Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
MARCH 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
COMMISSION FILE NUMBER: 000-22209
------------------------
PEREGRINE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3773312
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12670 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(Address of principal executive offices, including zip code)
(858) 481-5000
(Registrant's Telephone Number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sale price of the Common Stock on March 31,
2000, as reported on the Nasdaq National Market, was approximately
$6,636,446,655. Shares of Common Stock held by each executive officer and
director and by each person who may be deemed to be an affiliate of the
Registrant have been excluded from this computation. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of March 31, 2000, the Registrant had 109,501,146 shares of Common
Stock, $0.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PEREGRINE SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I..................................................................... 3
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II.................................................................... 16
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6. Selected Consolidated Financial Data........................ 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 36
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 36
PART III................................................................... 37
Item 10. Directors and Executive Officers of the Registrant.......... 37
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 44
Item 13. Certain Relationships and Related Transactions.............. 45
PART IV.................................................................... 46
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 46
Signatures............................................................. 49
2
PART I
ITEM 1. BUSINESS
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 STATEMENTS INCLUDE, AMONG OTHERS, STATEMENTS
CONCERNING OUR FUTURE OPERATIONS, FINANCIAL CONDITION AND PROSPECTS, AND OUR
BUSINESS STRATEGIES. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE" AND OTHER
SIMILAR EXPRESSIONS GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS. INVESTORS IN
OUR COMMON STOCK ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
SUBSTANTIAL RISKS AND UNCERTAINTIES THAT COULD CAUSE OUR FUTURE BUSINESS,
FINANCIAL CONDITION, OR RESULTS OF OPERATIONS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR CURRENTLY ANTICIPATED RESULTS. INVESTORS SHOULD CAREFULLY
REVIEW THE INFORMATION CONTAINED UNDER THE CAPTION "FACTORS THAT MAY EFFECT
FUTURE RESULTS" IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO,
THIS REPORT.
OVERVIEW
Peregrine refers to itself as "The Infrastructure Management Company." We
offer business organizations an integrated suite of packaged infrastructure
resource management application software. In addition, we have recently
introduced additional products designed to automate the processes associated
with the procurement and use of infrastructure assets. These software
applications are designed to manage the various aspects of organizational
infrastructure from the moment an asset is leased, acquired, or taken from
existing inventory until the moment it is taken out of service. Infrastructure
assets include computers, computer networks, telecommunication assets, physical
plant and facilities, corporate car or truck fleets, and many other assets. Our
products are designed to help businesses answer the following questions about
each item of corporate infrastructure:
- What assets does my business own?
- Where are each of these assets located?
- How well are each of these assets working?
- What is the total cost of owning each asset (I.E., the cost of acquiring,
maintaining, servicing, and disposing of each asset)?
- How well is each asset supporting my business?
CORPORATE BACKGROUND
We were incorporated in California in 1981 and reincorporated in Delaware in
1994. Our principal executive offices are located at 12670 High Bluff Drive, San
Diego, California 92130. Our telephone number at that address is (858) 481-5000.
INDUSTRY BACKGROUND
Until recently, automated management of organizational infrastructure was
not a priority for many companies. Rather, organizations tended to focus their
information technology spending on automating external business functions that
involve interactions with customers, suppliers, distributors, and other third
parties. These applications included building networks for voice and data and
implementing software solutions for enterprise resource planning (ERP), customer
supply chain management (CSCM), and customer relationship management (CRM).
Organizations have become increasingly dependent on these networks, systems, and
applications to provide core products and services, and we believe they are now
critical components of an organization's operating infrastructure.
3
Organizational infrastructure has also become larger and more complex.
Modern businesses now depend on an array of systems and applications to provide
electronic mail and Internet and Intranet services, to manage documents, and to
support mission critical ERP, CSCM, and CRM applications. In addition, the
various components of infrastructure, including desktop computers, networks, and
telecommunications assets, are increasingly linked. In turn, these internal
networks and systems depend on a physical infrastructure comprised of cable and
wiring in walls, floors, and ceilings that are ultimately part of the buildings
and campuses that comprise the larger organizational infrastructure.
We believe that the operational effectiveness of an organization ultimately
depends on the efficient acquisition, management, and disposal of these
infrastructure assets. Threats to infrastructure pose substantial business
risks. Issues raised in connection with Year 2000 remediation, European currency
conversion, computer viruses, major facilities relocations, and changes in
network environments have resulted in increased awareness of infrastructure
dependency by senior business executives and information technology managers.
Accordingly, we believe that opportunities exist for providers of an integrated
suite of infrastructure resource management software that can assist
organizations to acquire, deploy, maintain, and operate infrastructure assets
efficiently throughout their life cycle--from the time an organization starts to
contemplate purchase or lease of a new asset to the moment the asset is removed
from service and sold or disposed. We attempt to manage the following major
stages in the lifecycle of an asset:
- procurement or lease
- maintenance in inventory
- installation
- data collection
- taking and implementing a service or upgrade request
- asset relocation
- problem management and resolution
- performance tracking
- correlation of performance to service level agreements
- contract management
- removal from service
- disposition or re-use
Until recently, our products focused principally on problem management for
an organization's information technology infrastructure. Our principal product
suite, SERVICECENTER, is an integrated, enterprise service desk software
solution that assists information technology departments to manage and maintain
their internal computer networks and related assets. Since 1997, however, we
have made several acquisitions intended to broaden our infrastructure resource
management product suite beyond management of network help desks.
- In September 1997, we acquired ASSETCENTER, our first asset management
product through the acquisition of Apsylog, S.A., a French corporation,
and its U.S. parent company.
- 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 September 1998, we acquired technologies and other assets from related
entities operating as International Software Solutions. These technologies
expanded the ability of our products to help manage information technology
assets by permitting network help desk analysts to interface with users
over the corporate network without on-site visits.
- In March 1999, we acquired Prototype, a provider of software products for
managing corporate vehicle and equipment fleets.
- In April 1999, we acquired fPrint, a British provider of software used to
discover and inventory software located on the computers of individual
users on a corporate network.
4
- In September 1999, we acquired Knowlix, a developer of knowledge
management software that assists help desk analysts by managing the
intangible technical information and know-how required to assist callers.
- In December 1999, we acquired advanced and light rail management software
for the passenger and freight rail industries from KKO & Associates.
- In March 2000, we acquired Telco Research, a provider of software products
that help manage telecommunications assets, and Barnhill Management Group,
a services and solutions delivery partner with extensive experience in the
telecommunications industry.
PRODUCTS
We currently offer over forty infrastructure management and e-procurement
software products. The following discussion summarizes our principal product
families.
SERVICECENTER
SERVICECENTER is a set of applications intended to maintain the
effectiveness and functionality of an organization's information technology
infrastructure. ServiceCenter offers a number of gateway products to the
software tools and applications of other vendors. These gateway products include
interfaces to system and network management products such as Hewlett-Packard
Openview, Computer Associates Unicenter, and Tivoli TME10. In addition, gateways
to enterprise resource planning applications are supported to products such as
SAP R3, PeopleSoft, and Oracle.
PRIMARY SERVICECENTER APPLICATIONS
PROBLEM MANAGEMENT. The problem management application automates the
process of reporting and tracking specific problems or classes of problems
associated with a business enterprise's network computing environment. Help
desk personnel open problem tickets using templates specific to the class of
problem reported.
PROBLEM RESOLUTION. The problem management application works together
with our IR EXPERT, a text search expert system that employs advanced
technology to allow network operators to retrieve relevant information. This
application assists in problem solving, based on prior solutions. The IR
EXPERT reduces a user's question, or query, to a number of "terms," refining
the query to fit knowledge in the database and then searches resolution
databases using related terms. This application is self-learning, so the
customer does not have to perform any work to keep the knowledge base up to
date.
CHANGE MANAGEMENT. The change management application provides a
functional framework for proposing, accepting, scheduling, approving,
reviewing and coordinating network changes.
CONTRACT MANAGEMENT. The contract management application provides
information system departments with the tools they need to track all costs
associated with infrastructure problems or change.
INVENTORY CONFIGURATION MANAGEMENT. The inventory configuration
management application provides the service desk with a central repository
of information about inventories of networked devices and applications as
well as information concerning end-users. Easy access to inventory
information permits the service desk to respond to end-user problems, to
plan changes and services, and to create accurate reports about the
network's status and environmental trends.
REQUEST MANAGEMENT. The request management application automates and
tracks an organization's equipment and services ordering process from
initial request through installation and follow-up. Using SERVICECENTER, an
end-user identifies and orders products or services from a catalog
5
of items. SERVICECENTER then consolidates requests, forwards orders through
an organization's standard approval and order processing procedures, and
consolidates orders by vendor. End-users can track the status of requests
through SERVICECENTER at all times.
SERVICE LEVEL AGREEMENT MANAGEMENT. Service level agreements are used
by companies to relate the availability and performance of infrastructure to
the business mission performed by the infrastructure. Service level
agreement management is designed to simplify the task of managing these
contracts.
SERVICECENTER INSIGHT. ServiceCenter Insight is a data mining tool
which facilities the ability of the customer to make queries and prepare
reports about information in the infrastructure repositories.
SERVICE MANAGEMENT. Service management is a comprehensive call
management tool. The service desk operator uses service management to assess
an incoming call and determine whether it is an information request, a call
requiring problem management, a request for action to assist an individual
or a requirement for a change which would affect multiple elements of the
infrastructure.
WORK MANAGEMENT. Work management is designed to help managers better
balance the demands for service and support based on the priority of tasks
and the skill set of the workforce. Work management will automatically
allocate unassigned or incomplete problem tickets to individuals. The
manager can also assign new work, view progress on assigned items, or
reassign work based on changing properties using the drag and drop
interface.
E-SERVICECENTER is the Internet-hosted version of SERVICECENTER, which
offers a subset of the SERVICECENTER application set to help desk managers on an
application service provider basis. If the customer elects this option, we act
as the system administrator and operator for the customer. Their users connect
to our software over the Internet and receive the benefit of the application
without the administrative burden of actually running the server portion of the
application. The product is sold in two models. We may enter a perpetual license
agreement with the customer and recognize license revenue at the time of initial
sale, as with a standard SERVICECENTER license, and recognize maintenance,
hosting operations and administration revenues as a recurring payment stream.
Alternatively, we may provide a limited-term, noncancelable subscription to use
E-SERVICECENTER, where we recognize revenue for license, maintenance, hosting
operations and administration on a periodic basis.
ASSETCENTER
ASSETCENTER is a set of applications intended to manage financial
information relating to an organization's portfolio of information technology
infrastructure investments. Like SERVICECENTER, ASSETCENTER supports gateways to
enterprise resource planning and desktop inventory discovery tools.
PRIMARY ASSETCENTER APPLICATIONS
ASSET MANAGEMENT. The asset management application provides a
comprehensive inventory of an organization's equipment, users, suppliers,
and contracts. The application provides detailed descriptions of software
licenses acquired and their associated rights in order to reconcile them
with the software actually installed.
LEASE MANAGEMENT. Lease management manages the contractual aspects of
leasing and rental by returning, updating and renewing equipment through
alarm and messaging features. The application also includes a wide range of
methods for calculating lease terms and permits users to evaluate different
financing alternatives.
PROCUREMENT MANAGEMENT. This application manages the acquisition of
information technology products including assets, consumables and services.
Procurement management covers the entire
6
purchasing cycle: request, approval, estimate, issuance of purchase orders,
delivery and receipt. The application allows users to set up authorization
procedures as well as automatic reordering based on user-defined restocking
criteria.
COST MANAGEMENT. Cost management features analytic and budgetary
functions that allow tracking, control, and allocation of information
technology related expenses. The application allows users to track costs
related to each asset, including both capital and operational expenses
(E.G., training, service calls) and to measure the costs of ownership for
each asset. The application also allows users to compare accounting and
physical inventories to determine the correct valuation of balance sheet
assets.
INFRACENTER FOR WORKGROUPS
INFRACENTER FOR WORKGROUPS is a comprehensive asset management technology
targeted at the midrange market. INFRACENTER FOR WORKGROUPS offers functionality
and applications similar to those offered with our ASSETCENTER product suite. In
addition, Infratools desktop discovery provides complete, accurate, and timely
intelligence about desktop users on a network. The premium offering of
INFRACENTER FOR WORKGROUPS bundles our InfraTools Remote Control product, a
graphical remote control application. InfraTools Remote Control is designed for
everything from help desk and remote support to teaching applications and
network management.
FACILTYCENTER
FACILITYCENTER is a set of applications and multiple gateways that are
designed to manage assets related to physical plant and facilities.
FACILITYCENTER includes space planning, facilities management, work order
management, stacking, maintenance management, facilities help desk, cable plant
management, computer aided design integrator, data collection, and real estate
lease management. Like SERVICECENTER and ASSETCENTER, FACILITYCENTER also
supports gateways to external products.
The FACILITYCENTER product suite offers solutions specifically designed to
automate facilities, real estate and operations, and maintenance management.
E-FACILITYCENTER is the Internet-hosted version of FACILITYCENTER. It offers the
FACILITYCENTER application set to real estate and facilities managers on a
hosted application service provider basis.
PRIMARY FACILITYCENTER APPLICATIONS
FACILITYCENTER SOLUTION FOR FACILITIES MANAGEMENT. FACILITYCENTER
projects occupancy demand and supply scenarios to enable efficient move
planning and reduce costs. By interfacing to popular computer-aided-design
products, users can view information graphically and manage facilities using
a top down approach. The FACILITYCENTER application can also manage project
bids, costs and budgets.
FACILITYCENTER SOLUTION FOR OPERATIONS AND MAINTENANCE. OUR
FACILITYCENTER solution for operations and maintenance enables preventive
maintenance workflow to be streamlined and managed from a single point. It
allows managers to automatically schedule preventive maintenance, obtain
work order cost estimates, schedule work orders, and obtain information
about the status of work orders. Purchasing, receiving and shipping
functions can also be administered automatically.
FACILITYCENTER SOLUTION FOR REAL ESTATE. The FACILITYCENTER real
estate management solution helps real estate professionals optimize the use
of available space, reduce overall occupancy costs and implement continuous
improvement strategies and policy tactics. The application tracks owned and
leased property including space configuration and utilization.
7
FLEETANYWHERE
FLEETANYWHERE is a comprehensive, Internet-enabled, fully integrated,
Windows-based fleet management system. It is capable of tracking an unlimited
number of equipment units and supporting an unlimited number of workstations
from any number of locations. FLEETANYWHERE tracks all functions related to the
maintenance of equipment fleets, including processing repair and work orders,
tracking operating expenses such as for fuel, oil, and licensing, and tracking
and billing for equipment usage. Optional modules offer functionality related to
bar coding on the shop floor, online employee labor capture, motor pool
reservations tracking, shop scheduling, service level agreement tracking,
replacement analysis, tire tracking, and fleet optimization.
E.FLEET is the Internet-hosted version of FLEETANYWHERE. It offers the full
FLEETANYWHERE application set to fleet managers on an application service
provider basis.
GET.IT!
GET.IT! is our employee self-service product suite. The GET.IT! solution
offers employee self-service applications designed to improve employee
productivity and reduce operating expenses.
GET.IT! APPLICATIONS
GET.RESOURCES! Get.Resources! assists the traditional asset
procurement process by allowing businesses to evaluate total lifecycle costs
of an asset. Using a web interface, employees can buy, lease, or take from
existing stock needed resources or services. The workflow engine in
Get.Resources! routes requisitions through the organization based on local
business rules, thereby streamlining the process and reducing cycle time.
Get.Resources! is an open e-procurement application that allows
organizations to purchase products and resources through CommerceOne's
MarketSite or via direct, point-to-point links with suppliers from
e-catalogs hosted on either the buyer or supplier site.
GET.ANSWERS! Get.Answers! is a portal interface for accessing and
distributing information throughout an organization. With an easy-to-use web
interface, Get.Answers! lets any employee tap into the same information base
used by information technology support and other infrastructure
professionals. The reporting feature in Get.Answers! lets administrators
know who is using the system and what information is being used.
GET.SERVICE! Get.Service! automates the employee service request
process through a centralized portal for requesting services ranging from
training services to providing lunches for meetings.
COMMANYWHERE
COMMANYWHERE is a communications equipment management system that tracks
mobile and portable radios, base and fixed equipment, microwave equipment,
console and remote equipment, and 800 megahertz trunked radio system equipment.
KNOWLIX
KNOWLIX is our knowledge management product suite for help desks and
customer support centers. KNOWLIX assists help desk and call center analysts by
managing the technical information and know-how required to assist callers.
8
TELEPHONY AND DATA MANAGEMENT SOLUTIONS
In March 2000, we completed our acquisition of Telco Research Corporation
Limited, a provider of software products that help manage telecommunications
assets. The Telco Research product suite combines hardware and software
solutions that help organizations accurately accumulate and allocate
telecommunications cost, measure system health and performance, enforce
policies, manage security, and control fraudulent use of corporate phone
systems.
DATA COLLECTION DEVICES. We offer intelligent data collectors that monitor
and collect the information produced by network switching equipment. These data
collectors provide a solution for monitoring and filtering alarms, collecting
call detail records and traffic data and obtaining secure access into telephone
switches from a central point. These collection devices provide call detail
record storage, polling, toll fraud & real-time information concerning the
operating status of telecommunications systems.
VOICE SOLUTIONS. We offer solutions to manage the voice communications
network for companies of all sizes. This family of products provides customers
the ability to understand and control cost and usage, monitor network operating
status and maintain network integrity.
PRODUCT INTEGRATION
We have completed numerous acquisition of businesses and technologies since
late 1997. As a result, our research and development personnel have focused
substantial effort on integrating the acquired products and technologies into a
single product suite with a common data repository. In April 1998, we announced
and shipped the Peregrine Repository Interface Manager, which we market as PRIM.
PRIM integrates common elements between the data schema of SERVICECENTER and
ASSETCENTER. We are continuing to expend resources to improve the integration of
SERVICECENTER and ASSETCENTER and are beginning the integration of
FACILITYCENTER, a product we acquired in connection with the acquisition of
Innovative Tech Systems in July 1998. Integration of products of this number and
complexity can be costly and time consuming, could result in the diversion of
resources from development of new or enhanced products and technologies, and
exposes us to a number of risks which are described in greater detail under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Factors That May Affect Future Results" beginning on page 24.
PRODUCT DEVELOPMENT; PRODUCT AUTHORSHIP MODEL
We believe that attracting and retaining talented software developers is an
important component of our product development activities. To this end, we have
instituted a product authorship incentive program that rewards our developers
with commissions based on the market success of the applications designed,
written, marketed, and supported by them. Our product authorship program is
designed to encourage our developers to evaluate the effectiveness of a product
in the actual user environment.
We believe that the ability to deliver new and enhanced products to
customers is a key success factor. We have historically developed our products
through a consultative process with existing and potential customers. We expect
that continued dialogue with existing and potential customers may result in
enhancements to existing products and the development of new products. We have
in the past devoted and expect to continue to devote a significant amount of
resources to developing new and enhanced products. We currently have a number of
product development initiatives underway. We cannot predict, however, whether
any enhanced products, new products, or product suites will be embraced by
existing or new customers. The failure of any of these products to achieve
market acceptance would have a material adverse effect on our business, results
of operations and financial condition.
Our research and development expenditures in fiscal 2000, 1999, and 1998
were $28.5 million, $13.9 million, and $8.4 million, respectively, representing
11%, 10%, and 14% of total revenues in the
9
respective periods. See "Peregrine Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 20.
The market for our products is subject to rapid technological change,
changing customer needs, frequent new product introductions and evolving
industry standards that may render existing products and services obsolete. As a
result, our position in existing markets or other markets that we may enter
could be eroded rapidly by product advances. The life cycles of our products are
difficult to estimate. Our growth and future financial performance will depend
in part on our ability to enhance existing applications, develop and introduce
new applications that keep pace with technological advances, meet changing
customer requirements and respond to competitive products. Our product
development efforts are expected to continue to require substantial investment
by us. There can be no assurance that we will have sufficient resources to make
the necessary investment. We have in the past experienced development delays,
and there can be no assurance that we will not experience development delays in
the future. There can be no assurance that we will not experience difficulties
that could delay or prevent the successful development, introduction, or
marketing of new or enhanced products. In addition, there can be no assurance
that any new or enhanced products will achieve market acceptance, or that our
current or future products will conform to industry requirements. Our inability,
for technological or other reasons, to develop and introduce new and enhanced
products in a timely manner could have a material adverse effect on our
business, results of operations, and financial condition.
TECHNOLOGY
Our products rely on a number of standard, commercially available
technologies for relational database storage and retrieval and client/server
communications. They are designed to support a range of implementations of
infrastructure management applications and enterprise service desks within
medium sized to large organizations. We have developed other technologies
designed to provide a comprehensive environment to build, deploy, and customize
a range of applications.
N-TIERED ARCHITECTURE. N-tiered architecture applications permit the
separation of multiple clients, multiple application servers, and multiple
database servers in a single cohesive application implementation. Our database,
business rules, and presentation technologies create an N-tiered client/server
architecture intended to provide scalability and flexibility. The tiers are
logically separated, allowing changes to the database design or the graphical
interface to be made without requiring changes to the business rules or other
related tiers.
EASY CUSTOMIZATION/EXTENSION. In order to make our software fit customers'
needs, our products provide a number of tools that enable customers to customize
and extend SERVICECENTER, ASSETCENTER, FACILITYCENTER and FLEETANYWHERE. The
design of the database, the contents and appearance of the user interface, and
the business rules can be modified using the standard tools that we provide with
the system.
RAPID APPLICATION DEVELOPMENT ENVIRONMENT. We have created a
"fill-in-the-blanks" development environment for building and deploying
applications. All SERVICECENTER applications are implemented using our rapid
application development environment. If a customer requires more extensive
modification, the system can be customized by changing the applications that we
provide or by implementing new applications using the rapid application
development environment. In fiscal 1999, we introduced an advanced graphical
workflow engine in ASSETCENTER, along with technology for simplified tailoring
of the application. These technologies are expected to be introduced in future
applications.
DISTRIBUTED SERVICES. We have distributed a database technology that
provides replication services and the capability to move work from one
SERVICECENTER system to another. These services are database vendor independent
and contain knowledge of the application schema.
ADAPTERS. We provide adapters to industry standard application programming
interfaces, such as SMTP e-mail, and leading vendors products. These adapters
expand the reach of our products by allowing
10
them to interact with other products currently in the customer's environment. We
also have created adapters that permit the system to communicate using e-mail,
beepers, facsimile and Lotus Notes. The adapters also provide communication with
third party network management tools such as Hewlett-Packard's OpenView,
Computer Associates Unicenter, Tivoli's TME, Cabletron's Spectrum, Sun's SunNet
Manager and others. In addition, we have created an open application programming
interface permitting software developed by third parties, end-users or our
professional services group to be integrated into the system.
INTELLIGENT AGENTS. We provide intelligent agents that gather and feed
information to SERVICECENTER. The agents provide automated inventory gathering
and problem determination data for use in problem resolution and management of
an information technology environment. The agents permit help desk personnel to
open, update, and close trouble tickets based on criteria provided by the
customers.
JAVA CLIENT. We introduced a Java SERVICECENTER graphical user interface
client in fiscal 1999. The Java client duplicates the functionality of the
SERVICECENTER graphical user interface, allowing access to the entire
SERVICECENTER system via the Internet. The Java client is designed for use by
production or "heavy" users of the system, while the web client, available for
SERVICECENTER, ASSETCENTER, FACILITIES CENTER, and FLEETANYWHERE is designed for
the casual user requiring easy, simple access to basic system functions.
SALES AND MARKETING
We sell our software and services in North America and internationally
primarily through a direct sales force. A large number of our sales force is
based at our San Diego headquarters, but we also have North American sales
personnel located in, or in close proximity to, most major cities in the United
States and Canada. Our international sales force is located in the metropolitan
areas of Amsterdam, Frankfurt, London, Milan, Copenhagen, Munich, Paris,
Singapore and Sydney. Our sales model combines telephone and Internet
communications for product demonstrations with travel to customer locations to
pursue a consultative sales process. In addition to our direct sales strategy,
we continue to pursue indirect distribution channels. In the Pacific Rim and
Latin America, we have established a network of channel partners. In North
America, we have established a network of regional and national systems
integrators and channel partners. When sold through direct channels, the sales
cycle for our products typically ranges from six to nine months, depending on a
number of factors, including the size of the transaction and the level of
competition we encounter in our sales activities.
In recent periods, we have devoted significant resources to building our
marketing organization and infrastructure. We have significantly expanded
product marketing, marketing communications, alliance marketing, telemarketing
and sales training. The primary focus of our marketing department is to generate
qualified leads for the worldwide direct sales force and to create market
awareness programs for Peregrine and our products. As part of our strategy, we
have invested significantly in the Internet, developing a new corporate web site
during fiscal 2000 and executing an array of web-based marketing programs. In
addition, during fiscal 2000, we established an executive briefing center in
order to focus our sales efforts at senior levels within our prospective
customer's organizations.
We have significantly increased the size of our sales force over the last
year and expect to continue hiring sales personnel, both domestically and
internationally, over the next twelve months. Competition for qualified sales
personnel is intense in the software industry. We also expect to increase the
number of our regional, national, system integrator and channel partners, both
domestically and internationally. Any failure to expand our direct sales force
or other distribution channels could have a material adverse effect on our
business, results of operations, and financial condition.
We believe that our continued growth and profitability will require
expansion of our international operations, particularly in Europe, Latin
America, and the Pacific Rim. We intend to expand international operations and
to enter additional international markets, either directly or through
international distribution or similar arrangements, which will require
significant management attention and financial resources.
11
Competition for suitable distribution partners is intense in many markets
outside North America. There can be no assurance that we will be successful in
attracting and retaining qualified international distributors or that we will be
successful in implementing direct sales programs in selected international
markets. If we are unable to obtain qualified international distribution
partners or are otherwise unable to successfully penetrate important
international markets, our business, results of operations, and financial
condition would be materially and adversely affected.
In addition, continued international expansion poses a number of risks
associated with conducting business outside the United States, including
fluctuations in currency exchange rates, longer payment cycles, difficulties in
staffing and managing international operations, seasonal reductions in business
activity during the summer months in Europe and certain other parts of the
world, increases in tariffs, duties, price controls, or other restrictions on
foreign currencies, and trade barriers imposed by foreign countries, any of
which could have a material adverse effect on our business, operating results
and financial condition. In addition, we have only limited experience in
developing localized versions of our products and marketing and distributing our
products internationally. There can be no assurance that we will be able to
successfully localize, market, sell, and deliver products internationally. If we
are unable to expand our international operations successfully and in a timely
manner, our future revenues could decline or grow at a slower rate, and our
results of operations and financial condition could be impaired.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
Our professional services group provides technical consulting and training
to assist customers and business partners in implementing our products.
Our basic consulting services include analyzing user requirements and
providing the customer with a starter system that will quickly demonstrate
significant benefits of our products. More advanced consulting services include
providing turn-key implementations using our Advanced Implementation
Methodology, which begins with a structured analysis to map the customer's
business rules onto our service desk tools, continues with the technical design
and construction, and finishes with system roll out. Implementation assistance
frequently involves a modest level of process reengineering and the development
of interfaces between our products and legacy systems and other tools or
systems.
We offer training courses in the implementation and administration of our
products. On a periodic basis, we offer product training at our facilities in
San Diego, Orlando, Washington D.C., London, Paris, Frankfurt, Amsterdam and
Tokyo for customers and business partners. Customer-site training is also
available.
We maintain a staff of customer support and customer care personnel, who
provide technical support and periodic software updates to our customers and
partners. We offer complete technical support services 24 hours a day, five days
per week, with critical care services offered 24 hours a day, seven days a week
via toll free lines through our local offices in Europe and San Diego. In
addition to telephone support, we provide support via facsimile, e-mail, and a
web server.
COMPETITION
The markets for our products are highly competitive and diverse. The
technology for infrastructure management and e-procurement software products can
change rapidly. New products are frequently introduced and existing products are
continually enhanced. Competitors vary in size and in the scope and breadth of
the products and services offered. In the last few years, we have experienced
substantial competition from new competitors of all types and sizes, and we do
not foresee a change in the rate of increasing competition.
12
SOURCES OF EXISTING COMPETITION
We face competition from a number of sources in the markets for our
infrastructure resource management and e-procurement software solutions.
- In the markets for our infrastructure resource management products, we
face competition from:
- providers of internal help desk software applications, such as Remedy
Corporation and Tivoli Systems, that compete with our enterprise
service desk software
- providers of asset management software, including Remedy, MainControl,
and Janus Technologies
- providers of facilities management software, including Archibus,
Facilities Information Systems, and Assetworks (a division of
CSI-Maximus)
- providers of transportation management software that competes with our
fleet management and rail management software, including Control
Software (a division of CSI-Maximus) and Project Software and
Development Inc.
- information technology and systems management companies such as IBM,
Computer Associates, Network Associates, Hewlett-Packard, and Microsoft
- numerous start-up and other entrepreneurial companies offering products
that compete with the functionality offered by one or more of our
infrastructure management products
- the internal information technology departments of those companies with
infrastructure management needs
- In the markets for procurement and e-procurement solutions, we face
competition from:
- established competitors in the business-to-business internet commerce
solution market, such as Ariba and CommerceOne; and
- established providers of enterprise resource planning software that are
entering the market for procurement and e-procurement solutions,
including Oracle and SAP.
SOURCES OF FUTURE COMPETITION
Because competitors can easily penetrate the software market, we anticipate
additional competition from other established and new companies as the market
for enterprise infrastructure management applications develops. In addition,
current and potential competitors have established or may in the future
establish cooperative relationships among themselves or with third parties.
Large software companies may acquire or establish alliances with our smaller
competitors. We expect that the software industry will continue to consolidate.
It is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.
Increased competition may result from acquisitions of other infrastructure
management or e-procurement software vendors by system management companies. The
results of increased competition including price reductions of our products,
reduced gross margins, and reduction of market share, could materially adversely
affect our business, operating results, and financial condition. In several of
our market segments, we believe there is a distinct trend by competitors toward
securing market share at the expense of profitability. This could have an impact
on the mode and success of our ongoing business in these segments.
13
GENERAL COMPETITIVE FACTORS IN OUR INDUSTRY
Some of our current and many of our potential competitors have much greater
financial, technical, marketing, and other resources. As a result, they may be
able to respond more quickly than we can to new or emerging technologies and
changes in customer needs. They may also be able to devote greater resources to
the development, promotion, and sale of their products. We may not be able to
compete successfully against current and future competitors. In addition,
competitive pressures that we face may materially and adversely affect our
business, operating results, and financial condition.
We believe that the principal competitive factors affecting markets include
product features such as adaptability, scalability, ability to integrate with
third party products, functionality, ease of use, product reputation, quality,
performance, price, customer service and support, effectiveness of sales and
marketing efforts and company reputation. Although we believe that we currently
compete favorably with respect to these factors, there can be no assurance that
we will maintain our competitive position against current and potential
competitors, especially those with greater financial, marketing, service,
support, technical, and other resources than us. In addition, we believe that
our future financial performance will depend in large part on our success in
continuing to expand our product line of infrastructure management and
e-procurement solutions and to create organizational awareness of the benefits
when purchasing these integrated solutions from a single vendor.
INTELLECTUAL PROPERTY
Our success depends heavily on our ability to maintain and protect our
proprietary technology. We rely primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary rights, which offer only limited
protection. We attempt to protect our intellectual property rights by limiting
access to the distribution of our software, documentation and other proprietary
information. In addition, we enter into confidentiality agreements with our
employees and certain customers, vendors, and strategic partners. These steps
may fail to prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. Other parties may independently develop
competing technology. Attempts may be made to copy aspects of our products or to
obtain and use information that we regard as proprietary. Despite precautions we
may take, it may be possible for unauthorized third parties to copy aspects of
our current or future products or to obtain and use information that we regard
as proprietary. In particular, we may provide our licensees with access to our
data model and other proprietary information underlying our licensed
applications.
We employ a variety of intellectual property in the development and sale of
our products. We believe that the loss of all or a substantial portion of our
intellectual property rights would have a material adverse effect on our results
of operations. Our intellectual property protection measures might not be
sufficient to prevent misappropriation of our technology. From time to time, we
may desire or be required to renew or obtain licenses from others in order to
further develop and effectively market commercially viable products effectively.
Any necessary licenses might not be available on reasonable terms, if at all,
and the associated license fees could increase our expenses and impair our
results of operations.
Litigation concerning intellectual property is common among technology
companies. In the future, third parties may claim that we infringe their
products or technologies. These claims and any resulting lawsuit, if successful,
could subject us to significant liability for damages and invalidate our
proprietary rights. These lawsuits, regardless of their success, would likely be
time-consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation could also force us to
do one or more of the following:
- cease selling, incorporating, or using products or services that
incorporate the infringed intellectual property;
14
- obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
available on acceptable terms, if at all; or
- redesign those products or services that incorporate the disputed
technology.
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 our competitors. These
claims could result in costly litigation and the diversion of our technical and
management personnel's time and attention. As a result, our operating results
could suffer, and our financial condition could be harmed.
EMPLOYEES
As of March 31, 2000, we employed 1,433 persons, including 555 in sales and
marketing, 160 in customer support, 257 in professional services, 243 in
research and development and 218 in finance and administration. Of our
employees, 441 are located outside North America, principally in Europe. None of
our employees is represented by a labor union (other than by statutory unions or
workers' committees required by law in some European countries). We have not
experienced any work stoppages and consider our relations with our employees to
be good.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, support, research and
development and training functions are located at our headquarters facility in
San Diego, California. We currently occupy 127,110 square feet of space in San
Diego, and the underlying leases extend through August 2003. An additional
13,310 square feet of leased space at the San Diego headquarters is subleased to
JMI Services, Inc., an affiliate of the Company.
In June 1999, we entered into a series of leases covering up to
approximately 540,000 square feet of office space in San Diego, including an
option on approximately 118,000 square feet of office space. Excluding the
exercise of the option, the leases require minimum lease payments of
approximately $124 million over their term, which is approximately twelve years.
This office space (including the option) is intended for a five building campus
setting in San Diego, California. Initially, we expect to occupy three of the
buildings and sublet the remaining two buildings. We currently occupy one of the
three buildings and expect to occupy the balance sometime during the summer of
2000. As part of the relocation to the new campus facility, we intend to sublet
our currently leased space on High Bluff Drive for the remaining period of our
lease.
We also lease office space for sales, marketing, and professional services
staff in most major metropolitan areas of the United States and Canada. In
connection with our recent acquisition of Telco Research Corporation Limited, we
assumed leases for approximately 37,000 square feet of office space in
Nashville, Tennessee and 17,000 square feet of office space in Toronto, Ontario.
In Europe, we lease space in the metropolitan areas of Amsterdam, Copenhagen,
Dublin, Frankfurt, London, Milan and Paris. In the Pacific Rim, we lease space
in Singapore, Sydney and Tokyo.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceedings or claims,
either asserted or unasserted, which arise in the ordinary course of business.
Our management has reviewed pending legal matters and believes that the
resolution of such matters will not have a significant adverse effect on our
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No stockholder votes took place during the fourth quarter of the year ended
March 31, 2000.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the Nasdaq National Market under the
symbol "PRGN" since our initial public offering in April 1997. Prior to April
1997, there was no established public trading market for our common stock. The
following table sets forth for the periods indicated, the high and low closing
prices reported on the Nasdaq National Market. All prices have been adjusted to
reflect two-for-one stock splits of our common stock effected as stock dividends
in February 1999 and February 2000.
HIGH LOW
-------- --------
Fiscal Year Ended March 31, 2000:
Fourth Quarter............................................ $79.500 $36.625
Third Quarter............................................. 45.875 19.156
Second Quarter............................................ 20.563 12.813
First Quarter............................................. 17.344 8.563
Fiscal Year Ended March 31, 1999:
Fourth Quarter............................................ $16.813 $10.625
Third Quarter............................................. 11.594 7.109
Second Quarter............................................ 10.344 5.844
First Quarter............................................. 7.130 4.563
As of March 31, 1999, there were 109,501,146 shares of of our common stock
issued and outstanding held by 1,298 stockholders of record. We estimate that
there are approximately 8,500 beneficial stockholders.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended March 31, 2000, we issued shares of Peregrine
common stock in connection with the following transactions that did not involve
registration under the Securities Act of 1933. All share numbers give effect to
a two-for-one stock split effected in the form of a dividend in February 2000.
In March 2000, we issued approximately 191,267 shares of common stock in
connection with our acquisition of Barnhill Management Group, Inc. The shares
were issued in reliance upon Section 4(2) of the Securities Act of 1933.
In March 2000, we issued approximately 2,560,000 shares of common stock in
connection with our acquisition of Telco Research Corporation Limited. The
shares were issued in reliance upon Section 3(a)(10) of the Securities Act.
In February 2000, in connection with our investment in SupplyAccess, Inc.,
we issued 206,304 shares of common stock at a price of $53.09 per share to
SupplyAccess. The shares were issued in reliance upon Section 4(2) of the
Securities Act of 1933 and Regulation D thereunder.
In December 1999, we issued 2,243,932 shares of our common stock in exchange
for 5,395,642 shares of the common stock of Goldmine Software Corporation,
representing approximately 10% of the outstanding Goldmine common stock on a pro
forma basis. The shares were issued in reliance upon Section 4(2) of the
Securities Act of 1933 and Regulation D thereunder.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data is presented below as of March 31,
1996, 1997, 1998, 1999 and 2000 and for each of the years in the five-year
period ended March 31, 2000, and derives from the consolidated financial
statements of Peregrine Systems, Inc. and its subsidiaries, which financial
statements have been audited by Arthur Andersen LLP, independent public
accountants. The consolidated financial statements as of March 31, 1999 and 2000
and for each of the years in the three-year period ended March 31, 2000, and the
report of independent public accountants thereon, are included elsewhere in this
report. The selected consolidated financial data set forth below is qualified in
its entirety by, and should be read in conjunction with, the Consolidated
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
report.
YEAR ENDED MARCH 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues
Licenses.................................................. $168,467 $ 87,362 $38,791 $20,472 $11,642
Services.................................................. 84,833 50,701 23,086 14,563 12,124
-------- -------- ------- ------- -------
Total revenues.......................................... 253,300 138,063 61,877 35,035 23,766
Costs and expenses:
Cost of licenses.......................................... 1,426 1,020 326 215 415
Cost of services.......................................... 51,441 31,561 10,326 4,661 3,526
Sales and marketing....................................... 101,443 50,803 22,728 15,778 11,820
Research and development.................................. 28,517 13,919 8,394 5,877 7,742
General and administrative................................ 19,871 10,482 6,077 3,816 4,529
Amortization of intangibles............................... 34,753 18,012 3,168 -- --
Acquired in-process research and development.............. 24,505 26,005 6,955 -- --
-------- -------- ------- ------- -------
Total costs and expenses................................ 261,956 151,802 57,974 30,347 28,032
-------- -------- ------- ------- -------
Operating income (loss)..................................... (8,656) (13,739) 3,903 4,688 (4,266)
Interest income (expense) and other......................... 38 664 839 (478) (286)
-------- -------- ------- ------- -------
Income (loss) from continuing operations before income
taxes..................................................... (8,618) (13,075) 4,742 4,210 (4,552)
Income tax expense (benefit)................................ 16,452 10,295 5,358 (1,592) --
-------- -------- ------- ------- -------
Income (loss) from continuing operations.................... (25,070) (23,370) (616) 5,802 (4,552)
Loss from discontinued operations...........................
Loss from operations...................................... -- -- -- -- 781
Loss on disposal.......................................... -- -- -- -- 1,078
-------- -------- ------- ------- -------
Loss from discontinued operations....................... -- -- -- -- (1,859)
-------- -------- ------- ------- -------
Net income (loss)........................................... $(25,070) $(23,370) $ (616) $ 5,802 $(6,411)
======== ======== ======= ======= =======
Net income (loss) per share--diluted........................ $ (0.24) $ (0.27) $ (0.01) $ 0.10 $ (0.13)
======== ======== ======= ======= =======
Shares used in per share calculation........................ 102,332 87,166 69,520 59,856 49,324
======== ======== ======= ======= =======
MARCH 31,
----------------------------------------------------
2000 1999 1998 1997
-------- -------- -------- -------- 1996
(IN THOUSANDS) --------
BALANCE SHEET DATA
Cash, cash equivalents, and short-term investments........ $ 33,511 $ 23,545 $21,977 $ 305 $ 437
Working capital (deficit)................................. 20,510 25,302 23,779 (4,065) (9,697)
Total assets.............................................. 523,430 207,713 83,568 19,738 13,817
Total debt................................................ 1,331 649 1,117 3,866 5,208
Stockholders' equity (deficit)............................ 411,850 150,781 55,639 (2,849) (8,450)
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FOWARD-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" UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT.
OVERVIEW
Peregrine Systems, Inc. is a leading provider of infrastructure management
and e-infrastructure software products and solutions. Our products help
businesses to deploy, maintain, and dispose of numerous aspects of their
corporate infrastructure. Using common shared data, our products help to manage
information technology assets as well as assets relating to corporate facilities
and vehicle fleets. In addition, we have recently introduced products for rail
management and Internet-based asset procurement.
Until late 1997, our product offerings focused principally on managing
information technology assets through a consolidated enterprise service desk
that provided support to users of our customers' information technology systems
and networks. During fiscal 1998, we determined that our customers required a
more comprehensive solution to control and manage their infrastructure assets,
including information technology assets as well as the numerous other assets
that make up business infrastructures. Among other things, we determined that
businesses needed to be able to manage the availability of their assets,
minimize their investments and expense, consolidate data about infrastructure
assets, and interface their asset management solutions to enterprise
applications. Accordingly, we refocused our product development and marketing
strategies to focus on an "infrastructure resource management" strategy.
In order to execute on our infrastructure resource management strategy, we
have completed a number of acquisitions since late 1997. These acquisitions have
been designed to broaden our infrastructure resource management product suite.
- In September 1997, we acquired Apsylog S.A., a provider of asset
management software focused principally on managing information technology
assets.
- In July 1998, we acquired Innovative Tech Systems, a provider of software
products that address management of corporate facilities.
- In September 1998, we acquired technologies and other assets from related
entities operating as International Software Solutions. These technologies
expanded the ability of our products to help manage information technology
assets by permitting network help desk analysts to interface with users
over the corporate network.
- In March 1999, we acquired Prototype, a provider of software products for
managing corporate vehicle fleets.
- In April 1999, we acquired fPrint, a British provider of software used to
discover and inventory software located on the computers of individual
users on a corporate network.
- In September 1999, we acquired Knowlix, a developer of knowledge
management software that assists network help desk analysts by managing
the intangible technical information and know-how required to assist
callers.
18
- In March 2000, we acquired Telco Research, a provider of software products
that help manage telecommunications assets, and Barnhill Management Group,
a services and solutions delivery partner of Peregrine with extensive
experience in the telecommunications industry.
Our software products are currently available on most major computer
operating platforms; however, for the past several years, over 85% of our
license sales have been attributable to the UNIX and Windows NT platforms.
Our revenues are derived from product licensing and services. Services are
comprised of maintenance, professional services, and training. License fees are
generally due upon the granting of the license and typically include a one-year
maintenance and warranty period as part of the license agreement. We also
provide ongoing maintenance services, which include technical support and
product enhancements, for an annual fee based upon the current price of the
product.
Revenues from license agreements are recognized currently, provided that all
of the following conditions are met: a noncancelable license agreement has been
signed, the product has been delivered, there are no material uncertainties
regarding customer acceptance, collection of the resulting receivable is deemed
probable and the risk of concession is deemed remote, and no other significant
vendor obligations exist. Revenues from post-contract support services are
recognized ratably over the term of the support period, generally one year.
Maintenance revenues which are bundled with license agreements are unbundled
using vendor-specific objective evidence. Consulting revenues are primarily
related to implementation services most often performed on a time and material
basis under separate service agreements for the installation of our products.
Revenues from consulting and training services are recognized as the respective
services are performed.
We currently derive a substantial portion of our license revenues from the
sale of our infrastructure resource management applications and our
e-infrastructure solutions. 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 strategy and applications, including future
product enhancements. Substantially all of our license revenues are derived from
granting a non-exclusive perpetual license to use our products. Factors
adversely affecting the pricing of, demand for or market acceptance of the
infrastructure resource management applications, such as competition or
technological change, manner of distribution or licensing, and related method of
revenue recognition could have a material adverse effect on our business,
operating results, and financial condition.
19
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
consolidated statements of operations data as a percentage of total revenues.
MARCH 31,
------------------------------------
2000 1999 1998
-------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses......................................... 66.5% 63.3% 62.7%
Services......................................... 33.5 36.7 37.3
----- ----- -----
Total revenues............................... 100.0 100.0 100.0
Costs and expenses:
Cost of licenses................................. 0.6 0.7 0.5
Cost of services................................. 20.3 22.9 16.7
Sales and marketing.............................. 40.0 36.8 36.7
Research and development......................... 11.3 10.1 13.6
General and administrative....................... 7.8 7.6 9.8
Amortization of intangible assets................ 13.7 13.1 5.1
Acquired in-process research and development..... 9.7 18.8 11.3
----- ----- -----
Total costs and expenses..................... 103.4 110.0 93.7
----- ----- -----
Operating income (loss)............................ (3.4) (10.0) 6.3
Interest income and other.......................... -- 0.5 1.3
Income (loss) from before income taxes............. (3.4) (9.5) 7.6
Income tax expense................................. 6.5 7.4 8.7
----- ----- -----
Net loss........................................... (9.9)% (16.9)% (1.1)%
===== ===== =====
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 2000, 1999, AND 1998
REVENUES
REVENUES. Total revenues were $253.3 million, $138.1 million and
$61.9 million for fiscal year end 2000, 1999 and 1998, representing
period-to-period increases of 83% and 123% for the fiscal 2000 and 1999 periods.
The reasons for the revenue increases are more fully discussed below.
LICENSES. License revenues were $168.4 million, $87.4 million and
$38.8 million in fiscal 2000, 1999 and 1998, representing 67% of total revenues
in fiscal 2000 and 63% in both fiscal 1999 and 1998. Total license revenues
increased 93% and 125% period-to-period for fiscal 2000 and 1999. Domestic
license revenues increased 73% in fiscal 2000 and 135% in fiscal 1999, while
international license revenues increased 125% and 111% in fiscal 2000 and 1999.
The increases in license revenues are attributable to increased demand for new
and additional licenses of our infrastructure resource management applications,
from new and existing customers, larger transaction sizes, expansion of our
domestic and international sales forces, and acquisitions. We expect larger
transaction sizes from a limited number of customers to account for a large
percentage of license revenues for the foreseeable future. Management believes
these trends will fluctuate period to period in absolute dollars and as a
percentage of total revenues.
During the past three years, we have increased the number of channels that
we use to distribute our products. The majority of our products are distributed
through our direct sales organization. The balance is derived through indirect
sales channels and alliance partners, including value added resellers and
systems integrators. Revenues derived through indirect channel sales now
comprise a significant portion of our total license revenues. We have
substantially less ability to manage our sales through indirect channels and
less visibility about our partners' success in selling the products that they
have purchased from us. To
20
the extent indirect sales continue to increase as a percentage of total revenue,
we could experience unforseen variability in our future revenues and operating
results if our partners are unable to sell our products.
SERVICES. Services revenues consist of support, consulting and training
services. Service revenues were $84.8 million, $50.7 million and $23.1 million
for fiscal years 2000, 1999 and 1998, representing 33% of total revenues in
fiscal 2000 and 37% in both fiscal 1999 and 1998. Total services revenues
increased 67% and 120% period to period for fiscal 2000 and 1999. Domestic
services increased 63% in fiscal 2000 and 111% in fiscal 1999, while
international services revenues increased 78% and 140% in fiscal 2000 and 1999,
respectively. The dollar increases are attributable to maintenance agreements
and related billings from our expanded installed base of customers and an
increase in consulting and training revenues related to the implementation of
our software from initial license agreements and related expansion. While these
revenues are increasing in absolute dollars, we expect these trends to fluctuate
as a percentage of total revenues.
COSTS AND EXPENSES
COST OF LICENSES. Cost of licenses were $1.0 million, $0.3 million and
$0.2 million in fiscal years 2000, 1999 and 1998, each representing less than 1%
of total revenues in these periods. Cost of software licenses includes
third-party software royalties, product packaging, documentation and production.
These costs are expected to remain the same or increase as a percentage of total
revenues.
COST OF SERVICES. Cost of services were $51.4 million, $31.6 million and
$10.3 million in fiscal years 2000, 1999 and 1998, representing 20%, 23% and 17%
of total revenues in the respective periods. Cost of services primarily consists
of personnel, facilities and system costs in providing support, consulting and
training services. The dollar increases are attributable to an increase in
personnel related costs in order to support the related activities. Cost of
services increased as a percentage of related revenues due largely to a greater
percentage growth in lower margin consulting revenue compared to support
revenue. Consulting and training services generally have lower margins as
compared to support services.
SALES AND MARKETING. Sales and marketing expenses were $101.4 million,
$50.8 million and $22.7 million in fiscal years 2000, 1999 and 1998,
representing 40% of total revenues in fiscal 2000 and 37% of total revenues in
both fiscal 1999 and 1998. Sales and marketing expenses consists primarily of
personnel related costs, including commissions and bonuses, facilities and
system costs and travel and entertainment. The dollar increases in sales and
marketing expenses are attributable to the significant expansion of both the
North American and international sales forces, a large increase in general and
product specific marketing expenses, much of which related to our e-commerce
initiatives, the effect of combining the sales and marketing operations of the
acquisitions made during fiscal 2000 and 1999, and the effect of certain
operating expense increases. We expect that sales and marketing expenses will
continue to increase in absolute dollars as we continue to expand our sales and
marketing efforts and establish additional sales offices around the world. 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
$28.5 million, $13.9 million and $8.4 million in fiscal years 2000, 1999 and
1998, representing 11%, 10% and 14% of total revenues in those periods. Research
and development expenses consist primarily of employee salaries, developer
bonuses, quality assurance activities and consulting costs. The dollar increases
in research and development are due primarily to an increase in the number of
personnel conducting research and development, new product initiatives and
quality assurance efforts. These costs are expected to increase in absolute
dollars but remain relatively the same as a percentage of total revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$19.9 million, $10.5 million and $6.1 million in fiscal years 2000, 1999 and
1998, representing 8% of total revenues in fiscal 2000 and
21
1999 and 10% of total revenues in fiscal 1998. General and administrative
expenses consists primarily of employee salaries and overhead for administrative
personnel. The dollar increases from year to year are attributable to costs
associated with administrative personnel additions and infrastructure expansion
to support our growth. These costs are expected to increase in absolute dollars
but remain relatively the same as a percentage of total revenues.
AMORTIZATION OF INTANGIBLES AND OTHER ASSETS. Amortization of intangibles
and other assets were $34.8 million, $18.0 million and $3.2 million in fiscal
years 2000, 1999 and 1998, representing 14%, 13% and 6% of total revenues in
those periods. The dollar and percentage increases are attributable to the
amortization of intangible assets and goodwill related to acquisitions made
during those respective periods. These costs in future periods will be subject
to future potential acquisitions and amortization periods. These costs are
typically amortized over a five year period. See Note 1 of Notes to Peregrine
Consolidated Financial Statements.
ACQUIRED RESEARCH AND DEVELOPMENT COSTS. Acquired in-process research and
development costs were $24.5 million, $26.0 million and $7.0 million in fiscal
years 2000, 1999 and 1998, representing 10%, 19% and 11% of total revenues in
those periods. The costs incurred in fiscal 2000 relate to one-time charges
associated with the acquisitions of FPrint, Knowlix, and Telco Research. The
costs incurred in fiscal 1999 and 1998 relate to one-time charges associated
with the acquisitions of Innovative and Apsylog and the acquisition of certain
technology and other assets from a group of affiliated entities conducting
business as International Software Solutions. These costs in future periods will
be subject to future potential acquisitions. See Note 2 of Notes to Peregrine
Consolidated Financial Statements.
The value of each 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 the companies
acquired prior to the close of each acquisition.
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. We currently
believe that actual results have been consistent with forecasts with respect to
acquired in-process revenues. 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 have completed many of the original research and development projects in
accordance with our plans. We continue to work toward the completion of other
projects. The majority of the projects are on schedule, but delays may occur due
to changes in technological and market requirements for our products. The risks
associated with these efforts are still considered high and no assurance can be
made that any upcoming products will meet with market acceptance. Delays in the
introduction of certain products may adversely affect our revenues and earnings
in future quarters.
22
PROVISION FOR INCOME TAXES
Income tax expenses were $16.5 million, $10.3 million and $5.4 million for
fiscal year 2000, 1999 and 1998. This increase in absolute dollars is
attributable to an increase in operating profits. Excluding the effect on net
income of the acquired in-process research and development costs and
amortization of intangibles, our effective tax rates were 32.5%, 34.0% and 36.0%
for those fiscal years. These costs are expected to increase in absolute dollars
but remain relatively the same as a percentage of operating profits.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and marketable equity securities increased to
$33.5 million in fiscal year end 2000 from $23.5 million in fiscal 1999. This
increase is attributable to cash provided through ongoing operations, sale or
assignment of accounts receivables and cash received as a result of the exercise
of stock options under our stock incentive plans. Our days sales outstanding in
accounts receivable was 83 as of March 31, 2000 as compared with 76 as of
March 31, 1999. Since March 31, 1999, we have expended significant funds to
strengthen our operating infrastructure, including payments related to our lease
commitments for our recently signed campus leases. These leases require a
minimum aggregate lease payment of approximately $124 million over their twelve
year term. In addition, we have expended significant funds acquiring companies
and technologies subsequent to fiscal year end 1999.
During July 1999, we entered into a $20 million senior credit facility for a
term of three years with a syndicate of financial institutions. The facility is
available for general corporate purposes including acquisitions. We believe that
our current cash, short-term investments, cash flow from operations, and amounts
available under our credit facility will be sufficient to meet our working
capital requirements for at least the next 12 months. Although operating
activities may provide cash in certain periods, to the extent we experience
growth in the future, our operating and investing activities may use cash.
Consequently, any such future growth may require us to obtain additional equity
or debt financing, which may not be available on commercially reasonable terms
or which may be dilutive. As of March 31, 2000, there were no amounts
outstanding with respect to the $20 million senior credit facility.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than forward-rate currency contracts described below, which are used
for hedging our foreign currency risk, we do not use derivative financial
instruments in our investment portfolio. Our financial instruments consist of
cash and cash equivalents, short-term investments, trade accounts and contracts
receivable, accounts payable, and long-term obligations. We consider investments
in highly liquid instruments purchased with a remaining maturity of 90 days or
less at the date of purchase to be cash equivalents. Our exposure to market risk
for changes in interest rates relates primarily to our short-term investments
and short-term obligations. As a result, we do not expect fluctuations in
interest rates to have a material impact on the fair value of these securities.
We conduct business overseas in a number of foreign currencies, principally
in Europe. These currencies have been relatively stable against the U.S. dollar
for the past several years. As a result, foreign currency fluctuations have not
had a material impact historically on our revenues or results of operations.
Although we currently derive no material revenues from highly inflationary
economies, we are expanding our presence in international markets outside
Europe, including the Pacific Rim and Latin America, whose currencies have
tended to fluctuate more relative to the U.S. dollar. There can be no assurance
that European currencies will remain stable relative to the U.S. dollar or that
future fluctuations in the value of foreign currencies will not have a material
adverse effect on our business, operating results, revenues and financial
condition. Currently, we attempt to mitigate our transaction currency risks
through our foreign currency hedging program. The hedging program consists
primarily of using forward-rate currency contracts of approximately one month in
length to minimize the short-term impact of foreign currency fluctuations.
Currency contracts are accounted for in accordance with SFAS No. 52 and receive
hedge
23
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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING
STATEMENTS AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:
RISKS RELATING TO PEREGRINE
WE HAVE A HISTORY OF LOSSES, CANNOT PREDICT OUR FUTURE OPERATING RESULTS,
AND CANNOT ASSURE OUR FUTURE PROFITABILITY. IN ADDITION, MANAGEMENT DOES NOT
BELIEVE RECENT REVENUE GROWTH RATES ARE NECESSARILY SUSTAINABLE.
Prediction of our future operating results is difficult, if not impossible,
and we have incurred substantial losses in recent years. If we continue to incur
losses, if our revenues decline or grow at a slower rate, or if our expenses
increase without commensurate increases in revenues, our operating results will
suffer and our stock price may fall. Through March 31, 2000, we had recorded
cumulative net losses of approximately $64.9 million, including approximately
$113.4 million related to the write-off of acquired in-process research and
development and the amortization of goodwill and other intangible assets in
connection with several acquisitions completed since late 1997. We have also
incurred, and expect to continue to incur, substantial expenses associated with
the amortization of intangible assets. In addition, our management does not
believe our recent growth rates are necessarily sustainable in the future or
indicative of future growth rates. If our revenue growth rates slow or our
revenues decline, our operating results could be seriously impaired because many
of our expenses are fixed and cannot be easily or quickly changed.
OUR REVENUES VARY SIGNIFICANTLY FROM QUARTER TO QUARTER FOR NUMEROUS REASONS
BEYOND OUR CONTROL. QUARTER-TO-QUARTER VARIATIONS COULD RESULT IN SUBSTANTIAL
DECREASES IN OUR STOCK PRICE IF OUR REVENUES OR OPERATING RESULTS ARE LESS THAN
MARKET ANALYSTS ANTICIPATE.
Our revenues or operating results in a given quarter could be substantially
less than anticipated by market analysts, which could result in substantial
declines in our stock price. In addition, quarter-to-quarter variations could
create uncertainty about the direction or progress of our business, which could
also result in stock price declines. Our revenues and operating results will
vary from quarter to quarter for many reasons beyond our control. As a result,
our quarterly revenues and operating results are not predictable with any
significant degree of accuracy. Reasons for variability of our revenues and
operating results include the following:
- SIZE, TIMING, AND CONTRACTUAL TERMS OF ORDERS. Our revenues in a given
quarter could be adversely affected if we are unable to complete one or
more large license agreements, if the completion of a large license
agreement is delayed, or if the contract terms prevent us from recognizing
revenue during that quarter. In addition, when negotiating large software
licenses, many customers tend to time their negotiations until quarter-end
in an effort to improve their ability to negotiate more favorable pricing
terms. As a result, we tend to recognize a substantial portion of our
revenues in the last month or weeks of a quarter, and license revenues in
a given quarter will substantially depend on orders booked during the last
month or weeks of a quarter. Our revenue growth in recent periods has been
attributable in part to an increase in the number of large license
transactions we completed in a given period. We expect our reliance on
these large transactions to continue for the forseeable future. If we are
unable to complete a large license transaction in a
24
particular quarter, our revenues and operating results could be materially
below the expectations of market analysts, and our stock price could fall.
- ANNOUNCEMENTS BY PEREGRINE OR OUR COMPETITORS. Announcements of new
products or releases by us or our competitors could cause customers to
delay purchases pending the introduction of the new product or release. In
addition, announcements by us or our competitors concerning pricing
policies could have an effect on our revenues in a given quarter.
- CUSTOMER BUDGETING CYCLES. Our quarter-to-quarter revenues will depend on
customer budgeting cycles. If customers change their budgeting cycles, or
reduce their capital spending on technology, our revenues could decline.
- CHANGES IN PRODUCT MIX. Changes in our product mix could adversely affect
our operating results because some products provide higher margins than
others. For example, margins on software licenses tend to be higher than
margins on maintenance services.
- CHANGES IN METHOD OF SALE. Our profit margins will tend to vary based on
whether a sale was made through our direct sales force or through a
reseller or other strategic partner. Sales through indirect channels tend
to be less profitable, and if sales through indirect channels increased
relative to direct sales, our operating results could be harmed. Sales
through indirect channels, including distributors, third party resellers,
and system integrators, represent a 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 our indirect channels were to
decrease or were to increase at a slower rate. We have less ability to
manage our sales through indirect channels and less visibility about our
channel partners' success in selling our products. As a result, we could
experience unforeseen variability in our revenues and operating results
for a number of reasons, including the following:
- inability of our channel partners to sell our products;
- a decision by our channel partners to favor products that compete with
Peregrine's;
- inability of our channel partners to manage the timing of their
purchases from Peregrine against their sales to end-users, resulting in
substantial inventories of unsold licenses held by our channel
partners; or
- our inability to increase the number of channel partners that sell our
products and to maintain relationships with existing channel partners.
- CANCELLATION OF LICENSES OR MAINTENANCE AGREEMENTS. Cancellations of
licenses or maintenance contracts could reduce our revenues and harm our
operating results. In particular, our customers tend to renew their
maintenance contracts on an annual basis. Substantial cancellations of
maintenance agreements, or a substantial failure to renew maintenance
contracts, would reduce our revenues and harm our operating results.
THE LONG SALES CYCLE FOR OUR PRODUCTS MAY CAUSE SUBSTANTIAL FLUCTUATIONS IN
OUR REVENUES AND OPERATING RESULTS.
Delays in customer orders could result in our revenues being substantially
below the expectations of market analysts. In addition, we may incur substantial
sales and marketing expenses during a particular period in an effort to obtain
orders. If we are unsuccessful in generating offsetting revenues during that
period, our revenues and earnings could be substantially reduced or we could
experience a large loss. We are likely to experience delays in customer orders
because the sales cycle for our products is long and unpredictable.
Specifically, our customers' planning and purchase decisions involve a
significant commitment of resources and a lengthy evaluation and product
qualification process. The sales cycle for our products requires us to engage in
a sales cycle that, if it results in a sale, takes six to nine months to
25
complete. The length of the sales cycle may be extended beyond six or nine
months due to factors over which we have little or no control, including the
size of the transaction and the level of competition we encounter in our sales
activities. During the sales cycle, we typically provide a significant level of
education to prospective customers regarding the use and benefits of our
products. Any delay in the sales cycle of a large license or a number of smaller
licenses could have an adverse effect on our results of operation and financial
condition.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY RESULT IN A PERIODIC
REDUCTION IN OUR REVENUES AND IMPAIRMENT OF OUR OPERATING RESULTS.
Seasonality in our business could result in our revenues in a given period
being less than market estimates. Seasonality could also result in
quarter-to-quarter decreases in our revenues. In either of these events,
seasonality could have an adverse impact on our results of operations.
Historically, our revenues and operating results in our December quarter have
tended to benefit, relative to our June and September quarters, from purchase
decisions made by the large concentration of customers with calendar year-end
budgeting requirements. Revenues and operating results in our March quarter have
tended to benefit from the efforts of our sales force to meet fiscal year-end
sales quotas. These historical patterns may change over time, however,
particularly as our operations become larger and the sources of our revenue
change or become more diverse. For example, our international operations have
expanded significantly in recent years, particularly in Europe. We also have an
international presence in the Pacific Rim and Latin America. We may experience
variability in demand associated with seasonal buying patterns in these foreign
markets. As an example, the September quarter is typically weaker in Europe for
many technology companies, including Peregrine, due to the European summer
holiday season.
IF A MARKET FOR OUR INFRASTRUCTURE RESOURCE MANAGEMENT SOFTWARE AND ASSET
PROCUREMENT SOLUTIONS DOES NOT DEVELOP, WE WILL BE UNABLE TO SELL OUR PRODUCTS
OR INCREASE OUR REVENUES. THE MARKET FOR OUR PRODUCTS IS STILL RELATIVELY NEW
AND UNPROVEN.
If the market for our infrastructure management software products does not
continue to develop as we anticipate, our business and operating results would
be adversely affected, and our financial condition could deteriorate. Until
recently, our product strategy focused on providing software products that help
to manage business computer networks and other information technology assets.
Beginning in late 1997, we began to broaden our product line to offer products
capable of managing multiple aspects of a business enterprise's infrastructure,
including its physical plant and facilities, its telecommunications networks,
its distribution systems, and its corporate car and rail fleets. Prior to our
introduction of these products, an integrated software solution for managing
corporate infrastructure assets did not exist in the market. Rather,
corporations purchased software to manage specific components of their
infrastructure. In the second half of fiscal 2000, we attempted to further
expand our infrastructure management product line by introducing GET.IT!, a line
of employee self-service products that facilitate the acquisition and use of
infrastructure assets, services, and information. As a result, the market for
our products is still new and unproven and is continuing to develop. If a market
for infrastructure management solutions fails to develop, or develops in ways we
do not anticipate, our business would be seriously impaired. In particular, our
revenues and operating results would decrease, and we could experience losses.
IF WE DO NOT RESPOND ADEQUATELY TO OUR INDUSTRY'S EVOLVING TECHNOLOGY
STANDARDS, OR DO NOT CONTINUE TO MEET THE SOPHISTICATED NEEDS OF OUR CUSTOMERS,
SALES OF OUR PRODUCTS MAY DECREASE.
As a result of rapid technological change in our industry, our competitive
position in existing markets, or in markets we may enter in the future, can be
eroded rapidly by product advances and technological changes. We may be unable
to improve the performance and features of our products as necessary to respond
to these developments. In addition, the life cycles of our products are
difficult to estimate. Our growth and future financial performance depend in
part on our ability to improve existing products and develop and introduce new
products that keep pace with technological advances, meet changing customer
needs, and respond to competitive products. Our product development efforts will
continue to require
26
substantial investments. We may not have sufficient resources to make these
investments. In addition, if we are required to expend substantial resources to
respond to specific technological or product changes, our operating results
would be adversely affected.
IF WE CANNOT ATTRACT EXPERIENCED SALES PERSONNEL, SOFTWARE DEVELOPERS, AND
HIGHLY-TRAINED CUSTOMER SERVICE PERSONNEL, WE WILL NOT BE ABLE TO SELL AND
SUPPORT OUR PRODUCTS.
If we are not successful in attracting and retaining qualified sales
personnel, software developers, and customer service personnel, our revenue
growth rates could decrease, or our revenues could decline, and our operating
results could be materially harmed. Our products and services require a
sophisticated selling effort targeted at several key people within our
prospective customers' organizations. This process requires the efforts of
experienced sales personnel as well as specialized consulting professionals. In
addition, the complexity of our products, and issues associated with installing
and maintaining them, require highly trained customer service and support
personnel. We intend to hire a significant number of these personnel in the
future and train them in the use of our products. We believe our success depends
in large part on our ability to attract and retain these key employees.
Competition for these employees is intense, and we have in the past experienced
difficulty recruiting qualified employees.
OUR BUSINESS WOULD BE HARMED IF ONE OR MORE MEMBERS OF OUR SENIOR MANAGEMENT
TEAM CHOSE TO LEAVE US.
The loss of the services of one or more our executive officers or key
employees, or the decision of one or more of these individuals to join a
competitor, could adversely affect our business and harm our operating results
and financial condition. Our success depends to a significant extent on the
continued service of our senior management and other key sales, consulting,
technical, and marketing personnel. None of our senior management is bound by an
employment agreement. In addition, only a few employees who were significant
shareholders of businesses we acquired are bound by noncompetition agreements.
We do not maintain key man life insurance on any of our employees.
IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, THIS WILL PLACE A SIGNIFICANT
STRAIN ON OUR MANAGEMENT AND OPERATIONAL RESOURCES.
Our recent growth rates have placed a significant strain on our management
and operational resources. We have expanded our operations rapidly in recent
years and intend to continue to expand in order to pursue market opportunities
that our management believes are attractive. Our customer relationships could be
strained if we are unable to devote sufficient resources to them as a result of
our growth, which could have an adverse effect on our future revenues and
operating results.
NEW PRODUCT INTRODUCTIONS OR ENHANCEMENTS OF EXISTING PRODUCTS BY OUR
COMPETITORS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS.
If we cannot compete effectively in our market by offering products that are
comparable in functionality, ease of use, and price to those of our competitors,
our revenues will decrease, and our operating results would be adversely
affected. The market for our products is highly competitive and diverse, and the
technologies for infrastructure management software products can change rapidly.
New products are introduced frequently and existing products are continually
enhanced.
We face competition from a number of sources in the markets for our
infrastructure resource management and e-procurement software solutions.
- In the markets for our infrastructure resource management solutions, we
face competition from:
- providers of internal help desk software applications for managing
information technology service desks, such as Remedy Corporation and
Tivoli Systems, that compete with our enterprise service desk software;
- providers of asset management software, including Remedy, MainControl,
and Janus Technologies;
27
- providers of facilities management software, including Archibus,
Facilities Information Systems, and Assetworks (a division of
CSI-Maximus);
- providers of transportation management software that competes with our
fleet management and rail management software, including Control
Software (a division of CSI-Maximus) and Project Software and
Development Inc.;
- information technology and systems management companies such as IBM,
Computer Associates, Network Associates, Hewlett-Packard, and
Microsoft;
- numerous start-up and other entrepreneurial companies offering products
that compete with the functionality offered by one or more of our
infrastructure management products; and
- the internal information technology departments of those companies with
infrastructure management needs.
- In the markets for procurement and e-procurement solutions, we have
experienced competition from:
- established competitors in the business-to-business internet commerce
solution market, such as Ariba and CommerceOne; and
- established providers of enterprise resource planning software that are
entering the market for procurement and e-procurement solutions,
including Oracle and SAP.
Many of our current and potential competitors have substantially greater
financial, technical, marketing, and other resources than we have. As a result,
they may be able to respond more quickly to new or emerging technologies and
changes in customer needs. They may also be able to devote greater resources
than we can to the development, promotion, and sale of their products. We may
not be able to compete successfully against current and future competitors,
which could have an adverse effect on our future revenues and operating results.
NEW COMPETITORS AND ALLIANCES AMONG EXISTING COMPETITORS COULD IMPAIR OUR
ABILITY TO RETAIN AND EXPAND OUR MARKET SHARE.
Additional competition from new entrepreneurial companies or established
companies entering our markets could have an adverse effect on our business,
revenues, and operating results. In addition, alliances among companies that are
not currently direct competitors could create new competitors with substantial
market presence. Because few barriers to entry exist in the software industry,
we anticipate additional competition from new and established companies as well
as business alliances. We expect that the software industry will continue to
consolidate. In particular, we expect that large software companies will
continue to acquire or establish alliances with our smaller competitors, thereby
increasing the resources available to these competitors. These new competitors
or alliances could rapidly acquire significant market share at our expense.
SYSTEM MANAGEMENT COMPANIES MAY ACQUIRE INFRASTRUCTURE MANAGEMENT AND/OR
HELP DESK SOFTWARE COMPANIES AND CLOSE THEIR SYSTEMS TO OUR PRODUCTS, HARMING
OUR ABILITY TO SELL OUR PRODUCTS.
If large system management providers close their systems to our products,
our revenues and operating results would be seriously harmed. Our ability to
sell our products depends in large part on our products' compatibility with and
support by providers of system management products, including Tivoli, Computer
Associates, and Hewlett-Packard. Both Tivoli and Hewlett-Packard have acquired
providers of help desk software products. These large, established providers of
system management products and services may decide to close their systems to
competing vendors like us. They may also decide to bundle the products that
compete with our products with other products for enterprise licenses for
promotional purposes or as part of a long-term pricing strategy. If that were to
happen, our ability to sell our products could be
28
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, original manufacturers, and other third party
channel partners who market and sell our products. If we cannot establish these
relationships, or if our channel partners are unable to market our products
effectively or provide cost-effective customer support and service, our revenues
and operating results will be harmed. Even where we are successful in
establishing a new third-party relationship, our agreement with the third party
may not be exclusive. As a result, our partner may carry competing product
lines.
IF WE ARE UNABLE TO EXPAND OUR BUSINESS INTERNATIONALLY, OUR BUSINESS,
REVENUES, AND OPERATING RESULTS COULD BE HARMED.
In order to grow our business, increase our revenues, and improve our
operating results, we believe we must expand internationally. If we expend
substantial resources pursuing an international strategy and are not successful,
our revenues would be less than we or market analysts anticipate, and our
operating results would suffer. International revenues represented approximately
36.0% of Peregrine's business in each of fiscal 1998 and 1999 and approximately
41.0% of Peregrine's business in fiscal 2000. We have several international
sales offices in Europe as well as offices in Japan, Singapore, and Australia.
International expansion will require significant management attention and
financial resources, and we may not be successful expanding our international
operations. We have limited experience in developing local language versions of
our products or in marketing our products to international customers. We may not
be able to successfully translate, market, sell, and deliver our products
internationally.
CONDUCTING BUSINESS INTERNATIONALLY POSES RISKS THAT COULD AFFECT OUR
FINANCIAL RESULTS.
Even if we are successful in expanding our operations internationally,
conducting business outside North America poses many risks that could adversely
affect our operating results. These include the following:
- gains and losses resulting from fluctuations in currency exchange rates,
for which hedging activities may not adequately protect us;
- longer payment cycles;
- difficulties in staffing and managing international operations;
- problems in collecting accounts receivable; and
- the adverse effects of tariffs, duties, price controls, or other
restrictions that impair trade.
IF IMMIGRATION LAWS LIMIT OUR ABILITY TO RECRUIT AND EMPLOY SKILLED
TECHNICAL PROFESSIONALS FROM OTHER COUNTRIES, OUR BUSINESS AND OPERATING RESULTS
COULD BE HARMED.
Limitations under United States immigration laws could prevent us from
recruiting skilled technical personnel from foreign countries, which could harm
our business if we do not have sufficient personnel to develop new products and
respond to technological changes. This inability to hire technical personnel
could lead to future decreases in our revenues, or decreases in our revenue
growth rates, either of which would adversely affect our operating results.
Because of severe shortages for qualified technical personnel in the United
States, many companies, including Peregrine, have recruited engineers and other
technical
29
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 us with approximately
540,000 square feet of office space and an option to lease 118,000 square feet.
Even excluding the exercise of the option, the leases require a minimum
aggregate lease payment of approximately $124.0 million over the twelve year
term of the leases. The office space (including the option) is intended for a
five building campus in San Diego, California. We plan to fully occupy three of
these buildings by the summer of 2000 and 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 underestimate 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.
If we are required to expend significant amounts to correct software bugs or
errors, our revenues could be harmed as a result of our inability to deliver the
product, and our operating results could be impaired as we incur additional
costs without offsetting revenues. Errors can be detected at any point in a
product's life cycle. We have experienced errors in the past that resulted in
delays in product shipment and increased costs. Discovery of errors could result
in any of the following:
- loss of or delay in revenues and loss of customers or market share;
- failure to achieve market acceptance;
- diversion of development resources and increased development expenses;
- increased service and warranty costs;
- legal actions by our customers; and
- increased insurance costs.
30
WE COULD EXPERIENCE LOSSES AS A RESULT OF OUR STRATEGIC INVESTMENTS.
If our strategic investments in other companies are not successful, we could
incur losses. We have made and expect to continue to make minority investments
in companies with businesses or technologies that we consider to be
complementary with our business or technologies. These investments have
generally been made by issuing shares of our common stock or to a lesser extent
with cash. Many of these investments are in companies where operations are not
yet sufficient to establish them as profitable concerns. Adverse changes in
market conditions or poor operating results of underlying investments could
result in our incurring losses or an inability to recover the carrying value of
its investments.
WE COULD BE COMPETITIVELY DISADVANTAGED IF WE WERE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY.
If we fail to adequately protect our proprietary rights, our competitors
could offer similar products relying on technologies developed by us,
potentially harming our competitive position and decreasing our revenues. We
attempt to protect our intellectual property rights by limiting access to the
distribution of our software, documentation, and other proprietary information
and by relying on a combination of copyright, trademark, and trade secret laws.
In addition, we enter into confidentiality agreements with our employees and
certain customers, vendors, and strategic partners. In some circumstances,
however, we may, if required by a business relationship, provide our licensees
with access to our data model and other proprietary information underlying our
licensed applications.
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 our proprietary rights to the
same extent as United States laws. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, or to
determine the validity and scope of the proprietary rights of other. If we are
required to pursue litigation to enforce our proprietary rights, we could incur
substantial costs, and management attention could be diverted, either of which
could adversely affect our revenues and operating results.
IF WE BECOME INVOLVED IN A PROTRACTED INTELLECTUAL PROPERTY DISPUTE, OR ONE
WITH A SIGNIFICANT DAMAGES AWARD, OR WHICH REQUIRES US TO CEASE SELLING OUR
PRODUCTS, WE COULD BE SUBJECT TO SIGNIFICANT LIABILITY AND THE TIME AND
ATTENTION OF OUR MANAGEMENT COULD BE DIVERTED.
In recent years, there has been significant litigation in the United States
involving intellectual property rights, including companies in the software
industry. Intellectual property claims against us and any resulting lawsuit, if
successful, could subject us to significant liability for damages and invalidate
what we currently believe are our proprietary rights. These lawsuits, regardless
of their success, would likely be time-consuming and expensive to resolve and
could divert management's time and attention. Any potential intellectual
property litigation could also force us to do one or more of the following:
- cease selling, incorporating, or using products or services that
incorporate the infringed intellectual property;
- obtain from the holder of the infringed intellectual property a license to
sell or use the relevant technology, which license may not be available on
acceptable terms, if at all; or
- redesign those products or services that incorporate the disputed
technology, which could result in substantial unanticipated development
expenses.
If we are subject to a successful claim of infringement and we fail to
develop noninfringing technology or license the infringed technology on
acceptable terms and on a timely basis, our revenues could decline or our
expenses could increase.
We may in the future initiate claims or litigation against third parties for
infringement of our proprietary rights or to determine the scope and validity of
our proprietary rights or the proprietary rights
31
of competitors. These claims could result in costly litigation and the diversion
of technical and management personnel's attention.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN
SIGNIFICANT COSTS.
If we are held liable for damages incurred as a result of our products, our
operating results could be significantly impaired. Our license agreements with
our customers typically contain provisions designed to limit exposure to
potential product liability claims. These limitations may not be effect under
the laws of some jurisdictions, however. Although we have not experienced any
product liability claims to date, the sale and support of our products entails
the risks of these claims.
CONTROL BY OUR OFFICERS AND DIRECTORS MAY LIMIT OUR STOCKHOLDERS' ABILITY TO
INFLUENCE MATTERS REQUIRING STOCKHOLDER APPROVAL AND COULD DELAY OR PREVENT A
CHANGE IN CONTROL, WHICH COULD PREVENT OUR STOCKHOLDERS FROM REALIZING A PREMIUM
IN THE MARKET PRICE OF THEIR COMMON STOCK.
The concentration of ownership of our common stock by our officers and
directors could delay or prevent a change in control or discourage a potential
acquiror from attempting to obtain control of us. This could cause the market
price of our common stock to fall or prevent the stockholders from realizing a
premium in the market price of our common stock in the event of an acquisition.
As of March 31, 2000, our officers and directors owned approximately 12,061,678
shares of common stock (including shares issuable upon exercise of options
exercisable within 60 days of March 31, 2000), representing approximately 11.0%
of our total shares outstanding. Assuming the issuance of approximately
30 million shares of our common stock in connection with our contemplated merger
with Harbinger Corporation, our officers and directors will own approximately
8.6% of our outstanding common stock (not including shares held by those
officers and directors of Harbinger who will become officers and directors of
Peregrine after the merger). For information about the ownership of common stock
by our executive officers and stockholders, see "Peregrine Principal
Stockholders."
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DISCOURAGE
POTENTIAL ACQUISITION BIDS FOR US AND MAY PREVENT CHANGES IN OUR MANAGEMENT THAT
OUR STOCKHOLDERS OTHERWISE WOULD APPROVE.
Some provisions of our charter documents eliminate the right of stockholders
to act by written consent without a meeting and impose specific procedures for
nominating directors and submitting proposals for consideration at a stockholder
meeting. These provisions are intended to increase the likelihood of continuity
and stability in the composition of our board of directors and the policies
established by the board of directors. These provisions also discourage some
types of transactions, which may involve an actual or threatened change of
control. These provisions are designed to reduce our vulnerability to an
unsolicited acquisition proposal. As a result, these provisions could discourage
potential acquisition proposals and could delay or prevent a change of control
transaction. These provisions are also intended to discourage common tactics
that may be used in proxy fights. As a result, they could have the effect of
discouraging third parties from making tender offers for our shares. These
provisions may prevent the market price of our common stock from reflecting the
effects of actual or rumored takeover 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.
32
ADDITIONAL RISKS RELATING TO THE PROPOSED ACQUISITION OF HARBINGER
On April 5, 2000, we announced that we had signed a definitive merger
agreement with Harbinger Corporation, a provider of business-to-business
electronic commerce products and services. If the merger is completed, we will
issue 0.75 of a share of our common stock for each outstanding share of
Harbinger common stock and will assume all outstanding options and warrants to
acquire Harbinger common stock (the number and exercise price of which will be
adjusted based on the exchange ratio). We expect to issue approximately 35.6
million shares of our common stock in exchange for all the outstanding equity
securities of Harbinger. We expect the acquisition will be accounted for using
the purchase method of accounting and will be treated as a tax-free
reorganization. The definitive agreement has been approved by the boards of
directors of both Harbinger and Peregrine. Closing of the merger is subject to
approval by Peregrine's and Harbinger's stockholders, regulatory approvals, and
customary closing conditions.
In connection with the proposed merger, we expect to file a proxy statement
and Registration Statement on Form S-4 with the SEC, and Harbinger expects to
file a proxy statement with the SEC. We expect that Harbinger and Peregrine will
mail a Joint Proxy Statement/Prospectus to stockholders of Harbinger and
Peregrine containing additional information about the proposed merger. Investors
and security holders are urged to read the registration statement and the Joint
Proxy Statement/Prospectus carefully when they are available. The registration
statement and the Joint proxy Statement/Prospectus will contain important
information about Harbinger, Peregrine, the proposed merger, risks related to
the merger, the persons soliciting proxies relating to the proposed merger,
their interests in the proposed merger, and related matters.
WE MAY EXPERIENCE PROBLEMS INTEGRATING THE BUSINESSES OF PEREGRINE AND
HARBINGER. ANY INTEGRATION PROBLEMS COULD CAUSE US TO INCUR SUBSTANTIAL
UNANTICIPATED COSTS AND EXPENSES, WHICH WOULD HARM OUR OPERATING RESULTS.
If we fail to integrate our businesses successfully, we will incur
substantial costs, which will increase our expenses and reduce any earnings or
potentially result in losses, and we will fail to achieve the expected synergies
and cost reductions of the merger. In addition, integration problems could
divert management's attention from other business opportunities, which could
result in slower revenue growth than anticipated or in declines in revenue.
Integrating our business with Harbinger's business will be complex,
time-consuming, and expensive. It may disrupt both companies' businesses if not
completed in a timely and efficient manner. Peregrine and Harbinger are both
global companies with substantial operations throughout the world, and
integrating geographically separate and dispersed organizations may be
difficult. We have never attempted to integrate an acquisition of a company as
large as Harbinger.
Specific integration challenges faced by Peregrine and Harbinger include the
following:
- retaining existing customers and strategic partners;
- retaining and integrating management and other key employees of both
companies;
- combining product offerings and product lines effectively and quickly,
including technical integration by our respective engineering teams;
- integrating sales efforts so that customers can easily do business with
the combined company;
- transitioning multiple locations around the world to common systems,
including common information technology systems;
- persuading employees that the business cultures of the two companies are
compatible;
- successfully developing and promoting a unified brand strategy and
marketing it to existing and prospective customers; and
- developing and maintaining uniform standards, controls, procedures, and
policies.
33
THE MERGER COULD IMPAIR EXISTING RELATIONSHIPS WITH SUPPLIERS, CUSTOMERS,
STRATEGIC PARTNERS, AND EMPLOYEES, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR
INDIVIDUAL AND COMBINED BUSINESSES AND FINANCIAL RESULTS.
The public announcement of the merger could substantially impair important
business relationships of either company. Impairment of these business
relationships could reduce our revenues or increase our expenses, either of
which would harm our financial results. Specific examples of situations in which
we could experience problems include the following:
- suppliers, distributors, or customers of either Peregrine or Harbinger
could decide to cancel or terminate existing arrangements, or fail to
renew those arrangements, as a result of the merger;
- potential customers who are currently negotiating with Peregrine or
Harbinger with respect to the purchase or license of their products and
services may delay purchases, or defer or terminate negotiations, as a
result of uncertainty about the merger;
- customers of Harbinger who use our competitors' products could terminate
or delay orders with Harbinger because they question Harbinger's continued
commitment to provide products and enhancements, or to support products,
used in conjunction with products of our competitors;
- key employees of Harbinger, particularly those for whom vesting of options
or other benefits will accelerate as a result of the merger, may decide to
terminate their employment; and
- other current or prospective employees of Peregrine and Harbinger may
experience uncertainty about their future roles with the combined company,
which could adversely affect our ability to attract and retain key
management, sales, marketing, and technical personnel.
THE MERGER COULD RESULT IN SLOWER REVENUE GROWTH RATES FOR THE COMBINED
COMPANY THAN THOSE APPLICABLE TO US PRIOR TO THE MERGER, WHICH COULD ADVERSELY
AFFECT THE OPERATING RESULTS OF THE COMBINED COMPANY AND LEAD TO A DECLINE IN
ITS STOCK PRICE. HARBINGER'S REVENUES AND PROFITS COULD DECREASE AS IT
TRANSITIONS TO A BUSINESS MODEL THAT EMPHASIZES RECURRING SERVICES REVENUES.
We may not be able to maintain our recent revenue growth rates after the
merger, which could have an adverse effect on our operating results and could
lead to a decline in our stock price. Our revenues grew from $62 million in
fiscal 1998 to $138 million in fiscal 1999 and $253 million in fiscal 2000.
Harbinger has experienced substantially slower growth rates than we have in
recent periods, with revenues growing from $118 million in fiscal 1997 to
$135 million in fiscal 1998 to $156 million in fiscal 1999. Harbinger is
currently changing its business model by creating and supporting internet-based
trading solutions that assist companies to automate their procurement process
and by providing customers with the ability to use Harbinger's products on a
hosted subscription basis. If the merger does not create the product and
financial synergies management currently anticipates, and particularly if
Harbinger's business transition is not successful, the combined company's
revenue growth rates could be substantially lower than our recent growth rates.
In particular, if we and Harbinger experience integration problems, our
management's attention could be diverted from our existing core business and
lead to slower revenue growth rates for that business. Even if the merger is not
completed, our management does not believe that our historical growth rates can
necessarily be maintained. A more detailed discussion of our business and
associated risks is contained under the caption "Risks related to Peregrine."
HARBINGER AND SOME OF ITS CURRENT AND 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 AN
ADVERSE EFFECT ON THE COMBINED COMPANY'S FINANCIAL CONDITION AFTER THE MERGER.
If outstanding shareholder litigation against Harbinger were decided
adversely to Harbinger, or Harbinger were required to settle this litigation for
a substantial sum, our financial condition as a combined company after the
merger could be materially and adversely affected. In September 1999, a
complaint was filed against Harbinger and some of its current and former
officers and directors in the
34
United States District Court for the Northern District of Georgia. The complaint
alleges causes of action for misrepresentation and violations of federal
securities laws. An amended complaint was filed in March 2000, alleging
additional causes of action, including allegations relating to accounting
improprieties. The complaints relate to 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, Harbinger is not
insured with respect to any potential liability of Harbinger or any officer or
director of Harbinger. Harbinger is, 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.
The pending litigation is still in the early stages. As a result, we are
unable to estimate the damages, or range of damages, that Harbinger or the
combined company might incur in connection with this litigation. In addition,
defending the litigation will involve substantial direct expenses and will
likely result in a diversion of management's time and attention away from
business operations, which could have an adverse effect on the results of
operations of Harbinger or the combined company.
OUR REPORTED FINANCIAL RESULTS WILL SUFFER AS A RESULT OF PURCHASE
ACCOUNTING TREATMENT OF THE MERGER AND THE AMORTIZATION OF GOODWILL AND OTHER
INTANGIBLE ASSETS.
Purchase accounting treatment of the merger will result in a net loss for us
for the foreseeable future, which could have a material and adverse effect on
the market price of our common stock. Under purchase accounting, we will record
the following as an asset on its balance sheet:
- the fair value of the consideration given for Harbinger's outstanding
common stock;
- the fair value of the consideration given for outstanding options and
warrants to purchase Harbinger common stock, which we will assume in
connection with the merger; and
- merger-related direct transaction costs, including the fees of our legal,
accounting, and financial advisors.
We will allocate these costs to individual Harbinger assets acquired and
liabilities assumed. These assets and liabilities will include various
identifiable intangible assets such as acquired technology, acquired trademarks
and tradenames, and acquired workforce. Intangible assets, including goodwill,
will be amortized over a five year period. In addition, we will allocate a
portion of the purchase price for acquiring Harbinger to in-process research and
development. In-process research and development, which is currently estimated
at $66.1 million for Harbinger, will be expensed in the quarter in which the
merger is completed.
The amount of purchase cost allocated to goodwill and other intangibles is
estimated to be approximately $1.3 billion. If goodwill and other intangible
assets were amortized in equal annual amounts following completion of the
merger, the accounting charge attributable to these items would be approximately
$250.0 million per fiscal year.
OUR STOCKHOLDERS MAY NOT REALIZE A BENEFIT FROM THE MERGER COMMENSURATE WITH
THE OWNERSHIP DILUTION THEY WILL EXPERIENCE IN CONNECTION WITH THE MERGER.
If the combined company is unable to realize the strategic and financial
benefits currently anticipated from the merger, our stockholders will have
experienced substantial dilution of their ownership interest without receiving
any commensurate benefit. In connection with the merger, we anticipate that we
will issue approximately 35.6 million shares of our common stock (including
options being assumed), representing approximately 32.5% of our outstanding
common stock prior to the merger.
35
FAILURE TO COMPLETE THE MERGER COULD HAVE A NEGATIVE IMPACT ON OUR STOCK
PRICE AS WELL AS A NEGATIVE IMPACT ON OUR BUSINESSES AND FINANCIAL RESULTS.
If the merger is not completed for any reason, we may be subject to a number
of material risks, including the following:
- the price of our common stock may decline to the extent that the relevant
current market price reflects a market assumption that the merger will be
completed. Our stock price may also decline because of uncertainty
concerning our stand-alone prospects; and
- some costs related to the merger, such as legal, accounting, financial
advisory, and financial printing fees must be paid even if the merger is
not completed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the section entitled
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" beginning on page 18.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in the Company's
Financial Statements and Notes thereto beginning at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The following table sets forth certain information with respect to our
executive officers and directors as of March 31, 2000.
NAME AGE POSITION
- ---- --------- --------------------------------------------------------
Stephen P. Gardner................... 46 President, Chief Executive Officer and Director
David A. Farley...................... 44 Senior Vice President, Finance and Administration, Chief
Financial Officer, and Director
Matthew C. Gless..................... 34 Vice President, Finance, and Chief Accounting Officer
William G. Holsten................... 63 Senior Vice President, Customer Service
Frederic B. Luddy.................... 45 Vice President, Research and Development
Douglas S. Powanda................... 43 Executive Vice President, Worldwide Operations
Richard T. Nelson.................... 40 Vice President, Corporate Development and Secretary
Eric P. Deller....................... 39 Vice President and General Counsel
John J. Moores(2).................... 55 Chairman of the Board of Directors
Christopher A. Cole.................. 45 Director
Richard A. Hosley II(1)(2)........... 55 Director
Charles E. Noell III(1)(2)........... 47 Director
Norris van den Berg(1)............... 61 Director
Thomas G. Watrous, Sr.(2)............ 58 Director
- ------------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
STEPHEN P. GARDNER has served as our president and chief executive officer
and as a director since April 1998. From January 1998 until April 1998,
Mr. Gardner served as executive vice president and principal executive officer.
From May 1997 until January 1998, he served as vice president, strategic
acquisitions. From May 1996 until May 1997, Mr. Gardner was president of
Thunder & Lightning Company, an internet software company. From March 1995 until
May 1996, Mr. Gardner was president of Alpharel, Inc., a document management
software company. From March 1993 until March 1995, Mr. Gardner was vice
president of Data General Corporation, a manufacturer of multiuser computer
systems, peripheral equipment, communications systems, and related products.
DAVID A. FARLEY has served as our senior vice president, finance and
administration since August 1998, and as our chief financial officer and as a
director since October 1995. Mr. Farley served as vice president, finance from
October 1995 until August 1998 and as our secretary from October 1995 until
February 1997. From November 1994 to November 1995, Mr. Farley was vice
president, finance, and chief financial officer and a director of XVT
Software Inc., a development tools software company. From December 1984 until
October 1994, Mr. Farley held various accounting and financial positions at BMC
Software, Inc., a vendor of software system utilities for IBM mainframe
computing environments, most recently as chief financial officer and as a
director.
37
MATTHEW C. GLESS has served as our vice president, finance and chief
accounting officer since October 1998. From April 1996 until October 1998,
Mr. Gless served as our corporate controller. From 1990 to April 1996,
Mr. Gless held various accounting and financial management positions at BMC
Software, Inc.
WILLIAM G. HOLSTEN has served as our senior vice president, worldwide
professional services since August 1998. Mr. Holsten served as vice president,
professional services from November 1995 until August 1998. From July 1994 until
November 1995, Mr. Holsten was director of professional services for XVT
Software Inc.
FREDERIC B. LUDDY has served as our vice president, North American research
and development and chief technology officer since January 1998. From
April 1990 until January 1998, Mr. Luddy served as product architect for our
SERVICECENTER product suite.
DOUGLAS S. POWANDA has served as our executive vice president, worldwide
operations since April 1999. From August 1999 until April 1999, Mr. Powanda
served as senior vice president, worldwide sales and from January 1998 until
August 1998, as vice president, worldwide sales. From September 1995 until
January 1998, Mr. Powanda served as vice president, international sales.
RICHARD T. NELSON has served as our vice president, corporate development,
since March 2000 and as our corporate secretary since February, 1997.
Mr. Nelson served as our vice president and general counsel from November 1995
to March 2000. From August 1991 until November 1995, Mr. Nelson was an associate
in the Houston, Texas office of Jackson & Walker LLP, a law firm.
ERIC P. DELLER has served as our vice president and general counsel since
March 2000. From May 1999 until March 2000, Mr. Deller served as our associate
general counsel. From February 1997 to April 1999, Mr. Deller served as
Executive Vice President and General Counsel of PeakCare LLC, an internet based
provider of health care products. During the same period, he also served as
general counsel of The Leeds Group, Inc., an investment and development firm
that held a controlling interest in PeakCare. From February 1995 until February
1997, Mr. Deller was an associate at the law firm of McKenna & Cuneo.
JOHN J. MOORES has served as chairman of the our board of directors since
March 1990 and as a member of our board of directors since March 1989. In 1980,
Mr. Moores founded BMC Software, Inc. and served as its President and Chief
Executive Officer from 1980 to 1986 and as chairman of its board of directors
from 1980 to 1992. Since December 1994, Mr. Moores has served as owner and
Chairman of the Board of the San Diego Padres Baseball Club, L.P. and since
September 1991 as Chairman of the Board of JMI Services, Inc., a private
investment company. Mr. Moores serves as a director and member of the
compensation committees of Bindview Development Corp. and Neon Systems, Inc.
Mr. Moores also serves as a director of Mission Critical Software, Inc. and LEAP
Wireless International.
CHRISTOPHER A. COLE has served as a member of our board of directors since
founding the Company in 1981. He also served as its president and chief
executive officer from 1986 until 1989. Since 1992, Mr. Cole has served as
president and chief executive officer of Questrel, Inc., Ur Studios, Inc., and
Headlamp, Inc., each a software development company.
RICHARD A. HOSLEY II has served as a member of our board of directors since
January 1992. Prior to retiring from full-time employment, Mr. Hosley served as
president and chief executive officer of BMC Software, Inc. Mr. Hosley also
serves as a director of Bindview Development Corp.
CHARLES E. NOELL III has served as a member of our board of directors since
January 1992. Since January 1992, Mr. Noell has served as president and chief
executive officer of JMI Services, Inc., a private investment company, and as a
general partner of JMI Equity Partners, L.P., Mr. Noell also serves as a
director of Transaction Systems Architects, Inc., and as a director and member
of the compensation committee of Neon Systems. Inc.
38
NORRIS VAN DEN BERG has served as a member of our board of directors since
January 1992. Mr. van den Berg has served as a general partner of JMI Equity
Partners since July 1991. Mr. van den Berg also serves as director of Neon
Systems, Inc.
THOMAS G. WATROUS, SR. has served as a member of our board of directors
since January 1999. Prior to retiring from full-time employment in
September 1999, Mr. Watrous was a senior partner with the management consulting
firm of Andersen Consulting.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Exchange Act requires our officers and directors, and
persons who own more than ten percent of a registered class of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc. Executive officers, directors and greater than ten percent
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. Based solely on our review of the copies of such
forms that we have received, or written representations from reporting persons,
we believe that during the fiscal year ending March 31, 2000, except as
described below, all executive officers, directors and greater than ten percent
stockholders complied with all applicable filing requirements. John J. Moores,
one of our directors, inadvertently failed to timely file a Form 4. Frederic B.
Luddy, one of our officers, inadvertently failed to timely file a Form 5.
ITEM 11. EXECUTIVE COMPENSATION
(a) SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth certain information
regarding the compensation of our Chief Executive Officer and our five next most
highly compensated executive officers for the fiscal year ended March 31, 2000
for services rendered in all capacities for the years indicated.
LONG-TERM
COMPENSATION AWARDS
ANNUAL ------------------------
COMPENSATION(1) RESTRICTED SECURITIES
------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS(#) COMPENSATION(9)
- --------------------------- -------- -------- -------- ---------- ----------- ----------------
Stephen P. Gardner.......................... 2000 $250,000 $137,500(1) -- 291,850 $ 2,697
President and 1999 250,040 343,750 -- 730,000 2,599
Chief Executive Officer 1998 139,000 210,000 775,000(7) 150,000 5,156
Frederic B. Luddy........................... 2000 150,000 605,532(2) -- 313,212 3,385
Vice President, North American 1999 150,000 555,726 -- 112,564 3,143
Research and Development 1998 150,000 729,060 -- 25,000 2,837
Douglas S. Powanda.......................... 2000 225,000 326,250(3) -- 600 2,788
Executive Vice President, 1999 180,000 359,991 -- 400,000 3,143
Worldwide Operations 1998 150,000 309,523 -- 75,000 3,946
Richard T. Nelson........................... 2000 180,000 213,037(4) -- 80,600 3,282
Vice President, 1999 180,000 83,790 -- -- 4,751
Corporate Development 1998 180,000 54,000 -- 120,000 3,218
William G. Holsten.......................... 2000 180,000 137,812(5) -- 82,600 6,060
Senior Vice President, 1999 150,000 210,868 -- -- 428
Customer Service 1998 90,000 159,547 -- -- 127
Steven S. Spitzer........................... 2000 151,154 536,358(6) -- -- 597
Vice President, Alliances 1999 150,000 247,960 -- -- 428
1998 99,519 46,250 -- 420,000(8) 127
- ------------------------------
(1) Bonus compensation for 2000 consists of (i) $50,000 earned and paid in
fiscal 2000 and (ii) $87,500 earned in fiscal 2000 to be paid in fiscal
2001. Bonus compensation for 1999 consists of (i) $93,750 earned and paid in
fiscal 1999 and (ii) $250,000 earned in
39
fiscal 1999 and paid in fiscal 2000. Bonus compensation for fiscal 1998
includes $50,000 earned in fiscal 1998 and paid in fiscal 1999.
(2) Bonus compensation for 2000 consists of (i) $270,692 of product author
commission and $6,000 of bonus earned and paid in fiscal 2000 and
(ii) $253,839 of product author commission and $75,000 of bonus earned in
fiscal 2000 to be paid in fiscal 2001. Bonus compensation for 1999 consists
of (i) $381,406 of product author commission and $11,250 of bonus earned and
paid in fiscal 1999 and (ii) $148,070 of product author commission and
$15,000 of bonus earned in fiscal 1999 and paid in fiscal 2000. Bonus
compensation for fiscal 1998 consists of (i) $555,519 of product authorship
commission income earned and paid in fiscal 1998 and (ii) $173,541 of
product authorship commission income earned in fiscal 1998 and paid in
fiscal 1999.
(3) Bonus compensation for 2000 consists of (i) $55,875 of commission and
$50,000 of bonus compensation earned and paid in fiscal 2000 and
(ii) $45,375 of commission and $175,000 of bonus compensation earned in
fiscal 2000 to be paid in fiscal 2001. Bonus compensation for 1999 consists
of (i) $91,648 of commission and $80,551 of bonus earned and paid in fiscal
1999 and (ii) $87,792 of commission and $100,000 of bonus earned in fiscal
1999 and paid in fiscal 2000. Bonus compensation for fiscal 1998 consists of
(i) $10,000 of bonus compensation and $195,053 of commission income earned
and paid in fiscal 1998 and (ii) $115,570 of commission income earned in
fiscal 1998 and paid in fiscal 1999.
(4) Bonus compensation for 2000 consists of (i) $43,037 earned and paid in
fiscal 2000 and (ii) $170,000 earned in fiscal 2000 to be paid in fiscal
2001. Bonus compensation for 1999 consists of (i) $20,790 earned and paid in
fiscal 1999 and (ii) $63,000 earned in fiscal 1999 and paid in fiscal 2000.
Bonus compensation for 1998 was all earned and paid in fiscal 1998.
(5) Bonus compensation for 2000 consists of (i) $56,250 of bonus compensation
earned and paid in fiscal 2000 and (ii) $81,562 earned in fiscal 2000 to be
paid in fiscal 2001. Bonus compensation for 1999 consists of (i) $94,900
earned and paid in fiscal 1999 and (ii) $115,938 earned in fiscal 1999 and
paid in fiscal 2000. Bonus compensation for 1998 consists of (i) $144,547
earned and paid in fiscal 1998 and (ii) $15,000 earned in fiscal 1998 and
paid in fiscal 1999.
(6) Bonus compensation for 2000 consists of (i) $262,817 of commission and
$30,000 of bonus earned and paid in fiscal 2000, (ii) $206,354 of commission
and $20,000 of bonus earned in fiscal 2000 to be paid in fiscal 2001, and
(iii) $17,187 of bonus earned in fiscal 1999 and paid in fiscal 2000. Bonus
compensation for 1999 consists of (i) $56,195 of commission and $19,875 of
bonus earned and paid in fiscal 1999 and (ii) $89,077 of commission and
$82,813 of bonus earned in fiscal 1999 and paid in fiscal 2000. Bonus
compensation for 1998 was earned and paid in fiscal 1998.
(7) In November 1997, we issued Mr. Gardner 200,000 shares of common stock
pursuant to a restricted stock agreement. The closing sale price of our
common stock on the Nasdaq National Market on October 31, 1997, the last
trading date prior to the date of issuance was $3.875 (as adjusted for
subsequent stock splits). Such shares vest incrementally over ten years,
subject to earlier vesting over six years if we achieve certain financial
milestones.
(8) Includes an option to purchase 200,000 shares subsequently canceled.
(9) Consists of group life insurance excess premiums and matching contributions
under our 401(k) plan.
(b) OPTION GRANTS IN FISCAL YEAR 2000
The following table provides information relating to stock options to
purchase common stock granted to each of the executive officers named in the
compensation table above during our fiscal year ended March 31, 2000. All of
these options were granted under our 1994 stock plan and have a term of
10 years, subject to earlier termination in the event the optionee's services to
us cease.
The exercise price of the options we grant are equal to the fair market
value of our common stock based on the closing sales price of our common stock
in trading on the Nasdaq National Market on the trading day prior to the date of
grant. The exercise price may be paid by cash or check. Alternatively, optionees
may exercise their shares under a cashless exercise program. Under this program,
the optionee may provide irrevocable instructions to sell the shares acquired on
exercise and to remit to us a cash amount equal to the exercise price and all
applicable withholding taxes. The options granted under our 1994 stock plan vest
over a four year period. Twenty-five percent will vest on the first anniversary
of the date of grant. The balance of the option will vest over the remaining
three years at the rate of 6.25% every three months.
On May 5, 1999, we granted each employee, including each officer, an option
to acquire 600 shares of our common stock at an exercise price of $8.56. These
options were to vest on the earlier to occur of May 5, 2000 or the date we
achieve certain financial milestones. These options are now fully vested.
40
The potential realizable value of options is calculated by assuming that the
price of our common stock increases from the exercise price at assumed rates of
stock appreciation of 5% and 10%, compounded annually over the 10 year term of
the option, and subtracting from that result the total option exercise price.
These assumed appreciation rates comply with the rules of the Securities and
Exchange Commission and do not represent our prediction of the performance of
our stock price.
All share numbers and exercise prices have been adjusted to reflect a
two-for-one stock split effected in the form of a dividend in February 2000.
During fiscal 2000, we granted options to acquire 4,293,434 shares of common
stock to employees and consultants under our 1994 stock plan.
INDIVIDUAL GRANTS
----------------------------------------------------------- POTENTIAL REALIZABLE VALUES AT
NUMBER OF PERCENT OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTIONS TERM
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------------------
NAME GRANTED FISCAL 2000 PER SHARE DATE 5% 10%
- ---- ---------- ---------------- -------------- ---------- ------------- --------------
Stephen P. Gardner.... 600 * $ 8.56 05/05/09 $ 3,230 $ 8,185
91,250 2.13% 19.16 10/28/09 1,108,688 2,786,775
200,000 4.66% 36.63 01/13/10 4,608,000 11,675,751
Frederic B. Luddy..... 600 * 8.56 05/05/09 3,230 8,185
100,000 2.33% 8.56 05/05/09 538,000 1,364,000
212,612 4.95% 19.16 10/28/09 2,583,236 6,493,170
Douglas S. Powanda.... 600 * 8.56 05/05/09 3,230 8,185
Richard T. Nelson..... 600 * 8.56 05/05/09 3,230 8,185
40,000 * 19.16 10/28/09 486,000 1,221,600
40,000 * 36.63 01/13/10 921,600 2,335,200
William G. Holsten.... 600 * 8.56 05/05/09 3,230 8,185
120,000 2.79% 36.65 01/13/10 2,764,800 7,005,600
Steven S. Spitzer..... 600 * 8.56 05/05/09 3,230 8,185
2,000 * 8.56 05/05/09 10,760 27,280
40,000 * 19.16 10/28/09 486,000 1,221,600
40,000 * 36.63 01/13/10 921,600 2,335,200
- ------------------------
* Less than 1%
(c) AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information relating to option exercises by the
executive officers identified in the summary compensation table during the
fiscal year ended March 31, 2000. In addition, it indicates the number and value
of vested and unvested options held by these executive officers as of March 31,
2000.
The "Value Realized" on option exercises is equal to the difference between
the fair market value of our common stock on the date of exercise less the
exercise price. The "Value of Unexercised In-the-Money Options at March 31,
2000" is based on $67.0625 per share, the closing sales price of our common
stock in trading on the Nasdaq National Market on March 31, 2000, less the
exercise price, multiplied by the aggregate number of shares subject to
outstanding options.
41
All share numbers and exercise prices have been adjusted to reflect a
two-for-one stock split effected in the form of a dividend in February 2000.
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES MARCH 31, 2000 MARCH 31, 2000
ACQUIRED VALUE --------------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- -------------- ---------------- ----------- -------------
Stephen P. Gardner...... 468,352 $11,897,053 312,898 1,370,600 $19,306,778 $77,797,083
Frederic B. Luddy....... 167,500 4,117,200 14,102 536,738 886,200 29,791,184
Douglas S. Powanda...... 262,500 8,805,294 125,596 738,100 7,565,180 44,981,564
Richard T. Nelson....... 150,000 2,270,563 60,000 178,100 3,900,375 9,414,964
William G. Holsten...... 75,000 1,680,111 35,000 302,600 2,237,637 17,350,630
Steven S. Spitzer....... 202,500 4,042,842 20,000 218,100 1,300,129 9,933,464
(d) EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
We do not currently have any employment contracts in effect with any of the
executive officers named in the compensation table above.
We are parties to a restricted stock agreement dated November 1, 1997 with
Stephen P. Gardner, our chief executive officer, pursuant to which we issued
Mr. Gardner 100,000 shares of common stock. We are parties with David A. Farley,
our chief financial officer, to a substantially equivalent restricted stock
agreement dated November 1, 1995 pursuant to which we issued Mr. Farley 400,000
shares of common stock. The shares issued to each of Messrs. Gardner and Farley
vest incrementally over ten years, subject to earlier vesting over six years
contingent upon our achieving certain financial milestones. The restricted stock
agreements permit either Mr. Gardner or Mr. Farley to surrender shares to
satisfy withholding tax obligations that arise as the shares vest. In connection
with the lapsing of restrictions on 16,666 shares in April 1999, Mr. Gardner
surrendered 16,666 shares subject to his restricted stock agreement. In
connection with the lapsing of restrictions on 66,000 shares in April 1999,
Mr. Farley surrendered 33,000 shares subject to his restricted stock agreement.
In the event of our merger or change in control, all such shares will become
automatically vested.
Under our 1994 stock plan, in the event of our merger or our change in
control, vesting of options outstanding under our 1994 stock plan will
automatically accelerate such that outstanding options will become fully
exercisable, including with respect to shares for which such options would be
otherwise unvested.
(e) DIRECTOR COMPENSATION
Each member of our board who is not also an employee receives $2,000 for
each board meeting and $1,000 for each committee meeting he attends in person.
We pay members of our board $500 for telephonic attendance at a board or
committee meetings. Directors receive compensation for attendance at committee
meetings only if they are members of the applicable committee.
In September 1998, we granted each of Mr. Cole, Mr. Hosley, Mr. Noell, and
Mr. van den Berg an option to acquire 50,000 shares of our common stock under
our 1994 stock plan. The exercise price for these option grants was $7.50. These
options become exercisable over four years, with 25% vesting after one year and
the remaining shares vesting in quarterly installments thereafter. These grants
expire if not exercised prior to September 2008.
In May 1992, we granted each of Mr. Cole, Mr. Hosley, Mr. Noell, and
Mr. Van den Berg an option to acquire 180,000 shares of common stock under our
1991 nonqualified stock option plan at an exercise price of $0.335, the per
share fair market value of our common stock on the date of grant. Each of these
options vested in annual installments over four years, are now fully
exercisable, and expire if not exercised prior to
42
May 2002. In addition, in December 1990, we granted Mr. Cole an option to
acquire 450,000 shares of our common stock under a separate nonqualified stock
option plan at an exercise price of $0.255 per share, the per share fair market
value of our common stock on the date of grant. Following Mr. Cole's resignation
as an executive officer of Peregrine and in consideration of his continuing
service as a director, we extended the exercisability of the option with respect
to 112,500 vested shares for so long as Mr. Cole remains a director of Peregrine
but no later than December 2000.
In addition to the option grants described above, directors who are not also
employees receive automatic option grants under our 1997 director option plan.
Nonemployee directors who hold or are affiliated with a holder of three percent
or more of our outstanding common stock do not receive these automatic option
grants. Each new nonemployee director is automatically granted an option to
purchase 50,000 shares of our common stock at the time he or she is first
elected to our board of directors. Each nonemployee director receives a
subsequent option grant to purchase 10,000 shares of our common stock at each
annual meeting of our stockholders. All options granted under the director
option plan are granted at the fair market value of our common stock on the date
of grant. Options granted to nonemployee directors under the director plan
become exercisable over four years, with 25% of the shares vesting after one
year and the remaining shares vesting in quarterly installments thereafter.
(f) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of Peregrine. It also administers various incentive compensation and
benefit plans. Our compensation committee consist of Mr. Hosley, Mr. Moores,
Mr. Noell, and Mr. Watrous. Our president and chief executive officer
participates in all discussions and decisions regarding salaries and incentive
compensation for all employees and consultants. He is excluded, however, from
discussions regarding his own salary and incentive compensation. No interlocking
relationship exists between any member of the our compensation committee and any
member of any other company's board of directors or compensation committee.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information relating to the beneficial
ownership of our common stock as of March 31, 2000 by:
- each stockholder known by us to own beneficially more than 5% of its
common stock;
- each of our executive officers named in the summary compensation table
above;
- each of our directors; and
- all our directors and executive officers as a group.
Beneficial ownership is determined based on the rules of the Securities and
Exchange Commission. The column captioned "Number of Shares Beneficially Owned"
excludes the number of shares of our common stock subject to options held by
that person that are currently exercisable or will become exercisable on or
before May 31, 2000. The number of shares subject to options that each
beneficial owner has the right to acquire on or before May 31, 2000 is listed
separately under the column "Number of Shares Underlying Options." These shares
are not deemed exercisable for purposes of computing the beneficial ownership of
any other person. Percent of beneficial ownership is based upon 109,501,146
shares of our common stock outstanding as of March 31, 2000. The address for
those individuals for which an address is not otherwise provided is c/o
Peregrine Systems, Inc., 12670 High Bluff Drive, San Diego, California, 92130.
Unless otherwise indicated, we believe the stockholders listed have sole voting
or investment power with respect to all shares, subject to applicable community
property laws.
PERCENTAGE OF
NUMBER OF NUMBER OF OUTSTANDING
SHARES SHARES TOTAL SHARES SHARES
BENEFICIALLY UNDERLYING BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED OPTIONS OWNED OWNED
- ---------------- ------------ ---------- ------------ -------------
PRINCIPAL STOCKHOLDERS
Pilgrim Baxter & Associates, Ltd.(1)......... 7,140,400 -- 7,140,400 6.52%
825 Duportail Road
Wayne, Pennsylvania 19087
CURRENT EXECUTIVE OFFICERS AND DIRECTORS
Stephen P. Gardner........................... 195,688 436,768 632,456 *
David A. Farley.............................. 2,337,632 400,600 2,738,232 2.49
Christopher A. Cole.......................... 1,721,284 26,250 1,747,534 1.60
William G. Holsten........................... 50,000 20,600 70,600 *
Richard A. Hosley II......................... -- 26,250 26,250 *
Frederic B. Luddy............................ -- 60,023 60,023 *
John J. Moores(2)............................ 5,752,986 -- 5,752,986 5.23
Richard T. Nelson............................ 278,000 60,600 338,600 *
Charles E. Noell III......................... 54,428 116,250 170,678 *
Stephen S. Spitzer........................... -- 63,600 63,600 *
Douglas S. Powanda........................... 4 194,946 194,950 *
Norris van den Berg.......................... 38,744 76,250 114,994 *
Thomas G. Watrous, Sr........................ 10,000 16,250 26,250 *
All current executive officers and directors
as a group (15 persons)...................... 10,542,016 1,519,662 12,061,678 10.86
- ------------------------
* Less than 1%
(1) Based solely on a Schedule 13G, dated February 8, 1999, filed with the
Securities and Exchange Commission on February 9, 1999.
(2) Includes 1,352,590 shares held by Mr. Moores as trustee under various
trusts, substantially all of which were established for members of
Mr. Moores' family.
44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are parties with JMI Services, Inc., an investment management company, to
a sublease under which we sublease approximately 13,310 square feet of office
space in San Diego, California to JMI Services. The term of the sublease is from
June 1, 1996 through October 21, 2003. The sublease provides for initial monthly
rental payments of $16,638 to increase by $666 per month on each anniversary of
the sublease. John J. Moores, the chairman of our board of directors, also
serves as chairman of the board of JMI Services. Charles E. Noell, III, one of
our directors, serves as president and chief executive officer of JMI Services.
We believe that the terms of the sublease are at competitive market rates.
We lease a suite at San Diego's Qualcomm Stadium at competitive rates and on
an informal basis from the San Diego Padres Baseball Club, L.P. Mr. Moores has
served as owner and chairman of the board of the Padres since December 1994. Our
annual payments for the suite and game tickets total approximately $50,000.
We are parties to restricted stock agreements with Stephen P. Gardner, our
president and chief executive officer, and David A. Farley, our senior vice
president and chief financial officer. Under these agreements, we issued
1,000,000 shares of common stock. These agreements are discussed in detail under
the caption "Employment agreements and change in control arrangements."
During fiscal year 2000, we issued options to purchase common stock to
certain directors under our 1994 stock option plan. These grants are discussed
in detail under the caption "Director Compensation."
During fiscal year 1999, we purchased a golf club membership for business
entertainment use by Douglas S. Powanda, our executive vice president, worldwide
operations, at a cost of $70,000. Mr. Powanda and Peregrine have agreed that
upon termination of his employment with Peregrine, he may purchase the
membership from us at our original cost. During fiscal year 2000, we purchased a
similar membership at $70,000 under a similar agreement with Mr. Gardner.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
PAGE
--------
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Shareholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
2. FINANCIAL STATEMENT SCHEDULES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
(IN THOUSANDS)
BALANCE ADDITIONS BALANCE
AT BEGINNING CHARGED ADDITIONS AT END
OF PERIOD TO EXPENSE ACQUIRED DEDUCTIONS OF PERIOD
------------ ---------- --------- ---------- ---------
Year ended March 31, 2000
Allowance for doubtful accounts......... $1,248 $635 $ 430 $ (134) $ 2,179
Accrued acquisition costs............... $3,379 $ -- $19,555 $ (7,810) $15,124
Year ended March 31, 1999
Allowance for doubtful accounts......... $ 485 $516 $ 325 $ (78) $ 1,248
Accrued acquisition costs............... $1,112 $ -- $13,510 $ (11,243) $ 3,379
Year ended March 31, 1998
Allowance for doubtful accounts......... $ 220 $168 $ 97 $ -- $ 485
Accrued acquisition costs............... $ -- $ -- $ 3,500 $ (2,388) $ 1,112
46
3. EXHIBITS
EXHIBIT NO. EXHIBIT TITLE
----------- ------------------------------------------------------------
2.1 (a) Agreement and Plan of Merger and Reorganization by and among
Peregrine Systems, Inc., Soda Acquisition Corporation and
Harbinger Corporation, dated as of April 5, 2000.
3.1 (c) Amended and Restated Certificate of Incorporation as filed
with the Secretary of the State of Delaware on February 11,
1997.
3.2 (c) Bylaws, as amended.
4.1 (c) Specimen Common Stock Certificate.
10.1 (c) Nonqualified Stock Option Plan, as amended, and forms of
Stock Option Agreement and Stock Buy-Sell Agreement.
10.2 (c) Nonqualified Stock Option Plan, as amended, and forms of
Stock Option Agreement and Stock Buy-Sell Agreement.
10.3(a) (f) 1994 Stock Option Plan, as amended through July 1998.
10.3(b) (f) 1995 Stock Option Plan for French Employees (a supplement to
the 1994 Stock Option Plan).
10.4 (d) Form of Stock Option Agreement under the 1994 Stock Option
Plan, as amended through February 6, 1997.
10.5 (d) 1997 Employee Stock Purchase Plan and forms of participation
agreement thereunder.
10.6 (d) 1997 Director Option Plan.
10.7 (c) Form of Indemnification Agreement for directors and
officers.
10.8 (a) Credit Agreement dated as of July 30, 1999 by and between
the Registrant and Bank of America, N.A., Banc of America
Securities LLC and Bank Boston, N.A.
10.9 (c) Sublease between the Registrant and JMI Services, Inc.
10.10 (c) Lease between the Registrant and the Mutual Life Insurance
Company of New York dated October 26, 1994, as amended in
August 1995, and Notifications of Assignment dated June 14,
1996 and December 9, 1996 for the Registrant's headquarters
at 12670 High Bluff Drive, San Diego, CA.
10.11 (c) Lease between the Registrant and the Mutual Life Insurance
Company of New York dated October 26, 1994, as amended in
August 1995, and Notification of Assignment dated December
9, 1996 for the Registrant's headquarters at 12680 High
Bluff Drive, San Diego, CA.
10.14 (c) XVT Stock Option Agreement dated January 18, 1995 between
the Registrant and Christopher Cole, as amended on October
3, 1996.
10.16 (d) Restricted Stock Agreement dated November 1, 1995 between
the Registrant and David Farley.
10.17 (c) Stock Option Agreement dated as of December 7, 1990 between
the Registrant and Christopher Cole, as amended on October
26, 1995.
10.18 (c) Form of Stock Option Agreement under 1995 Stock Option Plan
for French Employees.
10.19 (c) Form of Stock Option Agreement under 1997 Director Option
Plan.
10.22 (b) Executive Officer Incentive Program and Form of Restricted
Stock Agreement.
10.24 (g) Lease between the Registrant and KR-Carmel Partners LLC
dated June 9, 1999 for Building No. 1 of the Registrant's
future campus in San Diego, CA.
10.25 (g) Lease between the Registrant and KR-Carmel Partners LLC
dated June 9, 1999 for Building No. 2 of the Registrant's
future campus in San Diego, CA.
47
EXHIBIT NO. EXHIBIT TITLE
----------- ------------------------------------------------------------
10.26 (g) Lease between the Registrant and KR-Carmel Partners LLC
dated June 9, 1999 for Building No. 3 of the Registrant's
future campus in San Diego, CA.
10.27 (g) Lease between the Registrant and KR-Carmel Partners LLC
dated June 9, 1999 for Building No. 5 of the Registrant's
future campus in San Diego, CA.
10.28 (g) Lease between the Registrant and KR-Carmel Partners LLC
dated June 9, 1999 for Building No. 4 of the Registrant's
future campus in San Diego, CA.
10.29 (a) 1999 Nonstatutory Stock Option Plan.
21.1 (a) Peregrine Systems, Inc. Subsidiaries.
23.1 (a) Consent of Arthur Andersen LLP, Independent Public
Accountants (relating to financial statements for Peregrine
Systems).
27.1 (a) Financial Data Schedule for Peregrine Systems, Inc.
- ------------------------
(a) Filed herewith.
(b) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration Statement
333-39891), which the Securities and Exchange Commission declared effective
on November 19, 1997.
(c) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration Statement
333-21483), which the Securities and Exchange Commission declared effective
on April 8, 1997.
(d) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Annual Report on Form 10-K for the year ended March 31,
1997.
(e) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(f) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-8 (Registration Statement
333-65541) which became effective upon its filing on October 9, 1998.
(g) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Annual Report on Form 10-K for the year ended March 31,
1999.
(b) REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K in April 2000 in connection with our
acquisition of Telco Research Corporation Limited.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this annual report on Form 10-K to be signed on its
behalf by the undersigned thereunto duly authorized in the City of San Diego,
California, this May 8, 2000.
PEREGRINE SYSTEMS, INC.
By /s/ STEPHEN P. GARDNER
-----------------------------------------
Stephen P. Gardner
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
By /s/ DAVID A. FARLEY
-----------------------------------------
David A. Farley
SENIOR VICE PRESIDENT, FINANCE AND
ADMINISTRATION, CHIEF FINANCIAL OFFICER
AND DIRECTOR (PRINCIPAL FINANCIAL OFFICER)
By /s/ MATTHEW C. GLESS
-----------------------------------------
Matthew C. Gless
VICE PRESIDENT, FINANCE AND
CHIEF ACCOUNTING OFFICER
[SIGNATURES CONTINUED ON NEXT PAGE]
49
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW HEREBY CONSTITUTES AND APPOINTS STEPHEN P. GARDNER AND DAVID A. FARLEY AND
EACH OF THEM ACTING INDIVIDUALLY, AS HIS OR HER ATTORNEY-IN-FACT, EACH WITH FULL
POWER OF SUBSTITUTION, FOR HIM OR HER IN ANY AND ALL CAPACITIES, TO SIGN ANY AND
ALL AMENDMENTS TO THIS REPORT ON FORM 10-K, AND TO FILE THE SAME, WITH ALL
EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT ON FORM 10-K HAS BEEN SIGNED ON BEHALF OF THE REGISTRANT BY THE FOLLOWING
PERSONS AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STEPHEN P. GARDNER President, Chief Executive Officer,
-------------------------------------- and Director (Principal Executive May 8, 2000
(Stephen P. Gardner Officer)
Senior Vice President, Finance and
/s/ DAVID A. FARLEY Administration, Chief Financial
-------------------------------------- Officer and Director (Principal May 8, 2000
(David A. Farley) Financial Officer)
/s/ JOHN J. MOORES
-------------------------------------- Chairman of the Board of Directors May 8, 2000
(John J. Moores)
/s/ CHRISTOPHER A. COLE
-------------------------------------- Director May 8, 2000
(Christopher A. Cole)
/s/ RICHARD A. HOSLEY II
-------------------------------------- Director May 8, 2000
(Richard A. Hosley II)
/s/ CHARLES E. NOELL III
-------------------------------------- Director May 8, 2000
(Charles E. Noell III)
/s/ NORRIS VAN DEN BERG
-------------------------------------- Director May 8, 2000
(Norris van den Berg)
/s/ THOMAS G. WATROUS, SR.
-------------------------------------- Director May 8, 2000
(Thomas G. Watrous, Sr.)
50
PEREGRINE SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To Peregrine Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Peregrine
Systems, Inc. (a Delaware corporation) and subsidiaries as of March 31, 2000 and
1999, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
March 31, 2000. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Peregrine Systems, Inc. and
subsidiaries as of March 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2000 in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. The schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
San Diego, California
April 25, 2000
F-2
PEREGRINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, MARCH 31,
2000 1999
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 33,511 $ 21,545
Short-term investments...................................... -- 2,000
Accounts receivable, net of allowance for doubtful accounts
of $2,179 and $1,248, respectively........................ 69,940 38,947
Deferred tax assets......................................... 4,024 5,798
Other current assets........................................ 18,802 10,370
-------- --------
Total current assets.................................... 126,277 78,660
Property and equipment, net................................. 29,537 15,895
Intangible assets, investments and other, net............... 367,616 113,158
-------- --------
$523,430 $207,713
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 19,850 $ 6,795
Accrued expenses.......................................... 49,064 26,460
Deferred revenue.......................................... 36,779 20,048
Current portion of long-term debt......................... 74 55
-------- --------
Total current liabilities............................... 105,767 53,358
Long-term debt, net of current portion...................... 1,257 594
Deferred revenue, net of current portion.................... 4,556 2,980
-------- --------
Total liabilities........................................... 111,580 56,932
-------- --------
Stockholders' Equity:
Preferred stock, $0.001 par value, 5,000 shares authorized,
no shares issued or outstanding........................... -- --
Common stock, $0.001 par value, 200,000 shares authorized,
109,501 and 97,106 shares issued and outstanding,
respectively.............................................. 110 97
Additional paid-in capital.................................. 480,957 193,739
Accumulated deficit......................................... (64,863) (39,793)
Unearned portion of deferred compensation................... (678) (1,019)
Accumulated other comprehensive loss........................ (666) (518)
Treasury stock, at cost..................................... (3,010) (1,725)
-------- --------
Total stockholders' equity.................................. 411,850 150,781
-------- --------
$523,430 $207,713
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Licenses.................................................. $168,467 $ 87,362 $38,791
Services.................................................. 84,833 50,701 23,086
-------- -------- -------
Total revenues.......................................... 253,300 138,063 61,877
-------- -------- -------
Costs and Expenses:
Cost of licenses.......................................... 1,426 1,020 326
Cost of services.......................................... 51,441 31,561 10,326
Sales and marketing....................................... 101,443 50,803 22,728
Research and development.................................. 28,517 13,919 8,394
General and administrative................................ 19,871 10,482 6,077
Amortization of intangible assets......................... 34,753 18,012 3,168
Acquired in-process research and development costs........ 24,505 26,005 6,955
-------- -------- -------
Total costs and expenses................................ 261,956 151,802 57,974
-------- -------- -------
Income (loss) from operations............................... (8,656) (13,739) 3,903
Interest income, net........................................ 38 664 839
-------- -------- -------
Income (loss) from operations before income taxes........... (8,618) (13,075) 4,742
Income taxes................................................ 16,452 10,295 5,358
-------- -------- -------
Net loss.................................................. $(25,070) $(23,370) $ (616)
======== ======== =======
Net loss per share--basic and diluted:
Net loss per share........................................ $ (0.24) $ (0.27) $ (0.01)
======== ======== =======
Shares used in computation................................ 102,332 87,166 69,520
======== ======== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
UNEARNED ACCUMULATED
NUMBER OF ADDITIONAL PORTION OF OTHER
SHARES COMMON PAID-IN ACCUMULATED DEFERRED COMPREHENSIVE
OUTSTANDING STOCK CAPITAL DEFICIT COMPENSATION LOSS
----------- -------- ---------- ------------ ------------- --------------
Balance, March 31, 1997.............. 51,680 $ 52 $ 15,042 $(15,807) $(1,748) $(388)
Net loss............................. -- -- -- (616) -- --
Issuance of common stock in IPO, net
of issuance costs of $1,181........ 9,200 9 18,062 -- -- --
Stock options exercised and
restricted stock granted (net)..... 6,616 6 2,788 -- -- --
Stock issued for Apsylog
Acquisition........................ 7,664 8 30,498 -- -- --
Stock option tax benefit............. -- -- 7,905 -- -- --
Compensation expense related to
restricted stock and options....... -- -- -- -- 414 --
Deferred compensation related to
options granted.................... -- -- -- -- (159) --
Stock repurchased.................... -- -- -- -- -- --
Equity adjustment from foreign
currency translation............... -- -- -- -- -- (165)
------- ---- -------- -------- ------- -----
Balance, March 31, 1998.............. 75,160 75 74,295 (16,423) (1,493) (553)
Net loss............................. -- -- -- (23,370) -- --
Stock options exercised.............. 7,018 7 7,914 -- -- --
Stock issued for acquisitions........ 14,928 15 105,434 -- -- --
Stock option tax benefit............. -- -- 6,096 -- -- --
Compensation expense related to
restricted stock and options....... -- -- -- -- 474 --
Stock repurchased.................... -- -- -- -- -- --
Equity adjustment from foreign
currency translation............... -- -- -- -- -- 35
------- ---- -------- -------- ------- -----
Balance, March 31, 1999.............. 97,106 97 193,739 (39,793) (1,019) (518)
Net loss............................. -- -- -- (25,070) -- --
Stock options exercised.............. 7,345 5 23,422 -- -- --
Stock issued for acquisitions........ 5,050 5 169,643 -- -- --
Stock issued for strategic
investments........................ -- 3 83,558 -- -- --
Stock option tax benefit............. -- -- 10,595 -- -- --
Compensation expense related to
restricted stock and options....... -- -- -- -- 341 --
Stock repurchased.................... -- -- -- -- -- --
Equity adjustment from foreign
currency translation............... -- -- -- -- -- (148)
------- ---- -------- -------- ------- -----
Balance, March 31, 2000.............. 109,501 $110 $480,957 $(64,863) $ (678) $(666)
======= ==== ======== ======== ======= =====
TOTAL
STOCKHOLDERS'
TREASURY EQUITY COMPREHENSIVE
STOCK (DEFICIT) INCOME (LOSS)
-------- ------------- --------------
Balance, March 31, 1997.............. $ $ (2,849) $ --
Net loss............................. -- (616) (616)
Issuance of common stock in IPO, net
of issuance costs of $1,181........ -- 18,071
Stock options exercised and
restricted stock granted (net)..... -- 2,794
Stock issued for Apsylog
Acquisition........................ -- 30,506
Stock option tax benefit............. -- 7,905
Compensation expense related to
restricted stock and options....... -- 414
Deferred compensation related to
options granted.................... -- (159)
Stock repurchased.................... (262) (262)
Equity adjustment from foreign
currency translation............... -- (165) (165)
------- -------- --------
Balance, March 31, 1998.............. (262) 55,639 (781)
========
Net loss............................. -- (23,370) (23,370)
Stock options exercised.............. -- 7,921
Stock issued for acquisitions........ -- 105,449
Stock option tax benefit............. -- 6,096
Compensation expense related to
restricted stock and options....... -- 474
Stock repurchased.................... (1,463) (1,463)
Equity adjustment from foreign
currency translation............... -- 35 35
------- -------- --------
Balance, March 31, 1999.............. (1,725) 150,781 (23,335)
========
Net loss............................. -- (25,070) (25,070)
Stock options exercised.............. -- 23,427
Stock issued for acquisitions........ -- 169,648
Stock issued for strategic
investments........................ -- 83,561
Stock option tax benefit............. -- 10,595
Compensation expense related to
restricted stock and options....... -- 341
Stock repurchased.................... (1,285) (1,285)
Equity adjustment from foreign
currency translation............... -- (148) (148)
------- -------- --------
Balance, March 31, 2000.............. $(3,010) $411,850 $(25,218)
======= ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
Cash flow from operating activities:
Net loss.................................................... $(25,070) $(23,370) $ (616)
Adjustments to reconcile loss to net cash provided by
operating activities:
Depreciation and amortization........................... 43,788 21,776 4,901
Acquired in-process research and development costs...... 24,505 26,005 6,955
Increase (decrease) in cash resulting from changes,
net of business acquired, in:
Accounts receivable............................... (24,364) (18,984) (5,982)
Deferred tax asset................................ 1,774 1,499 (856)
Other current assets.............................. (289) (7,177) (1,116)
Accounts payable.................................. 4,755 2,939 674
Accrued expenses.................................. 6,733 6,390 (1,767)
Deferred revenue.................................. 12,467 4,874 1,361
Other assets...................................... 2,717 (245) 534
-------- -------- --------
47,016 13,707 4,088
-------- -------- --------
Net cash used by discontinued business...................... -- -- (170)
-------- -------- --------
Net cash provided by operating activities....... 47,016 13,707 3,918
-------- -------- --------
Cash flows from investing activities:
Technology acquisitions................................... (22,351) -- --
Purchases of short-term investments....................... -- (49,000) (45,732)
Maturities of short-term investments...................... 2,000 54,027 38,705
Equity investments purchased.............................. (11,291) -- --
Purchases of property and equipment....................... (20,713) (12,426) (2,427)
Cash expenditures related to acquisitions................. (7,752) (11,231) (2,410)
Other investing activities................................ 145 103 582
-------- -------- --------
Net cash used in investing activities........... (59,962) (18,527) (11,282)
-------- -------- --------
Cash flows from financing activities:
Repayments of bank line of credit, net.................... -- -- (3,387)
Repayments of long-term debt.............................. (7,832) (1,174) (2,541)
Issuance of common stock.................................. 34,022 14,017 28,770
Treasury stock purchased.................................. (1,285) (1,463) (262)
Principal payments under capital lease obligation......... -- -- (406)
-------- -------- --------
Net cash provided by financing activities....... 24,905 11,380 22,174
-------- -------- --------
Effect of exchange rate changes on cash..................... 7 35 (165)
-------- -------- --------
Net increase in cash and cash equivalents................... 11,966 6,595 14,645
Cash and cash equivalents, beginning of period.............. 21,545 14,950 305
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 33,511 $ 21,545 $ 14,950
======== ======== ========
Cash paid during the period for:
Interest.................................................. $ 451 $ 26 $ 38
Income taxes.............................................. $ 3,015 $ 155 $ 622
Supplemental Disclosure of Noncash Investing and Financial
Activities:
Stock issued and other noncash consideration for
acquisitions............................................ $169,648 $105,449 $ 30,506
Stock issued for strategic investments.................... $ 83,561 $ -- $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Peregrine Systems, Inc. (unless otherwise noted, "Peregrine Systems," "we,"
"PSI," "us," or "our" refers to Peregrine Systems, Inc.) is a leading provider
of Infrastructure Management and e-Infrastructure software solutions. Using
common shared data, our products help manage information technology assets as
well as assets relating to corporate facilities and fleets. In addition, we have
recently introduced products for rail management and internet-based asset
procurement. We sell our software and services in North America and
internationally through both a direct sales force and through business
partnerships.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PSI and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain amounts previously reported have been
reclassified in order to ensure comparability among the years reported.
USE OF ESTIMATES
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.
REVENUE RECOGNITION
We generate revenues from licensing the rights to use our software products
primarily to end users. We also generate revenues from post-contract support
(maintenance), consulting and training services performed for customers who
license our products. We do not provide professional services unrelated to our
products.
Revenues from direct and indirect license agreements are recognized
currently, provided that all of the following conditions are met: a
noncancelable license agreement has been signed, the product has been delivered,
there are no material uncertainties regarding customer acceptance, collection of
the resulting receivable is deemed probable, risk of concession is deemed
remote, and we have no other significant obligations associated with the
transaction. Revenues from post-contract support services are recognized ratably
over the term of the maintenance period, generally one year. Maintenance
revenues which are bundled with license agreements, are unbundled using vendor
specific objective evidence. Professional services revenues are primarily
related to implementation services most often performed on a time and material
basis under separate service agreements for the installation of our products.
Revenues from professional services and customer training are recognized as the
respective services are performed.
Cost of license revenues consists primarily of amounts paid to third-party
vendors, product media, manuals, packaging materials, personnel, and related
shipping costs. Cost of maintenance and services revenues consists primarily of
salaries, benefits, and allocated overhead costs incurred in providing telephone
support, professional services, and training to customers.
Deferred revenues primarily relates to maintenance fees, which have been
paid by our customers in advance of the performance of these services.
F-7
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS RISK AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which may subject us to concentrations of credit risk
consist principally of trade and other receivables. We perform ongoing credit
evaluations of our customers' financial condition. We believe that the
concentration of credit risk with respect to trade receivables is further
mitigated as our customer base consists primarily of large, well established
companies. We maintain reserves for credit losses and such losses historically
have been within our expectations.
A substantial portion of our license revenue is derived from the sale of our
Infrastructure Management applications and our e-Infrastructure solutions and is
expected to account for a substantial portion of revenues for the foreseeable
future. As a result, our future operating results are dependent upon continued
market acceptance of the Infrastructure Resource Management strategy and
applications, including future product enhancements and new product initiatives.
Factors adversely affecting the pricing, demand for, or market acceptance of our
Infrastructure Resource Management applications, such as competition or
technological change, could have a material adverse effect on our business,
operating results, and financial condition.
CASH AND CASH EQUIVALANTS
We consider all highly liquid investments with an original maturity of three
months or less to be cash equivalents. Cash equivalents primarily consist of
overnight repurchase agreements and money market accounts. The carrying amount
reported for cash and cash equivalents approximates its fair value.
SHORT-TERM INVESTMENTS
We account for our short-term investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Short-term investments consist of auction rate
preferred stock with original maturities at date of purchase beyond three
months. These securities are classified as available-for-sale and are carried at
market. Gross unrealized gains or gross unrealized losses as of March 31, 1999
were not significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of our financial instruments, including
accounts receivable, accounts payable and accrued expenses approximates fair
value due to their short maturities. Based on borrowing rates currently
available to us for loans with similar terms, the carrying values of our notes
payable approximates the fair values.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over estimated useful lives, generally three to five years for furniture
and equipment. Amortization of leasehold improvements is provided using the
straight-line method over the lesser of the useful lives of the assets or the
terms of the related leases.
Maintenance and repairs are charged to operations as incurred. When assets
are sold, or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
operations for the applicable period.
F-8
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
We evaluate potential impairment of long-lived assets and long-lived assets
to be disposed of in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of"
("SFAS No. 121"). SFAS No. 121 establishes procedures for review of
recoverability, and measurement of impairment, if necessary, of long-lived
assets and certain identifiable intangibles held and used by an entity. SFAS
No. 121 requires that those assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable based on expected undiscounted cash flows attributable to
that asset. The amount of any impairment is measured as the difference between
the carrying value and the fair value of the impaired asset. As of March 31,
2000, we believe that there has not been any impairment of our long-lived assets
or other identifiable intangibles.
STRATEGIC INVESTMENTS
During fiscal 2000, we entered into a strategic relationship with Goldmine
Software Corporation ("Goldmine"), a developer of service desk and customer
relationship management software, to collaborate on sales and distribution
efforts and in the development of marketing and software content. As part of the
agreement, we invested approximately $74.5 million of our Common Stock in
exchange for approximately a 10% ownership of Goldmine, subsequent to our
investment. Our investment in Goldmine is being accounted for using the cost
method.
During fiscal 2000, we entered into a strategic relationship with
SupplyAccess, Inc. ("SupplyAccess"), a business-to-business electronic
marketplace provider for information technology equipment, to collaborate on the
sales and distribution efforts surrounding the information technology equipment
procurement market. As part of the agreement, we invested approximately
$9.1 million of our Common Stock in exchange for approximately an 18% ownership
of SupplyAccess, subsequent to our investment. Our investment in SupplyAccess is
being accounted for using the cost method.
In addition, we have made several other strategic investments for aggregate
consideration of approximately $11.3 million during fiscal 2000, all of which
are being accounted for using the cost method.
Many of our investments are in companies whose operations are not yet
sufficient to establish them as profitable concerns. Adverse changes in market
conditions or poor operating results of underlying investments could result in
losses or an inability to recover the carrying value of our investments.
INTANGIBLE ASSETS
Intangible assets are comprised of purchase price in excess of identifiable
assets associated with our acquired businesses and purchased technology.
Intangible assets are carried at cost less accumulated amortization, which is
being amortized on a straight-line basis over generally five years.
CAPITALIZED COMPUTER SOFTWARE
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", software development costs are capitalized from the time the
product's technological feasibility has been established until the product is
released for sale to the general public. During the three years in the period
ended March 31, 2000, no software
F-9
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
development costs were capitalized as the costs incurred between achieving
technological feasibility and product release were minimal. Research and
development costs, including the design of product enhancements, are expensed as
incurred.
FOREIGN CURRENCY TRANSLATION AND RISK MANAGEMENT
Assets and liabilities of our foreign operations are translated into United
States dollars at the exchange rate in effect at the balance sheet date, and
revenue and expenses are translated at the average exchange rate for the period.
Translation gains or losses of our foreign subsidiaries are not included in
operations but are reported as other comprehensive income. The functional
currency of those subsidiaries is the primary currency in which the subsidiary
operates. Gains and losses on transactions in denominations other than the
functional currency of our foreign operations, while not significant in amount,
are included in the results of operations.
We enter into forward exchange contracts of approximately one month in
length to minimize the short-term impact of foreign currency fluctuations on
assets and liabilities denominated in currencies other than the functional
currency of the reporting entity. All foreign exchange forward contracts are
designated and effective as a hedge and are inversely correlated to the hedged
item as required by generally accepted accounting principles.
Gains and losses on the contracts are included in other income and offset
foreign exchange gains or losses from the revaluation of intercompany balances
or other current assets and liabilities denominated in currencies other than the
functional currency of the reporting entity.
INCOME TAXES
Deferred taxes are provided for utilizing the liability method as prescribed
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," whereby deferred tax assets are recognized for deductible temporary
differences and operating loss carryforwards, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. Deferred tax assets are
reduced by a valuation allowance when, in our opinion, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
COMPUTATION OF NET LOSS PER SHARE
Our computation of net loss per share is performed in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"). SFAS No. 128 requires companies to compute net income
(loss) per share under two different methods, basic and diluted per share data
for all periods for which an income statement is presented. Basic earnings per
share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding during the period. Potential dilutive common shares
are calculated using the treasury stock method and represent incremental shares
issuable upon exercise of our outstanding stock options. For the years ended
March 31, 2000, 1999, and 1998, the diluted loss per share calculation excludes
the effect of outstanding stock options as inclusion would be anti-dilutive.
F-10
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK SPLIT
On January 20, 2000, our board of directors declared a two-for-one stock
split of our Common Stock, effected in the form of a stock dividend.
Stockholders of record as of the close of business on February 4, 2000 were
issued a certificate representing one additional share of our Common Stock for
each share of Common Stock held on the record date. All stock related data in
the consolidated financial statements and related notes reflect this stock split
for all periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). This statement changes the previous
accounting definition of derivative--which focused on freestanding contracts
such as options and forwards (including futures and swaps)--expanding it to
include embedded derivatives and many commodity contracts. Under the statement,
every derivative is recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in a
derivative's fair value be recognized currently in operations unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. We do not anticipate that the adoption of this amendment will have a
material impact on our financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101, as amended,
is effective no later than the second calendar quarter of fiscal 2001. We are in
the process of evaluating the potential impact of SAB No. 101, but we anticipate
that the impact to our consolidated financial statements, if any, will be
insignificant.
2. ACQUISITIONS
In September 1997, we completed the acquisition of all of the outstanding
stock of Apsylog, a developer of decision software solutions designed for asset
management. The consideration given for the stock of Apsylog included
approximately 7,664,000 shares of our Common Stock valued at a total purchase
price of $38.6 million, including merger costs and assumed liabilities.
On July 30, 1998, we completed the acquisition of Innovative Tech
Systems, Inc. ("Innovative"), a developer of facilities infrastructure
management software. This acquisition was structured as a tax-free
stock-for-stock exchange resulting in the issuance of approximately 11,837,000
shares of our Common Stock for all outstanding shares of Innovative Common Stock
valued at a total purchase price of $85.9 million, including merger costs and
assumed liabilities.
On September 23, 1998, we completed the acquisition of certain technology
and other assets and liabilities from International Software Solutions and
related persons and entities (collectively "ISS"), a developer of remote
management software. We issued approximately 1,569,000 shares of our Common
Stock in exchange for these assets valued at a total purchase price, including
merger costs, of $15.6 million.
On March 2, 1999, we completed the acquisition of Prototype, Inc.
("Prototype"), a developer of fleet infrastructure management software. We
issued approximately 1,522,000 shares of our Common Stock and $1.1 million in
cash for all of the outstanding shares of Prototype. The purchase price,
including merger costs and assumed liabilities, totaled $25.9 million.
F-11
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
On April 2, 1999, we completed the acquisition of F.Print UK Ltd.
("FPrint"), a developer of desktop inventory and asset discovery software. We
issued approximately 1,508,000 shares of our Common Stock and $1.3 million in
cash for all the outstanding shares of FPrint for a total purchase price,
including merger costs, of $26.2 million.
On September 29, 1999, we completed the acquisition of Knowlix Corporation
("Knowlix"), a developer of knowledge management software. We issued
approximately 706,000 shares of our Common Stock for all the outstanding shares
of Knowlix for a total purchase price, including merger costs, of
$17.8 million.
On March 23, 2000, we completed the acquisition of Telco Research
Corporation Limited ("Telco Research"), a developer of telephony infrastructure
management software and related ancillary products. We issued approximately
2,563,000 shares of our Common Stock for all of the outstanding shares of Telco
Research for a total purchase price, including merger costs, of $123.9 million.
On March 24, 2000, we completed the acquisition of Barnhill Management
Corporation ("Barnhill"), a provider of infrastructure management system
solutions and related professional services. We issued approximately 273,000
shares of our Common Stock for all of the outstanding shares of Barnhill for a
total purchase price, including merger costs and assumed liabilities, of
$32.2 million.
ACCOUNTING TREATMENT OF ACQUISITIONS
All of the transactions above were 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 independent appraisals, at the date of acquisition and the results
of operations for each of the acquisitions have been included in the financial
statements for the periods subsequent to acquisition.
F-12
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
We allocated each purchase price between acquired in-process research and
development, the fair value of the net assets acquired, and the purchase price
in excess of the acquired assets. The allocations of values are as follows (in
thousands):
ACQUIRED
IN-PROCESS PURCHASE PRICE IN
RESEARCH AND FAIR VALUE OF NET EXCESS OF THE
DEVELOPMENT ASSETS ACQUIRED ACQUIRED ASSETS TOTAL
------------ ----------------- ----------------- --------
FISCAL 2000
Fprint........................... $ 4,194 $ -- $ 22,018 $ 26,212
Knowlix.......................... 2,852 -- 14,973 17,825
Barnhill......................... -- -- 32,192 32,192
Telco Research................... 17,459 7,520 98,934 123,913
------- ------ -------- --------
$24,505 $7,520 $168,117 $200,142
======= ====== ======== ========
FISCAL 1999
Innovative....................... $18,907 $ -- $ 67,032 $ 85,939
ISS.............................. 2,959 -- 12,614 15,573
Prototype........................ 4,139 -- 21,728 25,867
------- ------ -------- --------
$26,005 $ -- $101,374 $127,379
======= ====== ======== ========
FISCAL 1998
Apsylog.......................... $ 6,955 $ -- $ 31,684 $ 38,639
------- ------ -------- --------
$ 6,955 $ -- $ 31,684 $ 38,639
======= ====== ======== ========
The value of each 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 the companies
acquired prior to the close of each acquisition.
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. We currently
believe that actual results have been consistent with forecasts with respect to
acquired in-process revenues. 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
F-13
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
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 have completed many of the original research and development projects in
accordance with our plans. We continue to work toward the completion of other
projects. The majority of the projects are on schedule, but delays may occur due
to changes in technological and market requirements for our products. The risks
associated with these efforts are still considered high and no assurance can be
made that any upcoming products will meet with market acceptance. Delays in the
introduction of certain products may adversely affect our revenues and earnings
in future quarters.
During fiscal years 2000, 1999, and 1998 we expended $7.8 million, $11.2
million, and $2.4 million, respectively, for acquisition costs and liabilities
assumed related to the acquisitions detailed above. These expenditures relate to
advisory fees (investment bankers, attorneys, accountants and other consultant
fees); employee severance and relocation costs; costs associated with the
reduction of duplicate facilities, equipment and efforts; and other merger
related costs (e.g. filing fees, travel costs, etc.).
Acquisition related liabilities of $3.4 million at March 31, 1999 related
principally to severance, relocation and lease termination costs. These amounts
were expended in fiscal 2000 in amounts approximating the recorded liability.
With respect to the acquisition related liabilities at March 31, 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 these 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 $15.1
million in merger related costs comprised principally of the following
components (in thousands):
ESTIMATED LIABILITY
-------------------
Estimated advisory fees..................................... 3,650
Employee severance and relocation........................... 5,854
Duplicative facilities, equipment and efforts............... 4,991
Other merger related costs.................................. 629
-------
$15,124
=======
This accrual represents our best estimate, based on information available as
of March 31, 2000, of the identifiable and quantifiable charges that we may
incur as a result of the acquisition and integration plans, however these
estimates may change. Any changes in the estimates during the next year will
increase or decrease goodwill as appropriate. We believe substantially all of
the above costs will be paid for within the next year.
In addition to the costs included in the accrual for our acquisition and
integration plans we will incur other incremental costs as a direct result of
our integration efforts. These costs will be accounted for as incurred in future
periods. To the extent these costs become significant they could have a material
adverse effect on our future operating results.
F-14
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
PRO FORMA FINANCIAL INFORMATION
The following table presents the unaudited pro forma results assuming we had
acquired each of Telco Research and Innovative at the beginning of fiscal years
2000 and 1999, as applicable. Net loss and diluted loss per share amounts have
been adjusted to exclude acquired in process research and development write-offs
of $24.5 million and $26.0 million in fiscal years 2000 and 1999, respectively
and to include goodwill amortization of $51.9 million and $35.2 million in
fiscal years 2000 and 1999, respectively. This information may not necessarily
be indicative of our future combined results.
The unaudited pro forma results of operations exclude the results of
operations of certain acquisitions consummated during fiscal 2000 and 1999. The
inclusion of the results associated with these acquisitions would not materially
affect the pro forma financial information presented below.
In thousands, except per share data:
PRO FORMA RESULTS
FOR THE YEARS ENDED
MARCH 31,
-------------------
(UNAUDITED)
2000 1999
-------- --------
Revenues................................................ $283,911 $174,409
Net loss................................................ $(40,874) $(52,014)
Basic and diluted loss per share........................ $ (0.40) $ (0.58)
3. SENIOR CREDIT FACILITY
In July 1999, we entered into a $20 million senior credit facility for a
term of three years with a syndicate of financial institutions. Any borrowings
under the credit facility are secured by substantially all assets and shall bear
interest at a rate equal to LIBOR plus the applicable margin rate. Proceeds of
the senior credit facility may be used for general corporate purposes, including
acquisitions.
4. BALANCE SHEET COMPONENTS
Other current assets consists of the following (in thousands):
MARCH 31,
-------------------
2000 1999
-------- --------
Prepaid expenses.......................................... $ 8,505 $ 4,928
Other..................................................... 10,297 5,442
------- -------
$18,802 $10,370
======= =======
Property and equipment consists of the following (in thousands):
MARCH 31,
-------------------
2000 1999
-------- --------
Furniture and equipment................................. $ 44,197 $ 23,075
Leasehold improvements.................................. 8,830 5,035
-------- --------
53,027 28,110
Less accumulated depreciation........................... (23,490) (12,215)
-------- --------
$ 29,537 $ 15,895
======== ========
F-15
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BALANCE SHEET COMPONENTS (CONTINUED)
Intangible assets, net and other consists of the following (in thousands):
MARCH 31,
-------------------
2000 1999
-------- --------
Strategic investments................................... $ 94,852 --
Intangible assets and purchased technology.............. 323,957 133,550
Other................................................... 4,740 788
-------- --------
423,549 134,338
Less accumulated amortization........................... (55,933) (21,180)
-------- --------
$367,616 $113,158
======== ========
Accrued expenses consists of the following (in thousands):
MARCH 31,
-------------------
2000 1999
-------- --------
Employee compensation..................................... $ 6,146 $ 7,370
Commissions............................................... 11,673 6,066
Taxes..................................................... 8,340 5,030
Acquisition related liabilities........................... 15,124 3,379
Other..................................................... 7,781 4,615
------- -------
$49,064 $26,460
======= =======
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
MARCH 31,
-------------------
2000 1999
-------- --------
Note payable to lessor. Unsecured; interest at 8%. Monthly
Payments of principal and interest of $4 through November
2003...................................................... $ 158 $194
Note payable to lessor. Unsecured; interest at 8%. Monthly
Payments of principal and interest of $4 through September
2003...................................................... 129 --
Note payable to shareholders of an acquired company.
Secured; interest at 7%. Specified Payments of principal
and interest through December 2001........................ 700 --
Note payable to third party. Unsecured; interest at 9%.
Monthly payments of principal and interest of $3 through
April 2004................................................ 180 --
French Government Agency loans and other.................... 164 455
------ ----
1,331 649
Less current portion........................................ (74) (55)
------ ----
$1,257 $594
====== ====
F-16
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
Scheduled fiscal year principal payments on long-term debt due as of
March 31, 2000 are as follows (in thousands):
FUTURE SCHEDULED
PRINCIPAL PAYMENTS
------------------
2001........................................................ $ 74
2002........................................................ 1,015
2003........................................................ 134
2004........................................................ 106
2005........................................................ 2
------
$1,331
======
6. INCOME TAXES
The geographic distribution of income (loss) before taxes is as follows (in
thousands):
MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
Domestic........................................ $(23,275) $(21,041) $ (772)
Foreign......................................... 14,657 7,966 5,514
-------- -------- ------
Total........................................... $ (8,618) $(13,075) $4,742
======== ======== ======
The income tax provision (benefit) consisted of the following (in
thousands):
MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
Current
Federal......................................... $ 9,670 $ 5,304 $5,197
State........................................... 925 792 1,017
Foreign......................................... 4,083 2,700 --
------- ------- ------
Total current..................................... 14,678 8,796 6,214
------- ------- ------
Deferred
Federal......................................... 1,265 1,262 (728)
State........................................... 331 188 (128)
Foreign......................................... 178 49 --
------- ------- ------
Total deferred.................................... 1,774 1,499 (856)
------- ------- ------
Total provision................................... $16,452 $10,295 $5,358
======= ======= ======
We realize an income tax benefit from disqualifying dispositions of certain
stock options. This benefit results in a decrease in current income taxes
payable and an increase in additional paid-in capital at the time the benefit is
realized. The amount of the benefit realized for the years ended March 31, 2000,
1999, and 1998 was $10,595,000, $6,096,000 and $7,905,000, respectively.
F-17
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
A reconciliation of expected income taxes using the statutory federal income
tax rate to the effective income tax provision is as follows (in thousands):
MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
Federal tax provision (benefit) at the statutory
rate............................................ $(3,016) $(4,446) $1,612
State tax provision (benefit), net of federal
effect.......................................... (345) (654) 237
Effect of foreign earnings taxed at different
rates........................................... (437) (912) --
Foreign sales corporation......................... (985) -- --
Tax credits....................................... (1,184) (860) --
Non-deductible acquired R&D and amortization of
intangibles..................................... 21,792 14,023 3,943
Other............................................. 78 1 16
Change in valuation allowance..................... 549 3,143 (449)
------- ------- ------
Total income tax provision........................ $16,452 $10,295 $5,359
======= ======= ======
The amounts stated in the table above for the years ended March 31, 2000,
1999, and 1998 are based upon income before taxes which include expenses (a
significant portion of which are not tax deductible) of $59,258,000,
$44,017,000, and $10,123,000, respectively, related to the acquisition of
in-process research and development and amortization of purchased intangibles.
Excluding these acquisition-related expenses, the effective tax rate for the
years ended March 31, 2000, 1999, and 1998 was 32.5, 33.3 and 37.0 percent,
respectively.
U.S. income taxes and foreign withholding taxes were not provided for on a
cumulative total of approximately $14.7 million of undistributed earnings for
certain non-U.S. subsidiaries. We intend to reinvest these earnings indefinitely
in operations outside of the U.S.
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows (in thousands):
MARCH 31,
-------------------
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforwards........................ $ 1,197 $ 3,148
Intangible Assets....................................... 5,192 3,143
Deferred maintenance revenue............................ 1,576 2,752
Other................................................... 726 1,030
------- -------
Total gross deferred tax assets........................... 8,691 10,073
Deferred tax liabilities:
Depreciation............................................ (167) (324)
Net deferred tax asset prior to valuation allowance....... 8,524 9,749
Valuation allowance....................................... (4,500) (3,951)
------- -------
Net deferred tax assets................................... $ 4,024 $ 5,798
======= =======
F-18
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
As of March 31, 2000, we had total net operating loss carryforwards of
approximately $66.8 million for domestic federal income tax reporting purposes,
which expire beginning in 2012. Approximately $63.7 million of the net operating
loss carryforwards (excluded from the table above) relate to disqualifying
dispositions of stock options which will result in an increase in additional
paid-in capital and a decrease in income taxes payable at such time that the tax
benefit is realized. In certain circumstances, as specified in the Internal
Revenue Code, an ownership change of fifty percent or more by certain
combinations of our stockholders during any three year period could result in an
annual limitation on our ability to utilize portions of our domestic net
operating loss carryforwards.
A valuation allowance in the amount set forth in the table above has been
recorded to properly reserve for a portion of the deferred tax assets due to
uncertainties surrounding their realization. We evaluate on a quarterly basis
the recoverability of the deferred tax assets and the amount of the valuation
allowance. At such time as it is determined that it is more likely than not that
the deferred tax assets are realizable, the valuation allowance will be reduced.
7. COMMITMENTS AND CONTINGENCIES
We lease certain buildings and equipment under noncancelable operating lease
agreements. The leases generally require us to pay all execution costs such as
taxes, insurance and maintenance related to the leased assets. Certain of the
leases contain provisions for periodic rate escalations to reflect
cost-of-living increases. Rent expense for such leases totaled approximately
$9.1 million, $4.6 million, and $2.6 million in fiscal years 2000, 1999, and
1998, respectively.
Future minimum lease payments under noncancelable operating leases, at
March 31, 2000 are as follows (in thousands):
OPERATING
LEASES
---------
2001........................................................ $ 14,257
2002........................................................ 18,362
2003........................................................ 18,578
2004........................................................ 17,291
2005........................................................ 13,535
Thereafter.................................................. 105,746
--------
Total minimum lease payments................................ $187,769
========
We sublease office space at our corporate headquarters to an affiliated
company. The term of the sublease is from June 1996 to October 2003 and requires
monthly rental payments of approximately $17,000.
On June 9, 1999, we entered into a series of leases covering up to
approximately 540,000 square feet of office space in San Diego, including an
option on approximately 118,000 square feet of office space. We have moved into
a portion of the completed new facilities with the remaining uncompleted space
currently scheduled for completion over the next four years. The future minimum
lease commitments detailed above contain our future commitments associated with
these leases. To the extent we do not require all of the space under these
leases, we have the right to sublet excess space.
F-19
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
We pay commissions to employees who have authored certain of our products
based on a percentage of the respective product's sales. Commissions paid under
such agreements are included in research and development expense in the
accompanying consolidated statements of operations and were approximately,
$3.6 million, $3.2 million and $1.7 million for fiscal years 2000, 1999, and
1998, respectively.
On March 31, 2000, we had outstanding forward contracts to buy foreign
currencies totaling $19.6 million U.S. Dollars. Additionally, we had outstanding
forward contracts to sell foreign currencies totaling $11.8 million U.S.
Dollars. These hedging exposures are consistent with transaction flows with
respect to our international operations. These contracts typically expire within
one month.
From time to time we are involved in various legal proceedings and claims
arising in the ordinary course of business, none of which, in our opinion, is
expected to have a material adverse effect on our consolidated financial
position or results of operations.
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
We have authorized 5,000,000, $0.001 par value, undesignated preferred
shares, none of which were issued or outstanding at March 31, 2000 and 1999. Our
board of directors has the authority to issue the preferred stock in one or more
series, and to fix the price, rights, preferences, privileges, and restrictions,
including dividend rights and rates, conversion and voting rights, and
redemption terms and pricing without any further vote or action by our
shareholders.
STOCK OPTIONS
We have five stock option plans, the 1990 Nonqualified Stock Option Plan
("1990 Plan"), the 1991 Nonqualified Stock Option Plan ("1991 Plan"), the 1994
Stock Option Plan ("1994 Plan"), the 1997 Director Option Plan (the "Director
Plan") and the 1999 Nonqualified Stock Option Plan ("the 1999 Plan").
We may no longer grant options under the 1990 and 1991 Plans. We may grant
up to 32,553,000, 600,000, and 2,000,000 options under the 1994 Plan, Director
Plan and the 1999 Plan, respectively. All options granted pursuant to the plans
have an exercise price determined by our board of directors on a per-grant
basis, which may not be less than fair market value on the date of grant. Option
grants under all five stock option plans generally vest over four years. During
December 1996, we recorded $631,000 in deferred compensation related to the
grant of 740,000 options. This deferred compensation is being amortized on a
straight-line basis to expense over the options' four year vesting period.
F-20
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes our five stock option plans at March 31,
2000, 1999, and 1998 as well as changes during the periods then ended.
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE PER SHARE
---------------- ------------------------
(IN THOUSANDS)
Balances, March 31, 1997................... 16,213.1 $ 0.52
Options granted............................ 6,514.9 3.40
Options exercised.......................... (7,290.6) 0.39
Options canceled........................... (1,142.5) 3.05
-------- ------
Balances, March 31, 1998................... 14,294.9 1.70
Options granted............................ 14,067.4 6.57
Options exercised.......................... (7,201.5) 0.96
Options canceled........................... (1,715.6) 1.52
-------- ------
Balances, March 31, 1999................... 19,445.2 5.52
Options granted............................ 5,989.6 19.01
Options exercised.......................... (4,791.0) 4.22
Options canceled........................... (776.1) 8.35
-------- ------
Balances, March 31, 2000................... 19,867.7 $ 9.79
======== ======
As of March 31, 2000, 1999 and 1998 exercisable options outstanding were
4,064,000, 2,329,000 and 4,660,000, respectively, with weighted average exercise
prices of $5.21, $2.00, and $0.68, respectively.
We have adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). Accordingly, we continue to account for stock options using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25.
Pursuant to SFAS No. 123, we are required to disclose the pro forma effects
on net income (loss) and net income (loss) per share data as if we had elected
to use the fair value approach to account for all of our employee stock-based
compensation plans. Had compensation cost for our plans been determined
F-21
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
consistent with the fair value approach enumerated in SFAS No. 123, our net
income (loss) and net income (loss) per share for the years ended March 31,
2000, 1999, and 1998 would have been as indicated below:
In thousands, except per share data:
FOR THE YEARS ENDED MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
Pro forma net loss:
As reported.................................. $(25,070) $(23,370) $ (616)
Pro forma expense effect of SFAS No. 123..... (15,216) (5,546) (1,300)
-------- -------- --------
Pro forma after giving effect to SFAS No.
123........................................ $(40,286) $(28,916) $ (1,916)
======== ======== ========
Basic and diluted pro forma net loss per share
As reported.................................. $ (0.24) $ (0.27) $ (0.01)
Pro forma expense effect of SFAS No. 123..... (0.15) (0.06) (0.02)
-------- -------- --------
Pro forma after giving effect to SFAS No.
123........................................ $ (0.39) $ (0.33) $ (0.03)
======== ======== ========
The fair value of options was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for option grants:
FOR THE YEARS ENDED MARCH 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
Risk-free interest rate....................... 6.38% 5.65% 6.11%
Expected life (in years)...................... 4 4 4
Expected volatility........................... 89.03% 78.92% 63.06%
RESTRICTED STOCK
During fiscal 1996, we granted 2,400,000 shares of nontransferable Common
Stock under restricted stock agreements to certain employees. These shares were
valued at a fair value of $0.59. The restrictions lapse on the shares ten years
from the date of grant or, if we achieve certain objectives for earnings growth
from fiscal 1997 through fiscal 2002, or, on a change in control of PSI. The
unearned portion of restricted stock is included in stockholders' equity and is
being amortized as compensation expense on a straight-line basis over the
vesting period. During fiscal 1998, 808,000 of the above shares were canceled.
During fiscal year 1998, we granted an additional 200,000 shares of
nontransferable Common Stock under restricted stock agreements valued at $3.16.
These shares vest over a six-year term and deferred compensation of $631,000 is
currently being amortized as compensation expense over this term.
1997 EMPLOYEE STOCK PURCHASE PLAN
In February 1997, our board of directors adopted, and the stockholders
approved, the 1997 Employee Stock Purchase Plan ("Purchase Plan"). We have
reserved 1,000,000 shares of common stock for issuance under the Purchase Plan.
The Purchase Plan enables eligible employees to purchase common stock at 85% of
the lower of the fair market value of the Company's common stock on the first or
last day of each option
F-22
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
purchase period, as defined. During fiscal years 2000, 1999, and 1998 we issued
100,000, 124,000, and 140,000 shares, respectively, pursuant to the Purchase
Plan.
DIRECTOR OPTION PLAN
In February 1997, our board of directors adopted, and the stockholders
approved, the 1997 Director Option Plan ("Director Plan"). We have reserved
600,000 shares of our Common Stock for issuance under the Director Plan. The
Director Plan provides each new eligible outside PSI director an initial option
grant to purchase 50,000 shares of our Common Stock upon election to our board
of directors. In addition, commencing with the 1998 Annual Stockholders meeting,
such eligible outside directors are granted an option to purchase 10,000 shares
of our Common Stock at each annual meeting. The exercise price per share of all
options granted under the Director Plan will be equal to the fair market value
of our Common Stock on the date of grant. Options may be granted for periods up
to ten years and generally vest over four years. No grants were made under the
Director Plan during fiscal 1998. We granted 50,000 and 100,000 shares of our
Common Stock under the Director Plan in fiscal 2000 and 1999, respectively.
9. EMPLOYEE BENEFIT PLAN
We have a 401(k) Employee Savings Plan ("Plan") covering substantially all
employees. The Plan provides for savings and pension benefits and is subject to
the provisions of the Employee Retirement Income Security Act of 1974. Those
employees who participate in the Plan are entitled to make contributions of up
to 20 percent of their compensation, limited by IRS statutory contribution
limits. In addition to employee contributions, we may also contribute to the
Plan by matching 25% of employee contributions. Amounts we contributed to the
Employee Savings Plan during fiscal 2000, 1999, and 1998, were $905,000,
$467,000, and $200,000, respectively.
10. GEOGRAPHIC OPERATIONS
We operate exclusively in the Infrastructure Resource Management software
industry. A summary of our operations by geographic area is presented below:
NORTH EUROPE &
AMERICA OTHER CONSOLIDATED
-------- -------- ------------
Year ended March 31, 2000
Revenues.................................... $149,582 $103,718 $253,300
Identifiable assets......................... $503,237 $ 20,193 $523,430
Year ended March 31, 1999
Revenues.................................... $ 88,649 $ 49,414 $138,063
Identifiable assets......................... $179,376 $ 28,337 $207,713
Year ended March 31, 1998
Revenues.................................... $ 39,512 $ 22,365 $ 61,877
Identifiable assets......................... $ 72,434 $ 11,134 $ 83,568
Amounts included in Europe and Other above relate principally to our European
operations.
F-23
PEREGRINE SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY INFORMATION (UNAUDITED)
The following unaudited quarterly financial information includes, in our
opinion, all normal and recurring adjustments (in thousands) necessary to fairly
state our consolidated results of operations and related information for the
periods presented.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
FISCAL 2000
License revenues.................................... $ 32,092 $ 37,102 $ 46,524 $ 52,749
Services revenues................................... 19,513 20,705 21,020 23,595
Total costs and expenses............................ (53,093) (56,006) (63,233) (89,624)
-------- -------- -------- --------
Income (loss) from operations....................... (1,488) 1,801 4,311 (13,280)
Interest income (expense) and other................. 86 7 5 (60)
Income tax expense.................................. 3,439 4,042 4,183 4,788
-------- -------- -------- --------
Net income (loss)................................... $ (4,841) $ (2,234) $ 133 $(18,128)
======== ======== ======== ========
Basic income (loss) per share....................... $ (0.05) $ (0.02) $ -- $ (0.17)
======== ======== ======== ========
Diluted income (loss) per share..................... $ (0.05) $ (0.02) $ -- $ (0.17)
======== ======== ======== ========
FISCAL 1999
License revenues.................................... $ 13,882 $ 17,375 $ 26,064 $ 30,041
Services revenues................................... 7,868 12,279 14,485 16,069
Total costs and expenses............................ (18,432) (49,960) (37,051) (46,359)
-------- -------- -------- --------
Income (loss) from operations....................... 3,318 (20,306) 3,498 (249)
Interest income (expense) and other................. 260 193 100 111
Income tax expense.................................. 1,742 2,209 2,969 3,375
-------- -------- -------- --------
Net income (loss)................................... $ 1,836 $(22,322) $ 629 $ (3,513)
======== ======== ======== ========
Basic income (loss) per share....................... $ 0.03 $ (0.26) $ 0.01 $ (0.04)
======== ======== ======== ========
Diluted income (loss) per share..................... $ 0.02 $ (0.26) $ 0.01 $ (0.04)
======== ======== ======== ========
12. SUBSEQUENT EVENT
On April 5, 2000 we entered into an Agreement and Plan of Merger and
Reorganization with Harbinger Corporation ("Harbinger"), a Georgia corporation,
in which each outstanding share of Harbinger common stock will be converted into
the right to receive 0.75 of a share of our Common Stock (the "Merger"), or
approximately 36 million shares, inclusive of approximately 5 million shares
associated with Harbinger's outstanding stock options.
The Merger is intended to constitute a reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended, and is to be accounted for as
a purchase transaction. Consummation of the Merger is subject to various
conditions, including, among other things, receipt of the necessary approvals of
our stockholders, the stockholders of Harbinger and certain regulatory agencies.
F-24
EXHIBIT INDEX
2.1 (a) Agreement and Plan of Merger and Reorganization by and among
Peregrine Systems, Inc., Soda Acquisition Corporation and
Harbinger Corporation, dated as of April 5, 2000.
3.1 (c) Amended and Restated Certificate of Incorporation as filed
with the Secretary of the State of Delaware on February 11,
1997.
3.2 (c) Bylaws, as amended.
4.1 (c) Specimen Common Stock Certificate.
10.1 (c) Nonqualified Stock Option Plan, as amended, and forms of
Stock Option Agreement and Stock Buy-Sell Agreement.
10.2 (c) Nonqualified Stock Option Plan, as amended, and forms of
Stock Option Agreement and Stock Buy-Sell Agreement.
10.3(a) (f) 1994 Stock Option Plan, as amended through July 1998.
10.3(b) (f) 1995 Stock Option Plan for French Employees (a supplement to
the 1994 Stock Option Plan).
10.4 (d) Form of Stock Option Agreement under the 1994 Stock Option
Plan, as amended through February 6, 1997.
10.5 (d) 1997 Employee Stock Purchase Plan and forms of participation
agreement thereunder.
10.6 (d) 1997 Director Option Plan.
10.7 (c) Form of Indemnification Agreement for directors and
officers.
10.8 (a) Credit Agreement dated as of July 30, 1999 by and between
the Registrant and Bank of America, N.A., Banc of America
Securities LLC and Bank Boston, N.A.
10.9 (c) Sublease between the Registrant and JMI Services, Inc.
10.10 (c) Lease between the Registrant and the Mutual Life Insurance
Company of New York dated October 26, 1994, as amended in
August 1995, and Notifications of Assignment dated June 14,
1996 and December 9, 1996 for the Registrant's headquarters
at 12670 High Bluff Drive, San Diego, CA.
10.11 (c) Lease between the Registrant and the Mutual Life Insurance
Company of New York dated October 26, 1994, as amended in
August 1995, and Notification of Assignment dated December
9, 1996 for the Registrant's headquarters at 12680 High
Bluff Drive, San Diego, CA.
10.14 (c) XVT Stock Option Agreement dated January 18, 1995 between
the Registrant and Christopher Cole, as amended on October
3, 1996.
10.16 (d) Restricted Stock Agreement dated November 1, 1995 between
the Registrant and David Farley.
10.17 (c) Stock Option Agreement dated as of December 7, 1990 between
the Registrant and Christopher Cole, as amended on October
26, 1995.
10.18 (c) Form of Stock Option Agreement under 1995 Stock Option Plan
for French Employees.
10.19 (c) Form of Stock Option Agreement under 1997 Director Option
Plan.
10.22 (b) Executive Officer Incentive Program and Form of Restricted
Stock Agreement.
10.24 (g) Lease between the Registrant and KR-Carmel Partners LLC
dated June 9, 1999 for Building No. 1 of the Registrant's
future campus in San Diego, CA.
10.25 (g) Lease between the Registrant and KR-Carmel Partners LLC
dated June 9, 1999 for Building No. 2 of the Registrant's
future campus in San Diego, CA.
10.26 (g) Lease between the Registrant and KR-Carmel Partners LLC
dated June 9, 1999 for Building No. 3 of the Registrant's
future campus in San Diego, CA.
10.27 (g) Lease between the Registrant and KR-Carmel Partners LLC
dated June 9, 1999 for Building No. 5 of the Registrant's
future campus in San Diego, CA.
10.28 (g) Lease between the Registrant and KR-Carmel Partners LLC
dated June 9, 1999 for Building No. 4 of the Registrant's
future campus in San Diego, CA.
10.29 (a) 1999 Nonstatutory Stock Option Plan.
21.1 (a) Peregrine Systems, Inc. Subsidiaries.
23.1 (a) Consent of Arthur Andersen LLP, Independent Public
Accountants (relating to financial statements for Peregrine
Systems).
27.1 (a) Financial Data Schedule for Peregrine Systems, Inc.
- ------------------------
(a) Filed herewith.
(b) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration Statement
333-39891), which the Securities and Exchange Commission declared effective
on November 19, 1997.
(c) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration Statement
333-21483), which the Securities and Exchange Commission declared effective
on April 8, 1997.
(d) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Annual Report on Form 10-K for the year ended March 31,
1997.
(e) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(f) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-8 (Registration Statement
333-65541) which became effective upon its filing on October 9, 1998.
(g) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Annual Report on Form 10-K for the year ended March 31,
1999.