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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001,
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
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PEREGRINE SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3773312
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3611 VALLEY CENTRE DRIVE
SAN DIEGO, CALIFORNIA 92130
(Address of principal executive offices, including zip code)
(858) 481-5000
(Registrant's Telephone Number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001
PAR VALUE
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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
Peregrine Systems, Inc., based on the closing sale price of Peregrine's common
stock on March 31, 2001, as reported on the Nasdaq National Market, was
approximately $3.1 billion. Shares of common stock held by each executive
officer and director and by each person who may be deemed to be an affiliate of
Peregrine have been excluded from this computation. The determination of
affiliate status for this purpose is not necessarily a conclusive determination
for other purposes. As of March 31, 2001, Peregrine had 160,359,096 shares of
its common stock, $0.001 par value, issued and outstanding.
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PEREGRINE SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I........................................................................ 1
ITEM 1. Business.................................................... 1
ITEM 2. Properties.................................................. 12
ITEM 3. Legal Proceedings........................................... 13
ITEM 4. Submission of Matters to a Vote of Security Holders......... 13
PART II....................................................................... 14
ITEM 5. Market for Peregrine's Common Equity and Related Stockholder
Matters..................................................... 14
ITEM 6. Selected Consolidated Financial Data........................ 15
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 40
ITEM 8. Financial Statements and Supplementary Data................. 40
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 40
PART III...................................................................... 41
ITEM 10. Directors and Executive Officers of Peregrine............... 41
ITEM 11. Executive Compensation...................................... 45
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 49
ITEM 13. Certain Relationships And Related Transactions.............. 50
PART IV....................................................................... 51
ITEM 14. Financial Statements, Financial Statement Schedule,
Exhibits, and Reports On Form 8-K........................... 51
SIGNATURES............................................................ 54
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 OTHER THINGS, STATEMENTS
CONCERNING OUR FUTURE OPERATIONS, FINANCIAL CONDITION AND PROSPECTS, AND
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 OUR
HISTORICAL RESULTS OR CURRENTLY ANTICIPATED RESULTS. INVESTORS SHOULD CAREFULLY
REVIEW THE INFORMATION CONTAINED UNDER THE CAPTION "FACTORS THAT MAY AFFECT OUR
BUSINESS, FINANCIAL CONDITION, AND FUTURE OPERATING RESULTS," BEGINNING ON PAGE
16 OF THE SECTION OF THIS REPORT ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT. IN ADDITION, INVESTORS ARE
ENCOURAGED TO REVIEW CAREFULLY THE ADDITIONAL INFORMATION CONTAINED UNDER THE
CAPTION "ADDITIONAL RISKS ASSOCIATED WITH OUR PENDING ACQUISITION OF REMEDY
CORPORATION," BEGINNING ON PAGE 37 OF THIS REPORT.
OVERVIEW
Peregrine is a leading global provider of software and services that are
designed to reduce the frictional cost of doing business for our client's
organizations. We offer products and services to address three principal
domains:
- infrastructure resource management;
- employee relationship management (or self-service); and
- e-commerce technologies and services.
We offer software products, services, and enabling technologies that permit
businesses to eliminate points of friction in their business processes and to
improve their returns on capital and investment in their infrastructure assets
and electronic business investments. Our solutions are intended to make our
customers more competitive in their markets by removing the friction points
associated with three primary business processes:
- life cycle management of infrastructure assets, from the point of
procurement through deployment, use, maintenance, change, and ultimately
disposition;
- employee procurement of the infrastructure required to do their jobs,
including e-procurement, employee self-service, knowledge access, and
reservation of shared assets, such as conference rooms and office space in
remote locations; and
- e-transaction management, which eliminates friction points among buyers,
suppliers, and market places as our customers attempt to transact business
through a global web of connected trading partners.
Peregrine is organized to provide its solutions to customers through three
groups:
- the infrastructure management group, referred to as "IMG";
- the e-markets group, referred to as "EMG"; and
- the integrated solutions group, referred to as "ISG."
Our infrastructure management group provides software, technologies, and
services to optimize and manage the procurement, maintenance, and disposition of
business infrastructure. We believe the
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use of our products can result in more efficient deployment of capital and other
resources and can lower the cost of operating and maintaining organizational
infrastructure. We offer management solutions for diverse categories of business
assets, including technology equipment and systems, telecommunications networks,
corporate vehicle fleets, and physical plant and facilities. Our products offer
complete life cycle management of infrastructure assets. At the beginning of the
cycle, we offer technologies and services that enable buyers and sellers of
infrastructure assets to purchase and sell assets electronically over the
Internet. Once an asset has been made available for automated purchase or lease,
we then automate and facilitate the management and maintenance of the asset as
well as its ultimate disposition. In addition, our employee relationship
management applications offer individual employees direct access to the
resources, help, information, or infrastructure they require.
Our e-markets group provides a suite of business-to-business software
products and services to facilitate the processes of selling and purchasing
direct goods among trading partners. Specifically, our e-markets group focuses
on creating and delivering technology and services that enable e-commerce. We
provide fundamental connection, transformation, cataloging, enterprise
application integration, and business-to-business process integration in order
to remove the frictional costs from the processes of electronic commerce. The
e-markets group provides vertically focused solutions for electronic commerce
that are primarily focused on the automotive, energy, industrial component, and
retail/ distribution industries. We believe that the combination of our
technologies, as well as our hosted network service offerings, can result in
lower costs, higher reliability, and easier use for creating
business-to-business connections using the Internet.
In April 2001, we announced the creation of our integrated solutions group.
We created this group specifically to respond to the requirements of our large,
multinational enterprise customers, whom we believe require integrated and
comprehensive solutions for both infrastructure management and e-transaction
management. The group is intended to leverage the synergies between our
infrastructure management and e-markets groups by working with our large
alliance partners, including some of the world's largest consulting firms,
managed service providers, and system integrators. These partners serve as
important and persuasive "influencers" for large enterprises considering
technology purchases, and the integrated solutions group was created to continue
to create and improve relationships with these partners. The integrated
solutions group has two primary responsibilities within our organization. The
first mission of the integrated solutions group will be to market and sell our
comprehensive product portfolio to our large enterprise customers and strategic
partners in a manner that is most efficient for both Peregrine and its largest
customers. The group's second objective is to sponsor and evolve new business
areas through an internal incubator process. An example of one such incubator
activity currently managed by the integrated solutions group is our recent
introduction of REAL ESTATE PORTFOLIO MANAGER, a web-based technology offered
primarily as a hosted solution to large real estate owners, operators, leasing
companies, and lessors to reduce the frictional costs associated with managing a
host of complex tasks involved in corporate real estate investments.
CORPORATE BACKGROUND
We were incorporated in California in 1981 and reincorporated in Delaware in
1994. Our principal executive offices are located at 3611 Valley Centre Drive,
San Diego, California 92130. Our telephone number at that address is
(858) 481-5000.
INDUSTRY BACKGROUND
Businesses across many industries are facing increasing competitive
pressures to improve their operations by optimizing the management and
procurement of infrastructure assets. In response, businesses are deploying
information technology to gain competitive advantages to more efficiently manage
the life cycle of infrastructure assets.
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We believe that the operational effectiveness of an organization ultimately
depends on the efficient acquisition, management, and divestiture of
infrastructure assets. Threats to infrastructure pose substantial business
risks. Issues addressed in connection with Year 2000 remediation, European
currency conversion, computer viruses, major facilities relocations and changes
in network environments have highlighted for senior business executives and
information technology managers the extent of infrastructure dependency and its
associated risks. In addition, in recent years, companies have focused
substantial resources on creating more efficient and less costly manufacturing,
production, and other core business processes, and we believe that they are now
looking internally to achieve similar cost reductions and efficiencies in
acquiring and maintaining infrastructure assets.
To address these challenges, businesses are increasingly replacing paper or
spreadsheet-based applications with single, integrated software solutions to
optimize the workflow associated with the processes to acquire, deploy,
maintain, operate, and divest infrastructure assets efficiently throughout their
life cycle. To further reduce infrastructure costs, businesses are increasingly
seeking web-based applications to facilitate the procurement of complex assets.
These assets can range from computers to manufacturing machinery to
transportation equipment that are mission-critical to core business operations.
The Internet provides a cost-effective and efficient channel for connecting and
transacting with global suppliers, distributors and customers. We believe
leveraging web-based procurement applications accelerates the procurement cycle,
lowers the cost of acquiring assets, minimizes levels of asset inventory, and
enables individual employees to initiate procurement decisions on an as-needed
basis, subject to automated approval processes that are less costly and more
efficient than manual order and approval processes.
DEVELOPMENT OF OUR BUSINESS
Until recently, our products focused principally on problem management for
an organization's information technology infrastructure. Historically, our
principal product suite has been SERVICECENTER, an integrated enterprise service
desk software solution that assists information technology departments to manage
and maintain their internal computer networks and related assets.
In addition to our internal development efforts, we have also made several
acquisitions intended to broaden the scope of our product suite beyond network
help desks. We have acquired, through product acquisitions and mergers,
solutions addressing asset management, fleet management, facilities management,
rail management, and telecommunication management, among others. In June 2000,
we completed the acquisition of Harbinger, through which we acquired the
e-transaction management and other e-business products and services that now
comprise our e-markets group.
In addition to the technologies and products we have obtained through
acquisitions, we have also focused substantial resources on internal product and
technology development. Our employee self-service procurement product, GET-IT,
was developed internally and introduced in late 1999 to assist companies in
automating their internal asset procurement processes and making these processes
more efficient. We believe continued investment in research and development is
critical to maintain and improve our competitive position. Accordingly, we
expect to continue to invest substantial resources in product and technology
development.
RECENT ACQUISITION DEVELOPMENTS
On June 11, 2001, we announced that we had entered into a definitive merger
agreement under which we would acquire all the outstanding shares of Remedy
Corporation, a supplier of information technology service management and
customer relationship management solutions. The acquisition is subject to
approval by Remedy's stockholders, regulatory approvals (including United States
and foreign antitrust approvals), and customary closing conditions. If the
merger is completed, we will acquire all of the outstanding common stock of
Remedy. Each outstanding share of Remedy common
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stock will be exchanged for $9.00 in cash and 0.9065 shares of our common stock.
In addition, we will assume options outstanding under Remedy's employee stock
incentive plans. Excluding assumed options and based on Remedy's outstanding
common stock as of June 7, 2001, we expect to issue approximately 28 million
shares of our common stock in connection with the merger and to pay Remedy
stockholders an aggregate cash consideration of approximately $274.5 million.
The pending acquisition of Remedy presents a number of risks, including the
risk that the acquisition is not completed. For more information about the
acquisition, please review the information under the caption "Additional risks
associated with our pending acquisition of Remedy Corporation," beginning on
page 37.
PRODUCTS
As of March 31, 2001, we offered over 40 infrastructure management, employee
relationship management, and e-commerce software products. The following
discussion summarizes the principal product families of our infrastructure
management and e-markets groups.
INFRASTRUCTURE MANAGEMENT GROUP
SERVICECENTER is a set of applications designed to maintain the
effectiveness and functionality of an organization's information technology
infrastructure. Products in this family include applications that report, track,
and assist operators in resolving problems with a business enterprise's
computing environment. Other SERVICECENTER applications maintain inventories of
network devices and applications in order to provide a framework for managing
changes to a network. The applications include products that track costs
associated with infrastructure problems and changes and that automate and track
an organization's equipment and services ordering process. SERVICECENTER
includes an Internet-hosted version, E-SERVICECENTER, in which we act as system
administrator and operator for the customer.
ASSETCENTER is a set of applications designed to manage financial
information relating to an organization's portfolio of information technology
investments. This family includes applications that provide a comprehensive
inventory of an organization's equipment, users, suppliers, and contracts, and
that assist in the financial analysis and decision-making of acquiring
information technology products. Other ASSETCENTER products help organizations
to monitor leased and rented equipment, and track, control, and allocate
information technology related expenses.
INFRATOOLS is a suite of software tools used in the real-time discovery,
tracking, and integration process of information technology infrastructure.
Applications in this family automate the discovery and inventory of personal
computer hardware and software assets, and the discovery, inventory, and
monitoring of intelligent devices on a network, such as routers, hubs, switches,
servers, and workstations. In addition, INFRATOOLS includes products that
remotely manage a number of intelligent devices with a graphical user interface,
either through dedicated networks or the Internet.
FACILITYCENTER is a set of applications 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,
and data collection. E-FACILITYCENTER, an Internet-hosted version, offers the
application set to real estate and facility managers on a hosted basis.
REAL ESTATE PORTFOLIO MANAGER manages all components of a real estate
portfolio, providing property management, contract management, and project
management. This scalable solution helps organizations manage small to global
real estate portfolios.
FLEETANYWHERE is a comprehensive, Internet-enabled, fully integrated fleet
management system. This product family tracks all functions related to the
maintenance of equipment fleets, including processing repair and work orders,
tracking operating expenses, and tracking and billing for equipment usage.
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E.FLEET, an Internet-hosted version, offers the FLEETANYWHERE application set to
fleet managers on a hosted basis.
GET-IT, our employee relationship management suite, is designed to improve
employee productivity and reduce operating expenses. Applications in this family
provide employees with a single point of access to secure knowledge, resources,
and services. Specifically, GET-SERVICES provides employees with a single point
of entry for initiating and tracking service requests. GET-RESOURCES enables
employees to obtain assistance with their infrastructure, GET-ANSWERS allows
employees to ask questions of their company knowledge bases, and GET-CHARGEBACKS
is a chargeback application that provides fiscal management of enterprise
services and assets.
TELECENTER is a product family that helps an organization to manage its
telecommunications assets. Applications in this family monitor and collect
information produced by network switching equipment and provide customers with
the information to control costs and usage of their voice communications
network, monitor network operating status, and maintain network integrity.
E-MARKETS GROUP
B2B ENABLEMENT is a suite of e-business software applications and services
for trading community management. Services in this suite allow enterprises and
e-marketplaces to attract a critical mass of suppliers and other business
partners for the purpose of conducting online business. A related software
application provides customers with an automated tool for rapidly profiling
trading partners and their participation in private, industry, and marketplace
communities.
CATALOG AND CONTENT MANAGEMENT is a suite of e-business software and
services for the creation and management of online procurement catalogs.
Implementations include both buy-side (within the firewall) and sell-side
(outside the firewall) configurations. Applications in this family provide a
catalog search engine, as well as management tools for the preparation,
validation, publishing, and approval of catalog items before they are made
available to buyers. Services in this suite allow suppliers to outsource the
preparation and maintenance of catalog content.
DATA TRANSFORMATION is a suite of e-business software and services that
allows businesses to create, exchange, and decipher online transactions using a
variety of data standards. Applications in this suite are compatible with
multiple formats, including XML (eXtensible markup language), EDI (electronic
data interchange), RosettaNet, Biztalk, OBI, and flat file as well as
proprietary formats. The software supports both real-time and batch transaction
processing and automatically interprets and transforms data between formats
regardless of the software used on either end of a transaction. Services in this
suite allow transactions to be converted between data formats before they are
received by a trading partner.
B2B INTEGRATION is a suite of e-business software that allows an enterprise
to integrate the flow of data between its business systems, automate its
business processes, extend its business systems and processes out to trading
partners, and create an end-to-end "digital dialogue" for business-to-business
transactions. Integration adapters provide interfaces among ERP (enterprise
resource planning), CRM (customer relationship management), SCM (supply chain
management), and other business systems.
NETWORK SERVICES is a suite of e-business connectivity and value-added
services for trading partners. GET2CONNECT (www.get2connect.net) is the center
of our solution for business-to-business relationship management. It provides a
single point of access on the Internet for transaction exchange, application
hosting, and monitoring and managing each customer's e-business program.
Value-added services include an array of tools for gaining insight to online
trading programs, such as supply chain analytics, compliance tracking, and
reporting.
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PRODUCT INTEGRATION
We have completed several acquisitions 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 October 2000, we
announced we had integrated the connectivity, marketplace, and catalog
technology acquired through the acquisition of Harbinger with our infrastructure
resource management products. At the same time, we announced we had also
integrated some of the technology we obtained through the purchase of Loran's
network discovery product. Prior to the Loran acquisition, we resold Loran's
products under our INFRATOOLS product line. We are continuing to expend
resources to improve the integration of SERVICECENTER, ASSETCENTER, and
FACILITYCENTER. Integration of products of this number and complexity is costly
and time consuming, results in the diversion of resources from the 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 "Factors that may
affect our business, financial condition, and future operating results,"
beginning on page 24.
If our pending acquisition of Remedy Corporation is completed, we expect to
expend substantial resources integrating Remedy's products with our products.
Integration of an acquisition as large as our proposed acquisition of Remedy
presents a number of risks. Some of these risks are identified under the caption
"Additional risks associated with our pending acquisition of Remedy
Corporation," beginning on page 37. You are encouraged to review and consider
this information carefully.
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 could have a material adverse effect on our business, results
of operations and financial condition.
Our research and development expenditures in fiscal 2001, 2000, and 1999
were $62.0 million, $28.5 million, and $13.9 million, representing 11%, 11%, and
10% of total revenues in the respective periods. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," beginning on
page 16 of this report, for additional discussion of these expenditures.
The market for our products is subject to rapid technological change,
changing customer needs, frequent new product introductions, and evolving
industry standards that may quickly render our 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
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assurance that we will have sufficient resources to make the necessary
investments. We have in the past experienced product development delays, and
there can be no assurance that we will not experience product 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,
and could negatively affect our stock price. Moreover, many of our recent
product introductions have been made possible by acquisitions of companies,
businesses, or technologies that we felt would complement our existing
infrastructure management and e-business product lines. We expect continued
growth in our businesses to occur as a result of our strategic acquisitions.
Acquiring businesses, products, or technologies poses substantial integration
risks not present with internal development. Please review the section under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" with the caption "Factors that may affect our business, financial
condition, and future operating results," beginning on page 24. This section
describes the numerous risks relating to product development and acquisitions,
among others, that could adversely affect our business.
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 within medium to large-sized
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. Our new product developments have been standardized upon a
Java and Enterprise Java Beans development environment using XML and HTTP for
inter-application event and data connectivity.
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.
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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 them to interact with other
products currently in the customer's environment. We have also 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.
GLOBAL USER ACCESS. The technology underlying our GET-IT employee
self-service applications also provides the foundation for a common user
approach to all of our applications, some applications of other software vendors
and customer-written applications. GET-IT technology provides a dynamic user
interface which enables users to access GET-IT's data and applications through a
cell phone, on a Palm OS, or Windows CE device.
UNIVERSAL CONNECTIVITY. Our technology also provides open communication
among our products, and between our products and applications and integration
tools from other software technology companies, which provides a unified user
interface for an organization's infrastructure management applications.
SALES AND MARKETING
We sell our software and services in North America and internationally
primarily through a direct sales force. During fiscal 2001, we implemented a
strategic segmentation of our business into two groups, our infrastructure
management group and our e-markets group, each with a dedicated sales and
marketing team to pursue business opportunities in their respective markets. In
April 2001, we announced the creation of our integrated solutions group. This
division is intended to focus our sales efforts to large multinational
corporations with both infrastructure management and e-business requirements.
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, Canada, and Mexico. Our
international sales force is located in major metropolitan areas of Europe and
the Pacific Rim. 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
continually seek to broaden the distribution of our products by marketing and
selling them through indirect distribution channels. As a result, we have
established important distribution relationships with managed service providers
(such as IBM and EDS), system integrators, and resellers. Sales through these
indirect channels have contributed significantly to our revenue growth in recent
periods. Even where our revenues are not directly attributable to our
relationship partners, we believe these partnerships are extremely important in
influencing a customer's purchase decision, particularly in the case of system
integrators and major service providers working with large enterprise customers.
Creating and maintaining these relationships, therefore, is critical to our
revenue growth prospects. For example, in December 2000, we acquired IBM's
enterprise service desk product line and customer base and entered into a
strategic distribution agreement with IBM with respect to our infrastructure
management products. In addition, in recent years, our revenues and revenue
growth have become increasingly dependent on completion of a relatively small
number of large license
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transactions with large companies and multinational distributors. For the year
ended March 31, 2001, sales to one of our customers accounted for approximately
10% of our total revenues. Our reliance on third party distributors to sell our
products and the increasing concentration of our revenues among a limited number
of large customers pose substantial risks to our business that you should
carefully consider. These and other risks facing our business are described
under the caption "Factors that may affect our business, financial condition,
and future operating results," beginning on page 24.
When sold through direct channels, the sales cycle for our products
typically ranges from four 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. Because our sales cycle is relatively long, predicting
our future revenues is difficult.
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 our worldwide direct sales force and to create market
awareness programs for Peregrine and our products. As part of our strategy, we
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
customers' organizations. During fiscal 2001, we have invested substantially in
marketing to increase awareness of Peregrine and its product line, including an
increase in our advertising expenditures.
We have significantly increased the size of our sales force over the last
year, both through acquisitions and direct hiring. We 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 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
continued 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. Competition for
suitable distribution partners is intense in many markets outside of 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.
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.
9
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, 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, e-commerce enablement, and employee
self-service 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.
SOURCES OF EXISTING COMPETITION
We face competition from a number of sources in the markets for our
infrastructure resource management, e-commerce enablement, and employee
relationship management software solutions. We face competition from numerous
companies that offer products that compete with one or more of our products and
services. With respect to our infrastructure management products, these
competitors include software companies as well as information technology and
system management companies, such as Applix, Blue Ocean, Computer Associates,
Control Software (a division of CSI-Maximus), FrontRange, Hewlett-Packard, IBM,
Intraware, Main Control, Microsoft, MRO Software (formerly Project Software and
Development Inc.), Network Associates, Nortel, PeopleSoft, Remedy, and Royal
Blue Technologies. In the markets served by our e-commerce enablement
technology, we face competition from providers of customer relationship portals,
such as Aspect Communications; providers of catalog management solutions, such
as Requisite Technology; providers of e-commerce enablement software such as
webMethods; and providers of legacy e-commerce technology and services such as
SBC Communications, through its acquisition of Sterling Commerce, and General
Electric eXchange Solutions. In the markets for employee relationship management
products, including procurement and e-procurement solutions, we face competition
from established providers of business-to-business Internet commerce solutions
such as Ariba and CommerceOne; established providers of enterprise resource
planning software such as Oracle and SAP; and numerous start-up and other
entrepreneurial companies offering products that provide one or more aspects of
employee relationship management such as self-help service offerings, or
web-based knowledge management systems.
SOURCES OF FUTURE COMPETITION
Because competitors can easily penetrate the software market, we anticipate
additional competition from other established and new companies as the markets
for enterprise infrastructure management, e-procurement, and e-business
connectivity applications continue to develop. 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 a significant market share.
10
Increased competition may result from acquisitions of other infrastructure
management, e-procurement, or e-business connectivity 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 and 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.
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 our customer
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. 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-business solutions and in creating organizational awareness of the
benefits associated with 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. To a lesser extent, we rely on patent protection, and some of our
technologies, consisting principally of acquired technologies, are covered by
issued patents and pending patent applications. We do not know if any of these
patents would prove enforceable, if challenged, or if we attempted to enforce
one or more of them against a third party, or whether any pending patent
applications will actually result in issued patents. 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 and adverse effect on our
business, financial condition, and results of operations. Our intellectual
property protection measures might not be sufficient to prevent misappropriation
of our
11
technology. From time to time, we may desire or be required to renew or obtain
licenses from others in order to develop further and 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. Third parties have from time to time claimed that we infringe their
marks, products, or technologies. We expect these claims to increase as our
business and intellectual property portfolio become larger. These pending
claims, any future claims, and any resulting lawsuits, if successful, could
subject us to significant liability for damages and invalidate what we believe
to be 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 marks, products, or technologies
that incorporate any infringed intellectual property;
- obtain from the holder of any infringed intellectual property right a
license to sell or use the relevant intellectual property, which may not
be available on acceptable terms, if at all, and which would in any event
have an adverse impact on our results of operations; or
- redesign those products or services that incorporate the disputed
intellectual property.
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, 2001, we employed 2,956 persons, including 1,074 in sales
and marketing, 413 in customer support, 465 in professional services, 503 in
research and development and 501 in finance and administration. Of our
employees, 778 were 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. In June 1999, we entered into a series of leases covering
up to approximately 540,000 square feet of office space, including an option on
approximately 118,000 square feet for our headquarters in San Diego, California.
This office space (including the option) relates to a five building campus in
San Diego, California. Our San Diego personnel occupy three of these buildings,
and we sublease part of the fourth building. In June 2001, we exercised our
option for the fifth and final building at the San Diego campus, which is
scheduled to be completed in October 2002. Including the exercise of the option,
the leases require minimum aggregate lease payments of approximately
$201.2 million over their term, which is approximately twelve years. In Atlanta,
we lease approximately 95,000 square fee of space, principally for our e-markets
group, under a lease expiring in 2008.
We also lease office space for sales, marketing, and professional services
staff in most major metropolitan areas of the United States and Canada as well
as in various metropolitan centers around the world.
12
ITEM 3. LEGAL PROCEEDINGS
In connection with our acquisition of Harbinger Corporation in June 2000, we
assumed the defense of an outstanding shareholder class action lawsuit against
Harbinger and several of its former officers and directors. In September 1999, a
complaint was filed against Harbinger and some of its former officers and
directors in the United States District Court for the Northern District of
Georgia. The complaint alleges that the defendants misrepresented or omitted
material facts in violation of federal securities laws. An amended complaint was
filed in March 2000, expanding upon the allegations of the initial complaint by,
among other things, alleging accounting improprieties. The allegations relate to
actions by Harbinger during the period from February 1998 to October 1998.
Harbinger did not maintain directors' and officers' liability insurance during
this period. As a result, we are not insured with respect to any potential
liability of Harbinger or any officer or director of Harbinger. Harbinger was,
however, obligated under agreements with each of its officers and directors to
indemnify them for the costs incurred in connection with defending themselves
against this litigation and is obligated to indemnify them to the maximum extent
permitted under applicable law if they are held liable. In connection with the
acquisition, we agreed to honor these contractual arrangements.
In October 2000, we entered into an agreement in principle to settle this
class action lawsuit. If the settlement is finalized and approved by the court,
we will be required to make an aggregate cash payment of $2.25 million to a
class of former shareholders of Harbinger in exchange for dismissal of all
claims against Harbinger. Although the parties to the litigation have agreed in
principle to this settlement, final settlement is subject to further
documentation, various contingencies, and approval by the court. The court may
not approve the settlement. If the court does not approve the settlement, the
plaintiffs in the lawsuit may proceed with their claims, without prejudice. It
is also possible that if the settlement is approved by the court, claims could
be pursued by class members who opt out of the class settlement by filing
appropriate notices with the court. If the litigation were to continue to
proceed, we could be required to spend substantial sums in an effort to litigate
this matter. Continued litigation would be likely to result in a diversion of
management's time and attention away from business operations. If the litigation
were decided adversely to Harbinger, or we agree in the future to settle this
litigation for a substantial sum as a result of failure to obtain court approval
of the pending settlement or for any other reason, our financial condition and
results of operations could be materially and adversely affected.
In addition to the class action lawsuit, we are a party to various other
proceedings or claims, either asserted or unasserted, which arise in the
ordinary course of business. Our management has reviewed these other pending
legal matters and believes that the resolution of such matters will not have a
significant adverse effect on our financial condition.
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, 2001.
13
PART II
ITEM 5. MARKET FOR PEREGRINE'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. 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 splits of our common stock effected as stock dividends in
February 1999 and February 2000.
HIGH LOW
-------- --------
FISCAL YEAR ENDED MARCH 31, 2001:
Fourth Quarter............................................ $33.00 $17.88
Third Quarter............................................. 25.31 15.63
Second Quarter............................................ 37.81 18.94
First Quarter............................................. 58.50 17.25
FISCAL YEAR ENDED MARCH 31, 2000:
Fourth Quarter............................................ $79.50 $36.63
Third Quarter............................................. 45.88 19.16
Second Quarter............................................ 20.56 12.81
First Quarter............................................. 17.34 8.56
As of March 31, 2001, there were 160,359,096 shares of our common stock
issued and outstanding and held by 1,589 stockholders of record. We estimate
that there are approximately 85,000 beneficial holders of our common stock.
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
In connection with the acquisition of all the outstanding capital stock of
Extricity, Inc., Peregrine issued approximately 9,200,000 shares of its common
stock, including 706,692 shares issuable upon exercise of assumed employee
options. The shares of Peregrine's common stock issued to the stockholders of
Extricity were not registered under the Securities Act of 1933. Rather, they
were issued in reliance on the exemption from registration set forth under
Section 3(a)(10) of the Securities Act following a fairness hearing before the
Commissioner of Corporations of the State of California. Following this hearing,
the commissioner issued a permit qualifying the shares for issuance under the
California Corporate Securities Law of 1968.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data is presented below as of March 31,
1997, 1998, 1999, 2000, and 2001 and for each of the years in the five-year
period ended March 31, 2001, and derives from the consolidated financial
statements of Peregrine Systems, Inc. and its subsidiaries. These consolidated
financial statements have been audited by Arthur Andersen LLP, independent
public accountants. The consolidated financial statements as of March 31, 2000
and 2001 and for each of the years in the three-year period ended March 31,
2001, 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,
-------------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues
Licenses.............................. $ 354,610 $ 168,467 $ 87,362 $ 38,791 $ 20,472
Services.............................. 210,073 84,833 50,701 23,086 14,563
---------- --------- -------- -------- --------
Total revenues...................... 564,683 253,300 138,063 61,877 35,035
---------- --------- -------- -------- --------
Costs and expenses:
Cost of licenses...................... 2,582 1,426 1,020 326 215
Cost of services...................... 111,165 51,441 31,561 10,326 4,661
Amortization of purchased
technology.......................... 11,844 1,338 50 -- --
Sales and marketing................... 223,966 101,443 50,803 22,728 15,778
Research and development.............. 61,957 28,517 13,919 8,394 5,877
General and administrative............ 48,420 19,871 10,482 6,077 3,816
Acquisition costs and other........... 918,156 57,920 43,967 10,123 --
---------- --------- -------- -------- --------
Total costs and expenses............ 1,378,090 261,956 151,802 57,974 30,347
---------- --------- -------- -------- --------
Income (loss) from operations........... (813,407) (8,656) (13,739) 3,903 4,688
Interest income (expense), net.......... (538) 38 664 839 (478)
---------- --------- -------- -------- --------
Income (loss) from operations before
income tax expense (benefit).......... (813,945) (8,618) (13,075) 4,742 4,210
Income tax expense (benefit)............ 38,296 16,452 10,295 5,358 (1,592)
========== ========= ======== ======== ========
Net income (loss)....................... $ (852,241) $ (25,070) $(23,370) $ (616) $ 5,802
========== ========= ======== ======== ========
Net income (loss) per share diluted..... $ (6.16) $ (0.24) $ (0.27) $ (0.01) $ 0.10
========== ========= ======== ======== ========
Shares used in per share calculation.... 138,447 102,332 87,166 69,520 59,856
========== ========= ======== ======== ========
MARCH 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents............... $ 286,658 $ 33,511 $ 23,545 $ 21,977 $ 305
Working capital (deficit)............... 204,547 20,510 25,302 23,779 (4,065)
Total assets............................ 2,003,766 523,430 207,713 83,568 19,738
Total debt.............................. 264,942 1,331 649 1,117 3,866
Stockholders' equity (deficit).......... 1,389,765 411,850 150,781 55,639 (2,849)
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE STATEMENTS INCLUDE, AMONG OTHER THINGS, STATEMENTS
CONCERNING OUR FUTURE OPERATIONS, FINANCIAL CONDITION AND PROSPECTS, AND
BUSINESS STRATEGIES. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," AND OTHER
SIMILAR EXPRESSIONS GENERALLY IDENTIFY 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 OUR HISTORICAL RESULTS OR CURRENTLY
ANTICIPATED RESULTS. INVESTORS SHOULD CAREFULLY REVIEW THE INFORMATION CONTAINED
UNDER THE CAPTION "FACTORS THAT MAY AFFECT OUR BUSINESS, FINANCIAL CONDITION,
AND FUTURE OPERATING RESULTS," BEGINNING ON PAGE 24 OF THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION," AND
ELSEWHERE IN OR INCORPORATED BY REFERENCE INTO THIS REPORT. IN ADDITION,
INVESTORS ARE ENCOURAGED TO REVIEW CAREFULLY THE ADDITIONAL INFORMATION
CONTAINED UNDER THE CAPTION "ADDITIONAL RISKS ASSOCIATED WITH OUR PENDING
ACQUISITION OF REMEDY CORPORATION," BEGINNING ON PAGE 37 OF THIS REPORT.
OVERVIEW
We are a leading global provider of infrastructure resource management
applications, employee relationship management solutions, and e-commerce
technologies and services.
Our infrastructure management group provides software, technologies, and
services to optimize and manage the procurement, maintenance, and disposition of
business infrastructure. In addition, it offers employee self-service products
designed to improve employee productivity and lower costs by providing employees
direct access to corporate resources and infrastructure. Our e-markets group
provides a suite of business-to-business software products and services to
facilitate the processes of selling and purchasing direct goods among trading
partners. In April 2001, we announced the creation of our integrated solutions
group. This division is intended to focus our sales efforts to our alliance
partners and to large multinational corporations with both infrastructure
management and e-business software requirements. We believe our major alliance
partners, comprised of worldwide consulting firms, managed service providers,
and system integrators, exert substantial influence over the purchase decisions
of large enterprise customers. Accordingly, a principal objective of our
integrated services group is to strengthen our relationships with existing
partners and to expand our network to include new partners.
Until recently, our products focused principally on problem management for
an organization's information technology infrastructure. Historically, our
principal product suite has been SERVICECENTER, an integrated, enterprise
service desk software solution that assists information technology departments
in managing and maintaining internal computer networks and related assets.
During fiscal 1998, we determined that our customers required a more
comprehensive solution to manage their infrastructure assets, including
information technology assets but also the numerous other assets that make up
business infrastructures. Through acquisitions and internal development, we have
expanded the breadth and functionality of our products for managing information
technology assets. In addition, we made a number of acquisitions intended to
broaden our infrastructure management product suite beyond management of network
help desks. Since 1997, we acquired new product lines relating, among others, to
asset management, facilities management, corporate fleet management, rail
management, telecommunications management, and network discovery.
In addition to acquiring technologies and products through acquisitions, we
have also focused substantial resources on internal product and technology
development. Our employee self-service procurement product, GET-IT, was
developed internally and introduced in late 1999 to assist companies in
automating their internal asset procurement and employee self-service processes.
16
In June 2000, we completed the acquisition of Harbinger Corporation.
Harbinger's business focused historically on providing electronic commerce
software that facilitates the exchange of electronic data between businesses.
Prior to the acquisition, however, revenues for Harbinger's legacy software
business were declining. At the time of the acquisition, Harbinger began to
focus its business on creating and managing web-based catalogs of supplies and
materials and on maintaining and hosting vertical market exchanges for supply
and commodity markets in the automotive, energy, industrial component and retail
industries. Our e-markets group is comprised largely of Harbinger's legacy
software business and newer e-commerce businesses.
We have integrated substantial aspects of Harbinger's connectivity and
marketplace technologies in our infrastructure management group. In particular,
we recently integrated the connectivity, data transformation, catalog creation
and management, and transaction assurance technologies acquired from Harbinger
with our infrastructure management products and solutions. We intend to use
these technologies to deliver services to suppliers of infrastructure assets and
infrastructure marketplaces and to enable electronic exchanges for
infrastructure assets. Harbinger's revenue growth rates were substantially lower
than Peregrine's historic revenue growth rates as a result, in part, of
declining revenues in Harbinger's legacy software business that were not offset
by increased revenues from new business lines. As a result, we expect our future
revenue growth rates will be less than historical rates, and predicting our
future operating results will be difficult as we continue our efforts to
integrate and streamline Harbinger's operations and businesses. In addition, as
part of continuing strategic review of our businesses, we have determined to
de-emphasize and discontinue certain businesses of Harbinger that we do not
believe are strategic to the combined company. In September 2000, we completed
the sale of one of Harbinger's product lines and may determine to sell or
discontinue other Harbinger products or businesses in the future. We expect this
recent divestiture and any future discontinuations or divestitures to result in
revenue reductions that may not be offset by revenues from other sources. During
our fiscal year 2001, our ability to maintain revenue growth rates estimated by
market analysts was attributable principally to the relative strength of our
infrastructure management group. We cannot predict whether this trend will
continue, and any weakness in our infrastructure management business could
result in our revenue growth rates, revenues, or operating results being less
than expected.
Our revenues are derived principally from product licensing and services.
License fees are generally due upon the granting of the license and typically
include a one-year warranty period as part of the license agreement. Services
revenues are comprised of fees for maintenance (post-contract support),
professional services (consulting), network services and training. We provide
ongoing maintenance services, priced and sold separately from our other
products, which include technical support and product enhancements, for an
annual fee based upon the current price of the product. Network fees consist of
monthly access charges and transaction-based usage charges for our e-commerce
transaction processing services. We also derive revenues from transaction fees,
subscription fees, and maintenance fees associated with our e-markets group. We
anticipate that, as a percentage of total revenues, subscription fees associated
with sales of our applications on a hosted basis will increase in future
periods, particularly in our e-markets group and to a lesser extent in our
infrastructure management group. The hosted service provider model is relatively
new and unproven for us, and we do not know whether it will prove financially
attractive relative to our historic license revenue model. We expect that
increasing sales of our products on a hosted subscription basis will result in
slower revenue growth rates. Under a subscription model, we will receive monthly
payments for our services ratably over the term of a subscription, typically
three to five years. Under our current license model, we primarily sell our
software in return for the up-front payment of a license fee.
Revenues from direct and indirect license agreements are recognized,
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 no other
significant vendor
17
obligations exist. Revenues from maintenance services are recognized ratably
over the term of the support period, generally one year. Consulting revenues are
primarily related to implementation services most often performed on a time and
materials basis under separate service agreements for the installation of our
products. Revenues from consulting and training services are recognized as the
respective services are performed. Transaction and subscription fees are
recognized monthly as services are provided.
We currently derive a substantial portion of our license revenues from the
sale of our infrastructure management applications and from our business
connectivity software products in our e-markets group. We expect these products
to account for a substantial portion of our revenues for the foreseeable future.
As a result, our future operating results are dependent upon continued market
acceptance of our infrastructure resource management and business connectivity
strategies and applications, including future product enhancements, and on the
development of a market for our asset procurement products. In particular, a
substantial majority of our license revenues are attributable to three
infrastructure management product suites: SERVICECENTER, ASSETCENTER, and
FACILITYCENTER. Substantially all of our license revenues are derived from
granting a non-exclusive perpetual license to use our products. Factors
adversely affecting the pricing of, demand for or market acceptance of our
infrastructure procurement and resource management applications, such as
competition or technological change, manner of distribution or licensing, and
related methods of revenue recognition could have a material adverse effect on
our business, operating results, and financial condition. In addition, our
license revenue growth has become increasingly dependent on the successful
completion of one or more large license transactions during a given quarter. As
a result, failure to complete one or more of these transactions by quarter-end
could have a material adverse effect on our license revenue, total revenue, and
operating results.
RECENT ACQUISITION ANNOUNCEMENT
On June 11, 2001, we announced that we entered into a definitive agreement
under which we would acquire all the outstanding shares of Remedy Corporation, a
supplier of information technology service management and customer relationship
management solutions. The acquisition is subject to approval by Remedy's
stockholders, regulatory approvals, and customary closing conditions. If the
merger is completed, we will acquire all of the outstanding common stock of
Remedy. Each outstanding share of Remedy common stock will be exchanged for
$9.00 in cash and 0.9065 shares of our common stock. In addition, we will assume
options outstanding under Remedy's employee stock incentive plans. Excluding
assumed options and based on Remedy's outstanding common stock as of June 7,
2001 we expect to issue approximately 28 million shares of our common stock in
connection with the merger and to pay Remedy stockholders an aggregate cash
consideration of approximately $274.5 million.
18
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,
------------------------------------
2001 2000 1999
-------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses......................................... 62.8% 66.5% 63.3%
Services......................................... 37.2 33.5 36.7
------ ----- -----
Total revenues................................. 100.0 100.0 100.0
------ ----- -----
Cost and expenses:
Cost of licenses................................... 0.5 0.6 0.7
Cost of services................................... 19.7 20.3 22.9
Amortization of purchased technology............... 2.1 0.5 0.1
Sales and marketing................................ 39.7 40.0 36.8
Research and development........................... 11.0 11.3 10.1
General and administrative......................... 8.6 7.8 7.6
Acquisition costs and other........................ 162.4 22.9 31.8
------ ----- -----
Total costs and expenses....................... 244.0 103.4 110.0
------ ----- -----
Loss from operations before interest (net) and income
tax expense........................................ (144.0) (3.4) (10.0)
Interest income (expense), net....................... (0.1) -- 0.5
------ ----- -----
Loss from operations before income tax expense....... (144.1) (3.4) (9.5)
Income tax expense................................... 6.8 6.5 7.4
------ ----- -----
Net loss............................................. (150.9)% (9.9)% (16.9)%
====== ===== =====
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 2001, 2000 AND 1999
REVENUES
REVENUES. Total revenues were $564.7 million, $253.3 million and
$138.1 million for fiscal year end 2001, 2000 and 1999, respectively,
representing period-to-period increases of 123% and 83% for the fiscal 2001 and
2000 periods, respectively. The reasons for the revenue increases are more fully
discussed below.
LICENSES. License revenues were $354.6 million, $168.5 million and
$87.4 million for fiscal years 2001, 2000 and 1999, respectively, representing
63% of total revenues in fiscal 2001, 67% in fiscal 2000 and 63% in fiscal 1999.
Total license revenues increased 110% and 93% period-to-period for fiscal 2001
and 2000, respectively. The increases in license revenues are primarily
attributable to increased demand for new and additional licenses of our
infrastructure resource management applications. We believe license revenues
will fluctuate period-to-period in absolute dollars and as a percentage of total
revenues. In recent periods, our revenues and revenue growth rates have become
increasingly dependent on our ability to complete one or more particularly large
license transactions with a major enterprise customer. We expect larger
transaction sizes from a limited number of customers to account for a large
percentage of license revenues for the foreseeable future. As a result, factors
that would have an adverse effect on technology investments by large enterprise
customers would also tend to adversely affect our future revenues, revenue
growth rates, and operating results. Investors are
19
encouraged to review the section entitled "Factors that may affect our business,
financial condition, and future operating results," beginning on page 24 of this
report, for further discussion of these risks.
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. We
believe that our alliance partners are particularly important in influencing the
purchase decisions of our largest enterprise customers. Revenues derived through
indirect sales channels 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 the extent indirect sales continue
to increase as a percentage of total revenues, we could experience unforeseen
variability in our future revenues and operating results if our partners are
unable to sell our products.
On occasion, we purchase goods or services for our operations from certain
limited vendors at or about the same time we license our software to these
organizations. These transactions are separately negotiated and recorded at
terms we consider to be arms length.
SERVICES. Services revenues consist of support, consulting and training
services. Services revenues were $210.1 million, $84.8 million, and
$50.7 million for fiscal years 2001, 2000, and 1999, respectively, representing
37% of total revenues in fiscal 2001, 34% in fiscal 2000, and 37% in fiscal
1999. Total services revenues increased 148% and 67% period-to-period for fiscal
2001 and 2000, respectively. The dollar increases in service revenues are
primarily attributable to maintenance, consulting, and training related to the
maintenance, implementation, and use of our software from license agreements and
related expansion. While these revenues are increasing in absolute dollars, we
expect service revenues to fluctuate as a percentage of total revenues.
COSTS AND EXPENSES
COST OF LICENSES. Cost of licenses were $2.6 million, $1.4 million, and
$1.0 million in fiscal years 2001, 2000, and 1999, respectively, each
representing less than 1% of total revenues in these periods. Cost of software
licenses primarily consists of third-party software royalties, product
packaging, documentation and production. These costs are expected to remain
consistent as a percentage of total revenues.
COST OF SERVICES. Cost of services were $111.2 million, $51.4 million and
$31.6 million in fiscal years 2001, 2000 and 1999, respectively, representing
20%, 20% and 23% 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 primarily
attributable to an increase in personnel related costs in order to support the
related activities. Cost of services as a percentage of total revenues decreased
slightly from fiscal 1999 to fiscal 2000, principally because license revenues
grew at a faster rate than service revenues.
AMORTIZATION OF PURCHASED TECHNOLOGY. Amortization of purchased technology
was $11.8 million, $1.3 million and $0.1 million in fiscal years 2001, 2000, and
1999, respectively, representing 2.1%, 0.5%, and 0.1% of total revenues in the
respective periods. The increases are primarily due to the acquisitions we made
during fiscal year 2001.
SALES AND MARKETING. Sales and marketing expenses were $224.0 million,
$101.4 million and $50.8 million in fiscal years 2001, 2000 and 1999,
respectively, representing 40%, 40%, and 37% of total revenues in the respective
periods. Sales and marketing expenses primarily consists of personnel related
costs, facilities and system costs and travel and entertainment. The dollar
increases in sales and marketing expenses are primarily attributable to the
significant expansion of both the North American and international sales and
marketing forces. 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
20
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
$62.0 million, $28.5 million and $13.9 million in fiscal years 2001, 2000 and
1999, respectively, representing 11%, 11% and 10% of total revenues in the
respective periods. Research and development expenses primarily consists of
personnel related costs. The dollar increases in research and development are
primarily attributable to an increase in the number of personnel conducting
research and development associated with new product initiatives, and the
integration of acquired software and multiple applications. These costs are
expected to increase in absolute dollars but remain relatively consistent as a
percentage of total revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$48.4 million, $19.9 million, and $10.5 million in fiscal years 2001, 2000 and
1999, respectively, representing 9%, 8%, and 8% of total revenues in the
respective periods. General and administrative expenses consists primarily of
employee salaries and overhead for administrative personnel. The dollar
increases in general and administrative are primarily attributable to an
increase in the number of personnel to support our growth.
ACQUISITION COSTS AND OTHER. Acquisition costs and other were
$918.2 million, $57.9 million, and $44.0 million in fiscal years 2001, 2000, and
1999, respectively, representing 162%, 23%, and 32% of total revenues in the
respective periods. Acquisition costs and other consist of impairment charges,
amortization of intangibles, acquired in-process research and development costs
and other acquisition related items. The increase in fiscal 2001 relative to
prior years is attributable primarily to our June 2000 acquisition of Harbinger,
our largest to date. During fiscal 2001, we wrote-off $490 million of related
assets related primarily to an acquisition made in our e-markets group segment
and investments made in our infrastructure management segment. We will continue
to monitor the value of such assets in the future and may have future such
impairment charges. The remaining dollar and percentage increases principally
relate to our 2001 and 2000 acquisitions.
PROVISION FOR INCOME TAXES
Income tax expenses were $38.3 million, $16.5 million and $10.3 million for
fiscal year 2001, 2000 and 1999, respectively. This increase in absolute dollars
is attributable to an increase in taxable income. Excluding the effect on net
income of acquisition costs, our effective tax rates were 33.0%, 32.5% and 33.3%
for fiscal years 2001, 2000, and 1999, respectively. These costs are expected to
increase in absolute dollars but remain consistent as a percentage of operating
profits.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased to $286.7 million as of March 31,
2001 from $33.5 million as of March 31, 2000. This increase is primarily
attributable to our issuance during fiscal 2001 of 5 1/2% convertible
subordinated notes due 2007 in an aggregate principal amount of $270 million.
The notes provide for annual aggregate interest payments of $14,850,000, payable
semi-annually in arrears. During July 1999, we entered into a $20 million senior
credit facility for a term of three years with a syndicate of financial
institutions. The facility is available for general corporate purposes including
acquisitions. As of March 31, 2001, there were no amounts outstanding with
respect to this facility.
On June 11 2001, we announced that we entered into a definitive agreement
under which we would acquire all the outstanding shares of Remedy Corporation, a
supplier of information technology service management and customer relationship
management solutions. This acquisition is subject to approval by Remedy's
stockholders, regulatory approvals and customary closing conditions. Based on
Remedy's outstanding shares as of June 7, 2001, we expect to pay out
approximately $274.5 million as
21
cash merger consideration. As of March 31, 2001, we had approximately $287
million in cash and cash equivalents, and Remedy Corporation had approximately
$218 million in cash and cash equivalents. As a result of the acquisition, we
would acquire all Remedy's cash and cash equivalents as of the date of the
merger. We currently expect these amounts, together with our anticipated cash
flows from operations, to be sufficient to satisfy our working capital
requirements for the next 12 months. Nevertheless, in anticipation of the use of
cash for payment to Remedy stockholders in the merger and to ensure adequate
levels of working capital for the combined company after the merger, we are
considering establishing a new bank facility or facilities. We may also consider
in the future additional financing in the form of issuances of our common stock
or the issuance of debt securities, including debt securities convertible into
shares of our common stock. Additional financing may take the form of issuances
of our common stock or the issuance of debt securities, including debt
securities convertible into shares of our common stock. Additional financing may
not be available when and as required on commercially reasonable terms, if at
all. In addition, the issuance of additional equity securities, including
securities convertible into our equity securities, would dilute the interests of
our existing stockholders. Issuance of additional debt securities could impair
our financial condition as we become increasingly leveraged, and interest
payments would be expected to have an adverse effect on our results of
operations.
In connection with our acquisition of Harbinger, we assumed the defense of
an outstanding shareholder class action lawsuit against Harbinger and several of
its former officers and directors. Harbinger did not maintain directors' and
officers' liability insurance to cover any liability resulting from this
lawsuit, and Peregrine's insurance will not cover any liability of Harbinger or
its former officers or directors resulting from the lawsuit. In October 2000, we
entered into an agreement in principle to settle this class action lawsuit. If
the settlement is finalized and approved by the court, we will be required to
make an aggregate cash payment of $2.25 million to a class of former
shareholders of Harbinger in exchange for dismissal of all claims against
Harbinger. Although the parties to the litigation have agreed in principle to
this settlement, final settlement is subject to further documentation, various
contingencies, and approval by the court. The court may not approve the
settlement. If the court does not approve the settlement, the plaintiffs in the
lawsuit may proceed with their claims, without prejudice. It is also possible
that if the settlement is approved by the court, claims could be pursued by
class members who opt out of the class settlement by filing appropriate notices
with the court. If the litigation were to continue to proceed, we could be
required to spend substantial sums in an effort to litigate this matter.
Continued litigation would be likely to result in a diversion of management's
time and attention away from business operations. If the litigation were decided
adversely to Harbinger, or we agree in the future to settle this litigation for
a substantial sum as a result of failure to obtain court approval of the pending
settlement or for any other reason, our financial condition and results of
operations could be materially and adversely affected. Please refer to the
section captioned "Factors that may affect our business, financial condition,
and future operating results" for a more detailed description of the risks
associated with this lawsuit.
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, 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 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. During our fiscal year ended March 31, 2001, declines in the value of
the Euro relative to the U.S. dollar had an
22
adverse effect on our revenues and results of operations. Although we currently
derive no material revenues from highly inflationary economies, we are expanding
our presence in international markets outside Europe, including the Pacific Rim
and Latin America, whose currencies have fluctuated in value relative to the
U.S. dollar more than European currencies. There can be no assurance that future
fluctuations in the value of foreign currencies relative to the U.S. dollar will
not have a material adverse effect on our business, financial condition, or
results of operations.
Currently, we attempt to mitigate our transaction currency risks through our
foreign exchange 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. 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.
In the fall of 2000, the technology driven Nasdaq Stock Market began a steep
decline in stock prices particularly in the e-commerce sectors. In early 2001,
it became apparent to us that the downturn was other than temporary. In
addition, it became apparent that technology spending, particularly in the
e-commerce and enterprise resource planning environments, would drop sharply in
2001.
Accordingly, we determined a SFAS 121 triggering event had occurred related
to certain of our tangible and intangible assets. We prepared analyses (such as
cash flow projections) related to these tangible and intangible assets and as a
result determined that certain assets had been impaired. We wrote these assets,
along with any allocated goodwill, down to fair value based on the related
discounted cash flows and similar evidence. During 2001, we wrote-off
$490 million of impaired intangibles, investments and other assets related
primarily to an acquisition made in our e-markets group segment and investments
made in our infrastructure management group segment. We will continue to monitor
the value of these assets in the future and may have future such impairment
charges.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," or SFAS No. 137. In June 2000, the FASB issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," or SFAS No. 138. SFAS No. 137
amends Statement of Financial Accounting Standards No. 133, "Accounting for
Derivatives and Hedging Activities," or SFAS No. 133, and SFAS No. 138 amends
SFAS No. 137. SFAS No. 133 requires that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value
and that changes in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. These new standards are effective
beginning with our first quarter of fiscal 2002. Our management believes that
adoption of SFAS No. 133, SFAS No. 137 and SFAS No. 138 will not have a material
impact on our consolidated results of operations, financial position or cash
flows.
In December 1999, the staff of the Securities Exchange Commission released
Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition," as
amended by SAB No. 101A and SAB No. 101B, to provide guidance on the
recognition, presentation, and disclosure of revenue in financial statements.
SAB No. 101 explains the SEC staff's general framework for revenue recognition,
stating that certain criteria be met in order to recognize revenue. SAB No. 101
also addresses gross versus net revenue presentation and financial statement and
Management's Discussion and Analysis disclosures related to revenue recognition.
Our management believes that our accounting policies comply with the applicable
provisions of SAB No. 101.
23
In April 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation: an
interpretation of APB Opinion No. 25." FIN No. 44 affects certain awards and
modifications made after December 15, 1998. Our management believes that our
accounting policies comply with the applicable provisions of FIN No. 44.
FACTORS THAT MAY AFFECT OUR BUSINESS, FINANCIAL CONDITION, AND FUTURE OPERATING
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 RISKS AND
UNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR
HISTORICAL RESULTS OR CURRENTLY ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:
WE HAVE A HISTORY OF LOSSES, EXPECT TO CONTINUE TO INCUR LOSSES FOR THE
FORESEEABLE FUTURE, AND CANNOT ASSURE THAT WE WILL BE PROFITABLE IN THE FUTURE
ON AN OPERATING BASIS OR OTHERWISE.
We have incurred substantial losses in recent years, and predicting our
future operating results is difficult. If we continue to incur losses, if our
revenues decline or grow at a slower rate, or if our expenses increase without
commensurate increases in revenues, our operating results will suffer and the
price of our common stock may fall. Through March 31, 2001, we had recorded
cumulative net losses of approximately $917.1 million, mainly comprised of
acquisition costs related to the acquisitions completed since late 1997. We have
incurred, and expect to continue to incur, substantial expenses associated with
acquisition related costs, and amortization of goodwill and other intangible
costs will result in our continuing to incur net losses for the foreseeable
future. In addition, we do not believe recent revenue growth rates are
sustainable in the future or indicative of future growth rates. If our revenue
growth rates slow or our revenues decline, our operating results could be
seriously impaired because many of our expenses are fixed and cannot be easily
or quickly changed. A reduction in our revenue growth rate and/or an impairment
of our financial results could lead to a dramatic decline in our stock price.
OUR REVENUES ARE NOT PREDICTABLE AND VARY SIGNIFICANTLY FROM
QUARTER-TO-QUARTER FOR NUMEROUS REASONS BEYOND OUR CONTROL. QUARTER-TO-QUARTER
VARIATIONS COULD RESULT IN A SUBSTANTIAL DECREASE IN OUR STOCK PRICE IF OUR
REVENUES OR OPERATING RESULTS ARE LESS THAN MARKET ANALYSTS ANTICIPATE.
Our revenues or operating results in a given quarter could be substantially
less than anticipated by market analysts, which could result in a substantial
decline in our stock price. In addition, quarter-to-quarter variations could
create uncertainty about the direction or progress of our business, which could
also result in a decline in the price of our common stock. Our revenues and
operating results will vary from quarter to quarter for many reasons beyond our
control, including those described in this section. As a result, our quarterly
revenues and operating results are not predictable with any significant degree
of accuracy.
OUR REVENUE GROWTH IS INCREASINGLY DEPENDENT ON A SMALL NUMBER OF LARGE
LICENSE TRANSACTIONS.
Our revenues in a given quarter could be adversely affected if we are unable
to complete one or more large license agreements, if the completion of a large
license agreement is delayed, or if the contract terms were to prevent us from
recognizing revenue during that quarter.
Our revenue growth in recent periods has been attributable in part to an
increase in the number of large license transactions sold to a limited number of
large, enterprise customers during a given period. For the year ended March 31,
2001, sales to one of our customers accounted for approximately 10% of our total
revenues. We expect our reliance on these large transactions with a limited
number of customers to continue for the foreseeable future. If we are unable to
complete one or more large license transactions by the end of a particular
quarter, our revenues and operating results could be materially below the
expectations of market analysts, and our stock price could fall. In particular,
our
24
dependence on a few relatively large license transactions could have an adverse
effect on our quarterly revenues or revenue growth rates to the extent we are
unable to complete a large license transaction because a large prospective
customer determines to reduce its capital investments in technology in response
to slowing economic growth.
When negotiating large software licenses, many customers time their
negotiations near quarter-end in an effort to improve their ability to negotiate
more favorable pricing terms. As a result, we recognize a substantial portion of
our revenues in the last month or weeks of a quarter, and license revenues in a
given quarter depend substantially on orders booked during the last month or
weeks of a quarter. If we are unable to complete a sufficient number of license
agreements during this short and intense sales period, our revenues could be
substantially below the expectations of market analysts, and our stock price
could decline.
OUR QUARTERLY AND ANNUAL REVENUE AND REVENUE GROWTH RATES MAY BE AFFECTED IF
OUR DISTRIBUTION PARTNERS ARE UNSUCCESSFUL IN SELLING OUR PRODUCTS OR IF WE ARE
UNSUCCESSFUL IN ADDING NEW DISTRIBUTION PARTNERS.
Many of our transactions are sourced, developed, and closed through our
strategic and distribution partners, including resellers and system integrators.
We believe that these transaction partners are extremely important influencers
of customer purchase decisions, particularly purchase decisions by large,
enterprise customers. If the number or size of our partner-influenced
transactions were to decrease for any reason, our revenue growth rates and
operating results would be materially and adversely affected. If our sales
through these indirect channels, or to new distributors, resellers, or strategic
partners, were to decrease in a given quarter, our total revenues and operating
results could be harmed. Sales through indirect channels, including
distributors, third party resellers, and system integrators, represent a
significant percentage of our total sales, and this percentage has increased in
recent periods. 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 these channels were to decrease or were
to increase at a slower rate than recently experienced. We have less ability to
manage sales through indirect channels, relative to direct sales, and less
visibility about our partners' success in selling our products. In addition,
many of our distribution arrangements are non-exclusive, and these distributors
may carry competing 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 partners to sell our products; a
decision by our partners to favor competing products; or inability of our
partners to manage the timing of their purchases from us against their sales to
end-users, resulting in inventories of unsold licenses held by partners.
OUR QUARTERLY AND ANNUAL REVENUES AND REVENUE GROWTH RATES ARE DEPENDENT ON
THE BUDGETING CYCLES AND INVESTMENT CYCLES OF OUR CUSTOMERS.
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. Many analysts predict substantially
slower growth rates for, and potential reductions in, information technology
capital investment in 2001 and potentially continuing in 2002. Moreover, many
software companies, including Peregrine, have experienced increasing reluctance
by customers to make substantial investments in new technologies. To the extent
these projections prove accurate, we expect our quarterly revenues and operating
results will be adversely affected. For example, quarter-to-quarter sales of our
GET-IT e-procurement application fell for the first time since the product's
introduction in the third quarter of fiscal 2000 as e-procurement applications
proved more sensitive to the downturn in capital spending than our other
flagship infrastructure management products. Moreover, during this downturn, we
have been highly dependent on our SERVICECENTER, ASSETCENTER and FACILITYCENTER
product lines to maintain our revenue growth rates, and we expect our dependence
on these product lines to continue. If the capital investment downturn continues
or worsens, we may experience reduced demand
25
for these core products as well, which could have a material and adverse effect
on our revenues, operating results, financial condition, and stock price. Most
software companies, including Peregrine, currently have very limited visibility
with respect to their near term quarters and are having difficulty predicting
their revenues and operating results during these periods.
OUR QUARTERLY AND ANNUAL REVENUES AND REVENUE GROWTH RATES COULD BE AFFECTED
BY NEW PRODUCTS WE ANNOUNCE OR THAT OUR COMPETITORS ANNOUNCE.
Announcements of new products or releases by us or our competitors could
cause customers to delay purchases pending the introduction of the new product
or release. In addition, announcements by us or our competitors concerning
pricing policies could have an adverse effect on our revenues in a given
quarter.
OUR PRODUCTS HAVE DIFFERENT MARGINS, AND CHANGES IN OUR PRODUCT MIX COULD
HAVE AN ADVERSE EFFECT ON OUR OPERATING RESULTS.
Changes in our product mix could adversely affect our operating results
because some products provide higher margins than others. For example, margins
on software licenses tend to be higher than margins on maintenance and services.
Cancellations of licenses, subscriptions, or maintenance contracts could reduce
our revenues and could adversely affect our operating results. In particular,
our maintenance contracts with customers terminate on an annual basis.
Substantial cancellations of maintenance or subscription agreements, or a
substantial failure to renew these contracts, would reduce our revenues and
impact our operating results.
THE LONG SALES CYCLE FOR OUR PRODUCTS MAY CAUSE SUBSTANTIAL FLUCTUATIONS IN
OUR REVENUES AND OPERATING RESULTS.
Delays in customer orders could result in our revenues being substantially
below the expectations of market analysts. Our customers' planning and purchase
decisions involve a significant commitment of resources and a lengthy evaluation
and product qualification process. As a result, we may incur substantial sales
and marketing expenses during a particular period in an effort to obtain orders.
If we are unsuccessful in generating offsetting revenues during that period, our
revenues and earnings could be substantially reduced, or we could experience a
large loss. The sales cycle for our products typically takes four to nine months
to complete, and we may experience delays that further extend this period. The
length of the sales cycle may be extended beyond four to nine months due to
factors over which we have little or no control, including the size of the
transaction and the level of competition we encounter. The average size of our
license transactions has increased in recent periods as we have generated an
increasingly larger percentage of our revenues from a limited number of large,
enterprise customers. This trend, should it continue, could have the effect of
further extending our sales cycle. During our sales cycle, we typically provide
a significant level of education to prospective customers regarding the use and
benefits of our products. Any delay in the sales cycle of a large license or a
number of smaller licenses could have an adverse effect on our operating results
and financial condition.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY RESULT IN PERIODIC
REDUCTIONS IN OUR REVENUES AND IMPAIRMENT OF OUR OPERATING RESULTS.
Seasonality in our business could result in our revenues in a given period
being less than market estimates. Seasonality could also result in
quarter-to-quarter decreases in our revenues. In either of these events,
seasonality could have an adverse impact on our results of operations.
Historically, our revenues and operating results in our December quarter have
tended to benefit, relative to our June and September quarters, from purchase
decisions made by the large concentration of our customers with calendar
year-end budgeting requirements. Our June and September quarters tend to be our
weakest. Revenues and operating results in the March quarter have tended to
benefit from the efforts of our sales force to meet fiscal year-end sales
quotas. Notwithstanding these seasonal factors, other
26
factors, including those identified in this section, could still result in
reduced revenues or operating results in our December and March quarters. For
example, we may not experience the typical increase in demand in our December
quarter if the downturn in capital spending and technology investment continues
through the end of 2001 or beyond. In addition, our pending acquisition of
Remedy Corporation could have an adverse effect on revenues during these periods
if customers defer purchases as a result of uncertainty about the merger or in
order to determine how Peregrine and Remedy will integrate their product lines.
In addition, historical patterns may change over time, particularly as our
operations become larger and the sources of our revenue change or become more
diverse. For example, our international operations have expanded significantly
in recent years, particularly in Europe. We also have an international presence
in the Pacific Rim and Latin America. We may experience variability in demand
associated with seasonal buying patterns in these foreign markets. As an
example, our September quarter is typically weaker in part due to the European
summer holiday season.
OUR JUNE 2000 ACQUISITION OF HARBINGER CORPORATION MAY REDUCE OUR REVENUE
GROWTH RATES AND MAKE PREDICTION OF OUR FUTURE REVENUES AND OPERATING RESULTS
MORE DIFFICULT AS WE INTEGRATE OUR BUSINESSES AND ATTEMPT TO FOCUS THE STRATEGIC
MODEL OF THE COMBINED COMPANY.
Harbinger's revenues prior to the acquisition were growing at a
substantially slower rate than our revenues, due in large part to declining
revenues for Harbinger's legacy electronic commerce software business. If our
efforts to refocus Harbinger's business and integrate it with that of Peregrine
are not successful, our future revenue growth rates could be substantially less
than our historic growth rates, and our future revenues and operating results
could be impaired. We have already begun to de-emphasize and discontinue certain
businesses of Harbinger that we do not believe are strategic to the combined
company. In September 2000, we completed the sale of one of Harbinger's product
lines, and we may sell or discontinue other Harbinger products or businesses in
the future. We expect this recent divestiture and any future discontinuations or
divestitures will result in revenue reductions that may not be offset by
revenues from other sources. In particular, our future revenue and operating
results may be adversely affected from the acquisition and subsequent
integration processes for a number of reasons, including the following:
- Revenues for Harbinger's e-commerce software products may continue to
decline, and we may not be able to offset these declines with increased
revenues from our infrastructure management or other product lines.
- Harbinger's web-based supply catalog and vertical supply businesses are
still in their early stages, and a sustainable market may not develop for
these services as offered by our e-markets group.
HARBINGER AND SOME OF ITS FORMER OFFICERS AND DIRECTORS ARE DEFENDANTS IN
SHAREHOLDER LITIGATION FOR WHICH NEITHER PEREGRINE NOR HARBINGER IS INSURED. THE
OUTCOME OF THIS LITIGATION, IF DETERMINED ADVERSELY TO HARBINGER, COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION.
In September 1999, a complaint was filed against Harbinger and some of its
then-current and former officers and directors in the United States District
Court for the Northern District of Georgia. The complaint alleges that the
defendants misrepresented or omitted material facts in violation of federal
securities laws. An amended complaint was filed in March 2000, expanding upon
the allegations of the initial complaint by, among other things, alleging
accounting improprieties. The complaint relates to actions by Harbinger during
the period from February 1998 to October 1998. Harbinger did not maintain
directors' and officers' liability insurance during this period. As a result, we
are not insured with respect to any potential liability of Harbinger or any
officer or director of Harbinger. Harbinger was, however, obligated under
agreements with each of its officers and directors to indemnify them for the
costs incurred in connection with defending themselves against this litigation
and is obligated to indemnify them to the maximum extent permitted under
applicable law if they are held liable. In connection with the acquisition, we
agreed to honor these contractual arrangements.
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In October 2000, we entered into an agreement in principle to settle this
class action lawsuit. If the settlement is finalized and approved by the court,
we will be required to make an aggregate cash payment of $2.25 million to a
class of former shareholders of Harbinger in exchange for dismissal of all
claims against Harbinger. Although the parties to the litigation have agreed in
principle to this settlement, final settlement is subject to further
documentation, various contingencies, and approval by the court. The court may
not approve the settlement. If the court does not approve the settlement, the
plaintiffs in the lawsuit may proceed with their claims without prejudice. It is
also possible that, if the settlement is approved by the court, claims could be
pursued by class members who opt out of the class settlement by filing
appropriate notices with the court. If the litigation were to continue to
proceed, we could be required to spend substantial sums in an effort to litigate
this matter. Continued litigation would be likely to result in a diversion of
management's time and attention away from business operations. If the litigation
were decided adversely to Harbinger, or if we were to agree in the future to
settle this litigation for a substantial sum as a result of failure to obtain
court approval of the pending settlement or for any other reason, our financial
condition and results of operations could be materially and adversely affected.
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 to our business or technologies. These investments have generally
been made by issuing shares of our common stock or, to a lesser extent, paying
cash. Many of these 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
our incurring losses or our being unable to recover the carrying value of our
investments. For example, during fiscal 2001, we recognized impairment charges
totalling $490 million, associated principally with impairment of acquired
assets but to a lesser extent with strategic investments. We will continue to
monitor the value of these investments, and may have additional impairment
charges in the future.
OUR BUSINESS AND OPERATING RESULTS WILL BE HARMED IF WE CANNOT COMPETE
EFFECTIVELY AGAINST OTHER COMPANIES IN OUR MARKETS.
The markets for our products are intensely competitive and diverse, and the
technologies for our products can change rapidly. New products are introduced
frequently and existing products are continually enhanced. We face competition
from a number of sources in the markets for our infrastructure resource
management, procurement and e-business connectivity solutions. We face
competition from numerous companies that offer products that compete with one or
more of our products and services. With respect to our infrastructure management
products, these competitors include software companies as well as information
technology and system management companies, such as Applix, Blue Ocean, Computer
Associates, Control Software (a division of CSI-Maximus), FrontRange,
Hewlett-Packard, IBM, Intraware, Main Control, Microsoft, MRO Software (formerly
Project Software and Development Inc.), Network Associates, Nortel, PeopleSoft,
Remedy, and Royal Blue Technologies. In the markets served by our e-commerce
enablement technology, we face competition from providers of customer
relationship portals, such as Aspect Communications; providers of catalog
management solutions, such as Requisite Technology; providers of e-commerce
enablement software such as webMethods; and providers of legacy e-commerce
technology and services such as SBC Communications, through its acquisition of
Sterling Commerce, and General Electric eXchange Solutions. In the markets for
employee relationship management products, including procurement and
e-procurement solutions, we face competition from established providers of
business-to-business Internet commerce solutions such as Ariba and CommerceOne;
established providers of enterprise resource planning software such as Oracle
and SAP; and numerous start-up and other entrepreneurial
28
companies offering products that provide one or more aspects of employee
relationship management such as self-help service offerings, or web-based
knowledge management systems.
If we cannot compete effectively in our markets by offering products that
are comparable in functionality, ease of use and price to those of our
competitors, our revenues will decrease and our operating results will be
adversely affected. Many of our current and potential competitors have
substantially greater financial, technical, marketing and other resources than
we have. As a result, they may be able to devote greater resources than we can
to the development, promotion and sale of their products, and they may be able
to respond more quickly to new or emerging technologies and changes in customer
needs.
Additional competition from new entrepreneurial companies or established
companies entering our markets could have an adverse effect on our business,
revenues and operating results. In addition, alliances among companies that are
not currently direct competitors could create new competitors with substantial
market presence. Because few barriers to entry exist in the software industry,
we anticipate additional competition from new and established companies as well
as business alliances. We expect that the software industry will continue to
consolidate. In particular, we expect that large software companies will
continue to acquire or establish alliances with our smaller competitors, thereby
increasing the resources available to those competitors. These new competitors
or alliances could rapidly acquire significant market share at our expense.
WE MAY EXPERIENCE INTEGRATION OR OTHER PROBLEMS WITH NEW ACQUISITIONS, WHICH
COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS OR RESULTS OF OPERATIONS. NEW
ACQUISITIONS COULD DILUTE THE INTERESTS OF EXISTING STOCKHOLDERS, AND THE
ANNOUNCEMENT OF NEW ACQUISITIONS COULD RESULT IN A DECLINE IN THE PRICE OF OUR
COMMON STOCK.
In addition to the acquisition of Harbinger, we have made a number of
acquisitions of businesses and technologies over the last three years, and we
expect to continue to make acquisitions as part of our growth strategy. We are
frequently in formal or informal discussions with potential acquisition
candidates. Accordingly, we may in the future make acquisitions of, or large
investments in, businesses that offer products, services and technologies that
we believe would complement our products or services. We may also make
acquisitions of, or investments in, businesses that we believe could expand our
distribution channels. Even though we announce an acquisition, we may not be
able to complete it. Any future acquisition or substantial investment would
present numerous risks. The following are examples of these risks:
- difficulty in combining the technology, operations or work force of the
acquired business;
- disruption of our on-going business;
- difficulty in realizing the potential financial or strategic benefits of
the transaction;
- difficulty in maintaining uniform standards, controls, procedures and
policies;
- possible impairment of relationships with employees and customers as a
result of integration of new businesses and management personnel; and
- impairment of assets related to resulting goodwill, and reductions in our
future operating results from amortization of goodwill and other
intangible assets.
We expect that future acquisitions could provide for consideration to be
paid in cash, shares of our common stock, or a combination of cash and our
common stock. If the consideration for the transaction were paid in common
stock, this would further dilute our existing stockholders. In addition, we may
raise additional equity or debt capital to finance cash acquisitions. Raising
additional equity capital would further dilute the interests of our existing
stockholders, and additional debt could impair our operating results and
financial condition. Additional financing may not be available when and as
29
needed on commercially reasonable terms, if at all. If an inability to obtain
financing were to preclude us from making an acquisition or completing a
previously announced acquisition, our future operating results could be
adversely affected, and our stock price could fall.
In June 2001, we announced our proposed acquisition of Remedy Corporation.
For additional factors related to that pending transaction, please refer to the
additional information under the caption "Additional risks associated with our
pending acquisition of Remedy Corporation" beginning on page 39 of this report.
OUR FUTURE REVENUES AND OPERATING RESULTS MAY BE ADVERSELY AFFECTED IF THE
SOFTWARE APPLICATION MARKET CONTINUES TO EVOLVE TOWARD A SUBSCRIPTION-BASED
MODEL, WHICH MAY PROVE LESS PROFITABLE FOR US.
We expect our revenue growth rates and operating results to be adversely
affected as customers require us to offer our products under a
subscription-based application service provider model. Historically, we have
sold our infrastructure management solutions on a perpetual license basis in
exchange for an up-front license fee. Customers are increasingly attempting to
reduce their up-front capital expenditures by purchasing software applications
under a hosted subscription service model. Under the hosted model, the customer
subscribes to use an application from the software provider. The application is
generally hosted on a server managed by the software provider or a third-party
hosting service. We expect that a substantial portion of future revenues
generated by our e-markets group will be realized under a subscription-based
model. We also expect that an increasing portion of future revenues generated by
our infrastructure management group may be represented by subscriptions.
Under the subscription revenue model, we generally will recognize revenue
and receive payment ratably over the term of a customer's subscription. As a
result, our rates of revenue growth under a subscription model may be less than
our historical rates under a license model. In addition, the price of our
services will be fixed at the time of entering into the subscription agreement.
If we are unable to adequately predict the costs associated with maintaining and
servicing a customer's subscription, then the periodic expenses associated with
a subscription may exceed the revenues we recognize for the subscription in the
same period, which would adversely affect our operating results.
In addition, if we are not successful in implementing the subscription
revenue model, or if market analysts or investors do not believe that the model
is attractive relative to our traditional license model, our business could be
impaired, and our stock price could decline dramatically.
IF WE, OR THIRD PARTIES ON WHICH WE WILL RELY, ARE UNABLE TO ADEQUATELY
DELIVER OUR INTERNET-BASED APPLICATIONS, OUR OPERATING RESULTS MAY BE ADVERSELY
AFFECTED.
We currently use our own servers to deliver our Internet-based products to
customers. We have, however, entered into agreements with a third party to
provide a full complement of services that will enable us to outsource the
delivery of these Internet-based products to our customers. For example, our
third-party service providers will manage the application servers, maintain
communications equipment, manage the network data centers where our software and
data will be stored, and provide client support. If we are unable to adequately
deliver our Internet-based applications, we may lose customers or be unable to
attract new customers, which would adversely affect our revenues.
In addition, the third-party service providers that we engage may not
deliver adequate support or service to our clients, which may harm our
reputation and our business. Because these third-party service providers handle
the installation of the computer and communications equipment and software
needed for the day-to-day operations of our Internet-based applications, we will
be dependent on them to manage, maintain and provide adequate security for
customer applications. If our customers experience any delays in response time
or performance problems while using our Internet applications, as hosted by a
third-party or by us, our customers may perceive the delays as defects with our
products and may stop using our applications, which would adversely affect our
revenues.
30
We have limited experience outsourcing these services and may have
difficulty managing this process. We will be required to monitor our third-party
service providers to ensure that they perform these services adequately. In
addition, if we do not maintain good relations with these third-party service
providers, or if they go out of business, they may be unable to perform critical
support functions for us. If we were unable to find replacement third-party
service providers, we would be required to perform these functions ourselves. We
may not be successful in obtaining or performing these services on a timely or
cost-effective basis.
IF WE DO NOT RESPOND ADEQUATELY TO OUR INDUSTRY'S EVOLVING TECHNOLOGY
STANDARDS, OR DO NOT CONTINUALLY DEVELOP PRODUCTS THAT MEET THE COMPLEX AND
EVOLVING NEEDS OF OUR CUSTOMERS, SALES OF OUR PRODUCTS MAY DECREASE.
As a result of rapid technological change in our industry, our competitive
position in existing markets, or in markets we may enter in the future, can be
eroded rapidly by product advances and technological changes. We may be unable
to improve the performance and features of our products as necessary to respond
to these developments. In addition, the life cycles of our products are
difficult to estimate. Our growth and future financial performance depend in
part on our ability to improve existing products and develop and introduce new
products that keep pace with technological advances, meet changing customer
needs, and respond to competitive products. Our product development efforts will
continue to require substantial investments. In addition, competitive or
technological developments may require us to make substantial, unanticipated
investments in new products and technologies, and we may not have sufficient
resources to make these investments.
IF WE CANNOT ATTRACT AND RETAIN QUALIFIED SALES PERSONNEL, SOFTWARE
DEVELOPERS, AND CUSTOMER SERVICE PERSONNEL, WE WILL NOT BE ABLE TO SELL AND
SUPPORT OUR PRODUCTS.
Competition for qualified employees is intense, particularly in the
technology industry, and we have in the past experienced difficulty recruiting
qualified employees. If we are not successful in attracting and retaining
qualified sales personnel, software developers, and customer service personnel,
our revenue growth rates could decrease, or our revenues could decline, and our
operating results could be materially harmed. Our products and services require
a sophisticated selling effort targeted at several key people within a
prospective customer's organization. This process requires the efforts of
experienced sales personnel as well as specialized consulting professionals. In
addition, the complexity of our products, and issues associated with installing
and maintaining them, require highly-trained customer service and support
personnel. We intend to hire a significant number of these personnel in the
future and train them in the use of our products. We believe our success will
depend in large part on our ability to attract and retain these key employees.
IF IMMIGRATION LAWS LIMIT OUR ABILITY TO RECRUIT AND EMPLOY SKILLED
TECHNICAL PROFESSIONALS FROM OTHER COUNTRIES, OUR BUSINESS AND OPERATING RESULTS
COULD BE HARMED.
Limitations under United States immigration laws could prevent us from
recruiting skilled technical personnel from foreign countries, which could harm
our business if we do not have sufficient personnel to develop new products and
respond to technological changes. This inability to hire technical personnel
could lead to future decreases in our revenues or decreases in our revenue
growth rates, either of which would adversely affect our operating results.
Because of severe shortages for qualified technical personnel in the United
States, many companies, including Peregrine, have recruited engineers and other
technical personnel from foreign countries. Foreign computer professionals such
as those we have employed typically become eligible for employment in the United
States by obtaining a nonimmigrant visa. The number of nonimmigrant visas is
limited annually by federal immigration laws. In recent years, despite increases
in the number of available visas, the annual allocation has been exhausted well
before year-end.
31
OUR BUSINESS COULD BE HARMED IF WE LOST THE SERVICES OF ONE OR MORE MEMBERS
OF OUR SENIOR MANAGEMENT TEAM.
The loss of the services of one or more of our executive officers or key
employees, or the decision of one or more of these individuals to join a
competitor, could adversely affect our business and harm our operating results
and financial condition. Our success depends to a significant extent on the
continued service of our senior management and other key sales, consulting,
technical and marketing personnel. None of our senior management is bound by an
employment or non-competition agreement. We do not maintain key man life
insurance on any of our employees.
IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, THIS WILL PLACE A SIGNIFICANT
STRAIN ON OUR MANAGEMENT AND OPERATIONAL RESOURCES.
Our recent growth rates, together with integration efforts resulting from
our numerous acquisitions, have placed a significant strain on our management
and operational resources. We have expanded the size and geographic scope of our
operations rapidly in recent years, both internally and through acquisitions,
and intend to continue to expand in order to pursue market opportunities that
our management believes are attractive. Our customer relationships could be
strained if we are unable to devote sufficient resources to them as a result of
our growth, which could have an adverse effect on our future revenues and
operating results.
WE MAY BE UNABLE TO EXPAND OUR BUSINESS AND INCREASE OUR REVENUES IF WE ARE
UNABLE TO EXPAND OUR DISTRIBUTION CHANNELS.
If we are unable to expand our distribution channels effectively, our
business, revenues and operating results could be harmed. In particular, we will
need to expand our direct sales force and establish relationships with
additional system integrators, resellers and other third party partners who
market and sell our products. If we cannot establish these relationships, or if
our 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 and, 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 continue to expand internationally. If we
expend substantial resources pursuing an international strategy and are not
successful, our revenues will be less than our management or market analysts
anticipate, and our operating results will suffer. International revenues
represented approximately 36%, 41% and 36% of our business in fiscal 1999, 2000
and 2001, respectively. We have several international sales offices in Europe,
as well as offices in Japan, Singapore, Australia and elsewhere. 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. In particular, we may experience gains and losses
resulting from fluctuations in currency exchange rates, for which hedging
activities may not adequately protect us. Moreover, exchange rate risks can have
an adverse effect on our ability to sell our products in foreign markets. Where
we sell our products in U.S. dollars, our sales
32
could be adversely affected by declines in foreign currencies relative to the
dollar, thereby making our products more expensive in local currencies. Where we
sell our products in local currencies, we could be competitively unable to
change our prices to reflect fluctuations in the exchange rate. In recent
periods, for example, our revenues in Europe have been adversely affected by the
decline in the value of the Euro and its component currencies relative to the
U.S. dollar.
Additional risks we face in conducting business internationally include the
following:
- longer payment cycles;
- difficulties in staffing and managing international operations;
- problems in collecting accounts receivable; and
- the adverse effects of tariffs, duties, price controls or other
restrictions that impair trade.
OUR REVENUES, OPERATING RESULTS, AND STOCK PRICE COULD BE ADVERSELY AFFECTED
IF WE WERE UNABLE TO CONDUCT OUR BUSINESS. IN PARTICULAR, OUR ADMINISTRATIVE
FACILITIES AND PRINCIPAL BUSINESS OPERATIONS ARE LOCATED IN CALIFORNIA, AND ANY
DISRUPTION IN THE AVAILABLE POWER SUPPLY IN CALIFORNIA COULD DISRUPT OUR
OPERATIONS, REDUCE OUR REVENUES, AND INCREASE OUR EXPENSES.
Our operations, and those of third parties on which we rely, are vulnerable
to interruption by fire, earthquake, power loss, telecommunications failure and
other events beyond our control. A substantial portion of our operating
activities and facilities, including our headquarters and principal
administrative facilities, are located in the State of California. California is
in the midst of an energy crisis that could interrupt our power supply or that
of our third-party service providers and thereby disrupt our operations and
increase our expenses. In the event of an acute power shortage, California has
implemented, and may in the future continue to implement, rolling blackouts
throughout the state. In the event these blackouts continue or increase in
severity, they could disrupt the operations of one or more of our facilities. We
currently maintain back-up generators of power in the event of a blackout.
Although our current insurance provides some coverage for any damages we, but
not our customers, may suffer as a result of any interruption in our power
supply, it may prove insufficient to cover any damages we might incur. We are in
the process of developing a plan to permit us to continue to operate critical
functions based in California during a blackout. Despite these precautions, we
may experience an interruption in our power supply. If blackouts or other forces
interrupt our power supply we would be temporarily unable to continue operations
at our facilities. Any interruption in our ability to continue operations at our
facilities could damage our reputation, harm our ability to retain existing
customers and to obtain new customers, and could result in lost revenue, any of
which could substantially harm our business and results of operations.
In addition, the utility deregulation program instituted in 1996 by the
California government deregulated wholesale prices while continuing to regulate
the retail prices charged by the electrical utilities. While wholesale prices
have increased dramatically, retail prices have, until recently, not increased
at comparable rates. Our business is substantially dependent on the availability
and price of electricity. If retail electricity prices rise dramatically, we
expect our expenses will increase, our operating results will be harmed, and our
stock price could fall.
OUR OUTSTANDING INDEBTEDNESS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, AND WE MAY INCUR SUBSTANTIALLY MORE DEBT.
As of the date of this report, we have approximately $265 million of
indebtedness outstanding, consisting principally of our 5 1/2% convertible
subordinated notes due 2007. Our indebtedness could adversely affect our results
of operations and financial condition. For example, our results of operations
33
will be adversely affected by approximately $15 million in annual interest
expenses, payable semi-annually. In addition, our indebtedness could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to obtain additional financing;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry; and
- place us at a competitive disadvantage relative to our competitors with
less debt.
Our indebtedness will require the dedication of a substantial portion of our
cash flow from operations to the payment of principal and interest on our
indebtedness, thereby reducing the availability of the cash flow to fund our
growth strategy, working capital, capital expenditures and other general
corporate purposes.
We may incur substantial additional debt in the future. The terms of our
existing indebtedness does not, and future indebtedness may not, prohibit us
from doing so. If new debt is added to our current levels, the related risks
described above could intensify.
WE MAY HAVE INSUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE OBLIGATIONS.
We will be required to generate cash sufficient to pay all amounts due on
our outstanding indebtedness and to conduct our business operations. We have
incurred net losses, and we may not be able to cover our anticipated debt
service obligations. This may materially hinder our ability to make payments on
our indebtedness. Our ability to meet our future debt service obligations will
be dependent upon our future operating performance, which will be subject to
financial, business and other factors affecting our operations, many of which
are beyond our control.
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 covering up to approximately
540,000 square feet of office space, including an option on approximately
118,000 square feet, for our headquarters in San Diego, California. This office
space (including the option) relates to a five building campus in San Diego,
California, of which four buildings are presently occupied. Our San Diego
personnel occupy three of these buildings, and we sublease part of the fourth
building. In June 2001, we exercised our option for the fifth and final building
at the San Diego campus, which is scheduled to be completed in October 2002.
Including the exercise of the option, the leases require minimum aggregate lease
payments of approximately $201.2 million over their term, which is approximately
twelve years. In Atlanta, we lease approximately 95,000 square feet of space,
principally for our e-markets group, under a lease expiring in 2008. The capital
commitments, construction oversight, and movement of personnel and facilities
involved in a transaction of this type and magnitude present numerous risks,
including:
- failure to properly estimate the future growth of our business;
- inability to sublease excess office space if we overestimate future
growth;
- disruption of operations; and
- inability to match fixed lease payments with fluctuating revenues, which
could impair our earnings or result in losses.
PRODUCT DEVELOPMENT DELAYS COULD HARM OUR COMPETITIVE POSITION AND REDUCE
OUR REVENUES.
34
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 a sufficient number of developers,
discovery of software 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 CORRECT THE ERRORS OR BUGS AND COULD RESULT IN PRODUCT LIABILITY
CLAIMS.
If we were required to expend significant amounts to correct software bugs
or errors, our revenues could be harmed as a result of an inability to deliver
the product, and our operating results could be impaired as we incur additional
costs without offsetting revenues. Errors can be detected at any point in a
product's life cycle. We have experienced errors in the past that have resulted
in delays in product shipment and increased costs. Discovery of errors could
result in any of the following:
- loss of or delay in revenues and loss of customers or market share;
- failure to achieve market acceptance;
- diversion of development resources and increased development expenses;
- increased service and warranty costs;
- legal actions by our customers; and
- increased insurance costs.
If we were held liable for damages incurred as a result of our products, our
operating results could be significantly impaired. Our license agreements with
our customers typically contain provisions designed to limit exposure to
potential product liability claims. However, these limitations may not be
effective under the laws of some jurisdictions. Although we have not experienced
any product liability claims to date, the sale and support of our products
entails the risk of these claims.
WE COULD BE COMPETITIVELY DISADVANTAGED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY.
If we fail to adequately protect our proprietary rights, competitors could
offer similar products relying on technologies we developed, potentially harming
our competitive position and decreasing our revenues. We attempt to protect our
intellectual property rights by limiting access to the distribution of our
software, documentation, and other proprietary information and by relying on a
combination of patent, copyright, trademark, and trade secret laws. In addition,
we enter into confidentiality agreements with our employees and certain
customers, vendors, and strategic partners. In some circumstances, however, we
may, if required by a business relationship, provide our licensees with access
to our data model and other proprietary information underlying our licensed
applications.
Despite precautions that we take, it may be possible for unauthorized third
parties to copy aspects of our current or future products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of software
is difficult, and some foreign laws do not protect proprietary rights to the
same extent as United States laws. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, or to
determine the validity and scope of the proprietary rights of others, any of
which could adversely affect our revenues and operating results.
IF WE BECOME INVOLVED IN AN INTELLECTUAL PROPERTY DISPUTE, WE MAY INCUR
SIGNIFICANT EXPENSES OR MAY BE REQUIRED TO CEASE SELLING OUR PRODUCTS, WHICH
WOULD SUBSTANTIALLY IMPAIR OUR REVENUES AND OPERATING RESULTS.
35
In recent years, there has been significant litigation in the United States
involving intellectual property rights, including rights of companies in the
software industry. We have from time to time in the past received correspondence
from third parties alleging that we infringe the third party's intellectual
property rights. We expect these claims to increase as Peregrine and its
intellectual property portfolio become larger. Intellectual property claims
against us, and any resulting lawsuit, may result in our incurring significant
expenses and could subject us to significant liability for damages and
invalidate what we currently believe are our proprietary rights. These lawsuits,
regardless of their success, would likely be time-consuming and expensive to
resolve and could divert management's time and attention. Any potential
intellectual property litigation against us could also force us to do one or
more of the following:
- cease selling, incorporating or using products or services that
incorporate the infringed intellectual property;
- obtain from the holder of the infringed intellectual property a license to
sell or use the relevant technology, which license may not be available on
acceptable terms, if at all; or
- redesign those products or services that incorporate the disputed
intellectual property, which could result in substantial unanticipated
development expenses.
If we are subject to a successful claim of infringement and we fail to
develop non-infringing intellectual property or license the infringed
intellectual property 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 intellectual property rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could also result in significant expense and the diversion of
technical and management personnel's attention.
CONTROL BY OUR OFFICERS AND DIRECTORS MAY LIMIT OUR STOCKHOLDERS' ABILITY TO
INFLUENCE MATTERS REQUIRING STOCKHOLDER APPROVAL AND COULD DELAY OR PREVENT A
CHANGE OF 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 of control or discourage a potential
acquirer from attempting to obtain control of Peregrine. This could cause the
market price of our common stock to fall or prevent our stockholders from
realizing a premium in the market price in the event of an acquisition.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DISCOURAGE
POTENTIAL ACQUISITION BIDS FOR PEREGRINE AND MAY PREVENT CHANGES IN OUR
MANAGEMENT THAT STOCKHOLDERS OTHERWISE WOULD APPROVE.
Some provisions of our charter documents eliminate the right of stockholders
to act by written consent without a meeting and impose specific procedures for
nominating directors and submitting proposals for consideration at a stockholder
meeting. These provisions are intended to increase the likelihood of continuity
and stability in the composition of our board of directors and the policies
established by the board of directors. These provisions also discourage some
types of transactions, which may involve an actual or threatened change of
control. These provisions are designed to reduce Peregrine's vulnerability to an
unsolicited acquisition proposal. As a result, these provisions could discourage
potential acquisition proposals and could delay or prevent a change of control
transaction. These provisions are also intended to discourage common tactics
that may be used in proxy fights. As a result, they could have the effect of
discouraging third parties from making tender offers for our shares. These
provisions may prevent the market price of our common stock from reflecting the
effects of actual or rumored take-over attempts. These provisions may also
prevent changes in our management.
36
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 of 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.
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE HIGHLY VOLATILE,
WHICH MAY MAKE THE COMMON STOCK DIFFICULT TO RESELL AT ATTRACTIVE TIMES AND
PRICES.
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:
- actual or anticipated variations in our quarterly operating results;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the software industry generally or specifically in
the markets for infrastructure management or e-business connectivity
solutions;
- changes in the economic performance and/or market valuations of our
competitors and the software industry in general;
- announcements by us or our competitors of significant contracts, changes
in pricing policies, acquisitions, strategic partnerships, joint ventures
or capital commitments;
- adoption of industry standards and the inclusion of our technology in, or
compatibility of our technology with, the standards;
- adverse or unfavorable publicity regarding us or our products;
- our loss of a major customer;
- additions or departures of key personnel;
- sales of our common stock in the public market; and
- other events or factors that may be beyond our control.
In addition, the stock markets in general, and in particular the markets for
securities of technology and software companies, have experienced extreme price
and volume volatility and a significant cumulative decline in recent months.
This volatility has affected many companies irrespective of or
disproportionately to the operating performance of these companies. These broad
market and industry factors can materially and adversely affect the market price
of our common stock, regardless of our actual operating performance.
ADDITIONAL RISKS ASSOCIATED WITH OUR PENDING ACQUISITION OF REMEDY CORPORATION
On June 11, 2001, we announced that we entered into a definitive merger
agreement under which we would acquire all the outstanding shares of Remedy
Corporation, a supplier of information technology service management and
customer relationship management solutions. If the merger is completed, we will
acquire all of the outstanding common stock of Remedy. Each outstanding share of
Remedy common stock will be exchanged for $9.00 in cash and 0.9065 shares of our
common stock. In addition, we will assume options outstanding under Remedy's
employee stock incentive plans. Excluding
37
assumed options and based on Remedy's outstanding common stock as of June 7,
2001, we expect to issue approximately 28 million shares of our common stock in
connection with the merger and to pay Remedy stockholders an aggregate of
approximately $274.5 million in cash. 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 Remedy and Peregrine.
Closing of the acquisition is subject to approval by Remedy's stockholders,
regulatory approvals (including United States and foreign antitrust approvals),
and customary closing conditions. In connection with the proposed merger, we
expect to file a Registration Statement on Form S-4 with the Securities and
Exchange Commission. The registration statement will contain a proxy statement
to be mailed to Remedy's stockholders containing additional information about
the proposed merger. Investors and securities holders are urged to read the
registration statement and the proxy statement when they are available. The
registration statement and the proxy statement will contain important
information about Remedy, Peregrine, the proposed merger, risks relating 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
REMEDY. ANY INTEGRATION PROBLEMS COULD CAUSE US TO INCUR SUBSTANTIAL
UNANTICIPATED COSTS AND EXPENSES, WHICH WOULD HARM OUR OPERATING RESULTS.
If we fail to successfully integrate our business with Remedy's business, we
will incur substantial costs, which will increase our expenses and increase our
losses. Our target markets have differed historically. Specifically, Peregrine's
customer base has been comprised principally of large, multinational
enterprises, while Remedy's sales have historically focused primarily on small
to mid-size businesses and organizations and to departments or divisions of
large organizations. The characteristics of these two market segments may be
sufficiently distinct so that we do not realize the anticipated synergies of the
merger. We have less experience selling to smaller organizations, and our sales
practices and processes may not be well-suited to success in these markets. In
particular, our sales efforts tend to focus on senior executives, chief
financial officers and chief technology officers of large, multinational
corporations to whom we seek to sell large, enterprise-wide licenses of our
infrastructure management products. In contrast, Remedy's transaction sizes tend
to be substantially smaller, and their sales efforts, when targeted at larger
organizations, have focused historically on managers of departments or divisions
within the organization. In addition, Remedy markets and sells other products,
such as its customer relationship management products, that we have no
experience marketing or selling. If we are unsuccessful in integrating the
companies' respective businesses, our combined revenues could fall or grow at a
slower rate than anticipated, we could incur substantial unexpected expenses,
and we could fail to realize the anticipated benefits of the merger.
Any integration problems we experience could divert our 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 Remedy's business will be complex, time-consuming, and expensive.
The merger may disrupt both companies' businesses if not completed in a timely
and efficient manner. Peregrine and Remedy are both global companies with
substantial operations throughout the world, and integrating geographically
separate and dispersed organizations may be difficult. Specific integration
challenges faced by Peregrine and Remedy 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;
38
- 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.
THE ANNOUNCEMENT OF THE MERGER COULD HAVE AN ADVERSE EFFECT ON ONE OR BOTH
COMPANIES' REVENUES IN NEAR-TERM QUARTERS IF CUSTOMERS DELAY, DEFER, OR CANCEL
PURCHASES PENDING RESOLUTION OF THE MERGER.
The announcement of the merger could have an adverse effect on the near-term
revenues and profitability of either or both of Peregrine and Remedy. In
particular, prospective customers could be reluctant to purchase either
company's products if they are uncertain about the direction of the combined
company's product offerings and its willingness to support and service existing
products. Since announcement of the merger, we have experienced questions from
prospective customers about the status of the merger and our anticipated product
integration plans, which have not yet been determined. We understand that Remedy
is experiencing similar inquiries. The merger was announced on June 11, 2001, in
the last month of Peregrine's first quarter of fiscal 2002 and the last month of
Remedy's second quarter of fiscal 2001. Both Peregrine and Remedy tend to
realize a substantial portion of their revenues during the last few weeks of a
quarter. Accordingly, the announcement of the merger could create uncertainty
among businesses and organizations contemplating software or service purchases
and subscriptions. If one large customer, or a significant group of small
customers, were to delay their purchase decisions pending resolution of the
merger, the quarterly revenues of either Peregrine or Remedy could be
substantially below the expectations of market analysts, which would have an
adverse effect on their results of operations and could cause a dramatic
reduction in either company's stock price. We anticipate announcement of the
merger could have an adverse effect on either or both companies' revenues in the
June 2001 and other near-term quarters pending completion of the merger and our
announcements concerning product integration initiatives.
THE MERGER COULD IMPAIR EXISTING RELATIONSHIPS OF PEREGRINE AND REMEDY 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 Peregrine or Remedy. 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 Remedy could
decide to cancel or terminate existing arrangements, or fail to renew
those arrangements, as a result of the merger;
- customers of Remedy could terminate or delay orders with Remedy because
they question Remedy's continued commitment to provide products and
enhancements, or to support products;
- key employees of Remedy may decide to terminate their employment; and
- other current or prospective employees of Peregrine and Remedy 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.
39
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 28 million shares of our common stock (including
options being assumed), representing approximately 17.4% of our outstanding
common stock as of March 31, 2001.
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 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.
- the benefits that we expect to realize from the merger, such as the
potentially enhanced financial position of the combined company, would not
be realized; and
- the diversion of management attention from our day-to-day business and the
unavoidable disruption to our employees and our relationships with
customers and suppliers during the period before consummation of the
merger may make it difficult for us to regain our financial market
position if the merger does not occur.
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 .
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in our consolidated
financial statements and notes thereto beginning on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PEREGRINE
The following table sets forth information with respect to our executive
officers and directors as of June 15, 2001.
NAME AGE POSITION
- ---- -------- ---------------------------------------------------
Stephen P. Gardner........................ 47 Chairman of the Board of Directors and Chief
Executive Officer
Matthew C. Gless.......................... 35 Executive Vice President, Finance, Chief Financial
Officer and Director
Louis A. Blatt............................ 39 President, E-Markets Group (EMG)
Andrew V. Cahill, Jr...................... 43 President, Infrastructure Management Group (IMG)
Gary L. Lenz.............................. 54 President, Integrated Solutions Group (ISG)
Eric P. Deller............................ 40 Vice President, General Counsel and Assistant
Secretary
R. Stephen Kiser.......................... 54 Senior Vice President, Research & Development and
Product Marketing
Frederic B. Luddy......................... 46 Chief Technology Officer
Daniel L. Manack.......................... 43 Senior Vice President, EMG Operations
Richard T. Nelson......................... 41 Senior Vice President, IMG Operations and Secretary
Thomas A. Smith........................... 51 Senior Vice President, Corporate Marketing
Barry M. Ariko............................ 55 Vice President and Director
Christopher A. Cole....................... 47 Director
John J. Moores (2)........................ 56 Director
Charles E. Noell III (1)(2)............... 48 Director
William B. Richardson..................... 53 Director
William D. Savoy (1)...................... 36 Director
Thomas G. Watrous, Sr. (1)(2)............. 59 Director
- ------------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
STEPHEN P. GARDNER became the chairman of our board of directors in
July 2000 and has served as our chief executive officer since 1998. Mr. Gardner
served as our president and as a director from April 1998 to July 2000. From
January 1998 until April 1998, Mr. Gardner served as our 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.
MATTHEW C. GLESS became our executive vice president, finance in May 2001
and has served as our chief financial officer and a member of our board of
directors since October 2000. Mr. Gless served as our vice president, finance
and chief accounting officer from October 1998 until October 2000. From
41
April 1996 until October 1998, Mr. Gless served as our corporate controller.
From 1990 until April 1996, Mr. Gless held various accounting and financial
management positions at BMC Software, Inc.
LOUIS A. BLATT became president of our e-markets group in April 2001. From
November 2000 to April 2001, Dr. Blatt served as the executive vice president
and general manager of our e-markets group. Prior to joining Peregrine,
Dr. Blatt served as executive vice president, strategy and business development
at MediaBridge, Inc. From 1996 to 2000, Dr. Blatt served first as a principal
and later as a partner of the firm of Arthur Andersen LLP. From 1994 to 1996
Dr. Blatt served as vice president of new media for Logica, Inc. Dr. Blatt
earned a Ph.D. in psychology and computers at Boston University in 1990.
ANDREW V. CAHILL, JR. became president of our infrastructure management
group in May 2001. Mr. Cahill served as our senior vice president, worldwide
sales from May 2000 to April 2001. From June 1998 to May 2000, Mr. Cahill served
as senior vice president of worldwide sales for Candle Corporation, a privately
held global software company. From September 1981 to May 1998, Mr. Cahill served
in a variety of U.S. and international sales and marketing management roles at
International Business Machines Corporation.
GARY L. LENZ became president of our integrated solutions group in
May 2001. Mr. Lenz served as our president and chief operating officer from
May 2000 to April 2001. From 1983 until May 2000, Mr. Lenz held various
positions at Arthur Andersen LLP and most recently served as managing partner of
its worldwide real estate and hospitality industry practice.
ERIC P. DELLER became assistant secretary in April 2001 and 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 until 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 1991 until February 1997, Mr. Deller was an associate
at the law firm of McKenna & Cuneo.
R. STEVEN KISER has served as senior vice president of research and
development and product marketing since January 2001. Prior to joining
Peregrine, Mr. Kiser served as vice president and group executive at Candle
Corporation. From 1996 to 1999, Mr. Kiser served as chief executive officer and
president of Chrystal Software, Inc. Before that, Mr. Kiser held various senior
positions, including director of worldwide marketing, during his 23-year career
with Xerox Corporation, and served as president of Xsoft, the software division
of Xerox.
FREDERIC B. LUDDY has served as our vice president, research and development
and chief technology officer since January 1998. From October 1995 until
January 1998, Mr. Luddy served as product architect for our SERVICECENTER
product suite. From April 1990 to October 1995, Mr. Luddy was a product author.
DANIEL L. MANACK has served as our senior vice president, EMG operations
since April 2001. Mr. Manack was our senior vice president, professional
services from July 2000 to April 2001. Mr. Manack held various positions at
Harbinger from January 1997 until July 2000, and most recently served as its
senior vice president of global operations. From September 1994 until
December 1996, he was a principal with the information services unit of Unisys
Corporation. From June 1980 until August 1994, Mr. Manack held various executive
positions at Texas Instruments.
RICHARD T. NELSON has served as our senior vice president, IMG operations
since April 2001 and as our corporate secretary since February 1997. Mr. Nelson
was our vice president, corporate development from March 2000 to April 2001.
Mr. Nelson served as our vice president and general counsel from
42
November 1995 until March 2000. From August 1991 until November 1995,
Mr. Nelson was an associate at the law firm of Jackson & Walker LLP.
THOMAS A. SMITH has served as senior vice president, corporate marketing
since August 2000. From 1996 to 2000, Mr. Smith was a partner at Arthur Andersen
and director of global integrated marketing for Arthur Andersen's real estate
and hospitality practice. Mr. Smith began his career as an investment broker at
CB Richard Ellis, where he later served as an executive vice president from 1990
to 1996.
BARRY M. ARIKO has served as vice president since June 2001 and has served
as a member of our board of directors since April 2001. Mr. Ariko served as
president and chief executive officer of Extricity, Inc. from February 2000
until Peregrine's acquisition of Extricity in March 2001. Mr. Ariko served as
chairman of Extricity's board of directors from March 2000 to March 2001. From
March 1999 to January 2000, Mr. Ariko was a senior vice president at America
Online, Inc., where he had responsibility for the Netscape Enterprise Group.
Prior to the acquisition of Netscape Communications Corp. by America Online in
March 1999, Mr. Ariko served as executive vice president and chief operating
officer of Netscape. From 1994 to August 1998, Mr. Ariko served as executive
vice president and as a member of the executive management committee at Oracle
Corporation. Mr. Ariko currently serves as a director of Autonomy Corporation
PLC and Incyte Genomics, Inc.
CHRISTOPHER A. COLE has served as a member of our board of directors since
founding Peregrine in 1981. He also served as our 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.
JOHN J. MOORES has served as a member of our board of directors since
March 1989 and as chairman of our board from March 1990 until July 2000. In
1980, Mr. Moores founded BMC Software, Inc. and served as its president and
chief executive officer from 1980 until 1986 and as chairman of its board of
directors from 1980 until 1992. Since June 2001, Mr. Moores has served as the
interim chief executive officer of Neon Systems, Inc., and he is also a director
and member of the compensation committee of Neon Systems. Since December 1994,
Mr. Moores has served as owner and chairman of the board of the San Diego Padres
Baseball Club, L.P. Since September 1991 Mr. Moores has served as chairman of
the board of JMI Services, Inc., a private investment company.
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.
WILLIAM B. RICHARDSON has served as a member of our board of directors since
February 2001. Mr. Richardson is currently an adjunct professor at Harvard
University's John F. Kennedy School of Government and is on the lecture circuit
nationally. Mr. Richardson was sworn in as the U.S. Secretary of Energy in 1998.
Mr. Richardson was appointed U.S. Ambassador to the United Nations from 1997 to
1998. From 1983 to 1997 Mr. Richardson was a member of the United States
Congress representing New Mexico's 3rd Congressional district. Mr. Richardson
currently serves as a director of Valero Energy Corporation, Diamond Offshore,
Venoco Energy, Dev Co, Terra Solar, NRDC (Natural Resources Defense Counsel),
and Freedom House.
WILLIAM D. SAVOY has served as a director of Peregrine since June 2000.
Since 1988, Mr. Savoy has served as President of Vulcan Northwest, Inc., a
venture capital and investment firm. Mr. Savoy also serves as a director of
Telescan, TicketMaster Online City Search, USA Networks, Metricom, Charter
Communications, Drugstore.com, Go2Net, Value America and High Speed Access
Corporation.
43
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, a position he had held since 1990.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 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, 2001, except as
described below, all executive officers, directors and greater than ten percent
stockholders complied with all applicable filing requirements: Matthew C. Gless,
an officer and a director, inadvertently failed to timely file a Form 4 covering
one transaction; Christopher A. Cole, one of our directors, inadvertently failed
to timely file a Form 4 covering two transactions; Stephen P. Gardner, an
officer and a director, inadvertently failed to timely file two Forms 4 covering
a total of two transactions; Charles E. Noell III, one of our directors,
inadvertently failed to timely file two Forms 4 covering a total of four
transactions; and John J. Moores, one of our directors, inadvertently failed to
timely file a Form 4 covering a total of eighteen transactions. Each of the
foregoing omissions has been corrected with a late filing.
44
ITEM 11. EXECUTIVE COMPENSATION
(A) SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth 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, 2001 for
services rendered in all capacities for the years indicated.
LONG-TERM
COMPENSATION AWARDS
ANNUAL -------------------
COMPENSATION SECURITIES
FISCAL --------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION(9)
- --------------------------- -------- -------- ---------- ------------------- ---------------
CURRENT EXECUTIVE OFFICERS
Stephen P. Gardner ............ 2001 $450,007 $ 400,000(1) 201 $4,230
Chief Executive Officer 2000 250,000 137,500 291,850(8) 2,697
1999 250,040 343,750 730,000 2,599
Frederic B. Luddy ............. 2001 $222,912 $ 867,171(2) 182,701 $2,017
Chief Technology Officer 2000 150,000 605,532 313,212 3,385
1999 150,000 555,726 112,564 3,143
Richard T. Nelson ............. 2001 $180,000 $ 670,352(3) 20,201 $4,747
Senior Vice President, 2000 180,000 213,037 80,600 3,282
Infrastructure Management 1999 180,000 83,790 -- 4,751
Operations
Gary L. Lenz .................. 2001 $212,183 $ 312,559(4) 600,201 $ 483
President, Integrated 2000 -- -- -- --
Solutions Group 1999 -- -- -- --
Andrew V. Cahill, Jr. ......... 2001 $241,676 $ 357,917(5) 300,201 $ 420
President, Infrastructure 2000 -- -- -- --
Management Group 1999 -- -- -- --
FORMER EXECUTIVE OFFICERS
Douglas S. Powanda(6) ......... 2001 $225,000 $1,167,628(7) 50,201 $3,822
Executive Vice President, 2000 225,000 326,250 600 2,788
Worldwide Operations 1999 180,000 359,991 400,000 3,143
- ------------------------
(1) Bonus compensation for fiscal 2001 includes $400,000 earned in fiscal 2001
and paid in fiscal 2002. Bonus compensation for 2000 consists of
(i) $50,000 earned and paid in fiscal 2000 and (ii) $87,500 earned in fiscal
2000 and 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
fiscal 1999 and paid in fiscal 2000.
(2) Bonus compensation for fiscal 2001 consists of (i) $594,178 of product
authorship commission income earned and paid in fiscal 2001, (ii) $162,993
of product authorship commission income earned in fiscal 2001 and paid in
fiscal 2002, and (iii) $110,000 of bonus compensation earned fiscal 2001 and
paid in fiscal 2002. Bonus compensation for 2000 consists of (i) $270,693 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 and 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.
(3) Bonus compensation for 2001 was all earned and paid in fiscal 2001. Bonus
compensation for 2000 consists of (i) $43,037 earned and paid in fiscal 2000
and (ii) $170,000 earned in fiscal 2000 and 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.
45
(4) Bonus compensation for fiscal 2001 consists of (i) $137,559 of bonus
compensation earned and paid in fiscal 2001 and (ii) $175,000 of bonus
compensation earned in fiscal 2001 and paid in fiscal 2002.
(5) Bonus compensation for fiscal 2001 consists of (i) $222,917 of bonus
compensation earned and paid in fiscal 2001 and (ii) $135,000 of bonus
compensation earned in fiscal 2001 and paid in fiscal 2002.
(6) Mr. Powanda resigned as an officer in February 2001 and from February to
April 2001 worked on strategic projects in the office of our Chairman. He is
currently on sabbatical.
(7) Bonus compensation for fiscal 2001 consists of (i) $715,178 of commission
income earned and paid in fiscal 2001 and (ii) $452,450 of commission income
earned in fiscal 2001 and paid in fiscal 2002. 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 and 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.
(8) Includes an option to purchase 200,000 shares that was subsequently
canceled.
(9) Consists of group life insurance excess premiums and matching contributions
under our 401(k) plan.
(B) OPTION GRANTS IN FISCAL YEAR 2001
The following table provides information relating to 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, 2001. 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 is 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, as long as the optionee continues to provide employment
or consulting services to us. Twenty-five percent of the option vests on the
first anniversary of the date of grant. The balance of the option vests over the
remaining three years at the rate of 6.25% every three months.
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.
46
During fiscal 2001, we granted options to acquire 6,718,469 shares of common
stock to employees and consultants under our 1994 stock plan and our 1999
nonstatutory stock option plan.
INDIVIDUAL GRANTS
------------------------------------------------------------ POTENTIAL REALIZABLE VALUES
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTIONS TERM
OPTIONS EMPLOYEES IN EXERCISE PRICE PER EXPIRATION ----------------------------
NAME GRANTED FISCAL 2001 SHARE DATE 5% 10%
- ---- ---------- ------------- ------------------ ---------- ------------ -------------
Stephen P. Gardner.......... 201 * $17.25 05/24/10 $ 2,181 $ 5,526
Frederic B. Luddy........... 32,500 * 23.88 04/28/10 488,085 1,236,904
10,000 * 17.25 05/23/10 108,484 274,921
10,201 * 17.25 05/24/10 110,665 280,446
130,000 1.93% 15.63 11/23/10 1,277,851 3,328,325
Douglas S. Powanda.......... 50,000 * 23.88 04/28/10 750,900 1,902,928
201 * 17.25 05/24/10 2,181 5,526
Richard T. Nelson........... 20,201 * 17.25 05/23/10 219,149 555,367
Gary L. Lenz................ 500,201 7.45% 17.75 05/29/10 5,583,684 14,150,150
100,000 1.49% 16.57 10/04/10 1,042,078 2,640,831
Andrew V. Cahill, Jr........ 250,000 3.72% 17.25 05/23/10 2,712,108 6,873,014
201 * 17.25 05/24/10 2,181 5,526
50,000 * 15.63 11/23/10 491,481 1,245,510
- ------------------------
* 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, 2001. In addition, it indicates the number and value
of vested and unvested options held by these executive officers as of March 31,
2001.
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,
2001" is based on $19.50 per share, the closing sales price of our common stock
in trading on the Nasdaq National Market on March 30, 2001, less the exercise
price, multiplied by the aggregate number of shares subject to outstanding
options.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES MARCH 31, 2001 MARCH 31, 2001
ACQUIRED REALIZED --------------------------------- ---------------------------
NAME ON EXERCISE VALUE EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------- -------------- ---------------- ----------- -------------
Stephen P. Gardner....... 21,917 $ 613,206 835,096 626,686 $11,908,949 $8,222,769
Frederic B. Luddy........ 224,924 4,127,091 -- 508,617 -- 2,842,653
Douglas S. Powanda....... 400,000 8,945,433 38,696 475,201 459,519 5,494,702
Richard T. Nelson........ -- -- 159,600 107,701 2,216,558 504,802
Gary L. Lenz............. -- -- -- 600,201 -- 1,168,351
Andrew V. Cahill, Jr..... -- -- -- 300,201 -- 756,452
(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.
47
We are a party to a restricted stock agreement dated November 1, 1997 with
Stephen P. Gardner, our chief executive officer, pursuant to which we issued
Mr. Gardner 200,000 shares of our common stock. The shares issued to
Mr. Gardner vest incrementally over ten years, subject to earlier vesting over
six years contingent upon our achieving certain financial milestones. The
restricted stock agreement permits Mr. Gardner to surrender shares to satisfy
withholding tax obligations that arise as the shares vest. In connection with
the lapsing of restrictions on 33,332 shares in April 2001, Mr. Gardner
surrendered all 33,332 shares subject to his restricted stock agreement in
connection with tax withholding obligations. In the event of our merger or
change in control, Mr. Gardner's shares will become automatically vested.
Under our 1994 stock plan, in the event of a merger or a change in control,
vesting of options outstanding under the plan will automatically accelerate.
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 meeting. 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 and Mr. Noell 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 and Mr. Noell an option to acquire
180,000 shares of common stock under our 1991 nonqualified stock option plan at
an exercise price of $0.34, 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
May 2002. These options have been exercised by Mr. Cole.
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 25,000 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 5,000 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 our directors, officers and other
employees. It also administers various incentive compensation and benefit plans.
Our compensation committee consists of Mr. Moores, Mr. Noell, and Mr. Watrous.
Mr. Gardner, our 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 our compensation committee and any member of any other company's board
of directors or compensation committee.
48
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 June 1, 2001 by:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- each of our executive officers named in the summary compensation table on
page 45;
- each of our directors; and
- all our current executive officers and directors 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"
includes 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 July 30, 2001. The number of shares subject to options that each
beneficial owner has the right to acquire on or before July 30, 2001 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 162,130,889
shares of our common stock outstanding as of June 1, 2001. The address for those
individuals for which an address is not otherwise provided is c/o Peregrine
Systems, Inc., 3611 Valley Centre 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 OUTSTANDING
SHARES TOTAL SHARES SHARES
NUMBER OF SHARES UNDERLYING BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS BENEFICIALLY OWNED OPTIONS OWNED OWNED
- ---------------- ------------------ ---------- ------------ -------------
PRINCIPAL STOCKHOLDERS
Putnam Investments, LLC (1)..................... 19,443,554 -- 19,443,554 11.99%
One Post Office Square
Boston, Massachusetts 02109
EXECUTIVE OFFICERS AND DIRECTORS
Stephen P. Gardner.............................. 142,620 1,057,474 1,200,094 *
Frederic B. Luddy............................... -- 88,825 88,825 *
Douglas S. Powanda (3).......................... -- 152,076 152,076 *
Richard T. Nelson............................... 76,000 173,301 249,301 *
Gary L. Lenz.................................... 56,338 125,200 181,538 *
Andrew V. Cahill, Jr............................ 1,600 62,701 64,301 *
Matthew C. Gless................................ 115,750 161,801 277,551 *
John J. Moores (2).............................. 1,107,422 -- 1,107,422 *
Christopher A. Cole............................. 1,647,534 26,250 1,673,874 1.03%
Charles E. Noell III............................ 13,078 58,125 71,203 *
Barry M. Ariko (4).............................. 565,591 -- 565,591 *
William B. Richardson........................... -- -- -- *
William D. Savoy................................ 2,083,059 47,312 2,130,371 1.31%
Thomas G. Watrous, Sr........................... 10,000 51,875 61,875 *
All current executive officers and directors as
a group (18 persons).......................... 5,820,470 1,899,744 7,720,214 4.71%
- --------------------------
* Less than 1%
(1) Based solely on a Schedule 13G/A, dated February 13, 2001, filed with the
Securities and Exchange Commission on February 20, 2001.
(2) Includes 705,749 shares held by Mr. Moores as trustee under various trusts,
substantially all of which were established for members of Mr. Moores's
family.
(3) Mr. Powanda resigned as an officer in February 2001 and from February to
April 2001 worked on strategic projects in the office of our Chairman. He is
currently on sabbatical.
(4) Includes 62,550 shares held by Mr. Ariko as trustee under various trusts,
all of which were established for members of Mr. Ariko's family.
49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of transactions since April 1, 2000 to which
we have been a party, in which the amount involved in the transaction exceeds
$60,000 and in which any director, executive officer or holder of more than 5%
of our capital stock had or will have a direct or indirect material interest
other than compensation arrangements which are otherwise described under
"Employment Agreements and Change in Control Arrangements" in Item 11 of this
report.
We are party to an agreement with JMI Services, Inc., an investment
management company, in which we sublease approximately 13,310 square feet of
office space in San Diego 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. Mr. Moores, the chairman of our board of directors, also serves as
chairman of the board of JMI Services, and Charles E. Noell III, a director on
our board, serves as president and chief executive officer of JMI Services. We
believe that the terms of the sublease are at competitive market rates.
We also 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 a party to a restricted stock agreement with Mr. Gardner, our chief
executive officer. Under this agreement, we issued 200,000 shares of our common
stock. This agreement is discussed in detail under the caption "Employment
Agreements and Change in Control Arrangements" in Item 11 of this report.
During fiscal 2001, we purchased golf club memberships for business
entertainment use by each of Gary L. Lenz, president of our integrated solutions
group, and Andrew V. Cahill, Jr., president of our infrastructure management
group. Each membership cost $150,000. Mr Lenz and Mr. Cahill may, but are not
required to, purchase the membership from us at cost upon termination of their
employment.
During fiscal 2001, 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" in Item 11 of this report.
50
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE, EXHIBITS, AND
REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following consolidated 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 Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
2. FINANCIAL STATEMENT SCHEDULE
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2001, 2000, AND 1999
(IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED ADDITIONS AT END
PERIOD TO EXPENSE ACQUIRED DEDUCTIONS OF PERIOD
------------ ---------- --------- ---------- ---------
Year ended March 31, 2001
Allowance for doubtful accounts........ $ 2,179 $2,791 $ 7,743 $ (1,202) $11,511
Accrued acquisition costs.............. $15,100 $ -- $113,600 $(54,950) $73,750
Year ended March 31, 2000
Allowance for doubtful accounts........ $ 1,248 $ 635 $ 430 $ (134) $ 2,179
Accrued acquisition costs.............. $ 3,400 $ -- $ 16,055 $ (4,355) $15,100
Year ended March 31, 1999
Allowance for doubtful accounts........ $ 485 $ 516 $ 325 $ (78) $ 1,248
Accrued acquisition costs.............. $ 1,100 $ -- $ 13,500 $(11,200) $ 3,400
51
3. EXHIBITS
EXHIBIT NO. EXHIBIT TITLE
(A) ---------------- ------------------------------------------------------------
2.1 (a) Agreement and Plan of Merger and Reorganization by and among
Peregrine Systems, Inc., Rose Acquisition Corporation and
Remedy Corporation, dated as of June 10, 2001.
3.1 (h) Amended and Restated Certificate of Incorporation as filed
with the Secretary of the State of Delaware on February 11,
1997, and amendments thereto.
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) (e) 1994 Stock Option Plan, as amended through July 1998.
10.3(b) (e) 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 (g) 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.
10.18 (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) Form of Restricted Stock Agreement.
10.24 (f) 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 (f) 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 (f) 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 (f) 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.
52
10.28 (f) 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 (g) 1999 Nonstatutory Stock Option Plan.
10.40 (i) First Amendment to the Credit Agreement dated as of December
31, 1999 by and between the Company and Bank of America,
N.A. and BankBoston, N.A.
10.41 (i) Second Amendment to the Credit Agreement dated as of
November 1, 2000 by and between the Company and Bank of
America, N.A. and Fleet National Bank.
10.42 (i) Indenture dated November 14, 2000 between Peregrine and
State Street Bank
10.43 (i) Registration Rights Agreement dated as of November 14, 2000
by and among the Company, Banc of America Securities LLC,
Bear, Stearns & Co. Inc. and Prudential Securities
Incorporated
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).
- ------------------------
(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 Registration Statement on Form S-8 (Registration Statement
333-65541) which became effective upon its filing on October 9, 1998.
(f) 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.
(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,
2000.
(h) 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
December 31, 2000.
(i) 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, 2000.
(B) REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K in March 2001 in connection with our
acquisition of Extricity, Inc.
(C) EXHIBITS
See Item 14(a)(3) above.
(D) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
53
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 June 29, 2001.
PEREGRINE SYSTEMS, INC.
By: /s/ STEPHEN P. GARDNER
-----------------------------------------
Stephen P. Gardner
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ MATTHEW C. GLESS
-----------------------------------------
Matthew C. Gless
EXECUTIVE VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND DIRECTOR
(PRINCIPAL FINANCIAL OFFICER)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Stephen P. Gardner and Eric P. Deller 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 Chief Executive Officer and Chairman of
--------------------------------- the Board of Directors (Principal June 29, 2001
(Stephen P. Gardner) Executive Officer)
/s/ MATTHEW C. GLESS Executive Vice President, Finance, Chief
--------------------------------- Financial Officer and Director June 29, 2001
(Matthew C. Gless) (Principal Financial Officer)
/s/ BARRY M. ARIKO
--------------------------------- Vice President and Director June 29, 2001
(Barry M. Ariko)
54
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CHRISTOPHER A. COLE
--------------------------------- Director June 29, 2001
(Christopher A. Cole)
/s/ JOHN J. MOORES
--------------------------------- Director June 29, 2001
(John J. Moores)
/s/ CHARLES E. NOELL III
--------------------------------- Director June 29, 2001
(Charles E. Noell III)
/s/ WILLIAM B. RICHARDSON
--------------------------------- Director June 29, 2001
(William B. Richardson)
/s/ WILLIAM D. SAVOY
--------------------------------- Director June 29, 2001
(William D. Savoy)
/s/ THOMAS G. WATROUS, SR.
--------------------------------- Director June 29, 2001
(Thomas G. Watrous, Sr.)
55
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............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Peregrine Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Peregrine
Systems, Inc. (a Delaware corporation) and subsidiaries as of March 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
2001. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Peregrine Systems, Inc. and subsidiaries as of March 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 2001 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
consolidated 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 consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
San Diego, California
April 26, 2001
(except with respect to the matter discussed in Note 13, as to which the date is
June 11, 2001)
F-2
PEREGRINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, MARCH 31,
2001 2000
---------- ---------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 286,658 $ 33,511
Accounts receivable, net of allowance for doubtful
accounts of $11,511 and $2,179, respectively............ 180,372 69,940
Other current assets...................................... 62,811 22,826
---------- --------
Total current assets.................................... 529,841 126,277
Property and equipment, net................................. 82,717 29,537
Goodwill, net of accumulated amortization of $334,178 and
$54,406, respectively..................................... 1,192,855 233,504
Other intangible assets, investments and other, net of
accumulated amortization of $24,015 and $1,398,
respectively.............................................. 198,353 134,112
---------- --------
$2,003,766 $523,430
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 36,024 $ 19,850
Accrued expenses.......................................... 200,886 49,064
Current portion of deferred revenue....................... 86,653 36,779
Current portion of long-term debt......................... 1,731 74
---------- --------
Total current liabilities............................... 325,294 105,767
Deferred revenue, net of current portion.................... 8,299 4,556
Other long-term liabilities................................. 17,197 --
Long-term debt, net of current portion...................... 884 1,257
Convertible subordinated notes.............................. 262,327 --
---------- --------
Total liabilities....................................... 614,001 111,580
---------- --------
Stockholders' Equity:
Preferred stock, $0.001 par value, 5,000 shares authorized,
no shares issued or outstanding........................... -- --
Common stock, $0.001 par value, 500,000 shares authorized,
160,359 and 109,501 shares issued and outstanding,
respectively.............................................. 160 110
Additional paid-in capital.................................. 2,342,235 480,957
Accumulated deficit......................................... (917,104) (64,863)
Unearned portion of deferred compensation................... (22,151) (678)
Cumulative translation adjustment........................... (3,950) (666)
Treasury stock, at cost..................................... (9,425) (3,010)
---------- --------
Total stockholders' equity.............................. 1,389,765 411,850
---------- --------
$2,003,766 $523,430
========== ========
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,
--------------------------------
2001 2000 1999
---------- -------- --------
Revenues:
Licenses.................................................. $ 354,610 $168,467 $ 87,362
Services.................................................. 210,073 84,833 50,701
---------- -------- --------
Total revenues.......................................... 564,683 253,300 138,063
---------- -------- --------
Costs and Expenses:
Cost of licenses.......................................... 2,582 1,426 1,020
Cost of services.......................................... 111,165 51,441 31,561
Amortization of purchased technology...................... 11,844 1,338 50
Sales and marketing....................................... 223,966 101,443 50,803
Research and development.................................. 61,957 28,517 13,919
General and administrative................................ 48,420 19,871 10,482
Acquisition costs and other............................... 918,156 57,920 43,967
---------- -------- --------
Total costs and expenses................................ 1,378,090 261,956 151,802
---------- -------- --------
Loss from operations before interest (net) and income tax
expense................................................... (813,407) (8,656) (13,739)
Interest income (expense), net.............................. (538) 38 664
---------- -------- --------
Loss from operations before income tax expense.............. (813,945) (8,618) (13,075)
Income tax expense.......................................... 38,296 16,452 10,295
---------- -------- --------
Net loss................................................ $ (852,241) $(25,070) $(23,370)
========== ======== ========
Net loss per share basic and diluted:
Net loss per share........................................ $ (6.16) $ (0.24) $ (0.27)
========== ======== ========
Shares used in computation................................ 138,447 102,332 87,166
========== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
PEREGRINE SYSTEMS, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
UNEARNED
NUMBER OF PORTION OF
SHARES ADDITIONAL DEFERRED CUMULATIVE
OUT- COMMON PAID-IN ACCUMULATED COMPEN- TRANSLATION TREASURY
STANDING STOCK CAPITAL DEFICIT SATION ADJUSTMENT STOCK
---------- -------- ---------- ------------ ---------- ----------- --------
Balance, March 31, 1998...... 75,160 $ 75 $ 74,295 $ (16,423) $ (1,493) $ (553) $ (262)
Net loss..................... -- -- -- (23,370) -- -- --
Stock issued under employee
plans...................... 7,018 7 7,914 -- -- -- --
Stock issued for
acquisitions............... 14,928 15 105,434 -- -- -- --
Stock option tax benefit..... -- -- 6,096 -- -- -- --
Deferred compensation........ -- -- -- -- 474 -- --
Stock repurchased............ -- -- -- -- -- -- (1,463)
Equity adjustment from
foreign currency
translation................ -- -- -- -- -- 35 --
------- ---- ---------- --------- -------- ------- -------
Balance, March 31, 1999...... 97,106 97 193,739 (39,793) (1,019) (518) (1,725)
Net loss..................... -- -- -- (25,070) -- -- --
Stock issued under employee
plans...................... 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 -- -- -- --
Deferred compensation........ -- -- -- -- 341 -- --
Stock repurchased............ -- -- -- -- -- -- (1,285)
Equity adjustment from
foreign currency
translation................ -- -- -- -- -- (148) --
------- ---- ---------- --------- -------- ------- -------
Balance, March 31, 2000...... 109,501 110 480,957 (64,863) (678) (666) (3,010)
Net loss..................... -- -- -- (852,241) -- -- --
Stock issued under employee
plans...................... 6,320 6 42,495 -- -- -- --
Stock issued for
acquisitions............... 44,538 44 1,762,908 -- -- -- --
Stock option tax benefit..... -- -- 16,384 -- -- -- --
Deferred compensation........ -- -- 39,491 (21,473) -- --
Stock repurchased............ -- -- -- -- -- -- (6,415)
Equity adjustment from
foreign currency
translation................ -- -- -- -- -- (3,284) --
------- ---- ---------- --------- -------- ------- -------
Balance, March 31, 2001...... 160,359 $160 $2,342,235 $(917,104) $(22,151) $(3,950) $(9,425)
======= ==== ========== ========= ======== ======= =======
TOTAL ACCUMULATED
STOCKHOLDERS' COMPRE-
EQUITY HENSIVE LOSS
------------- ------------
Balance, March 31, 1998...... $ 55,639 $ (781)
=========
Net loss..................... (23,370) (23,370)
Stock issued under employee
plans...................... 7,921
Stock issued for
acquisitions............... 105,449
Stock option tax benefit..... 6,096
Deferred compensation........ 474
Stock repurchased............ (1,463)
Equity adjustment from
foreign currency
translation................ 35 35
---------- ---------
Balance, March 31, 1999...... 150,781 (24,116)
=========
Net loss..................... (25,070) (25,070)
Stock issued under employee
plans...................... 23,427
Stock issued for
acquisitions............... 169,648
Stock issued for strategic
investments................ 83,561
Stock option tax benefit..... 10,595
Deferred compensation........ 341
Stock repurchased............ (1,285)
Equity adjustment from
foreign currency
translation................ (148) (148)
---------- ---------
Balance, March 31, 2000...... 411,850 (49,334)
=========
Net loss..................... (852,241) (852,241)
Stock issued under employee
plans...................... 42,501
Stock issued for
acquisitions............... 1,762,952
Stock option tax benefit..... 16,384
Deferred compensation........ 18,018
Stock repurchased............ (6,415)
Equity adjustment from
foreign currency
translation................ (3,284) (3,284)
---------- ---------
Balance, March 31, 2001...... $1,389,765 $(904,859)
========== =========
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,
--------------------------------
2001 2000 1999
---------- -------- --------
Cash flows from operating activities:
Net loss.................................................... $ (852,241) $(25,070) $(23,370)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation, amortization, acquisition costs and other... 954,231 68,293 47,781
Increase (decrease) in cash resulting from changes in:
Accounts receivable................................... (100,474) (24,364) (18,984)
Other current assets.................................. (25,955) 1,485 (5,678)
Other assets.......................................... 7,648 2,717 (245)
Accounts payable and other liabilities................ 18,563 4,755 2,939
Accrued expenses...................................... (32,794) 17,328 12,486
Deferred revenue...................................... 20,851 12,467 4,874
---------- -------- --------
Net cash (used in) provided by operating
activities........................................ (10,171) 57,611 19,803
---------- -------- --------
Cash flows from investing activities:
Acquisitions and investments, net of cash acquired........ 17,974 (41,249) (11,128)
Purchases of short-term investments....................... -- -- (49,000)
Maturities of short-term investments...................... -- 2,000 54,027
Purchases of property and equipment....................... (49,031) (20,713) (12,426)
---------- -------- --------
Net cash used in investing activities............... (31,057) (59,962) (18,527)
---------- -------- --------
Cash flows from financing activities:
Issuance (repayments) of long-term debt................... 1,284 (7,832) (1,174)
Issuance of common stock.................................. 42,501 23,427 7,921
Issuance of notes receivable.............................. (1,611) -- --
Treasury stock purchased.................................. (6,415) (1,285) (1,463)
Issuance of convertible subordinated notes................ 261,900 -- --
---------- -------- --------
Net cash provided by financing activities........... 297,659 14,310 5,284
---------- -------- --------
Effect of exchange rate changes on cash..................... (3,284) 7 35
---------- -------- --------
Net increase in cash and cash equivalents................... 253,147 11,966 6,595
Cash and cash equivalents, beginning of period.............. 33,511 21,545 14,950
---------- -------- --------
Cash and cash equivalents, end of period.................... $ 286,658 $ 33,511 $ 21,545
========== ======== ========
Cash paid during the period for:
Interest.................................................. $ 1,069 $ 451 $ 26
Income taxes.............................................. $ 1,587 $ 3,015 $ 155
Supplemental Disclosure of Noncash Investing Activities:
Stock issued and other noncash consideration for
acquisitions and investments............................ $1,762,952 $253,209 $105,499
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
PEREGRINE SYSTEMS, INC.
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 global
provider of infrastructure resource management applications, employee
relationship management solutions, and e-commerce technologies and services.
Using common shared data, our infrastructure management applications help manage
information technology assets as well as assets relating to corporate facilities
and fleets. In addition, it offers employee relationship management products
designed to improve employee productivity and lower costs by providing employees
direct access to corporate resources and infrastructure. Our e-markets group
provides products and services associated with the procurement of manufacturing
supplies and materials as well as commodity assets. 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.
RECLASSIFICATION
Certain amounts for prior years have been reclassified to conform to current
year presentation.
USE OF ESTIMATES
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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
Our revenues are derived principally from product licensing and services.
License fees are generally due upon the granting of the license and typically
include a one-year warranty period as part of the license agreement. Service
revenues are comprised of fees from maintenance (post-contract support),
professional services (consulting), network services, and training. We also
derive revenues from transaction fees, subscription fees, and maintenance fees
associated with our e-markets group.
Revenues from direct and indirect license agreements are recognized,
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 no other
significant vendor obligations exist. We may grant extended payment terms of
more than one year. Typically this is only done in limited circumstances where
the contract is with customers having a proven credit history; when appropriate
we discount the related receivable at the applicable market interest rate as a
reduction of revenue. Revenues from maintenance 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
F-7
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Transaction and subscription fees are recognized monthly as services
are provided.
Cost of licenses consists primarily of amounts paid to third-party vendors,
product media, manuals, packaging materials, personnel, and related shipping
costs. Cost of services consists primarily of salaries, benefits, and allocated
overhead costs incurred in providing telephone support, professional services,
training to customers, and other maintenance. Deferred revenues primarily
relates to maintenance fees, which have been paid by our customers in advance of
the performance of these services.
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. For the year ended March 31, 2001, sales to
one of our customers accounted for approximately 10% of our total revenues.
In addition, our license revenue growth has become increasingly dependent on
the successful completion of one or more large license transactions during a
given quarter. As a result, failure to complete one or more of these
transactions by quarter-end could have a material adverse effect on our license
revenue, total revenue, and operating results.
CASH AND CASH EQUIVALENTS
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 money market accounts, time deposits, commercial paper and government
agency notes. The carrying amount reported for cash and cash equivalents
approximates its fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of our financial instruments, including
accounts receivable, other current assets, 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 approximate 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.
F-8
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
In the fall of 2000 the technology driven NASDAQ Stock Market began a steep
decline in stock prices, particularly in the e-commerce sectors. In early 2001
it became apparent to us that the downturn was other than temporary. In
addition, it became apparent that technology spending, particularly in the
e-commerce and enterprise resource planning environments, would drop sharply in
2001.
Accordingly, we determined a SFAS 121 triggering event had occurred related
to certain of our tangible and intangible assets. We prepared analyses (such as
cash flow projections) related to these tangible and intangible assets and as a
result determined that certain assets had been impaired. We wrote these assets,
along with any allocated goodwill, down to fair value based on the related
discounted cash flows and similar evidence. During 2001, we wrote-off
$490 million of impaired intangibles, investments and other assets related
primarily to an acquisition made in our e-markets group segment and investments
made in our infrastructure management group segment. We will continue to monitor
the value of such assets in the future and may have future such impairment
charges.
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.
During fiscal 2001, we entered into a strategic relationship with Motive
Communications, Inc. ("Motive"), a provider of intelligent service software, to
offer advanced electronic service and support
F-9
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
capabilities. As part of the agreement, we invested approximately $11.0 million
in exchange for approximately a 3.5% ownership of Motive, subsequent to our
investment. Our investment in Motive is being accounted for using the cost
method.
In addition, we have made several other strategic investments for aggregate
consideration of approximately $17.5 million and $11.3 million during fiscal
2001 and 2000, respectively, 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 and we have incurred
impairments on some of these investments. Adverse changes in market conditions
or poor operating results of underlying investments could result in additional
future losses or an inability to recover the carrying value of our investments.
INTANGIBLE ASSETS AND GOODWILL
Intangible assets and goodwill are comprised of purchase price in excess of
identifiable tangible assets associated with our acquired businesses and
purchased technology. Intangible assets and goodwill 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", ("SFAS No. 86",) 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. Our basis for establishing
technological feasibility in accordance with SFAS No. 86 is the working model
method. During the three years in the period ended March 31, 2001, no internal
software 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.
ADVERTISING COSTS
We expense advertising costs in the period they are 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 each
reporting 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
F-10
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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. Potentially dilutive securities
represent incremental shares issuable upon exercise of our equity and debt
securities. For the years ended March 31, 2001, 2000, and 1999, the diluted loss
per share calculation excludes the effect of certain equity and debt securities
as inclusion would be anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," ("SFAS No. 137"). In June 2000, the FASB issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," ("SFAS No. 138"). SFAS No. 137
amends Statement of Financial Accounting Standards No. 133, "Accounting for
Derivatives and Hedging Activities," ("SFAS No. 133"), and SFAS No. 138 amends
SFAS No. 137. SFAS No. 133 requires that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value
and that changes in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. These new standards are effective
beginning with our first quarter of fiscal 2002. We have determined that
adoption of SFAS No. 133, SFAS No. 137 and SFAS No. 138 will not have a material
impact on our consolidated results of operations, financial position or cash
flows.
In December 1999, the Securities Exchange Commission ("SEC") staff released
Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition," as
amended by SAB No. 101A and SAB No. 101B, to provide guidance on the
recognition, presentation and disclosure of revenue in financial
F-11
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
statements. SAB No. 101 explains the SEC staff's general framework for revenue
recognition, stating that certain criteria be met in order to recognize revenue.
SAB No. 101 also addresses gross versus net revenue presentation and financial
statement and Management's Discussion and Analysis disclosures related to
revenue recognition. We believe that our accounting policies comply with the
applicable provisions of SAB No. 101.
In April 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation: an
interpretation of APB Opinion No. 25." FIN No. 44 affects certain awards and
modifications made after December 15, 1998. We believe that our accounting
policies comply with the applicable provisions of FIN No. 44.
2. ACQUISITIONS
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.
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
F-12
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
shares of Barnhill for a total purchase price, including merger costs and
assumed liabilities, of $32.2 million.
On June 16, 2000, we completed the acquisition of Harbinger Corporation
("Harbinger"), a provider of electronic business connectivity software and
services. We issued approximately 30,157,000 shares of our Common Stock
(excluding approximately 6.0 million shares of Peregrine Common Stock issuable
upon exercise of options and warrants assumed in connection with the
acquisition) in exchange for all of the outstanding shares of Harbinger for a
total purchase price, including merger related costs, of approximately
$1,481.4 million.
On September 1, 2000, we completed the acquisition of Loran Network Holding
Corporation, Inc. ("Loran"), a provider of network discovery and management
solutions. We issued approximately 2,861,000 shares of our Common Stock
(excluding approximately 600,000 shares of Peregrine Common Stock issuable upon
exercise of options assumed in connection with the acquisition) in exchange for
all the outstanding shares of Loran for a total purchase price, including merger
related costs, of approximately $109.8 million.
On December 29, 2000, we completed the acquisition of the Tivoli Service
Desk Suite of products ("Tivoli") and certain related assets from Tivoli
Systems, Inc. We issued approximately 3,015,000 shares of our Common Stock and
$45 million in cash for the entire Tivoli product suite for a total purchase
price, including merger related costs, of approximately $133.1 million.
On March 23, 2001, we completed the acquisition of Extricity, Inc.
("Extricity"), a provider of business-to-business relationship management
software. We issued approximately 8,398,000 shares of our Common Stock
(excluding approximately 707,000 shares of Peregrine Common Stock issuable upon
exercise of options assumed in connection with the acquisition) in exchange for
all of the outstanding shares of Extricity for a total purchase price, including
merger related costs, of approximately $202.5 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 at the
date of acquisition and the results of operations for each of the acquisitions
have been included in the consolidated financial statements for the periods
subsequent to acquisition. The dollar amount assigned to the issued shares for
each acquisition is based on the
F-13
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
market price of the securities over the five days before and after the terms of
the acquisition are agreed to and announced. The purchase price allocations are
as follows (in thousands):
PURCHASE PRICE IN
ACQUIRED IN-PROCESS EXCESS OF THE
RESEARCH AND FAIR VALUE OF NET ACQUIRED
DEVELOPMENT ASSETS ACQUIRED ASSETS TOTAL
------------------- ----------------- ----------------- ----------
FISCAL 2001
Harbinger......................... $64,100 $82,775 $1,334,563 $1,481,438
Loran............................. 6,000 260 103,562 109,822
Tivoli............................ 8,641 120 124,301 133,062
Extricity......................... 14,619 5,241 182,632 202,492
------- ------- ---------- ----------
$93,360 $88,396 $1,745,058 $1,926,814
======= ======= ========== ==========
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
======= ======= ========== ==========
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 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
F-14
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
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.
IN-PROCESS RESEARCH AND DEVELOPMENT
INNOVATIVE
The R&D activities acquired in this acquisition focused on creating advanced
computer-integrated facilities management technologies.
We estimated that the projects under development were approximately 30%
complete at the time of the acquisition. We also expected the initial phases of
the R&D to reach technological feasibility within 12 to 18 months and begin
generating revenues shortly thereafter. Costs to complete all phases on the R&D
projects were estimated at approximately $3 to $5 million at the acquisition
date, with the expectation that the initial phases of the R&D would reach
technological feasibility, at the earliest, within one year of the acquisition
date and begin generating revenues shortly thereafter. Substantial progress had
been made on the next-generation software architecture and design.
At the time of this acquisition, the engineers had not produced a working
model of the future product. In order for the R&D to be technologically or
commercially viable, complex functions needed to be fully architected, coded,
developed, and tested to create a seamless, workable product. Revenues
attributed to the in-process technologies were estimated based on forecasted
sales and anticipated timing of new product introductions. Aggregate revenues
for the in-process products are expected to peak in 2002 and then decline over
the remaining forecast period. The overall technology life was estimated to be
approximately 5 to 7 years for the in-process technologies. Expenses as a
percentage of revenue for Innovative were expected to decrease over the
projected period due primarily to cost efficiencies gained from a larger revenue
base. We used a 30% discount rate in our calculations based on independent
studies that analyze market return for various development-stage companies.
We believe that the foregoing assumptions used in the in-process R&D
analysis were reasonable at the time of the acquisition. No assurance can be
given, however, that the underlying assumptions used will transpire as
estimated. We currently believe that actual results for Innovative have been
higher than forecasts with respect to acquired in-process revenues. However, we
believe that expenses incurred to date associated with the development and
integration of the in-process R&D projects were higher than previous estimates.
The project was completed with minor delay, which did not have a material effect
on the costs.
ISS
We believe that the assumptions used in the in-process R&D analysis were
reasonable at the time of acquisition. No assurance can be given, however, that
the underlying assumptions used will transpire as estimated. We currently
believe that actual expenses were less than previous estimates. The project was
completed on time and within budget.
F-15
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
PROTOTYPE
We believe that the assumptions used in the in-process R&D analysis were
reasonable at the time of acquisition. No assurance can be given, however, that
the underlying assumptions used will transpire as estimated. We currently
believe that actual revenues have been higher than forecast and expenses are
consistent with previous estimates. All projects were completed on time and
within budget.
FPRINT
We believe that the assumptions used in the in-process R&D analysis were
reasonable at the time of acquisition. No assurance can be given, however, that
the underlying assumptions used will transpire as estimated. We currently
believe that actual expenses have been materially consistent with previous
estimates. The FPrint version 5.0X project was modified after 3 months into an
alternate UNIX supported project that was completed on time. The Cascade version
2.0 project was modified and its functionality was integrated into our existing
products. The project was completed on time.
KNOWLIX
We believe that the assumptions used in the in-process R&D analysis were
reasonable at the time of acquisition. No assurance can be given, however, that
the underlying assumptions used will transpire as estimated. We currently
believe that actual revenues have been lower than forecast and expenses are
materially consistent with previous estimates. The iKnow enterprise (v2.0)
project was completed on time and within budget. The iKnow Enterprise (v3.0)
project was modified to create a more advanced product and this was not
completed on time or within budget.
TELCO RESEARCH
At the acquisition date, the significant ongoing R&D projects were focused
mainly on TRU Server version 5.0, TRU System version 6.0, and TRU Access Manager
version 3.x. Development work on the TRU Server version 5.0 includes support for
Oracle 8 and a new Distributed Cost Allocation module. In addition, these R&D
efforts will result in a common platform for both TRU Server and TRU System. For
the TRU System version 6.0, development efforts include migration to a 32-bit
platform for the TRU System and moving to a SQL Server 7 back-end database and
development efforts toward Integrated Data Collection release 3. Development
activities for TRU Access Manager 3.x include: 1) moving away from Visual FoxPro
to SQL Server 7 as the back-end database, 2) extending firewall support to Cisco
PIX, Checkpoint Firewall-1, and Axent Raptor, 3) web-based querying tool, and
4) multi-user support.
At the time of acquisition, TRU Server version 5.0 was 80% complete, TRU
System version 6.0 was 60% complete, and TRU Access Manager version 3.x was 90%
complete. It was estimated that to complete TRU Server version 5.0, $90,000
remained to complete the project. It was estimated that to complete TRU System
version 6.0, $240,000 remained to complete the project. It was estimated that to
complete TRU Access Manager version 3.x, $50,000 remained to complete the
project. In addition, at the acquisition date, approximately $360,000, $360,000,
and $475,000 had been spent on TRU Server version 5.0, TRU System version 6.0,
and TRU Access Manager version 3.x, respectively. Furthermore, it was estimated
that the TRU Server version 5.0 project would be complete and introduced during
Q2 2000. It was estimated that the TRU System version 6.0 project would be
complete and introduced
F-16
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
during Q3 2000. It was estimated that the TRU Access Manager version 3.x project
would be complete and introduced during Q2 2001.
The revenue projections used to value in-process research and development
were based on estimates of relevant market sizes and growth factors, expected
trends in technology and the nature and expected timing of new product
introductions. Future revenue estimates were aggregated for the voice and data
product lines based on estimates of product life cycles and expected revenue
contributions from each product line. Operating expenses were projected as a
percentage of sales. We used a 20% discount rate in our calculations based on
the weighted average cost of capital as based on the risk of realizing cash
flows from products that had yet to reach technological feasibility.
We believe that the foregoing assumptions used in the in-process R&D
analysis were reasonable at the time of the acquisition. No assurance can be
given, however, that the underlying assumptions used will transpire as
estimated. We believe that actual results for Telco have been consistent with
forecasts with respect to acquired in-process revenues. However, we believe that
expenses incurred to date associated with the development and integration of the
in-process R&D projects are in excess of previous estimates. TRU Server version
5.0 was completed in the Beta phase in Q3 2001 and as a final product in Q4
2001. The project was completed with a cost in excess of budget. TRU System
version 6.0 was renamed TeleCenter and was completed on time in Q3 2001. The
project was completed with costs in excess of budget. TRU Access Manager version
3.x was completed on time and within the budget.
HARBINGER
At the acquisition date, the significant ongoing R&D projects were focused
mainly on the TrustedLink Family, Harbinger.net-IVAS/Pipeline, and
Next-Generation-FLD/SLD. We began development work on its TrustedLink e-Version
5 during Q2 1999. This server solution project includes development work related
to the Unix, NT, and AS/400 editions. The project plan includes a phase 1 target
of Q2 2000 and a phase 2 target of Q4 2000. Development work related to the
TrustedLink AS/400 edition will be completed prior to that of the Unix and NT
editions. The major development work focuses on the next-generation XML and
Internet enablements. Development work related to the core technology underlying
Harbinger.net includes IVAS 3. 4/3.5, Pipeline 3.0, as well as various other
supporting core technologies. The major development work revolves around two
core functionalities, connectivity (Pipeline) and message handling (IVAS).
During 1999, the Harbinger labs development group initiated work on its
next-generation e-commerce technologies. A component-based architecture using
the Java programming language was adopted to lower development costs, shorten
time to market and enhance product performance. In addition, this
next-generation technology will support real-time transactions and true
application-to-application integration, which will be a critical requirement
with new Internet B2B applications.
At the acquisition date, the Trusted/Link AS/400, Unix, NT project was 52%
complete, the Harbinger.net-IVAS/Pipeline project was 49% complete, and the
Next-generation-FLD/SLD project was 33% complete. In order to complete
TrustedLink-AS/400, Unix, NT project, an additional $3.6 million in costs
remained. $2 million in costs remained to complete the
Harbinger.net-IVAS/Pipeline project. It was estimated that to complete the
Next-generation-FLD/SLD project $4.5 million remained. At the date of
acquisition, approximately $3.9 million, $2 million and $2.2 million had been
spent on the TrustedLink-AS/400 Unix project, Harbinger.net-IVAS/Pipeline
project and Next-generation-FLD/SLD
F-17
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
project, respectively. It was estimated that the TrustedLink-AS/400, Unix, NT
project consists of two phases. The first phase is expected to be completed in
Q2 2000 and phase two is expected to be completed in Q4 2000. It was estimated
that the Harbinger.net-IVAS/Pipeline project will be completed in mid/late 2000.
It was estimated that the Next-generation-FLD/SLD project will be completed in
Q4 2000 to Q1 2001.
The revenue projections used to value the developed technology and
in-process R&D were based on estimates of relevant market sizes and growth
factors, expected trends in technology and the nature and expected timing of new
product introductions. Future revenue estimates were aggregated for Harbinger's
traditional revenue model (TrustedLink family/core software sale), as well as
for the projected growth drivers (ASP/Portal model) based on management's
estimate of product line cycles and expected revenue contributions from each
revenue model. Operating expenses were projected as a percentage of sales. We
used a 17.5% discount rate in our calculations based on the weighted average
cost of capital as based on the risk of realizing cash flows from products that
had yet to reach technological feasibility.
We believe that the foregoing assumptions used in the in-process R&D
analysis were reasonable at the time of the acquisition. No assurance can be
given, however, that the underlying assumptions used will transpire as
estimated. We believe that actual results for Harbinger have been lower than
forecasts with respect to acquired in-process revenues. However, we believe that
expenses incurred to date associated with the development and integration of the
in-process R&D projects is generally consistent with previous estimates. The
TrustedLink project, the IVAS project and the FLD/SLD project (renamed
Power.Enterprise) were completed generally on time and on budget.
LORAN
We believe that the assumptions used in the in-process R&D analysis were
reasonable at the time of acquisition. No assurance can be given, however, that
the underlying assumptions used will transpire as estimated. We currently
believe that actual revenues and expenses have been consistent with previous
estimates. The project was completed later than anticipated in Q3 2000, but was
within budget. The delay in completion was due to the fact that additional
functionalities were added.
TIVOLI
The R&D activities acquired in this acquisition focused on the development,
engineering and testing activities associated with TSD version 7.x, which
includes substantial new functionality and expanded HTML capabilities.
We estimated that the projects under development were approximately 80%
complete at the time of the acquisition. We also expected the initial phases of
the R&D to reach technological feasibility within 12 to 15 months and begin
generating revenues shortly thereafter. Costs to complete all phases on the R&D
projects were estimated at approximately $1.3 million at the acquisition date,
with the expectation that the initial phases of the R&D would reach
technological feasibility, at the earliest, within one year of the acquisition
date and begin generating revenues shortly thereafter.
At the time of this acquisition, the engineers were completing development
work. In order for the R&D to be technologically or commercially viable,
development and testing needed to be completed to create a seamless, workable
product. Revenues attributed to the in-process technologies were estimated
F-18
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
based on forecasted sales and anticipated timing of new product introductions.
Aggregate revenues for the in-process products are expected to peak in 2002 and
then decline over the remaining forecast period. The overall technology life was
estimated to be approximately 3 to 5 years for the in-process technologies.
Expenses as a percentage of revenue for Tivoli were expected to decrease over
the projected period due primarily to cost efficiencies gained from a larger
revenue base. We used a 22% discount rate in our calculations based on
independent studies that analyze market returns.
We believe that the assumptions used in the above in-process R&D analysis
were reasonable at the time of acquisition. No assurance can be given, however,
that the underlying assumptions used will transpire as estimated. We currently
believe that actual revenues and expenses have been materially consistent with
previous estimates.
EXTRICITY
The R&D activities acquired in this acquisition focused the development,
engineering and testing activities associated with the completion of release 4.x
of Extricity Alliance Manager and the development of several related Adapters
and Channels technologies. R&D also included development efforts related to
Extricity Alliance Manager release 5.x.
We estimated that the 4.x and 5.x projects under development were
approximately 80% and 10% complete, respectively, at the time of the
acquisition. We also expected the initial phases of the R&D to reach
technological feasibility within 3 to 12 months and begin generating revenues
shortly thereafter. Costs to complete all phases on the R&D projects were
estimated at approximately $7.3 million at the acquisition date, with the
expectation that the initial phases of the R&D would reach technological
feasibility, at the earliest, within three months of the acquisition date and
begin generating revenues shortly thereafter.
At the time of this acquisition, the engineers were completing development
and testing activities related to release 4.x. R&D efforts related to release
5.x included completion of requirements definition and all subsequent
development stages. In order for the R&D to be technologically or commercially
viable, certain components of the R&D projects needed to be fully architected,
coded, developed, and tested to create a seamless, workable product. Revenues
attributed to the in-process technologies were estimated based on forecasted
sales and anticipated timing of new product introductions. Aggregate revenues
for the in-process products are expected to peak in fiscal 2005 and then decline
over the remaining forecast period. The overall technology life was estimated to
be approximately 5 to 7 years for the in-process technologies. Expenses as a
percentage of revenue for Extricity were expected to decrease over the projected
period due primarily to cost efficiencies gained from a larger revenue base. We
used discount rates ranging from 22.5% to 25.0% in our calculations based on
independent studies that analyze market returns for similar companies.
We believe that the foregoing assumptions used in the in in-process R&D
analysis were reasonable at the time of the acquisition. No assurance can be
given, however, that the underlying assumptions used will transpire as
estimated. We currently believe that actual revenues and expenses have been
materially consistent with previous estimates.
With respect to acquisition related liabilities at March 31, 2001, 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
F-19
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
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 for acquisition related
costs comprised principally of the following components (in thousands):
ESTIMATED LIABILITY
-------------------
Estimated advisory fees..................................... $12,200
Employee severance and relocation........................... 17,100
Duplicative facilities, equipment and efforts............... 14,100
Other merger related costs.................................. 30,350
-------
$73,750
=======
This accrual represents our best estimate, based on information available as
of March 31, 2001, of the identifiable and quantifiable charges that we may
incur as a result of the acquisition and integration plans, however these
estimates may change. Any changes in the estimates during the twelve month
period following the acquisition will increase or decrease goodwill as
appropriate. We believe substantially all of the above costs will be paid for
within the next twelve months.
The following represents a detail, by acquisition, of our acquisition
related liabilities (in thousands):
MARCH 31, 1999 ADDITIONS USES MARCH 31, 2000 ADDITIONS USES MARCH 31, 2001
--------------- --------- -------- --------------- --------- -------- ---------------
Prototype.............. $3,400 $ -- $(3,400) $ -- $ -- $ -- $ --
Fprint................. -- 3,250 (750) 2,500 -- (2,500) --
Knowlix................ -- 1,305 (205) 1,100 -- (1,100) --
Telco.................. -- 11,500 -- 11,500 -- (7,500) 4,000
Harbinger.............. -- -- -- -- 73,600 (39,850) 33,750
Loran.................. -- -- -- -- 8,500 (500) 8,000
Tivoli................. -- -- -- -- 13,500 (3,500) 10,000
Extricity.............. -- -- -- -- 18,000 -- 18,000
------ ------- ------- ------- -------- -------- -------
$3,400 $16,055 $(4,355) $15,100 $113,600 $(54,950) $73,750
====== ======= ======= ======= ======== ======== =======
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.
PRO FORMA FINANCIAL INFORMATION
The following table presents the unaudited pro forma results assuming we had
acquired each of Harbinger and Telco Research at the beginning of fiscal 2001
and 2000, as applicable. This information may not necessarily be indicative of
our future combined results.
F-20
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The unaudited pro forma results of operations exclude the results of
operations of certain acquisitions consummated during fiscal 2001 and 2000. The
inclusion of the results associated with these acquisitions would not materially
affect the pro forma financial information presented below.
PRO FORMA RESULTS FOR THE
YEARS ENDED
MARCH 31,
-------------------------
2001 2000
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
(UNAUDITED)
Revenues.............................................. $ 598,085 $ 444,329
Net loss.............................................. $(913,247) $(333,864)
Basic and diluted loss per share...................... $ (6.60) $ (3.26)
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. As of March 31, 2001, there were no amounts outstanding with
respect to this facility.
4. BALANCE SHEET COMPONENTS
Other current assets consists of the following (in thousands):
MARCH 31,
-------------------
2001 2000
-------- --------
Prepaid expenses.......................................... $13,861 $ 8,505
Deferred tax assets....................................... 13,762 4,024
Other..................................................... 35,188 10,297
------- -------
$62,811 $22,826
======= =======
Property and equipment (net) consists of the following (in thousands):
MARCH 31,
-------------------
2001 2000
-------- --------
Furniture and equipment................................. $111,157 $ 44,197
Leasehold improvements.................................. 17,259 8,830
-------- --------
128,416 53,027
Less accumulated depreciation........................... (45,699) (23,490)
-------- --------
$ 82,717 $ 29,537
======== ========
F-21
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BALANCE SHEET COMPONENTS (CONTINUED)
Accrued expenses consists of the following (in thousands):
MARCH 31,
-------------------
2001 2000
-------- --------
Employee compensation.................................... $ 20,904 $ 6,146
Commissions.............................................. 18,611 11,673
Taxes.................................................... 31,012 8,340
Acquisition related liabilities.......................... 73,750 15,124
Other.................................................... 56,609 7,781
-------- -------
$200,886 $49,064
======== =======
5. CONVERTIBLE SUBORDINATED NOTES
In November and December of 2000, we issued $270 million principal amount of
5.5% convertible subordinated notes (the "Convertible Notes") due November 2007
to qualified institutional buyers and non-U.S. persons in a private placement.
After expenses, we received net proceeds of $261.9 million. Interest on the
Convertible Notes is payable semi-annually on May 15th and November 15th. The
Convertible Notes will mature on November 15, 2007, and are convertible into
10,800,000 shares of Peregrine common stock at the option of the holder at any
time at a price of $25.00 per share. The Convertible Notes may be redeemed at
our option on or after November 18, 2003 at a premium of 103.143% of principal
value, plus accrued and unpaid interest, which declines annually to par value at
maturity date, if the closing price of our common stock has exceeded 140% of the
conversion price for a specified period of time before the redemption notice. In
addition, holders may require us to repurchase the notes upon a change in
control.
Costs incurred to issue the debt have been deferred against the carrying
value of the Convertible Notes and are being accreted over the term of the
related debt using the effective interest method. The Convertible Notes are
subordinate to substantially all of our existing and future outstanding debt. We
are not restricted under the indenture from incurring additional debt.
F-22
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
MARCH 31,
-------------------
2001 2000
-------- --------
Note payable to lessor. Unsecured; interest at 8%. Paid in
full in 2001.............................................. $ -- $ 158
Note payable to lessor. Unsecured; interest at 8%. Monthly
payments of principal and interest through September
2003...................................................... 97 129
Note payable to shareholders of an acquired company.
Secured; interest at 7%. Paid in full in 2001............. -- 700
Note payable to third party. Unsecured; interest at 9%. Paid
in full in 2001........................................... -- 180
French Government Agency loans and other. Paid in full in
2001...................................................... -- 164
Note payable to third party. Unsecured; interest at 8%.
Principal and interest due in full February 2002.......... 766 --
Notes payable to third party. Unsecured; varied interest.
Principal and interest due in full during fiscal 2002..... 646 --
Note payable to third party. Unsecured; interest at 8%.
Quarterly payments of interest through March 2006.
Principal due in annual payments beginning March 2004
through March 2006........................................ 300 --
Note payable to third party. Unsecured; interest at 8%.
Quarterly payments of interest through March 2006.
Principal due in annual payments beginning March 2004
through March 2006........................................ 433 --
Note payable to financial institution. Secured; interest at
banks' prime plus 1.75% (9.75% at March 31, 2001). Monthly
payments of principal and interest through October 2001... 105 --
Note payable to financial institution. Secured; interest at
banks' prime plus 1.75%. (9.75% at March 31, 2001).
Monthly payments of principal and interest through
September 2002............................................ 268 --
------- ------
2,615 1,331
Less current portion........................................ (1,731) (74)
------- ------
$ 884 $1,257
======= ======
Scheduled fiscal year principal payments on long-term debt due as of
March 31, 2001 are as follows (in thousands):
FUTURE SCHEDULED
PRINCIPAL PAYMENTS
------------------
2002........................................................ $1,731
2003........................................................ 130
2004........................................................ 266
2005........................................................ 244
2006........................................................ 244
------
$2,615
======
F-23
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The geographic distribution of income (loss) before income taxes is as
follows (in thousands):
MARCH 31,
-------------------------------
2001 2000 1999
--------- -------- --------
Domestic...................................... $(848,528) $(23,275) $(21,041)
Foreign....................................... 34,583 14,657 7,966
--------- -------- --------
Total......................................... $(813,945) $ (8,618) $(13,075)
========= ======== ========
The income tax provision consisted of the following (in thousands):
MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------
Current
Federal........................................ $25,619 $ 9,670 $ 5,304
State.......................................... 2,488 925 792
Foreign........................................ 10,521 4,083 2,700
------- ------- -------
Total current.................................... 38,628 14,678 8,796
------- ------- -------
Deferred
Federal........................................ (298) 1,265 1,262
State.......................................... (34) 331 188
Foreign........................................ -- 178 49
------- ------- -------
Total deferred................................... (332) 1,774 1,499
------- ------- -------
Total provision.................................. $38,296 $16,452 $10,295
======= ======= =======
We realize an income tax benefit from disqualifying dispositions of certain
stock options. This benefit results in a decrease to current income taxes
payable and an increase to additional paid-in capital at the time the benefit is
realized. The amount of the benefit realized for the years ended March 31, 2001,
2000, and 1999 was $16,384,000, $10,595,000, and $6,096,000, respectively.
F-24
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. 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,
-------------------------------
2001 2000 1999
--------- -------- --------
Federal tax provision (benefit) at the statutory rate....... $(284,880) $(3,016) $(4,446)
State tax provision (benefit), net of federal effect........ (32,558) (345) (654)
Effect of foreign earnings taxed at different rates......... (3,112) (437) (912)
Foreign sales corporation................................... -- (985) --
Tax credits................................................. (1,061) (1,184) (860)
Non-deductible acquired R&D and amortization of
intangibles............................................... 354,312 21,792 14,023
Other....................................................... 5,595 78 1
Change in valuation allowance............................... -- 549 3,143
--------- ------- -------
Total income tax provision.................................. $ 38,296 $16,452 $10,295
========= ======= =======
The amounts stated in the table above for the years ended March 31, 2001,
2000, and 1999 are based upon income before taxes which include expenses 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, 2001, 2000, and 1999 was 33.0%,
32.5%, and 33.3%, respectively.
U.S. income taxes and foreign withholding taxes were not provided for on a
cumulative total of approximately $38.8 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,
-------------------
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards....................... $ 35,870 $ 1,197
Intangible assets...................................... 13,221 5,192
Deferred maintenance revenue........................... 1,600 1,576
Bad debt reserves...................................... 2,498 --
Accrued vacation and bonuses........................... 3,555 --
Tax credits............................................ 4,973 --
Other.................................................. 1,550 726
-------- -------
Total gross deferred tax assets.......................... 63,267 8,691
Deferred tax liabilities:
Depreciation........................................... (2,176) (167)
-------- -------
Net deferred tax asset prior to valuation allowance...... 61,091 8,524
Valuation allowance...................................... (47,329) (4,500)
-------- -------
Net deferred tax assets.................................. $ 13,762 $ 4,024
======== =======
F-25
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
As of March 31, 2001, we had total net operating loss carryforwards of
approximately $200.0 million for domestic federal income tax reporting purposes,
which expire beginning in 2002. Approximately $117.0 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.
8. 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
$17.9 million, $9.1 million, and $4.6 million in fiscal years 2001, 2000, and
1999, respectively.
Future minimum lease payments under noncancelable operating leases (net of
sublease payments), at March 31, 2001 are as follows (in thousands):
OPERATING LEASES
----------------
2002........................................................ $ 21,447
2003........................................................ 22,565
2004........................................................ 22,911
2005........................................................ 21,361
2006........................................................ 20,355
Thereafter.................................................. 140,538
--------
Total minimum lease payments................................ $249,177
========
We sublease office space in San Diego 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, and an option to
lease approximately 118,000 square feet of office space. In June 2001, we
exercised our option to lease the additional space. To the extent we do not
require all of the space under these leases, we have the right to sublet excess
space. Currently, we have moved into a portion of the completed new facilities
and are subleasing a portion to unaffiliated companies. The remaining
uncompleted space is scheduled for completion over the next three years. The
future minimum lease commitments detailed above contain our future commitments
associated with these leases and are net of the sublease payments.
F-26
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 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
$5.4 million, $3.6 million, and $3.2 million for fiscal years 2001, 2000, and
1999, respectively.
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.
9. 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, 2001 and 2000. 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.
TREASURY STOCK
As of March 31, 2001, 2000 and 1999, shares of treasury stock held were
414,000, 157,000, and 29,000, respectively.
STOCK OPTIONS
We have twelve stock option plans, the 1990 Peregrine Systems Nonqualified
Stock Option Plan ("1990 PSI Plan"), the 1991 Peregrine Systems Nonqualified
Stock Option Plan ("1991 PSI Plan"), the 1994 Peregrine Systems Stock Option
Plan ("1994 PSI Plan"), the 1997 Peregrine Systems Director Option Plan ("PSI
Director Plan"), the 1999 Peregrine Systems Nonqualified Stock Option Plan
("1999 PSI Plan"), the 1994 Innovative 1994 Stock Option Plan ("1994 Innovative
Plan"), 1996 Harbinger Stock Option Plan ("1996 Harbinger Plan"), the 1997
Knowlix Amended and Restated 1997 Stock Option Plan ("1997 Knowlix Plan"), the
Loran Share Option Plan ("Loran Plan"), the Barnhill Amended and Restated 1998
Stock Option Plan ("1998 Barnhill Plan"), the 1996 Extricity Stock Option Plan
("1996 Extricity Plan"), and the Telco Management Stock Option Plan ("Telco
Plan"). Furthermore, we have stock option agreements related to the 1997 Apsylog
acquisition ("Apsylog Agreements"). We may no longer grant options under the
1990 PSI Plan, the 1991 PSI Plan, the 1994 Innovative Plan, the 1996 Harbinger
Plan, the 1997 Knowlix Plan, the Loran Plan, the 1998 Barnhill Plan, the 1996
Extricity Plan, the Telco Plan, or the Apsylog Agreements. We may grant up to
38,503,000, 600,000, and 4,996,000 options under the 1994 PSI Plan, the PSI
Director Plan and the 1999 PSI 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 active stock option plans generally vest over
four years.
F-27
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes our outstanding stock options at March 31,
2001, 2000, and 1999 as well as changes during the periods then ended.
WEIGHTED AVERAGE
EXERCISE PRICE
NUMBER OF SHARES PER SHARE
---------------- ----------------
(IN THOUSANDS)
Balances, March 31, 1998...................... 14,294.9 $ 1.70
--------
Options assumed in acquisition................ 2,038.4 1.72
Options granted............................... 12,029.0 7.44
Options exercised............................. (7,201.5) 0.96
Options canceled.............................. (1,715.6) 1.52
--------
Balances, March 31, 1999...................... 19,445.2 5.52
--------
Options assumed in acquisitions............... 132.3 20.95
Options granted............................... 5,857.3 19.18
Options exercised............................. (4,791.0) 4.22
Options canceled.............................. (776.1) 8.35
--------
Balances, March 31, 2000...................... 19,867.7 9.79
--------
Options assumed in acquisitions............... 7,632.7 16.16
Options granted............................... 6,776.3 18.30
Options exercised............................. (6,262.8) 6.43
Options canceled.............................. (2,859.5) 14.83
--------
Balances, March 31, 2001...................... 25,154.4 $14.32
========
As of March 31, 2001, the weighted average remaining life of the
25.2 million outstanding shares was approximately 7 years. As of March 31, 2001,
2000 and 1999 exercisable options outstanding were 8,738,000, 4,064,000, and
2,329,000, respectively, with weighted average exercise prices of $10.63, $5.21,
and $2.00, 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, "Accounting for Stock Issued to Employees."
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
consistent with the fair value approach enumerated in SFAS No. 123, our net
income (loss)
F-28
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
and net income (loss) per share for the years ended March 31, 2001, 2000, and
1999 would have been as indicated below:
FOR THE YEARS ENDED MARCH 31,
-------------------------------------
2001 2000 1999
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma net loss:
As reported................................. $(852,241) $(25,070) $(23,370)
Pro forma expense effect of SFAS No. 123.... (34,202) (15,216) (5,546)
--------- -------- --------
Pro forma after giving effect to SFAS No.
123....................................... $(886,443) $(40,286) $(28,916)
========= ======== ========
Basic and diluted pro forma net loss per share
As reported................................. $ (6.16) $ (0.24) $ (0.27)
Pro forma expense effect of SFAS No. 123.... (.24) (0.15) (0.06)
--------- -------- --------
Pro forma after giving effect to SFAS No.
123....................................... $ (6.40) $ (0.39) $ (0.33)
========= ======== ========
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,
------------------------------
2001 2000 1999
-------- -------- --------
Risk-free interest rate................................ 4.59% 6.38% 5.65%
Expected life (in years)............................... 4.5 4 4
Expected volatility.................................... 99.14% 89.03% 78.92%
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. During fiscal 1998, 808,000 of these shares
were canceled. As of March 31, 2001, all restrictions have lapsed on the
non-cancelled shares and compensation expense has been recognized.
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 to income 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") covering
substantially all employees. 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 our common stock on the first or last day of each option purchase period, as
defined. During fiscal years 2001, 2000, and 1999 we issued 106,000, 100,000,
and 124,000 shares, respectively, pursuant to the Purchase Plan.
F-29
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
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 25,000 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 5,000 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. We granted 70,000, 50,000 and
100,000 shares of our Common Stock under the Director Plan in fiscal 2001, 2000,
and 1999, respectively.
10. EMPLOYEE BENEFIT PLAN
We have a 401(k) Plan ("Plan") covering substantially all U.S. 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
Plan during fiscal 2001, 2000, and 1999 were $1,457,000, $905,000, and $467,000,
respectively.
11. SEGMENT AND GEOGRAPHIC OPERATIONS
We adopted Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," ("SFAS No. 131"). This
statement requires disclosure of segment information in a manner consistent with
the "management approach". The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. Prior to the acquisition of
Harbinger in June 2000, we operated exclusively in the Infrastructure Management
industry. We now operate in two segments that meet the criteria of being a
reportable segment in accordance with the provisions of SFAS No. 131. These
reportable segments are the infrastructure management group and the e-markets
group. Transactions between our reportable segments are made at terms which
approximate arms length transactions and are in accordance with generally
accepted accounting principles. There is no significant difference between the
measurement of the reportable segment's assets and profits and losses disclosed
below and the measurement of assets and profits and losses in our consolidated
balance sheet and statement of income. Accounting allocations are made in the
same manner for all operating segments.
F-30
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT AND GEOGRAPHIC OPERATIONS (CONTINUED)
Required reported segment information is as follows (in thousands):
INFRASTRUCTURE
MANAGEMENT E-MARKETS
GROUP GROUP CONSOLIDATED
-------------- --------- ------------
Year ended March 31, 2001
Revenues................................. $ 451,786 $ 112,897 $ 564,683
Income (loss) from operations before
income tax expense..................... $ (466,019) $(347,926) $ (813,945)
Income tax expense....................... $ 21,926 $ 16,370 $ 38,296
Total assets............................. $1,917,600 $ 86,166 $2,003,766
A summary of our operations by geographic area is as follows (in thousands):
NORTH
AMERICA EMEA APLA CONSOLIDATED
----------- -------- ---------- ------------
Year ended March 31, 2001
Revenues...................................... $ 363,999 $186,627 $14,057 $ 564,683
Total assets.................................. $1,894,895 $ 98,098 $10,773 $2,003,766
Year ended March 31, 2000
Revenues...................................... $ 149,582 $ 96,886 $ 6,832 $ 253,300
Total assets.................................. $ 503,237 $ 19,066 $ 1,127 $ 523,430
Year ended March 31, 1999
Revenues...................................... $ 88,649 $ 47,276 $ 2,138 $ 138,063
Total assets.................................. $ 179,376 $ 27,754 $ 583 $ 207,713
F-31
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY INFORMATION (UNAUDITED)
The following unaudited quarterly financial information (in thousands)
includes, in our opinion, all normal and recurring adjustments 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 2001
Licenses revenue................................. $ 62,442 $ 87,395 $ 99,543 $ 105,230
Services revenue................................. 31,882 55,320 57,064 65,807
Total costs and expenses......................... (183,561) (216,552) (229,558) (748,419)
--------- --------- --------- ---------
Income (loss) from operations.................... (89,237) (73,837) (72,951) (577,382)
Interest income (expense), net................... 75 8 224 (845)
Income tax expense............................... 5,963 9,001 11,114 12,218
--------- --------- --------- ---------
Net income (loss)................................ $ (95,125) $ (82,830) $ (83,841) $(590,445)
--------- --------- --------- ---------
Basic and diluted income (loss) per share........ $ (0.83) $ (0.58) $ (0.58) $ (4.17)
--------- --------- --------- ---------
FISCAL 2000
Licenses revenue................................. $ 32,092 $ 37,102 $ 46,524 $ 52,749
Services revenue................................. 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), net................... 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 and diluted income (loss) per share........ $ (0.05) $ (0.02) $ -- $ (0.17)
========= ========= ========= =========
13. SUBSEQUENT EVENT
On June 11, 2001, we announced that we entered into a definitive agreement
under which we would acquire all the outstanding shares of Remedy Corporation, a
supplier of information technology service management and customer relationship
management solutions. This acquisition is subject to approval by Remedy's
stockholders, regulatory approvals, and customary closing conditions. If the
acquisition is completed, we will acquire all of the outstanding common stock of
Remedy. Each outstanding share of Remedy common stock will be exchanged for
$9.00 in cash and 0.9065 shares of our common stock. In addition, we will assume
options outstanding under Remedy's employee stock incentive plans. Excluding
assumed options and based on Remedy's outstanding common stock as of June 7,
2001, we expect to issue approximately 28 million shares of our common stock in
connection with the acquisition and to pay Remedy stockholders an aggregate cash
consideration of approximately $274.5 million.
F-32
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT TITLE
--------------------- ------------------------------------------------------------
2.1 (a) Agreement and Plan of Merger and Reorganization by and among
Peregrine Systems, Inc., Rose Acquisition Corporation and
Remedy Corporation, dated as of June 10, 2001.
3.1 (i) Amended and Restated Certificate of Incorporation as filed
with the Secretary of the State of Delaware on February 11,
1997, and amendments thereto.
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.
10.3A (e) 1994 Stock Option Plan, as amended through July 1998.
10.3B (e) 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 (g) 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.
10.18 (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) Form of Restricted Stock Agreement.
10.24 (f) 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 (f) 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 (f) 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 (f) 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 (f) 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.
EXHIBIT NO. EXHIBIT TITLE
--------------------- ------------------------------------------------------------
10.29 (g) 1999 Nonstatutory Stock Option Plan.
10.40 (h) First Amendment to the Credit Agreement dated as of
December 31, 1999 by and between the Company and Bank of
America, N.A. and BankBoston, N.A.
10.41 (h) Second Amendment to the Credit Agreement dated as of
November 1, 2000 by and between the Company and Bank of
America, N.A. and Fleet National Bank.
10.42 (h) Indenture dated November 14, 2000 between Peregrine and
State Street Bank
10.43 (h) Registration Rights Agreement dated as of November 14, 2000
by and among the Company, Banc of America Securities LLC,
Bear, Stearns & Co. Inc. and Prudential Securities
Incorporated
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).
- ------------------------
(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 Registration Statement on Form S-8 (Registration Statement
333-65541) which became effective upon its filing on October 9, 1998.
(f) 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.
(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,
2000.
(h) 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, 2000.
(i) 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
December 31, 2000.