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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)
12670 HIGH BLUFF DRIVE
San Diego, California 92130
(Address of principal executive offices, including zip code)
(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 December 31, 1999, was
52,512,932.
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PEREGRINE SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated BalanceSheets as of December 31, 1999
(unaudited) and March . 31,1999 (audited).................................. 3
Condensed Consolidated Statements of Operations for
the Three Months Ended December 31, 1999 and 1998 (unaudited).............. 4
Condensed Consolidated Statements of Operations for
the Nine Months Ended December 31, 1999 and 1998 (unaudited)............... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 20
PART II OTHER INFORMATION
Item 2. Changes in Securities...................................................... 21
Item 4. Submi21ion 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>
DECEMBER 31, MARCH 31,
1999 1999
--------------- ---------------
(UNAUDITED) (AUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash, cash equivalents, and short-term investments....................... $ 25,231 $ 23,545
Accounts receivable, net of allowance for doubtful accounts of $1,937
and $1,248, respectively.............................................. 59,629 38,947
Other current assets..................................................... 17,564 16,168
--------------- ---------------
Total current assets.................................................. 102,424 78,660
Property and equipment, net.............................................. 24,178 15,895
Intangible assets, investments and other, net............................ 225,171 113,158
--------------- ---------------
$ 351,773 $ 207,713
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................................... $ 10,045 $ 6,795
Accrued expenses...................................................... 25,874 26,460
Deferred revenue...................................................... 31,323 20,048
Current portion of long-term debt..................................... 74 55
--------------- ---------------
Total current liabilities.......................................... 67,316 53,358
Long-term debt, net of current portion................................... 716 594
Deferred revenue, net of current portion................................. 2,305 2,980
--------------- ---------------
Total liabilities........................................................ 70,337 56,932
--------------- ---------------
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, 52,513 and
48,553 shares issued and outstanding, respectively.................... 53 49
Additional paid-in capital............................................... 332,557 193,787
Accumulated deficit...................................................... (46,735) (39,793)
Unearned portion of deferred compensation................................ (763) (1,019)
Cumulative translation adjustment........................................ (666) (518)
Treasury stock, at cost.................................................. (3,010) (1,725)
--------------- ---------------
Total stockholders' equity............................................... 281,436 150,781
--------------- ---------------
$ 351,773 $ 207,713
=============== ===============
</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 Nine Months Ended
December 31, December 31,
----------------------- --------------------------
1999 1998 1999 1998
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Licenses.....................................................$ 46,524 $ 26,064 $ 115,718 $ 57,321
Services......................................................... 21,020 14,485 61,238 34,632
--------- ----------- ------------ ------------
Total revenues ............................................ 67,544 40,549 176,956 91,953
--------- ----------- ------------ ------------
Costs and Expenses:
Cost of licenses ............................................. 155 306 813 429
Cost of services.............................................. 12,832 9,486 37,468 20,893
Sales and marketing .......................................... 29,117 15,144 68,867 33,900
Research and development ..................................... 7,522 3,723 20,413 9,322
General and administrative ................................... 5,052 2,825 13,601 6,946
Amortization of intangible assets ............................ 8,555 5,567 24,124 12,087
Acquired in-process research and development costs ........... - - 7,046 21,866
--------- --------- ------------ ------------
Total costs and expenses .................................. 63,233 37,051 172,332 105,443
--------- ----------- ------------ ------------
Income (loss) from operations ................................... 4,311 3,498 4,624 (13,490)
Interest income, net ............................................ 5 100 98 553
--------- ----------- ------------ ------------
Income (loss) from operations before income taxes ............... 4,316 3,598 4,722 (12,937)
Income taxes .................................................... 4,183 2,969 11,664 6,920
--------- ----------- ------------ ------------
Net income (loss) ...........................................$ 133 $ 629 $ (6,942) $ (19,857)
========= =========== ============ ============
Net income (loss) per share - basic:
Net income (loss) per share .................................$ - $ 0.01 $ (0.14) $ (0.46)
========= =========== ============ ============
Shares used in computation ................................... 51,236 46,598 50,225 42,718
========= =========== ============ ============
Net income (loss) per share - diluted:
Net income (loss) per share .................................$ - $ 0.01 $ (0.14) $ (0.46)
========= =========== ============ ============
Shares used in computation .................................. 55,436 50,076 50,225 42,718
========= =========== ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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PEREGRINE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Cash flow from operating activities:
Net loss........................................................................$ (6,942) $ (19,857)
Adjustments to reconcile net (loss) to net cash used in operating activities:
Depreciation and amortization ............................................. 30,478 14,691
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................................................... 19,852) (14,165)
Deferred tax asset ................................................... 1,153 -
Other current assets.................................................. (2,472) (5,201)
Accounts payable...................................................... 2,737 2,307
Accrued expenses...................................................... (7,648) (3,327)
Deferred revenue ..................................................... 9,860 (128)
Other assets.......................................................... (7,013) (116)
----------------- ---------------
Net cash used in operating activities .............................. 7,347 (3,930)
----------------- ---------------
Cash flows from investing activities:
Technology acquisitions, net of cash acquired................................ (16,694) -
Purchases of short-term investments.......................................... - (38,000)
Maturities of short-term investments ........................................ 2,000 40,027
Purchases of property and equipment.......................................... (13,947) (6,758)
Other investing activities .................................................. 145 46
---------------- ----------------
Net cash used in investing activities............................... (28,496) (4,685)
---------------- ----------------
Cash flows from financing activities:
Repayments of long-term debt ................................................ (14) (1,063)
Issuance of common stock..................................................... 26,127 11,303
Treasury stock purchased..................................................... (1,285) (1,463)
---------------- ----------------
Net cash provided by financing activities .......................... 24,828 8,777
---------------- ----------------
Effect of exchange rate changes on cash ........................................ 7 97
---------------- ---------------
Net increase in cash and cash equivalents....................................... 3,686 259
Cash and cash equivalents, beginning of period ................................. 21,545 14,950
---------------- ----------------
Cash and cash equivalents, end of period........................................$ 25,231 $ 15,209
================ ================
Cash paid during the period for:
Interest.....................................................................$ 112 $ 22
Income taxes.................................................................$ 595 $ 64
Supplemental Disclosure of Noncash Investing and Financial Activities:
Stock issued and other noncash consideration for acquisitions ...............$ 43,716 $ 86,421
Stock issued for investment .................................................$ 74,770 $ -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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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 December
31, 1999, condensed consolidated statements of operations for the three and
nine month periods ended December 31, 1999, and 1998, and condensed
consolidated statements of cash flows for the nine month periods ended
December 31, 1999, and 1998, 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, 1999, 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.
NOTE 2. INVESTMENTS
In December 1999, pursuant to a Common Stock Exchange Agreement, we
issued and exchanged approximately 1,121,966 shares of our Common Stock for
approximately 5,395,642 shares of Goldmine Software Corporation ("Goldmine")
Common Stock, representing approximately 10 percent of the outstanding
Goldmine Common Stock on a pro forma basis. Our investment in Goldmine is
accounted for using the cost method of accounting.
NOTE 3. EARNINGS PER SHARE
Basic net income (loss) per share is computed using the weighted
average number of common shares outstanding. Diluted net income (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 income (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss).....................................$ 133 $ 629 $ (6,942) $ (19,857)
============= ============= ============= ==============
Denominator:
Denominator for basic net income (loss) per
share, weighted average shares..................... 51,236 46,598 50,225 42,718
Dilutive effect of employee stock options............. 4,200 3,478 - -
------------ ------------- ------------- --------------
Denominator for diluted net income (loss) per
share, dilutive potential common shares............... 55,436 50,076 50,225 42,718
============= ============= ============= ==============
Net income (loss).....................................$ - $ 0.01 $ (0.14) $ (0.46)
============= ============= ============= ==============
Net income (loss) per share - diluted.................$ - $ 0.01 $ (0.14) $ (0.46)
============= ============= ============= ==============
</TABLE>
6
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NOTE 4. 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.
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 5. 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.
NOTE 6. SUBSEQUENT EVENTS
On January 20, 2000, our board of directors declared a two-for-one
stock split of our Common Stock, to be effected in the form of a stock
dividend. Stockholders of record as of the close of business on February 4,
2000 will be issued, on or about February 22, 2000, a certificate
representing one additional share of our Common Stock for each share of
Common Stock held on the record date.
On February 8, 2000, we entered into a definitive merger agreement
("the Agreement") under which we have agreed to acquire all of the
outstanding shares of Telco Research Corporation Limited ("Telco Research"),
a developer of telephony infrastructure management software and related
ancillary products. The Agreement has been approved by the Boards of
Directors of both companies and is subject to approval by the shareholders of
Telco Research, regulatory approvals, and customary closing conditions. As
consideration for the merger, we expect to issue approximately 1.28 million
shares, without giving effect to the stock split referenced above, of our
Common Stock. The acquisition will be accounted using the purchase method
and, accordingly, we will record the assets, including in-process research
and development, and liabilities based on their fair values at the date of
the acquisition. The results of operations for Telco Research will be
included in the financial statements for the periods subsequent to
acquisition.
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" 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.
OVERVIEW
Peregrine Systems is a leading provider of Infrastructure Management
and e-Infrastructure software solutions. Our products help businesses deploy,
maintain, and dispose of numerous aspects of their infrastructure. Using
common shared data, our products help manage information technology assets as
well as assets relating to corporate facilities and 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. 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.
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"), which provided 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' corporate knowledge. In
December 1999, we acquired KKO, a developer of advanced and light rail
software for the passenger and freight rail industries.
Our software products are currently available on most major computer
operating platforms; however, for the past two fiscal years over 85% of our
license revenues have been attributable to the 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 direct and indirect 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. Professional services 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 professional services 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
8
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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 of, demand for, or market acceptance of our 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 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
consolidated statements of operations data as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Licenses................................................ 68.9% 64.3% 65.4% 62.3%
Services................................................ 31.1 35.7 34.6 37.7
---------- ---------- ---------- ----------
Total revenues......................................... 100.0 100.0 100.0 100.0
---------- ---------- ---------- ----------
Costs and Expenses:
Cost of licenses......................................... 0.2 0.8 0.5 0.5
Cost of services......................................... 19.0 23.4 21.2 22.7
Sales and marketing...................................... 43.1 37.3 38.9 36.9
Research and development................................. 11.1 9.2 11.5 10.1
General and administrative............................... 7.5 7.0 7.7 7.6
Amortization of intangible assets........................ 12.7 13.7 13.6 13.1
Acquired in-process research and development costs....... - - 4.0 23.8
---------- ---------- ---------- ----------
Total costs and expenses............................... 93.6 91.4 97.4 114.7
---------- ---------- ---------- ----------
Income (loss) from operations.............................. 6.4 8.6 2.6 (14.7)
Interest income, net....................................... - 0.2 0.1 0.6
---------- ---------- ---------- ----------
Income (loss) from operations before income taxes.......... 6.4 8.8 2.7 (14.1)
Income taxes............................................... 6.2 7.3 6.6 7.5
---------- ---------- ---------- ----------
Net income (loss).......................................... 0.2% 1.5% (3.9)% (21.6)%
========== ========== ========== ==========
</TABLE>
9
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THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Total revenues were $67.5 million and $40.5 million in the
third quarter of fiscal 2000 and 1999, respectively, representing a
period-to-period increase of 67%. For the nine month periods ended December
31, 1999 and 1998, total revenues increased 92% to $177.0 million from $92.0
million. The reasons for the revenue increases are more fully discussed below.
LICENSES. License revenues were $46.5 million and $26.1 million in
the third quarter of fiscal 2000 and 1999, respectively, representing 69% and
64% of total revenues in the respective periods and $115.7 million and $57.3
million for the nine months ended December 31, 1999 and 1998, respectively,
representing 65% and 62% of total revenues for such periods. License revenues
increased 78% in the third quarter of fiscal 2000 compared to the third
quarter of fiscal 1999. For the nine months ended December 31, 1999, license
revenues increased 102% compared to the nine month period ended December 31,
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, larger transaction sizes, expansion of
our domestic and international sales forces, and acquisitions.
SERVICES. Services revenues were $21.0 million and $14.5 million in
the third quarter of fiscal 2000 and 1999, respectively, representing 31% and
36% of total revenues in the respective periods and $61.2 million and $34.6
million for the nine months ended December 31, 1999 and 1998, respectively,
representing 35% and 38% of total revenues for such periods. Services
revenues increased 45% in the third quarter of fiscal 2000 compared to the
third quarter of fiscal 1999. For the nine months ended December 31, 1999,
services revenues increased 77% compared to the nine months ended December
31, 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 $155,000 and $306,000 in the
third quarter of fiscal 2000 and 1999, respectively, each representing less than
1% of total revenues in the respective periods and $813,000 and $429,000 for the
nine month periods ended December 31, 1999 and 1998, respectively, again
representing less than 1% of the total revenues in the respective periods.
COST OF SERVICES. Cost of services were $12.8 million and $9.5
million in the third quarter of fiscal 2000 and 1999, respectively,
representing 19% and 23% of total revenues in the respective periods and
$37.5 million and $20.9 million for the nine months ended December 31, 1999
and 1998, respectively, representing 21% and 23% of total revenues for such
periods, respectively. The dollar increases in the third quarter of fiscal
2000 over 1999 and for the nine months ended December 31, 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 $29.1 million
and $15.1 million in the third quarter of fiscal 2000 and 1999, respectively,
representing 43% and 37% of total revenues in the respective periods and
$68.9 million and $33.9 million for the nine months ended December 31, 1999
and 1998, respectively, representing 39% 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 general and product specific
marketing expenses, the effect of combining the sales and marketing
operations of the acquisitions made during fiscal 2000 and 1999, 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
$7.5 million and $3.7 million in the third quarter of fiscal 2000 and 1999,
respectively, representing 11% and 9% of total revenues in the respective
periods and $20.4 million and $9.3 million for the nine months ended December
31, 1999 and 1998, respectively, representing 12% and 10% of total revenues
in such PERIODS. The dollar increases in research and development in fiscal
2000 from fiscal 1999 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
$5.1 million and $2.8 million in the third quarter of fiscal 2000 and 1999,
respectively, representing 8% and 7% of total revenues in the respective
periods, and $13.6
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million and $6.9 million for the nine months ended December 31, 1999 and
1998, respectively, representing 8% of total revenues in both periods. The
dollar increases in fiscal 2000 from fiscal 1999 are attributable to costs
associated with administrative personnel additions and infrastructure
expansion to support our growth.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles of $8.6
million and $5.6 million were incurred in the third quarter of fiscal 2000
and 1999, respectively, representing 13% and 14% of total revenues in the
respective periods and $24.1 million and $12.1 million for the nine months
ended December 31, 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.
ACQUIRED RESEARCH AND DEVELOPMENT COSTS. No acquired in-process
research and development costs were incurred in either the third quarter of
fiscal 2000 or the third quarter of fiscal 1999. Acquired in-process research
and development costs of $7.0 million and $21.9 million were incurred for the
nine month periods ended December 31, 1999 and 1998, respectively,
representing 4% and 24% of total revenues in such periods. The costs incurred
in fiscal 2000 relate to one-time charges associated with the acquisitions of
FPrint and Knowlix, while the costs incurred in fiscal 1999 relate to
one-time charges associated with the acquisitions of Innovative and ISS.
PROVISION FOR INCOME TAXES
Income tax expense for the third quarter of fiscal 2000 amounted to
$4.2 million compared with $3.0 million in the comparable quarter of fiscal
1999. This increase results from the $3.7 million dollar increase in
operating profits, before taxes and the amortization of intangibles in the
respective periods. Excluding the effect on net income of the amortization of
intangibles the effective tax rate for both the third quarter of fiscal 2000
and 1999 was 32%.
LIQUIDITY AND CAPITAL RESOURCES
Our increase in cash from March 31, 1999 to December 31, 1999 was
attributable to cash provided through ongoing operations and cash received as
a result of Common Stock issuances associated with employee stock options.
Since March 31, 1999, we have expended significant funds to strengthen our
operating infrastructure, including payments related to our lease commitments
for our recently signed campus leases. In addition, we have expended
significant funds acquiring companies and technologies subsequent to March
31, 1999.
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 December 31,
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 need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, many companies' software and
computer systems needed to be upgraded or replaced in order to comply with
such Year 2000 requirements. As of January 31, 2000, we had not experienced
any material disruptions in our operations or internal systems as a result of
Year 2000 compliance issues. In addition, we were not aware of any material
disruptions or malfunctions associated with the use of our products.
As of December 31, 1999, we had received assurances from suppliers
of all third party software that we deemed material to our business that such
software was Year 2000 compliant. If we experience Year 2000 disruptions
associated with our use of this software we could 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,
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which would potentially have a material adverse effect on our results of
operations and financial conditions.
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 our
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. Such changes in purchasing
patterns 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.
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 December 31, 1999, we have recorded cumulative net losses of
approximately $46.7 million, including approximately $40.0 million related to
the write-off of acquired in-process research and development in connection
with acquisitions. In addition, we have incurred, and expect to continue to
incur, substantial expense associated with the amortization of intangible
assets, related principally to acquisitions. Our applications have changed
substantially since the mid-1990s, and 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
nine months ended December 31, 1999 (excluding the impact of $40.0 million in
charges 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
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affected by many factors, including the timing of contract execution and
delivery. The timing between initial customer contact and fulfillment of
criteria for revenue recognition can be lengthy and unpredictable, and
revenues in any given quarter can be adversely affected as a result of such
unpredictability. In the event of any downturn in potential customers'
businesses or the economy in general, planned purchases of 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 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 our 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 seven acquisitions. In the
future, we may acquire, or make 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 our on-going businesses
- difficulty inrealizing 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 reported
earnings
- potential dilutive effect on earnings
The risks described above, either individually or in the aggregate,
could result in decreases in our revenues 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.
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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. We have recently 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.
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.
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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 (now a division of PeopleSoft), 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 we do. 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, other competitive pressures we face 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 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
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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 third 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 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
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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.
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 ("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 OUR 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.
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Based on shares outstanding as of December 31, 1999, our officers,
directors, and entities directly related to such individuals together
beneficially own approximately 20.1% of the outstanding shares of PSI Common
Stock. In particular, John J. Moores, Chairman of our board of directors,
beneficially owns approximately 14.9% of the outstanding shares of PSI Common
Stock. As a result, our 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. 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,
18
<PAGE>
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 MAY 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 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
19
<PAGE>
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
competitor
- 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency
exchange rate and interest rate fluctuations. In the normal course of
business, we employ established policies and procedures to manage these
risks, including the use of derivative instruments in our foreign exchange
hedging program, which consists 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.
20
<PAGE>
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
In December 1999, we issued approximately 1,121,966 shares of our
Common Stock to Goldmine Software Corporation ("Goldmine") in exchange for
approximately a 10% equity interest in Goldmine. This issuance was made in
reliance on the exemptions from the registration requirements of the
Securities Act of 1933, as amended, set forth in Section 4(2) of and
Regulation D under the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBITS EXHIBIT TITLE
27.1 Financial Data Schedule.
b) Reports on Form 8-K:
We filed a current report on Form 8-K on December 21, 1999, in
connection with our investment in Goldmine Software Corporation.
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 ____th day of February, 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
22
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