<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-2222209
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PEREGRINE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-3773312
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
</TABLE>
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 September 30, 2000, was 144,982,452.
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<PAGE>
PEREGRINE SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
------- --------------------- --------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2000 (unaudited) and March 31, 2000 (audited)............... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2000 and 1999
(unaudited)................................................. 4
Condensed Consolidated Statements of Operations for the Six
Months Ended September 30, 2000 and 1999 (unaudited)........ 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 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................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 29
PART II. OTHER INFORMATION
--------------------- ------------------------------------------------------------
Item 1. Legal Proceedings........................................... 30
Item 2. Changes in Securities....................................... 30
Item 4. Submission of Matters to a Vote of Security Holders......... 30
Item 6. Exhibits and Reports on Form 8-K............................ 31
Signatures.......................................................................... 32
</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>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash, cash equivalents, and short-term investments.......... $ 35,234 $ 33,511
Accounts receivable, net of allowance for doubtful accounts
of $10,909 and $2,179, respectively....................... 164,800 69,940
Other current assets........................................ 42,256 22,826
---------- --------
Total current assets.................................... 242,290 126,277
Property and equipment, net................................. 70,116 29,537
Intangible assets, investments and other, net............... 1,771,696 367,616
---------- --------
$2,084,102 $523,430
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 53,015 $ 19,850
Accrued expenses.......................................... 173,105 49,064
Deferred revenue.......................................... 62,498 36,779
Current portion of long-term debt......................... -- 74
---------- --------
Total current liabilities............................... 288,618 105,767
Long-term debt, net of current portion -- 1,257
Deferred revenue, net of current portion.................... 5,501 4,556
---------- --------
Total liabilities....................................... 294,119 111,580
---------- --------
Stockholders' Equity:
Preferred stock, $0.001 par value, 5,000 shares authorized,
no shares issued or outstanding........................... -- --
Common stock, $0.001 par value, 500,000 and 200,000 shares
authorized, respectively; 144,982 and 109,501 shares
issued and outstanding, respectively...................... 145 110
Additional paid-in capital.................................. 2,076,941 480,957
Accumulated deficit......................................... (242,818) (64,863)
Unearned portion of deferred compensation................... (34,933) (678)
Cumulative translation adjustment........................... (723) (666)
Treasury stock, at cost..................................... (8,629) (3,010)
---------- --------
Total stockholders' equity.............................. 1,789,983 411,850
---------- --------
$2,084,102 $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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses............................................ $ 87,395 $37,102 $ 149,837 $69,194
Services............................................ 55,320 20,705 87,202 40,218
-------- ------- --------- -------
Total Revenues.................................... 142,715 57,807 237,039 109,412
-------- ------- --------- -------
Costs and Expenses:
Cost of licenses.................................... 532 215 1,010 658
Cost of services.................................... 30,670 12,400 47,568 24,636
Sales and marketing................................. 54,249 20,649 93,489 39,750
Research and development............................ 16,487 7,441 27,787 12,891
General and administrative.......................... 13,477 4,671 21,922 8,549
Acquisition costs................................... 101,137 10,630 208,337 22,615
-------- ------- --------- -------
Total costs and expenses.......................... 216,552 56,006 400,113 109,099
-------- ------- --------- -------
Income (loss) from operations......................... (73,837) 1,801 (163,074) 313
Interest income, net................................ 8 7 83 93
-------- ------- --------- -------
Income (loss) from operations before income taxes..... (73,829) 1,808 (162,991) 406
Income taxes.......................................... 9,001 4,042 14,964 7,481
-------- ------- --------- -------
Net loss............................................ $(82,830) $(2,234) $(177,955) $(7,075)
======== ======= ========= =======
Net loss per share--basic and diluted:
Net loss per share.................................. $ (0.58) $ (0.02) $ (1.39) $ (0.07)
======== ======= ========= =======
Shares used in computation.......................... 142,105 99,974 128,340 99,434
======== ======= ========= =======
</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>
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
---------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net loss.................................................. $ (177,955) $ (7,075)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 131,646 18,138
Acquired in-process research and development costs 70,100 7,046
Increase (decrease) in cash resulting from changes, net
of business acquired, in:
Accounts receivable................................... (63,269) (11,281)
Deferred tax asset.................................... (2,699) 1,340
Other current assets.................................. (12,013) (2,502)
Accounts payable...................................... 9,914 1,710
Accrued expenses...................................... 12,668 (7,946)
Deferred revenue...................................... 7,173 1,948
Other assets.......................................... (3,150) (5,116)
---------- -----------
Net cash used in operating activities............. (27,585) (3,738)
---------- -----------
Cash flows from investing activities:
Equity investments purchased.............................. (17,517) --
Maturities of short-term investments...................... -- 2,000
Purchases of property and equipment....................... (27,369) (7,003)
Cash acquired in acquisition.............................. 73,457 --
Other investing activities................................ -- 145
---------- -----------
Net cash provided by (used in) investing activities... 28,571 (4,858)
---------- -----------
Cash flows from financing activities:
Repayments of long-term debt.............................. (1,331) (43)
Issuance of common stock.................................. 7,744 13,226
Treasury stock purchased.................................... (5,619) (1,285)
---------- -----------
Net cash provided by financing activities................. 794 11,898
---------- -----------
Effect of exchange rate changes on cash..................... (57) 11
---------- -----------
Net increase (decrease) in cash and cash equivalents........ 1,723 3,313
Cash and cash equivalents, beginning of period.............. 33,511 21,545
---------- -----------
Cash and cash equivalents, end of period.................... $ 35,234 $ 24,858
========== ===========
Cash paid during the period for:
Interest.............................................. $ 173 $ 13
Income taxes.......................................... $ 263 $ 11
Supplemental Disclosure of Non-Cash Investing and Financial
Activities:
Stock issued and other non-cash consideration for
acquisition............................................. $1,538,318 $ 17,825
</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 September 30,
2000, condensed consolidated statements of operations for the three and six
month periods ended September 30, 2000 and 1999, and condensed consolidated
statements of cash flows for the six month periods ended September 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 condensed consolidated financial statements include
the accounts of Peregrine Systems 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 six month periods ended September 30, 2000 and 1999
approximates comprehensive loss, as defined by Statement of Financial Accounting
Standards ("FAS") No. 130, "Reporting Comprehensive Income" 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 September 30, 2000 and 1999, and the
six month periods ended September 30, 2000 and 1999, the diluted loss per share
calculation excludes the effect of outstanding stock options as inclusion would
be anti-dilutive.
6
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PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2. EARNINGS PER SHARE (CONTINUED)
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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Numerator:
Net loss........................................... $(82,830) $ (2,234) $(177,955) $(7,075)
======== ======== ========= =======
Denominator:
Denominator for basic net loss per share, weighted
average shares................................... 142,105 99,974 128,340 99,434
Dilutive effect of employee stock options.......... -- -- -- --
-------- -------- --------- -------
Denominator for diluted net loss per share, dilutive
potential common shares............................ 142,105 99,974 128,340 99,434
======== ======== ========= =======
Net loss per share--basic............................ $ (0.58) $ (0.02) $ (1.39) $ (0.07)
======== ======== ========= =======
Net loss per share--diluted.......................... $ (0.58) $ (0.02) $ (1.39) $ (0.07)
======== ======== ========= =======
</TABLE>
NOTE 3. ACQUISITIONS
On September 1, 2000, we completed the acquisition of Loran Network Holding
Corporation Inc. ("Loran"), a provider of network discovery and management
solutions. We issued approximately 2,861,000 shares of our Common Stock
(excluding approximately 600,000 shares of Peregrine Common Stock issuable upon
exercise of options assumed in connection with the acquisition) in exchange for
all the outstanding shares of Loran for a total purchase price, including merger
related costs, of approximately $103 million.
In accordance with Interpretation No. 44 of APB 25, we have recorded
deferred compensation of $1.2 million related to the unvested intrinsic value of
Loran 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 five years.
The Loran 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 Loran have been included in the financial statements for the
period subsequent to acquisition.
We allocated the $103.1 million purchase price of Loran as follows: acquired
in-process research and development of $6.0 million, the fair value of the net
assets acquired of $0.3 million, and purchase price in excess of the acquired
assets of $96.8 million.
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
7
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PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. ACQUISITIONS (CONTINUED)
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 as follows:
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 both the Loran and 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 and Loran 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. 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.
8
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PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. ACQUISITIONS (CONTINUED)
With respect to acquisition related liabilities at September 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 million
in merger related costs comprised principally of the following components (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED LIABILITY
-------------------
<S> <C>
Estimated advisory fees..................................... $21,370
Employee severance and relocation........................... 25,595
Duplicative facilities, equipment, and efforts.............. 23,563
Other merger related costs.................................. 15,189
-------
$85,717
=======
</TABLE>
This accrual represents our best estimate, based on information available as
of September 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 twelve month
period following the acquisition will increase or decrease goodwill as
appropriate. We believe substantially all of the above costs will be paid for
within the next twelve months.
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 three and six months period ending September 30,
2001 and 2000, respectively, consist of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Amortization of intangibles and other acquisition related
costs................................................... 95,137 7,778 138,237 15,569
Acquired in-process research and development.............. 6,000 2,852 70,100 7,046
------- ------ ------- ------
101,137 10,630 208,337 22,615
======= ====== ======= ======
</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
9
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PEREGRINE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
In April 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 44, "Accounting for Certain Transactions involving
Stock Compensation: an interpretation of FASB Opinion No. 25." FIN 44 affects
awards and modifications made after December 15, 1998. Management believes that
their accounting policies comply with the applicable provisions of FIN 44.
NOTE 5. SUBSEQUENT EVENTS
In October 2000, we entered into an agreement in principle to settle an
outstanding shareholder class action lawsuit against Harbinger and several of
its former officers and directors. If settlement is finalized and approved by
the court, we will be required to make an aggregate cash payment of
$2.25 million to a class of former shareholders of Harbinger in exchange for
dismissal of all claims against Harbinger. Although the parties to the
litigation have agreed in principle to this settlement, the final settlement is
subject to further documentation, various contingencies, and approval by the
court. It is also possible that if the settlement is approved by the court,
claims could be pursued by class members who opt out of the class settlement by
filing appropriate notices with the court.
On November 14, 2000, we issued our 5 1/2% Convertible Subordinated Notes
due 2007 in the aggregate principal amount of $250 million. These notes were
issued in a private placement transaction pursuant to Rule 144A under the
Securities Act of 1933, as amended. We have also granted the placement agents
for this transaction an option to purchase up to an additional $37.5 million of
the notes. We intend to use the proceeds of these notes for general corporate
purposes, including capital expenditures, research and development, and
acquisitions.
The notes will pay interest semi-annually in cash in arrears on May 15 and
November 15 of each year, beginning on May 15, 2001. The notes are convertible
by the holders at any time after initial issuance beginning 90 days after
original issuance. The initial conversion price is $25 per share, equivalent to
a conversion rate of 40 shares per $1,000 principal amount of notes. We may
redeem the notes at any time on or after November 18, 2003 at specified prices
if the trading price of our common stock exceeds $35 during a specified trading
period. The notes will be unsecured and will rank junior to our existing and
future senior indebtedness. The notes will become due and payable, if not
previously redeemed, on November 15, 2007.
10
<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."
WE COMPLETED THE ACQUISITION OF HARBINGER 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
SEPTEMBER 30, 2000 INCLUDE THE RESULTS OF OPERATIONS OF PEREGRINE AND HARBINGER
AS A COMBINED COMPANY BEGINNING JUNE 16, 2000. WE COMPLETED THE ACQUISITION OF
LORAN ON SEPTEMBER 1, 2000 AND HAVE INCLUDED ITS RESULTS OF OPERATIONS WITH
THOSE OF PEREGRINE BEGINNING SEPTEMBER 1, 2000.
OVERVIEW
We are a leading global provider of infrastructure resource management
applications, employee self-service solutions and e-commerce technologies and
services.
Our infrastructure management group provides software technologies and
services that permit large and medium-sized businesses to manage the
acquisition, use, maintenance and disposition of the various infrastructure
assets used by businesses and their employees. In addition, it offers employee
self-service products designed to improve employee productivity and lower costs
by providing employees direct access to corporate resources and infrastructure.
Our e-markets group provides products and services associated with the
procurement of manufacturing supplies and materials as well as commodity assets.
The objective of our e-markets group is to leverage the availability of the
Internet and our business-to-business software products and solutions to
facilitate the processes of selling and purchasing direct goods used in the
manufacture of finished products.
Until recently, our products focused principally on problem management for
an organization's information technology infrastructure. Historically, our
principal product suite has been SERVICECENTER, an integrated, enterprise
service desk software solution that assists information technology departments
in managing and maintaining their internal computer networks and related assets.
During fiscal 1998, we determined that our customers required a more
comprehensive solution to manage their infrastructure assets, including
information technology assets but also the numerous other assets that make up
business infrastructures. Through acquisitions, we have expanded the breadth and
functionality of our products for managing information technology assets. In
addition, we have made a number of acquisitions intended to broaden our
infrastructure management product suite beyond management of network help desks.
The largest and most significant of these acquisitions are the following:
- In September 1997, we acquired ASSETCENTER, our asset management solution,
through the acquisition of Apsylog, S.A., a French corporation.
- In July 1998, we acquired Innovative Tech Systems, a leading provider of
facilities management software. Innovative's SPAN-FM product line became
our FACILITYCENTER product line.
- In March 1999, we acquired Prototype, a provider of software products for
managing corporate vehicle and equipment fleets. Prototype's fleet
management product line became our FLEETANYWHERE product line.
- In December 1999, we acquired advanced and light rail management software
for the passenger and freight rail industries from KKO & Associates. Our
recently released RAILANYWHERE rail management product is based on
software developed by KKO applied to our FLEETANYWHERE technology base.
- In March 2000, through the acquisition of Telco Research, we acquired our
TELECENTER application for managing telecommunications assets.
11
<PAGE>
In addition to acquiring technologies and products through acquisitions, we
have also focused substantial resources on internal product and technology
development. Our employee self-service procurement product, GET.IT!, was
developed internally and introduced in late 1999 to assist companies in
automating their internal asset procurement and employee self-service processes.
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.
Prior to the acquisition, however, revenues for Harbinger's legacy software
business were declining. At the time of the acquisition, Harbinger had recently
begun to focus its business on creating and managing web-based catalogs of
supplies and materials and on maintaining and hosting vertical market exchanges
for supply and commodity markets in the automotive, energy, industrial component
and retail industries. Our e-markets group is comprised largely of Harbinger's
legacy software business and newer e-commerce businesses.
We have also integrated substantial aspects of Harbinger's connectivity and
marketplace technologies in our infrastructure management group. In particular,
we recently integrated the connectivity, data transformation, catalog creation
and management and transaction assurance technologies acquired from Harbinger
with our infrastructure management products and solutions. We intend to use
these technologies to deliver services to suppliers of infrastructure assets and
infrastructure marketplaces and to enable electronic exchanges for
infrastructure assets.
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. While we believe 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.
Relative to its legacy electronic commerce software business, Harbinger's
electronic procurement and other Internet-based businesses represented a
relatively small percentage of Harbinger's total revenues. Moreover, Harbinger's
revenue growth rates were substantially lower than Peregrine's historic revenue
growth rates as a result of considerably slower growth in Harbinger's legacy
software businesses. As a result, we expect our future revenue growth rates will
be less than historical rates, and predicting our future operating results will
be difficult as we attempt to integrate and streamline Harbinger's operations
and businesses. As part of that integration process, in October 2000, we
announced the strategic segmentation of our business into two distinct operating
units, the infrastructure management group and the e-markets group.
Our revenues are derived principally from product licensing and services.
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. Services
revenues are comprised of fees for maintenance, professional services, network
services and training. We 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 for our e-commerce transaction processing services. We also derive
revenues from transaction fees, subscription fees, and maintenance fees
associated with vertical market exchanges that were part of the businesses
acquired with Harbinger and now represented largely by our e-markets group. We
anticipate that, as a percentage of total revenues, subscription fees associated
with sales of our applications on a hosted basis will increase in future
periods, particularly in our e-markets group and to a lesser extent in our
infrastructure management group. The hosted service provider model is relatively
new and unproven for us, and we do not know whether it will prove financially
attractive relative to our historic license revenue model. We expect that
increasing sales of our products on a hosted subscription basis will result in
slower revenue growth rates for us. Under a subscription model, we will receive
monthly payments for our services ratably over the term of a subscription,
typically three to five years. Under our current license model, we sell our
software in return for the up-front payment of a license fee.
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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 materials 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. Subscription fees are
recognized monthly as services are provided.
We currently derive a substantial portion of our license revenues from the
sale of our infrastructure management applications and from our business
connectivity software products in our e-markets group. We expect these products
to account for a substantial portion of our revenues for the foreseeable future.
As a result, our future operating results are dependent upon continued market
acceptance of our infrastructure resource management and business 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 our infrastructure procurement and resource management
applications, such as competition or technological change, manner of
distribution or licensing, and related methods 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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
STATEMENT OF OPERATIONS DATA: -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses............................................ 61.2% 64.2% 63.2% 63.2%
Services............................................ 38.8 35.8 36.8 36.8
------ ------ ------ ------
Total revenues.................................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Costs and expenses:
Cost of licenses.................................... 0.4 0.4 0.4 0.6
Cost of services.................................... 21.5 21.4 20.1 22.5
Sales and marketing................................. 38.0 35.7 39.4 36.3
Research and development............................ 11.6 12.9 11.7 11.8
General and administrative.......................... 9.4 8.1 9.3 7.8
Acquisition costs................................... 70.8 18.4 87.9 20.6
------ ------ ------ ------
Total costs and expenses.......................... 151.7 96.9 168.8 99.6
------ ------ ------ ------
Income (loss) from operations......................... (51.7) 3.1 (68.8) 0.4
Interest income, net.................................. -- -- -- --
------ ------ ------ ------
Income (loss) from operations before income taxes..... (51.7) 3.1 (68.8) 0.4
Income taxes.......................................... 6.3 7.0 6.3 6.8
------ ------ ------ ------
Net loss.............................................. (58.0)% (3.9)% (75.1)% (6.4)%
====== ====== ====== ======
</TABLE>
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THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
REVENUES. Total revenues were $142.7 million and $57.8 million for the
three months ended September 30, 2000 and 1999, representing a period-to-period
increase of 147%. For the six month periods ended September 30, 2000 and 1999,
total revenues were $237.0 million and $109.4 million, representing a
period-to-period increase of 117%. The reasons for these revenue increases are
more fully discussed below.
LICENSES. License revenues were $87.4 million and $37.1 million for the
three months ended September 30, 2000 and 1999, representing 61% and 64% of
total revenues in the respective periods. License revenues were $149.8 million
and $69.2 million for the six months ended September 30, 2000 and 1999,
representing 63% of total revenues for both periods. License revenues increased
136% and 117% for the three months and six months ended September 30, 2000 as
compared to the comparable prior-year periods.
The increases in our license revenues are attributable in part to
acquisitions completed during the last year, including Harbinger and Telco
Research. Revenues and results of operations for these acquisitions would not
have been included in our revenues or results of operations for the three or six
month periods ended September 30, 1999. Excluding the effect of these
acquisitions and other acquisitions of products and technologies completed
during the prior twelve months, our license revenues grew at rates of
approximately 100% and 82% for the three and six month periods ended September
30, 2000 as compared to the comparable prior-year periods. Growth in "organic"
(I.E., not attributable to acquisitions) license revenues was attributable to an
increase in the number of large transactions completed, increased demand for new
(I.E., employee self-service applications) and additional licenses of our
infrastructure management applications from new and existing customers, and
expansion of our domestic and international sales forces. We expect larger
transaction sizes from a limited number of customers to account for a large
percentage of license revenues for the forseeable future.
SERVICES. Services revenues were $55.3 million and $20.7 million for the
three months ended September 30, 2000 and 1999, representing 39% and 36% of
total revenues in the respective periods. Service revenues were $87.2 million
and $40.2 million for the six months ended September 30, 2000 and 1999,
representing 37% of total revenues for both periods. Services revenues increased
167% and 117% for the three and six month periods ended September 30, 2000 as
compared to the prior year periods. The dollar increases are attributable to
revenues associated with acquisitions completed within the last year, the
addition of network revenue, 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. Services revenues may prospectively
account for a larger percentage of our total revenues 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 was $532,000 and $215,000 for the three
months ended September 30, 2000 and 1999, representing less than 1% of total
revenues in each of the respective periods. Cost of licenses was $1 million and
$658,000 for the six months ended September 30, 2000 and 1999, again
representing less than 1% of our total license revenues in the respective
periods.
COST OF SERVICES. Cost of services was $30.7 million and $12.4 million for
the three months ended September 30, 2000 and 1999, representing 22% and 21% of
total revenues in each of the respective periods. Cost of services was
$47.6 million and $24.6 million for the six months ended September 30, 2000 and
1999, representing 20% and 23% of total revenues. The dollar increases in cost
of services are attributable to increases in the number of professional services
personnel resulting from both acquisitions and organic hiring. In recent
periods, our cost of services had been increasing as a
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percentage of total services revenues due largely to a greater percentage growth
in lower margin consulting revenue compared to support revenue. Consulting and
training services generally have lower margins as compared to support services,
and we expect the trend toward greater percentage growth of lower margin
services to continue in the future. As a percentage of total services revenues,
cost of services decreased from 55.4% to 59.9% for the three months ended
September 30, 2000 and 1999 and decreased from 54.5% to 61.3% for the six months
ended September 30, 2000 and 1999. The decreases in cost of services as a
percentage of total service revenues reflects, in part, the purchase accounting
effects of the Harbinger transaction in which we recognized certain services
revenues incurred beginning June 16, 2000 but were not required to recognize
related expenses previously accrued by Harbinger. To a lesser extent, the
decreases reflect increased outsourcing of consulting and training services to
third party providers and partners.
SALES AND MARKETING. Sales and marketing expenses were $54.2 million and
$20.6 million for the the three months ended September 30, 2000 and 1999,
representing 38% and 36% of total revenues in the respective periods. Sales and
marketing expenses were $93.5 million and $39.8 million for the six months ended
September 30, 2000 and 1999, representing 39% and 36% of total revenues in such
periods. The dollar and percentage increases in sales and marketing expenses are
attributable to the significant expansion of our 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, including Harbinger and
Telco, 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 our operating margins will decline as well.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$16.5 million and $7.4 million for the three months ended September 30, 2000 and
1999, representing 12% and 13% of total revenues in the respective periods.
Research and development expenses were $27.8 million and $12.9 million for the
six months ended September 30, 2000 and 1999, representing 12% of total revenues
in both periods. The dollar increases in our research and development expenses
are due primarily to an increase in the number of personnel conducting research,
an increase in discretionary spending related to compensation and consultancy
fees, and development and quality assurance efforts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$13.5 million and $4.7 million for the three months ended September 30, 2000 and
1999, representing 9% and 8% of total revenues in the respective periods.
General and administrative expenses were $21.9 million and $8.5 million for the
six months ended September 30, 2000 and 1999, representing 9% and 8% of total
revenues in such periods. The dollar increases are primarily attributable to
costs associated with administrative personnel additions and infrastructure
expansion to support our growth.
ACQUISITION COSTS. Acquisition costs were $101.1 million and $10.6 million
for the three months ended September 30, 2000 and 1999, representing 71% and 18%
of total revenues in the respective periods. Acquisition costs were
$208.3 million and $22.6 million for the six months ended September 30, 2000 and
1999, representing 88% and 21% of total revenues in such 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 principally attributable to our acquisition of
Harbinger in June 2000 and our acquisition of Loran in September 2000.
PROVISION FOR INCOME TAXES
Income tax expense for the second quarter of fiscal 2001 amounted to
$9.0 million compared with $4.0 million for the three months ended
September 30, 1999. This increase results from the $14.9 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 rates for the three months ended September 30, 2000 and 1999 were 33.0% and
32.5%, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and marketable equity securities decreased to
$35.2 million as of September 30, 2000 from $69.5 million as of June 30, 2000.
This decrease is primarily attributable to expenses related to the Harbinger
acquisition, which was completed immediately prior to the end of our June 30,
2000 quarter. 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. Most of these
third party expenses became payable during our quarter ended 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 resulted in the substantial
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.
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. As of
September 30, 2000, there were no amounts outstanding with respect to our
$20 million senior credit facility.
On November 14, 2000, we issued our 5 1/2% Convertible Notes due 2007 in the
aggregate principal amount of $250 million. After deducting commissions, costs,
and expenses associated with this offering, we anticipate the net proceeds of
this offering will total approximately $242.5 million. We intend to use the
proceeds of these notes for general corporate purposes, including capital
expenditures and research and development. The notes will pay interest
semi-annually in cash in arrears on May 15 and November 15 of each year,
beginning on May 15, 2001. The notes are convertible by the holders at any time
after initial issuance beginning 90 days after original issuance. The initial
conversion price is $25 per share, equivalent to a conversion rate of 40 shares
per $1,000 principal amount of notes. We may redeem the notes at any time on or
after November 18, 2003 at specified prices if the trading price of our common
stock exceeds $35 during a specified trading period. The notes will be unsecured
and will rank junior to our existing and future senior indebtedness. The notes
will become due and payable, if not previously redeemed, on November 15, 2007.
We believe that our current cash, short-term investments, cash flow from
operations, and amounts available under our credit facility, together with the
proceeds of the notes, 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.
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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. 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. In October 2000, we
entered into an agreement in principle to settle this class action lawsuit. If
the settlement is finalized and approved by the court, we will be required to
make an aggregate cash payment of $2.25 million to a class of former
shareholders of Harbinger in exchange for dismissal of all claims against
Harbinger. Although the parties to the litigation have agreed in principle to
this settlement, final settlement is subject to further documentation, various
contingencies, and approval by the court. The court may not approve the
settlement. If the court does not approve the settlement, the plaintiffs in the
lawsuit may proceed with their claims, without prejudice. It is also possible
that if the settlement is approved by the court, claims could be pursued by
class members who opt out of the class settlement by filing appropriate notices
with the court. If the litigation were to continue to proceed, we could be
required to spend substantial sums in an effort to litigate this matter.
Continued litigation would be likely to result in a diversion of management's
time and attention away from business operations. If the litigation were decided
adversely to Harbinger, or we agree in the future to settle this litigation for
a substantial sum as a result of failure to obtain court approval of the pending
settlement or for any other reason, our financial condition and results of
operations could be materially and adversely affected. 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 OUR 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 OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:
WE HAVE A HISTORY OF LOSSES AND CANNOT ASSURE THAT WE WILL BE PROFITABLE IN
THE FUTURE ON AN OPERATING BASIS OR OTHERWISE.
We have incurred substantial losses in recent years, and predicting our
future operating results is difficult. 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 the
price of our common stock may fall. Through September 30, 2000, we had recorded
cumulative net losses of approximately $242.8 million, including approximately
$226.6 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 a series of acquisitions completed since late 1997. We have
incurred, and expect to continue to incur, substantial expenses associated with
the amortization of intangible assets. In addition, we do not believe recent
revenue growth rates are 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 MAY REDUCE OUR REVENUE
GROWTH RATES AND MAKE PREDICTION OF OUR FUTURE REVENUES AND OPERATING RESULTS
MORE DIFFICULT AS WE INTEGRATE OUR BUSINESSES AND ATTEMPT TO FOCUS THE STRATEGIC
MODEL OF THE COMBINED COMPANY.
Harbinger's revenues prior to the acquisition were growing at a
substantially slower rate than our revenues, due in large part to declining
revenues for Harbinger's legacy electronic commerce software
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business. If our efforts to refocus Harbinger's business and integrate it with
that of Peregrine are not successful, our future revenue growth rates could be
substantially less than our historic growth rates, and our future revenues and
operating results could be impaired. We have already determined to de-emphasize
and discontinue certain businesses of Harbinger that we do not believe are
strategic to the combined company. In September 2000, we completed the sale of
one of Harbinger's product lines and may determine to sell or discontinue other
Harbinger products or businesses in the future. We expect this recent
divestiture and any future discontinuations or divestitures to result in revenue
reductions that may not be offset by revenues from other sources.
In October 2000, we announced that we were implementing a strategic
segmentation of our business into an infrastructure management group and
e-markets group. Our infrastructure management group will focus principally on
the sale of our historic infrastructure management product line together with
procurement solutions and technologies acquired from Harbinger that were
complementary with or otherwise relevant to managing internal infrastructure
assets. Our e-markets group will focus on the acquisition of supplies and
materials used in the manufacture and production of finished goods. The
e-markets group will be comprised substantially of Harbinger's legacy e-commerce
software and data transformation businesses as well as web-based supply catalogs
and vertical exchange markets for supply and commodity markets in the
automotive, energy, industrial component and retail industries.
We expect the continuing strategic and operational integration of Harbinger
into Peregrine will make prediction of our future revenues and operating results
particularly difficult because our results of operations in future periods will
reflect a substantially different business than the historical businesses of
either Peregrine or Harbinger. We may not be able to accurately predict how the
combined businesses, or the individual businesses represented by our
infrastructure management and e-markets groups, will evolve. In particular, our
future revenues and operating results may be adversely affected for a number of
reasons resulting from the acquisition and subsequent integration processes,
including the following:
- Revenues for Harbinger's e-commerce software products may continue to
decline.
- Harbinger's web-based supply catalog and vertical supply businesses are
still in their early stages, and a sustainable market may not develop for
these services as offered by our e-markets group.
- The businesses associated with our infrastructure management and e-markets
groups may be sufficiently distinct that customers perceive no benefit
from our combined product offerings, in which case we will not realize the
anticipated financial and product synergies of the acquisition.
- We may experience substantial unanticipated integration costs.
OUR REVENUES VARY SIGNIFICANTLY FROM QUARTER-TO-QUARTER FOR NUMEROUS REASONS
BEYOND OUR CONTROL. QUARTER-TO-QUARTER VARIATIONS COULD RESULT IN A SUBSTANTIAL
DECREASE 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 a substantial
decline 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 a decline in the price of our common stock. 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 were to prevent us from
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recognizing revenue during that quarter. In addition, when negotiating
large software licenses, many customers time their negotiations until
quarter-end in an effort to improve their ability to negotiate more
favorable pricing terms. As a result, we recognize a substantial portion
of our revenues in the last month or weeks of a quarter, and license
revenues in a given quarter depend substantially 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 by the
end of a particular quarter, our revenues and operating results could be
materially below the expectations of market analysts, and our stock price
could fall.
- FLUCTUATIONS IN REVENUE SOURCES. If our sales through indirect channels
were to decrease in a given quarter, our total revenues and operating
results could be harmed. Sales through indirect channels, including
distributors, third party resellers, and system integrators, represent a
significant 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 indirect channels were to decrease or were to increase at a
slower rate than recently experienced. We have less ability to manage
sales through indirect channels, relative to direct sales, 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 competing products; or inability of our channel
partners to manage the timing of their purchases from us against their
sales to end-users, resulting in inventories of unsold licenses held by
channel partners.
- 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.
- PRODUCT AND PRICING ANNOUNCEMENTS. 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 adverse effect on our revenues in a given quarter.
- 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 and services.
- CANCELLATION OF LICENSES, SUBSCRIPTION OR MAINTENANCE AGREEMENTS.
Cancellations of licenses, subscription or maintenance contracts could
reduce our revenues and harm our operating results. In particular, our
maintenance contracts with customers terminate on an annual basis.
Substantial cancellations of maintenance or subscription agreements, or a
substantial failure to renew these 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. Our customers' planning and purchase
decisions involve a significant commitment of resources and a lengthy evaluation
and product qualification process. As a result, 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. The sales cycle for our products typically takes six to nine months
to complete, and we may experience delays that further extend this period.
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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. The average size of our
transactions has increased in recent periods, and this could have the effect of
further extending our sales cycle. 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 operating results
and financial condition.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY RESULT IN PERIODIC
REDUCTIONS 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 our customers with calendar
year-end budgeting requirements. Our June and September quarters tend to be our
weakest. Revenues and operating results in the 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, our September quarter is typically weaker in part due to
the European summer holiday season.
OUR BUSINESS AND OPERATING RESULTS WILL BE HARMED IF WE CANNOT COMPETE
EFFECTIVELY AGAINST OTHER COMPANIES IN OUR MARKETS.
The market for our products is intensely competitive and diverse, and the
technologies for our 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, procurement and e-business connectivity solutions.
- In the markets for our infrastructure resource management and employee
self-service software solutions, we face competition from providers of
internal help desk software applications for managing information
technology service desks, such as Remedy Corporation and Computer
Associates, 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 Tivoli Systems (a division of 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 employee self-service, including procurement and
e-service 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
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enterprise resource planning software that are entering the market for
procurement and e-procurement solutions, including Oracle and SAP.
- In the markets served by our e-commerce enablement technology, we have
experienced competition from Sterling Commerce, a division of SBC
Communications, and General Electric eXchange solutions, each a provider
of electronic commerce software; Aspect Development, a provider of
internet business software solutions; Requisite Technology, a provider of
catalog management solutions; and webMethods, a provider of e-commerce
enablement software.
If we cannot compete effectively in our markets 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 will be
adversely affected. 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 devote greater resources than we can
to the development, promotion and sale of their products and may be able to
respond more quickly to new or emerging technologies and changes in customer
needs.
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.
OUR FUTURE OPERATING RESULTS MAY BE ADVERSELY AFFECTED IF THE SOFTWARE
APPLICATION MARKET CONTINUES TO EVOLVE TOWARD A SUBSCRIPTION-BASED MODEL, WHICH
MAY PROVE LESS PROFITABLE FOR US.
We expect our revenue growth rates and operating results to be adversely
affected as customers require us to offer our products under a
subscription-based application service provider model. Historically, we have
sold our infrastructure management solutions on a perpetual license basis in
exchange for an up-front license fee. Customers are increasingly attempting to
reduce their up-front capital expenditures by purchasing software applications
under a hosted subscription service model. Under the hosted model, the customer
subscribes to use an application from the software provider. The application is
generally hosted on a server managed by the service provider or a third-party
hosting service. We expect that a substantial portion of future revenues
generated by our e-markets group will be realized under a subscription model. We
also expect that an increasing portion of our infrastructure management group
revenues may be represented by subscriptions.
Under the subscription revenue model, we generally will recognize revenue
and receive payment ratably over the term of the customer's subscription. As a
result, our rates of revenue growth under a subscription model may be less than
our historical rates under a license model. In addition, the price of our
services will be fixed at the time of entering into the subscription agreement.
If we are unable to adequately predict the costs associated with maintaining and
servicing a customer's subscription, then the periodic expenses associated with
a subscription may exceed the revenues we recognize for the subscription in the
same period, which may adversely affect our operating results.
In addition, if we are not successful in implementing the subscription
revenue model, or if market analysts or investors do not believe that the model
is attractive relative to our traditional license model, our business could be
impaired, and our stock price could decline dramatically.
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IF WE, OR THIRD PARTIES ON WHICH WE WILL RELY, ARE UNABLE TO ADEQUATELY
DELIVER OUR INTERNET-BASED APPLICATIONS, OUR OPERATING RESULTS MAY BE ADVERSELY
AFFECTED.
We currently use our own servers to deliver our Internet-based products to
customers. We intend, however, to engage one or more third parties to provide a
full complement of services that will enable us to outsource the delivery of
these Internet-based products to our customers. For example, our third-party
service providers will manage the application servers, maintain communications
equipment, manage the network data centers where our software and data will be
stored, and provide client support. If we are unable to adequately deliver our
Internet-based applications, we may lose customers or be unable to attract new
customers, which would adversely affect our revenues.
In addition, the third-party service providers that we engage may not
deliver adequate support or service to our clients, which may harm our
reputation and our business. Because these third-party service providers handle
the installation of the computer and communications equipment and software
needed for the day-to-day operations of our Internet-based applications, we will
be dependent on them to manage, maintain and provide adequate security for
customer applications. If our customers experience any delays in response time
or performance problems while using our Internet applications hosted by a
third-party or us, our customers may perceive such delays as defects with our
products and may stop using our applications, which will adversely impact our
revenues.
We have limited experience outsourcing these services and may have
difficulties managing this process. We will be required to monitor our
third-party service providers to ensure that they perform these services
adequately. In addition, if we do not maintain good relations with these
third-party service providers, or if they go out of business, they may be unable
to perform critical support functions for us. If we were unable to find
replacement third-party service providers, we would be required to perform these
functions ourselves. We may not be successful in obtaining or performing these
services on a timely or cost-effective basis.
OUR OUTSTANDING INDEBTEDNESS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, AND WE MAY INCUR SUBSTANTIALLY MORE DEBT.
We have approximately $250 million of indebtedness outstanding, consisting
principally of our 5 1/2% Convertible Subordinated Notes due 2007. Our
indebtedness could adversely affect our results of operations and financial
condition. For example, our results of operations will be adversely affected by
approximately $13.7 million in annual interest expenses, payable semi-annually.
In addition, our indebtedness could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to obtain additional financing;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry; and
- place us at a competitive disadvantage relative to our competitors with
less debt.
Our indebtedness will require the dedication of a substantial portion of our
cash flow from operations to the payment of principal of, and interest on, our
indebtedness, thereby reducing the availability of such cash flow to fund our
growth strategy, working capital, capital expenditures and other general
corporate purposes.
We may incur substantial additional debt in the future. The terms of of our
existing indebtedness does not, and future indebtedness may not, prohibit us
from doing so. If new debt is added to our current levels, the related risks
described above could intensify.
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WE MAY HAVE INSUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE OBLIGATIONS.
We will be required to generate cash sufficient to pay all amounts due on
our outstanding indebtedness and to conduct our business operations. We have
incurred net losses, and we may not be able to cover our anticipated debt
service obligations. This may materially hinder our ability to make payments on
our indebtedness. Our ability to meet our future debt service obligations will
be dependent upon our future performance, which will be subject to financial,
business and other factors affecting our operations, many of which are beyond
our control.
IF WE DO NOT RESPOND ADEQUATELY TO OUR INDUSTRY'S EVOLVING TECHNOLOGY
STANDARDS, OR DO NOT CONTINUALLY DEVELOP PRODUCTS THAT MEET THE COMPLEX AND
EVOLVING 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. In addition, competitive or
technological developments may require us to make substantial, unanticipated
investments in new products and technologies, and we may not have sufficient
resources to make these investments. If we were required to expend substantial
resources to respond to specific technological or product changes, our operating
results would be adversely affected.
IF WE CANNOT ATTRACT AND RETAIN QUALIFIED SALES PERSONNEL, SOFTWARE
DEVELOPERS AND CUSTOMER SERVICE PERSONNEL, WE WILL NOT BE ABLE TO SELL AND
SUPPORT OUR PRODUCTS.
Competition for qualified employees is intense, particularly in the
technology industry, and we have in the past experienced difficulty recruiting
qualified employees. 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 a
prospective customer's organization. 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 will
depend in large part on our ability to attract and retain these key employees.
OUR BUSINESS WOULD BE HARMED IF WE LOST THE SERVICES OF ONE OR MORE MEMBERS
OF OUR SENIOR MANAGEMENT TEAM.
The loss of the services of one or more of 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 or non-competition agreement. We do not maintain key man life
insurance on any of our employees.
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IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, THIS WILL PLACE A SIGNIFICANT
STRAIN ON OUR MANAGEMENT AND OPERATIONAL RESOURCES.
Our recent growth rates, together with integration of numerous acquisitions,
have placed a significant strain on our management and operational resources. We
have expanded the size and geographic scope of our operations rapidly in recent
years, both internally and through acquisitions, 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.
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 their 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.
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, resellers 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.
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 continue to expand internationally. If we
expend substantial resources pursuing an international strategy and are not
successful, our revenues will be less than our management or market analysts
anticipate, and our operating results will suffer. International revenues
represented approximately 36.0% of our business in each of fiscal 1998 and 1999
and approximately 41.0% of our 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.
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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. In particular, we may experience gains and losses
resulting from fluctuations in currency exchange rates, for which hedging
activities may not adequately protect us. Moreover, exchange rate risks can have
an adverse effect on our ability to sell our products in foreign markets. Where
we sell our products in U.S. dollars, our sales could be adversely affected by
declines in foreign currencies relative to the dollar, thereby making our
products more expensive in local currencies. Where we sell our products in local
currencies, we could be competitively unable to change our prices to reflect
exchange rate changes. In recent periods, for example, our revenues in Europe
have been adversely affected by the decline in the value of the Euro and its
component currencies relative to the U.S. dollar.
Additional risks we face in conducting business internationally include the
following:
- 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.
WE MAY EXPERIENCE INTEGRATION OR OTHER PROBLEMS WITH NEW ACQUISITIONS, WHICH
COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS OR RESULTS OF OPERATIONS. NEW
ACQUISITIONS COULD DILUTE THE INTERESTS OF EXISTING STOCKHOLDERS, AND THE
ANNOUNCEMENT OF NEW ACQUISITIONS COULD RESULT IN A DECLINE IN THE PRICE OF OUR
COMMON STOCK.
In addition to the acquisition of Harbinger, we have made a number of
acquisitions of businesses and technologies over the last three years. We are
frequently in formal or informal discussions with potential acquisition
candidates. Accordingly, we may in the future make acquisitions of, or large
investments in, businesses that offer products, services and technologies that
we believe would complement our products or services. We may also make
acquisitions of or investments in businesses that we believe could expand our
distribution channels. Even though we announce an acquisition, however, we may
not be able to complete it. Any future acquisition or substantial investment
would present numerous risks. The following are examples of these risks:
- difficulty in combining the technology, operations or work force of the
acquired business;
- disruption of our on-going business;
- difficulty in realizing the potential financial or strategic benefits of
the transaction;
- difficulty in maintaining uniform standards, controls, procedures and
policies;
- possible impairment of relationships with employees and customers as a
result of any integration of new businesses and management personnel;
- impairment of assets related to resulting goodwill, and reductions in our
future operating results from amortization of goodwill and other
intangible assets.
We expect that future acquisitions could provide for consideration to be
paid in cash, shares of our common stock, or a combination of cash and our
common stock. If the consideration for the transaction were paid in common
stock, this would further dilute our existing stockholders. Any amortization of
goodwill or other assets resulting from the acquisition could materially impair
our operating results and financial condition. If an acquisition were to take
place, the risks described above could materially and adversely affect our
business and operating results.
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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 OUR FINANCIAL CONDITION.
In September 1999, a complaint was filed against Harbinger and some of its
former officers and directors in the United States District Court for the
Northern District of Georgia. The complaint alleges that the defendants
misrepresented or omitted material facts in violation of federal securities
laws. An amended complaint was filed in March 2000, expanding upon the
allegations of the initial complaint by, among other things, alleging accounting
improprieties. The complaints relate to 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, we are 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, we agreed to honor these
contractual arrangements.
In October 2000, we entered into an agreement in principle to settle this
class action lawsuit. If the settlement is finalized and approved by the court,
we will be required to make an aggregate cash payment of $2.25 million to a
class of former shareholders of Harbinger in exchange for dismissal of all
claims against Harbinger. Although the parties to the litigation have agreed in
principle to this settlement, final settlement is subject to further
documentation, various contingencies, and approval by the court. The court may
not approve the settlement. If the court does not approve the settlement, the
plaintiffs in the lawsuit may proceed with their claims, without prejudice. It
is also possible that if the settlement is approved by the court, claims could
be pursued by class members who opt out of the class settlement by filing
appropriate notices with the court. If the litigation were to continue to
proceed, we could be required to spend substantial sums in an effort to litigate
this matter. Continued litigation would be likely to result in a diversion of
management's time and attention away from business operations. If the litigation
were decided adversely to Harbinger, or we agree in the future to settle this
litigation for a substantial sum as a result of failure to obtain court approval
of the pending settlement or for any other reason, our financial condition and
results of operations could be materially and adversely affected.
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.
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
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us with approximately 540,000 square feet of office space and an option to lease
118,000 square feet for our headquarters in San Diego, California. Even
excluding the exercise of the option, the leases require a minimum aggregate
lease payment of approximately $119.3 million over the twelve year term of the
leases. The office space (including the option) relates to a five building
campus. 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:
- failure to properly estimate the future growth of our business;
- inability to sublease excess office space if we overestimate future
growth;
- disruption of operations; and
- 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 AND COULD RESULT IN PRODUCT
LIABILITY CLAIMS.
If we were required to expend significant amounts to correct software bugs
or errors, our revenues could be harmed as a result of an 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.
If we were 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 effective 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.
WE COULD BE COMPETITIVELY DISADVANTAGED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY.
If we fail to adequately protect our proprietary rights, competitors could
offer similar products relying on technologies we developed, 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 patent, copyright, trademark, and trade secret laws. In addition,
we enter into confidentiality
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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.
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. Policing unauthorized use of software
is difficult, and some foreign laws do not protect 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, any of
which could adversely affect our revenues and operating results.
IF WE BECOME INVOLVED IN AN INTELLECTUAL PROPERTY DISPUTE, WE MAY INCUR
SIGNIFICANT EXPENSES OR MAY BE REQUIRED TO CEASE SELLING OUR PRODUCTS, WHICH
WOULD SUBSTANTIALLY IMPAIR OUR REVENUES AND OPERATING RESULTS.
In recent years, there has been significant litigation in the United States
involving intellectual property rights, including rights of companies in the
software industry. Intellectual property claims against us, and any resulting
lawsuit, may result in our incurring significant expenses and 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 against us
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 also result in significant expense and the diversion of technical and
management personnel's attention
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 Peregrine. This could cause the
market price of our common stock to fall or prevent our stockholders from
realizing a premium in the market price in the event of an acquisition.
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, by paying cash. Many of these investments are in companies whose
operations are not yet sufficient to
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establish them as profitable concerns. Adverse changes in market conditions or
poor operating results of underlying investments could result in our incurring
losses or our being unable to recover the carrying value of our investments.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DISCOURAGE
POTENTIAL ACQUISITION BIDS FOR PEREGRINE AND MAY PREVENT CHANGES IN OUR
MANAGEMENT THAT 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 Peregrine's 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 rumored 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.
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. Declines in the value of the Euro relative to the U.S. dollar have
recently had an adverse effect on our revenues and 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. 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 that the defendants misrepresented or omitted material facts in
violation of federal securities laws. An amended complaint was filed in
March 2000, expanding upon the allegations of the initial complaint by, among
other things, alleging accounting improprieties. This matter is still pending,
but a tentative settlement has been agreed to among the parties. 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.
ITEM 2. CHANGES IN SECURITIES
AMENDMENT OF CERTIFICATE OF INCORPORATION
On September 18, 2000, we filed a Certificate of Amendment of our
Certificate of Incorporation with the Secretary of State of the State of
Delaware. The certificate of amendment increased the authorized number of shares
of our common stock from 200 million to 500 million. This amendment was approved
by our stockholders at the 2000 Annual Meeting of Stockholders held on
September 15, 2000.
RECENT SALES OF UNREGISTERED SECURITIES
On September 1, 2000, we issued 2,860,857 shares of our common stock
(excluding 602,799 shares of Peregrine common stock issuable upon exercise of
assumed options) in connection with the acquisition of all the outstanding share
capital of Loran Network Holding Corporation Inc., a Canada Business Corporation
Act corporation. The acquisition was affected pursuant to an Acquisition
Agreement for Amalgamation dated as of August 16, 2000. The shares of our common
stock issued to former shareholders of Loran were issued in reliance on the
exemptions from the registration requirements of the Securities Act of 1933 set
forth in Regulations D and S.
On November 14, 2000, we issued our 5 1/2% Convertible Subordinated Notes
due 2007 in the aggregate principal amount of $250 million. The notes and the
shares of common stock issuable upon conversion of the notes were not registered
under the Securities Act but were offered only to qualified institutional buyers
in reliance on Rule 144A under the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of the Stockholders of the Company was held on
September 15, 2000 in San Diego, California. John J. Moores, Christopher A.
Cole, David A. Farley, Stephen P. Gardner, James M. Travers, William D. Savoy,
Charlie E. Noell, III, Norris van den Berg, Thomas G. Watrous, Sr. were elected
to the Board of Directors. In addition, the following items were voted upon and
passed:
(i) A proposal to amend our amended and restated Certificate of
Incorporation to increase the number of authorized shares of our common stock
from 200,000,000 to 500,000,000 shares.
<TABLE>
<CAPTION>
<S> <C> <C>
VOTES FOR VOTES AGAINST ABSTENTIONS
116,098,345 10,544,777 884,798
</TABLE>
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<PAGE>
(ii) To ratify the Board's selection of Arthur Andersen as independent
public accountants for the Company for the fiscal year ending March 31, 2001.
<TABLE>
<CAPTION>
<S> <C> <C>
VOTES FOR VOTES AGAINST ABSTENTIONS
126,854,362 608,972 64,586
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
<TABLE>
<CAPTION>
EXHIBITS EXHIBIT TITLE
-------- -------------
<S> <C>
10.40 First Amendment to the Credit Agreement dated as of
December 31, 1999 by and between the Company and Bank of
America, N.A. and BankBoston, N.A.
10.41 Second Amendment to the Credit Agreement dated as of
November 1, 2000 by and between the Company and Bank of
America, N.A. and Fleet National Bank.
10.42 Indenture dated November 14, 2000 between Peregrine and
State Street Bank
10.43 Registration Rights Agreement
27.1 Financial Data Schedule.
</TABLE>
b) Reports on Form 8-K:
On November 3, 2000, we filed a Current Report on Form 8-K containing as an
exhibit a copy of our press release dated November 2, 2000 announcing our
proposed offering of convertible subordinated notes.
On November 3, 2000, we filed a separate Current Report on Form 8-K that
included as exhibits disclosure updating the description of our business,
describing the risks and other factors that could affect our future results, and
providing information about recent developments.
On November 13, 2000, we filed a Current Report on Form 8-K containing as an
exhibit a copy of our news release dated November 10, 2000 announcing the
pricing of our offering of convertible subordinated notes.
On November 14, 2000, we filed a Current Report on Form 8-K containing as an
exhibit a copy of our news release dated November 14, 2000 announcing the
issuance of $250 million in aggregate principal of our 5 1/2% convertible
subordinated notes due 2007.
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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 November, 2000.
<TABLE>
<S> <C> <C>
PEREGRINE SYSTEMS, INC.
By: /s/ MATTHEW C. GLESS
-----------------------------------------
Matthew C. Gless
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
</TABLE>
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