currency 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 accounted for
in accordance with SFAS No. 52 and receive hedge accounting treatment. To the
extent not 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 us against such risk.
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<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We completed the acquisition of Harbinger Corporation, a Georgia
corporation, in June 2000. In September 1999, a complaint was filed against
Harbinger and some of its then-current and former officers and directors in the
United States District Court for the Northern District of Georgia. The complaint
alleges causes of action for misrepresentation and violations of federal
securities laws. An amended complaint was filed in March 2000, alleging
additional causes of action, including allegations relating to accounting
improprieties. This matter is still pending. Please refer to "Factors That May
Affect Future Results" under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of the risks associated
with this lawsuit.
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<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 16, 2000, we held a special meeting of our stockholders for
purposes of approving the issuance of shares of Peregrine Common Stock
in connection with the acquisition of Harbinger. Stockholder approval
was required by the rules of the Nasdaq Stock Market. The results of
voting at the special meeting were as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstentions
--- ------- -----------
<S> <C> <C> <C>
Proposal to approve issuance of 70,354,732 6,170,225 61,968
Peregrine Common Stock
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibits Exhibit Title
-------- ------------------------
27.1 Financial Data Schedule.
b) Reports on Form 8-K:
On June 29, 2000, we filed a current report on Form 8-K relating to
the acquisition of Harbinger.
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<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 14th day of August, 2000.
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
24
