Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______.
COMMISSION FILE NUMBER: 000-22209
PEREGRINE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3773312
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
12670 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(858) 481-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF
THE ACT: COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing sale price of the Common Stock on May
28, 1999, as reported on the Nasdaq National Market, was approximately
$1,131,650,877. Shares of Common Stock held by each executive officer and
director and by each person who may be deemed to be an affiliate of the
Registrant have been excluded from this computation. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of May 28, 1999, the Registrant had 49,336,278 shares of Common
Stock, $.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form 10-K
portions of its Proxy Statement for the 1999 Annual Meeting of Stockholders.
PEREGRINE SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I ................................................................................................ 3
Item 1. Business .............................................................................. 3
Item 2. Properties............................................................................. 12
Item 3. Legal Proceedings...................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................................... 13
PART II ............................................................................................. 15
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 15
Item 6. Selected Consolidated Financial Data................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................ 29
Item 8. Financial Statements and Supplementary Data............................................ 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 29
PART III ............................................................................................. 30
Item 10. Directors and Executive Officers of the Registrant..................................... 30
Item 11. Executive Compensation................................................................. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 30
Item 13. Certain Relationships and Related Transactions......................................... 30
PART IV ............................................................................................. 31
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K...................... 31
Signatures ............................................................................................. 34
2
PART I
ITEM 1. BUSINESS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE STATEMENTS INCLUDE, AMONG OTHERS, STATEMENTS
CONCERNING OUR FUTURE OPERATIONS, FINANCIAL CONDITION AND PROSPECTS, AND OUR
BUSINESS STRATEGIES. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE" AND OTHER
SIMILAR EXPRESSIONS GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS. INVESTORS IN
OUR COMMON STOCK ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
SUBSTANTIAL RISKS AND UNCERTAINTIES THAT COULD CAUSE OUR FUTURE BUSINESS,
FINANCIAL CONDITION, OR RESULTS OF OPERATIONS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR CURRENTLY ANTICIPATED RESULTS. INVESTORS SHOULD CAREFULLY
REVIEW THE INFORMATION CONTAINED UNDER THE CAPTION "FACTORS THAT MAY EFFECT
FUTURE RESULTS" IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO,
THIS REPORT.
OVERVIEW
Peregrine Systems, Inc. refers to itself as "The Infrastructure
Management Company." We offer business organizations an integrated suite of
packaged infrastructure management application software. These software
applications are designed to manage the fiscal and physical aspects of
organizational infrastructure from the moment infrastructure enters an
organization until the moment it is taken out of service.
We were incorporated in California in 1981 and reincorporated in
Delaware in 1994. Unless the context requires otherwise, references in this
report to "Peregrine," "we," "PSI", "us," or "our" refer to Peregrine Systems,
Inc., a Delaware corporation, its predecessor, Peregrine Systems, Inc., a
California corporation, and its subsidiaries. Our principal executive offices
are located at 12670 High Bluff Drive, San Diego, California 92130. Our
telephone number is (858) 481-5000.
INDUSTRY AND CORPORATE BACKGROUND
Historically, automated management of organizational infrastructure was
not a priority for many companies. Rather, organizations tended to focus their
information technology (IT) spending on automating external business functions
that involve interaction with customers, suppliers, distributors, and other
third parties. These applications included building communications networks for
voice and data and implementing software solutions for Enterprise Resource
Planning (ERP), Customer Supply Chain Management (CSCM), and Customer
Relationship Management (CRM). Organizations have become increasingly dependent
on these networks, systems, and applications to provide core products and
services, and we believe they are now critical components of organizations'
operating infrastructures.
Organizational infrastructures have also become larger and more
complex. For example, modern businesses now depend on an array of systems and
applications to provide electronic mail and Internet and Intranet services, to
manage documents, and to support mission critical ERP, CSCM, and CRM
applications. In addition, the various components of infrastructure, including
desktop computers, networks, and telephony assets, are increasingly linked. In
turn, these internal networks and systems depend on a physical infrastructure
comprised of cable and wiring in walls, floors, and ceilings that are ultimately
part of the buildings and campuses that comprise the larger organizational
infrastructure.
We believe that the operational effectiveness of an organization
ultimately depends on the efficient management of these infrastructure assets.
Threats to infrastructure pose substantial business risks, and issues raised in
connection with Year 2000 remediation, European currency conversion, major
facilities relocations, and changes in network operating environments have
resulted in increased awareness by IT managers and senior executives of
infrastructure dependency. Accordingly, we believe that opportunities exist for
providers of an integrated suite of infrastructure management software that can
assist organizations to deploy, maintain, and operate infrastructure assets
efficiently throughout their life cycle -- from the time an organization starts
to contemplate purchase or lease of a
3
new asset to the moment the asset is removed from service and sold or
disposed. Major phases in the lifecycle are: procurement or lease,
installation, data collection, taking a service request, upgrade, move,
problem management, problem resolution, change management of system-wide
changes, dispatch of work as a result of a request, problem, or change;
performance tracking, correlation of performance to service level agreements,
contract management, removal from service, and finally, disposition or re-use.
Until recently, our products focused principally on problem
management for an organization's IT infrastructure. Our principal product
suite, SERVICECENTER, is an integrated, enterprise service desk solution that
focused historically on network management. Recently, SERVICECENTER has been
extended to address the lifecycle of IT infrastructure assets. Since 1997, we
have also made several acquisitions intended to create a complete
infrastructure management software solution. In September 1997, we acquired
ASSETCENTER through the acquisition of Apsylog S.A., a French corporation,
and United Software, Inc., its parent company. ASSETCENTER extended our
infrastructure management product line by offering customers the ability to
manage the fiscal aspects of infrastructure through automated lease
management, procurement management, asset management, and cost management
applications. In July 1998, we acquired Innovative Tech Systems, Inc., a
leading provider of facilities management software. Innovative's SPAN-FM
product line offered the ability to manage real estate, space planning,
stacking, data collection, and other facilities management activities, as
well as the ability to integrate facilities data to underlying computer aided
design (CAD) drawings using third party CAD software. In September 1998, we
acquired a remote management technology from International Software Solutions
(ISS). ISS's remote management software manages a variety of graphical user
interface technologies over a network and assists network support personnel
to diagnose and remedy a user's problems remotely, without the need to
provide on-site support.
In March, 1999, we acquired Prototype, Inc., a leading provider of
fleet and transportation management applications in North America. As a
result of that acquisition, FLEETANYWHERE and E.FLEET are the primary product
families now offered to large organizations to assist in the management of
the fiscal and physical optimization of their transportation assets: fleets
of cars, trucks, planes, and specialized vehicles.
We believe that our future growth and profitability will depend on a
number of factors, including, among others, factors relating to the quality
of our products and to our ability to penetrate new markets and further
penetrate existing markets. In that regard, our strategy is focused on
maintaining and enhancing our technological position and the functionality of
our products; developing an integrated product line of software applications
to manage all aspects of the enterprise infrastructure; creating
organizational awareness of the benefits to be obtained from an integrated
approach to enterprise infrastructure management; expanding our sales and
service operations and capability both directly and through our alliance
partners; expanding international sales; leveraging a product authorship
model that rewards product developers based on sales of products developed by
them; expanding our distribution channels through relationships with third
party distributors, system integrators, and original equipment manufacturers;
and supporting the efforts of other companies to integrate their applications
and technologies our product offerings.
PRODUCTS
We currently offer over twenty Infrastructure Management software
products:
- - SERVICECENTER
SERVICECENTER is a set of applications intended to maintain the
effectiveness and functionality of IT infrastructure by keeping it working.
SERVICECENTER applications include problem management, problem resolution,
change management, service level agreement management, request management,
service management, remote management, work management, SERVICECENTER
INSIGHT, an OLAP data mining tool, REPORTCENTER, and SERVICECENTER/2000, a
specific version of SERVICECENTER tailored for Year 2000 crisis management
and contingency planning. SERVICECENTER also offers a number of gateway
products to the software tools and applications of other vendors. These
gateway products include interfaces to system and network management products
such as HP Openview, CA Unicenter, and Tivoli TME10. In addition, gateways to
Enterprise Resource Planning applications are supported to products such as
SAP R3, Peoplesoft, and Oracle. Gateways are licensed individually, providing
an additional product revenue source.
PRIMARY SERVICECENTER APPLICATIONS
PROBLEM MANAGEMENT. The problem management application automates the process of
reporting and tracking specific problems or classes of problems associated with
an enterprise network computing environment. Help desk personnel open problem
tickets using templates specific to the class of problem reported.
PROBLEM RESOLUTION. The problem management application works together with the
Company's IR EXPERT, a text search expert system that employs advanced
technology to allow network operators to retrieve relevant information. This
application assists in problem solving, based on prior solutions. The IR EXPERT
reduces a user's question, or
4
query, to a number of "terms," refining the query to fit knowledge in the
database and can then search resolution databases using related terms. This
application is self-learning, so the customer does not have to perform any
work to keep the knowledge base up to date.
CHANGE MANAGEMENT. The change management application provides a functional
framework for proposing, accepting, scheduling, approving, reviewing and
coordinating network changes. Change management permits end-users to enter
proposed changes to the production environment and then circulate those changes
electronically for review and action. Change requests can be tracked and details
can be added at any time to the initial specifications.
CONTRACT MANAGEMENT. Contract Management provides enterprise IS organizations
with the tools they need to track all costs associated with infrastructure
problems or change. Tracking asset, labor, and outage costs in one central
repository provides management with real-time information on asset ROI and the
costs of supporting specific problems.
INVENTORY CONFIGURATION MANAGEMENT. The inventory configuration management
application provides the service desk with a central repository of information
about an organization's IT environment, including inventories of networked
devices and applications as well as information concerning end-users. Easy
access to inventory information permits the service desk to respond to end-user
problems, to plan changes and services, and to create accurate reports about the
network's status and environmental trends.
REQUEST MANAGEMENT. The request management application automates and tracks an
organization's equipment and services ordering process from initial request
through installation and follow-up. Using SERVICECENTER, an end-user identifies
and orders products or services from a catalog of items. SERVICECENTER then
consolidates requests, forwards orders through an organization's standard
approval and order processing procedures, and consolidates orders by vendor.
End-users can track the status of requests through SERVICECENTER at all times.
SERVICE LEVEL AGREEMENT MANAGEMENT. Service Level Agreements (SLA) are used
by companies to relate the availability and performance of infrastructure to
the business mission performed by the infrastructure. Service Level Agreement
Management is designed to simplify the task of managing SLA by providing an
automated, real-time view of SLA performance. It provides a single,
centralized repository of SLA information and automated data feeds related to
infrastructure health. It can also help prioritize problem resolution to
ensure that SLA metrics are achieved. If a threshold of performance is being
approached which would threaten the SLA, a problem ticket can be
automatically opened and managed.
SERVICECENTER INSIGHT. ServiceCenter Insight is a data mining tool which
facilities the ability of the customer to ask a number of ad hoc questions
relative to the information in the Infrastructure Repositories. From broad
questions such as "what do we own", "how well is it working," to detailed
questions such as "what is the Year 2000 compliance status of my PCs?" Based
on the Cognos OLAP engine, which we sell under license, ServiceCenter
Insight, provides a powerful query and reporting capability for the
Infrastructure manager.
SERVICE MANAGEMENT. Service Management provides businesses with a comprehensive
call management tool. The service desk operator uses Service Management to
assess an incoming call and determine whether it is an information request, a
call requiring problem management, a request for action to assist an individual
or a requirement for a change which would impact multiple elements of the
infrastructure.
WORK MANAGEMENT. Work Management is designed to help managers better balance
the demands for service and support based on the priority of tasks and the skill
set of the workforce. Work Management will automatically allocate unassigned or
incomplete problem tickets to individuals. The manager can also assign new work,
view progress on assigned items, or reassign work based on changing properties
using the drag and drop interface.
- - ASSETCENTER
ASSETCENTER is a set of applications intended to manage the
portfolio of IT infrastructure investments by managing related financial
information. ASSETCENTER applications include asset management, procurement
management, leasing management, and cost management. In the European market,
ASSETCENTER also includes a network help desk application. Like
SERVICECENTER, ASSETCENTER also supports gateways to ERP and desktop
inventory discovery tools. The gateways are licensed as add-ons to the base
applications.
MAJOR ASSETCENTER APPLICATIONS
ASSET MANAGEMENT. The Asset Management application provides a comprehensive
inventory of an organization's equipment, users, suppliers, and contracts. The
application provides detailed descriptions of software licenses
5
acquired and their associated rights in order to reconcile them with the
software actually installed. Asset Management allows users to track assets
throughout their life cycle, from the initial purchase request to retirement.
LEASE MANAGEMENT. Lease Management manages the contractual aspects of leasing
and rental by returning, updating and renewing equipment through alarm and
messaging features. The application also includes a wide range of methods for
calculating lease terms and permits users to evaluate different financing
alternatives.
PROCUREMENT MANAGEMENT. This application manages the acquisition of IT products
including assets, consumables and services. Procurement Management covers the
entire purchasing cycle: request, approval, estimate, issuance of purchase
orders, delivery and receipt. The application allows users to set up
authorization procedures as well as automatic reordering based on user-defined
restocking criteria.
COST MANAGEMENT. Cost Management features analytic and budgetary functions that
allow tracking, control, and allocation of IT related expenses. The application
allows users to track costs related to each asset, including both capital and
operational expenses (E.G., training, service calls) and to measure the costs of
ownership for each asset. The application also allows users to compare
accounting and physical inventories to determine the correct valuation of
balance sheet assets.
- - SPAN-FM
SPAN-FM is a set of applications and multiple gateways that are
designed to manage non-IT assets related to physical plant and facilities.
SPAN-FM includes Space Planning, Facilities Management, Work Order
Management, Stacking, Maintenance Management, Facilities Help Desk, Cable
Plant Management, CAD integrator, Data Collection, and Real Estate Lease
Management. Like SERVICECENTER and ASSETCENTER, SPAN-FM also supports
gateways to external products.
The SPAN-FM product suite offers solutions specifically designed to automate
Facilities, Real Estate and Operations, and Maintenance Management.
- - SPAN-FM Solution for Facilities Management
The SPAN-FM Solution for Facilities Management is the only true
computer integrated facility management solution for facilities design,
planning and management. SPAN-FM accurately projects occupancy demand
and supply scenarios enabling efficient move planning thus substantially
reducing the costs of churn. A bi-directional interface to the most
popular computer-aided-design products such as Autocad and Microstation
allows users to easily view information graphically and to manage
facilities from a top down approach. Users can also use the SPAN-FM
application to manage project bids, costs and budgets automatically.
- - SPAN-FM Solution for Operations and Maintenance
The crux of any truly effective plant and facilities maintenance is
providing reliable preventive maintenance to avert or minimize the
impact of equipment breakdown. SPAN-FM Solution for Operations and
Maintenance enables corrective maintenance workflow to be streamlined
and managed from a single point. This reduces duplication allowing
managers to automatically schedule preventive maintenance, reducing
downtime and increasing production. SPAN-FM automatically provides work
order cost estimates, work order status and work order scheduling.
Purchasing, receiving and shipping functions can also be administered
automatically with this leading computerized maintenance management
solution.
- - SPAN-FM Solution for Real Estate
The SPAN-FM Real Estate Management Solution helps real estate
professionals optimize the use of available space, reduce overall
occupancy costs and implement continuous improvement strategies and
policy tactics. The application tracks owned and leased property
including space configuration and utilization. Its powerful project
management features automatically track work orders, staff and
contractors as well as other vendors. SPAN-FM also facilitates
benchmarking against the organization's own past performance and
accepted industry standards.
- - FLEETANYWHERE
FLEETANYWHERE is a comprehensive, Internet-enabled, fully integrated,
Windows-based fleet management system. It is capable of tracking an unlimited
number of equipment units and supporting an unlimited number of workstations
from any number of locations. FLEETANYWHERE tracks all functions related to the
maintenance of equipment fleets, including processing repair and PM work orders,
tracking operating expenses such as for fuel, oil, and licensing, and tracking
and billing for equipment usage. Customers receive immediate return on
investment related to warranty claims and reduction of obsolete parts inventory.
Optional modules offer functionality related to bar coding on the shop floor,
online employee labor capture, motor pool reservations tracking, shop
scheduling, service level agreement tracking, replacement analysis, tire
tracking, and fleet optimization.
E.FLEET is a variation of FLEETANYWHERE which offers the full
application set to fleet managers as an Internet service. If the customer
elects this option, we act as the system administrator and operator for the
customer. Their users connect to our software over the Internet and receive
the benefit of the application without the administrative burden of actually
running the server portion of the application. We recognize revenue both at
the time of initial sale, as with a standard FLEETANYWHERE sale, and in the
form of receiving payments for maintenance, operation, and administration of
the application's Internet server.
ADDITIONAL FLEETANYWHERE MODULES
BAR CODE MODULE. The Bar Code Module provides full support for automated data
collection in a customer's shop and parts inventory operations. Mechanics and
field technicians use this module to capture a log of their daily activities by
scanning bar coded work order and task numbers into a standalone hand-held
device, then uploading the data at the end of the day into the database.
Inventory warehouse operations use this module along with wireless hand-held bar
code devices and laser scanners to perform physical inventory counts and issue
parts.
LABOR CAPTURE MODULE. The Labor Capture Module provides the capability for
mechanics and technicians to log on and off of work order and indirect
activities by scanning bar codes with a laser scanner or by keying data into a
workstation positioned on the shop floor. Shop managers can view real-time data
representing tasks in progress and current assignments of employees to each work
order.
MOTOR POOL MODULE. The Motor Pool Module offers the online, real-time ability to
book in advance and track reservations for equipment units assigned to an
organization's motor pool (e.g. internal car rental operation). The module also
allows users to record the dispatch and return of equipment units to the pool
and to check the availability of equipment units of any type for any time into
the future.
SHOP SCHEDULING MODULE. The Shop Scheduling Module allows users to manage all
shop resources including labor (mechanics), work bays, parts, and tools. The
module generates an optimized schedule for each shop based on task priorities
(based on necessary turnaround time) designated for each equipment unit by the
user. Users can generate a schedule as often as they wish to adjust for changes
in work load, available resources, priorities, or start dates.
SERVICE LEVEL AGREEMENTS MODULE. The Service Level Agreements Module assesses
the level of service a fleet organization is providing to its customers based on
the needs of the customer's operation. It tracks available and non-available
equipment unit-minutes for each service level agreement requirements period
designated by the user.
REPLACEMENT ANALYSIS MODULE. The Replacement Analysis Module identifies, in
advance, the optimum replacement point for each individual equipment unit in its
life. The module considers the optimum replacement point for an equipment unit
to be the time at which the accumulated lifetime cost per meter unit achieves a
minimum value based on neural network calculations. The neural network projects
future performance for each equipment unit based on historical data for similar
equipment units at similar points in their lives.
TIRE MODULE. The Tire Module provides the capability to maintain master data for
each tire, including identifying, descriptive, installation, recap, and cost
information. It also records a complete history of each event affecting a tire.
The module generates a list of all tires currently mounted on a particular
equipment unit, a list of all tires associated with a specific part number, and
a list of all tires of a specified tire type.
- - INFRATOOLS
In the past, IT decision makers have had to choose between point
solutions that failed to address the breadth of their problem and expensive
cumbersome frameworks which often failed to deliver on their promises. Now IT
organizations concerned with service and asset management have a new set of
tools that uniquely address their problems with INFRATOOLS REMOTE CONTROL and
INFRATOOLS DESKTOP DISCOVERY, and the soon to be available INFRATOOLS NETWORK
DISCOVERY.
INFRATOOLS REMOTE CONTROL. InfraTools Remote Control is a graphical remote
control application with cross-platform support providing the most stable
connections and unparalleled enterprise-level security. InfraTools Remote
Control is designed for everything from help desk and remote support to teaching
applications and even network management. By slashing the time needed to
identify and solve problems and eliminating travel to manage remote and mobile
systems, IT organizations will dramatically reduce their Total Cost of
Ownership.
INFRATOOLS DESKTOP DISCOVERY. InfraTools Desktop Discovery addresses the
underlying need for IT intelligence about your desktops by providing complete,
accurate, and timely information that is continuously accessible and easy to
maintain. This information lets you know exactly what you own to confidently
address your service and
6
asset management needs by providing integration with SERVICECENTER and
ASSETCENTER from Peregrine Systems.
INFRATOOLS NETWORK DISCOVERY. InfraTools Network Discovery, to be released this
summer, provides complete, accurate, and real-time information about your
network and all networked devices. This combined with InfraTools Desktop
Discovery will provide a complete view of your IT infrastructure and a unique
level of accurate detail that is simple to deploy and powerfully integrated with
Peregrine Systems SERVICECENTER and ASSETCENTER.
PRODUCT INTEGRATION
In light of our numerous acquisitions of new software products and
technologies, our research and development personnel have been focused, in
part, on integrating these products and technologies into a single product
suite with a common data repository. In April 1998, we announced and shipped
the Peregrine Repository Interface Manager (PRIM), which integrates common
elements between the data schema of SERVICECENTER and ASSETCENTER. PRIM
technology is currently being enhanced to further improve the integration of
SERVICECENTER and ASSETCENTER and to begin the integration of SPAN-FM. The
remote management application acquired from ISS has been integrated into
SERVICECENTER and ASSETCENTER and is now being offered commercially as both a
standalone and integrated solution. INFRATOOLS DESKTOP DISCOVERY is currently
being integrated to SERVICECENTER and ASSETCENTER and will be commercially
offered in the second fiscal quarter of fiscal 2000 as both an integrated and
standalone product.
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 such 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 in the future to continue to devote a significant
amount of resources to developing new and enhanced products. We currently have a
number of product development initiatives underway. We cannot predict, however,
whether any enhanced products, new products, or product suites will be embraced
by existing or new customers. The failure of any of these products to achieve
market acceptance would have a material adverse effect on our business, results
of operations and financial condition.
Our research and development expenditures in fiscal 1997, 1998, and
1999 were $5.9 million, $8.4 million, and $13.9 million, respectively,
representing 17%, 14%, and 10% of total revenues in the respective periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The market for our products is subject to rapid technological change,
changing customer needs, frequent new product introductions and evolving
industry standards that may render existing products and services obsolete. As a
result, our position in its existing markets or other markets that it may enter
could be eroded rapidly by product advances. The life cycles of the our products
are difficult to estimate. Our growth and future financial performance will
depend in part on its 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 investments
by us. There can be no
7
assurance that we will have sufficient resources to make the necessary
investments. We have in the past experienced development delays, and there
can be no assurance that we will not experience such 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 such
products will achieve market acceptance, or that our current or future
products will conform to industry requirements. Our inability, for
technological or other reasons, to develop and introduce new and enhanced
products in a timely manner could have a material adverse effect on our
business, results of operations, and financial condition.
TECHNOLOGY
Our products rely on a number of standard, commercially available
technologies for relational database storage and retrieval and client/server
communications and are designed to support a range of implementations of
infrastructure management applications and the Enterprise Service Desk within
medium sized organizations to large enterprises. We have developed other
technologies designed to provide a comprehensive environment to build, deploy,
and customize a range of applications.
We commenced integration of the SERVICECENTER and ASSETCENTER product
suites shortly after completion of the acquisition of Apsylog. The Company has a
phased plan for converging the technologies. The first phase, completed in 1998,
integrates SERVICECENTER and ASSETCENTER using a replication scheme called the
Peregrine Repository Interface Manager ("PRIM"). PRIM allows SERVICECENTER and
ASSETCENTER to manage simultaneously data describing infrastructure assets as
though they were in the same database. In July 1998 we acquired Innovative with
its SPAN-FM product suite. Our product objective is to merge the technologies of
the four product suites, retaining the best technology from each and maintaining
an upgrade path for current customers.
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. The
Company's database, business rules, and presentation technologies create a
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 the software fit the
customers' needs, the Company's products provide a number of tools that
enable customers to customize and extend SERVICECENTER, ASSETCENTER, SPAN-FM,
and FLEETANYWHERE. The design of the database, the contents and appearance of
the user interface, and the business rules can be modified using the
Company's standard tools provided with the system.
RAPID APPLICATION DEVELOPMENT ENVIRONMENT. The Company has created a
"fill-in-the-blanks" development environment for building and deploying
applications. All SERVICECENTER applications are implemented using the
Company's RAD environment. If a customer requires more extensive
modification, the system can be customized by changing the applications
provided by the Company or implementing new applications using the RAD
environment. In fiscal 1999, the Company introduced an advanced graphical
workflow engine in ASSETCENTER, along with Wizard technology for simplified
tailoring of the application. These technologies will be introduced in future
Peregrine Systems applications.
DISTRIBUTED SERVICES. The Company has 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. The Company has
implemented a "follow-the-sun" approach to allow continuous updates of
information as ownership of processes moves from one group to another during
the global business day.
ADAPTERS. The Company provides adapters to industry standard APIs, such as SMTP
e-mail, and leading vendors products. These adapters expand the reach of the
Company's products by allowing them to interact with other products currently in
the customer's environment. The Company has also created adapters that permit
the system to communicate using e-mail, beeper, fax and Lotus Notes. The
adapters also provide communication with third party network management tools
such as Hewlett Packard's OpenView, CA-Unicenter, Tivoli's TME, Cabletron
Spectrum, Sun's SunNet Manager and others. In addition, the Company has created
an open API permitting software developed by third parties, end-users or the
Company's Professional Services group to be integrated into the system.
INTELLIGENT AGENTS. The Company provides 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
8
management of an IT environment. The agents permit help desk personnel to
open, update, and close trouble tickets based on criteria provided by the
customers.
JAVA CLIENT. The Company introduced a 100% pure Java SERVICECENTER GUI client
in fiscal 1999. The Java client duplicates the functionality of the
SERVICECENTER GUI, allowing access to the entire SERVICECENTER system via the
internet (world wide web). The Java client is designed for use by production
or "heavy" users of the system, while the HTML web client, available for
SERVICECENTER, ASSETCENTER, SPAN-FM, and FLEETANYWHERE is designed for the
casual user requiring easy, simple access to basic system functions.
SALES AND MARKETING
We sell our software and services in both North America and
internationally primarily through a direct sales force. In addition to the
Company's San Diego headquarters, the North American sales force is located
in the metropolitan areas of Atlanta, Boston, Chicago, Dallas, Houston, New
York, Philadelphia, San Francisco, Washington, D.C., and Winnipeg, Canada.
The international sales force is located in the metropolitan areas of
Amsterdam, Frankfurt, London, Milan, Munich, Paris, Singapore and Sydney. Our
sales model combines telephone and network communications for product
demonstrations and product sales with travel to customer locations to pursue
a consultative sales process. In addition to our direct sales strategy, we
continue to pursue indirect distribution channels. In the Pacific Rim and
Latin America, we have established a network of channel partners. In North
America, the Company has established a network of regional and national
systems integrators and channel partners. When sold through direct channels,
the sales cycle for the product is typically six to nine months depending on
a number of factors, including the size of the transaction and the level of
competition which the Company encounters in its selling activities.
In the last year, we have devoted significant resources to
restructuring and building its marketing organization. In the course of this
restructuring, the marketing organization has launched a new corporate
marketing strategy emphasizing our objective to be the leading infrastructure
management solution worldwide. As part of our marketing strategy, we have
implemented the infrastructure management strategy throughout its marketing
programs such as seminars, monthly executive briefings, direct mailings,
industry trade shows, advertising and public relations. In addition, we have
significantly expanded in product marketing, telemarketing, and web
marketing. We plan to continue to expand our marketing organization in an
effort to broaden our market presence.
We have significantly increased the size of our sales force over the
last year and expect to continue hiring sales personnel, both domestically and
internationally, over the next twelve months. Competition for qualified sales
personnel is intense in the software industry. We also expect to increase the
number of our regional, national, and system integrators and channel partners,
domestically and internationally. Any failure to expand the direct sales force
or other distribution channels could have a material adverse effect on our
business, results of operations and financial condition.
We believe that our continued growth and profitability will require
expansion of our international operations, particularly in Europe, Latin
America, and the Pacific Rim. We intend to expand international operations and
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 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 otherwise unable to
successfully penetrate important international markets, our business, results of
operations, and financial condition could be materially and adversely affected.
In addition, continued international expansion poses a number of risks
associated with conducting business outside the United States, including
fluctuations in currency exchange rates, longer payment cycles, difficulties in
staffing and managing international operations, seasonal reductions in business
activity during the summer months in Europe and certain other parts of the
world, increases in tariffs, duties, price controls, or other restrictions on
foreign currencies, and trade barriers imposed by foreign countries, any of
which could have a material adverse effect on our business, operating results
and financial condition. In addition, we have only limited experience in
developing localized versions of our products and marketing and distributing our
products internationally. There can be no assurance that we will be able to
successfully localize, market, sell, and deliver products internationally. The
inability of the Company to expand its international operations successfully and
in a
9
timely manner could have a material adverse effect on the Company's business,
results of operations, and financial condition.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
Our Professional Services group provides technical consulting and
training to assist customers 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 the Company's service desk tools, continues with the
technical design and construction, and finishes with system roll out.
Implementation assistance frequently involves process reengineering and the
development of interfaces between the Company's products and legacy systems and
other tools or systems.
We offer training courses in the implementation and administration
of our products. On a periodic basis, we offer product training at our
facilities in San Diego, Orlando, Washington D.C., and London for customers
and channel partners. Customer-site training is also available.
We maintain a staff of customer service personnel, who provide
technical support and complete training, 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 through our local offices in Europe and San Diego via toll
free lines. In addition to telephone support, we provide support via fax,
e-mail, and a Web server. We use our own "follow-the-sun" technology as a
foundation for this continuous worldwide support.
COMPETITION
The market for our products is highly competitive and diverse. The
technology for infrastructure management software products can change rapidly.
New products are frequently introduced and existing products are continually
enhanced. Competitors vary in size and in the scope and breadth of the products
and services offered.
EXISTING COMPETITION. We have faced competition from a number of
sources, including:
- providers of internal help desk software applications such as Remedy
Corporation and Software Artistry, Inc. (now a division of Tivoli
Systems, Inc.)
- customer interaction software companies such as Clarify Inc. and The
Vantive Corporation, whose products include internal help desk
applications
- information technology and systems management companies such as IBM,
Computer Associates International, Inc., Network Associates, Inc.
(recently formed as a result of the business combination of McAfee
Associates, Inc. and Network General Corporation), and
Hewlett-Packard Company through its acquisition of PROLIN
- providers of asset management and facilities management software
such as MainControl, Janus, and NCR in asset management,
and Archibus, FIS, and Assetworks in facilities management
- providers of fleet management software, such as the Control
Software division of Maximus.
- providers of plant and equipment asset management software which
is a market we compete in only peripherally today, but many of
those vendors are broadening their offerings into facilities,
fleet, and even technology infrastructure management. Companies
in this area include Project Software and Development, Indus,
and Datastream.
- the internal information technology departments of those companies
with infrastructure management needs
FUTURE COMPETITION. Because competitors can easily penetrate the
software market, we anticipate additional competition from other established and
new companies as the market for enterprise infrastructure management
applications develops. In addition, current and potential competitors have
established or may in the future establish cooperative relationships among
themselves or with third parties. Large software companies may acquire or
establish alliances with smaller competitors of Peregrine. We expect that the
software industry will continue to consolidate. It is possible that new
competitors or alliances among competitors may emerge and
10
rapidly acquire significant market share.
Our ability to sell our products depends in part on their
compatibility with and support by providers of system management products,
including Tivoli, Computer Associates, and Hewlett-Packard. All three of
these companies have acquired providers of help desk software products over
the past 36 months. These providers of system management products may decide
to close their systems to competing vendors like Peregrine. They may also
decide to bundle their infrastructure management and/or help-desk software
products with other products for enterprise licenses for promotional purposes
or as part of a long-term pricing strategy. If that were to happen, our
ability to sell our products could be adversely affected. Increased
competition may result from acquisitions of help desk and other
infrastructure management software vendors by system management companies.
The results of increased competition including price reductions of our
products, reduced gross margins, and reduction of market share, could
materially adversely affect our business, operating results, and financial
condition.
GENERAL COMPETITION. Some of our current and many of our potential
competitors have much greater financial, technical, marketing, and other
resources than Peregrine. As a result, they may be able to respond more quickly
to new or emerging technologies and changes in customer needs. They may also be
able to devote greater resources to the development, promotion, and sale of
their products than we can. We may not be able to compete successfully against
current and future competitors. In addition, competitive pressures faced by
Peregrine may materially adversely affect our business, operating results, and
financial condition.
The Company believes that the principal competitive factors affecting
its market 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
the Company believes that it currently competes favorably with respect to such
factors, there can be no assurance that the Company can maintain its competitive
position against current and potential competitors, especially those with
greater financial, marketing, service, support, technical, and other resources
than the Company. In addition, the Company believes that its future financial
performance will depend in large part on its success in developing an integrated
product line of software applications to manage all aspects of the enterprise
infrastructure, including management of IT, plant and facilities, communication
systems, and distribution systems, and to create organizational awareness of the
benefits to be obtained from an integrated approach to infrastructure
management.
INTELLECTUAL PROPERTY
The Company's success is heavily dependent upon proprietary technology.
The Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary rights. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. Despite precautions taken by the Company, it may be
possible for unauthorized third parties to copy aspects of its current or future
products or to obtain and use information that the Company regards as
proprietary. In particular, the Company may provide its licensees with access to
its data model and other proprietary information underlying its licensed
applications. There can be no assurance that the Company's means of protecting
its proprietary rights will be adequate or that the Company's competitors will
not independently develop similar or superior technology. Policing unauthorized
use of the Company's software is difficult and, while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. Litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company is not aware that any of its software product offerings
infringes the proprietary rights of third parties. There can be no assurance,
however, that third parties will not claim infringement by the Company with
respect to current or future products. The Company expects that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the Company's industry segment grows
11
and the functionality of products in different industry segments overlaps.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company or at all, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
EMPLOYEES
As of March 31, 1999, we employed 878 persons, including 324 in sales
and marketing, 124 in research and development, 104 in customer support, 179 in
professional services, and 147 in finance and administration. Of our employees,
219 are located in Europe, 24 in the Pacific Rim, and the remainder in North
America. Our future success will depend in part on our continued ability to
attract, hire and retain qualified personnel. Competition for such personnel is
intense, and there can be no assurance that we will be able to identify,
attract, and retain such personnel in the future. None of our employees is
represented by a labor union (other than statutory unions required by law in
certain European countries). We have not experienced any work stoppages and
consider our relations with our employees to be good.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, support, research and
development and training functions are located at our headquarters facility in
San Diego, California. We currently occupy 127,110 square feet of space in San
Diego, and the underlying leases extend through August 2003. An additional
13,310 square feet of leased space at the San Diego headquarters is subleased to
JMI Services, Inc., an affiliate of the Company.
In June 1999, we entered into a series of leases covering up to
approximately 540,000 square feet of office space in San Diego, including an
option on approximately 118,000 square feet of office space. Building has
commenced on this campus location and we intend to begin moving into the
location in the fall of 1999 and continuing as buildings are completed over the
next four years. We believe that these facilities along with our current
facilities are adequate to meet our needs through the next twelve months.
We also lease office space for sales, marketing, and professional
services staff in the metropolitan areas of Atlanta, Chicago, Houston, New York,
Philadelphia, San Francisco, Washington, D.C., and Winnipeg Canada. In Europe,
we lease space in the metropolitan areas of Amsterdam, Copenhagen, Frankfurt,
London, Milan, Munich, Paris, and Sydney for international sales, customer
support, professional services, and administration.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to various legal proceedings or
claims, either asserted or unasserted, which arise in the ordinary course of
business. Management has reviewed pending legal matters and believes that the
resolution of such matters will not have a significant adverse effect on the
Company's financial condition or results of operations.
12
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, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Company's executive officers as of March 31, 1999.
NAME AGE POSITION
---- --- --------
Stephen P. Gardner ................ 45 President, Chief Executive Officer and Director
David A. Farley.................... 43 Senior Vice President, Finance, Chief Financial Officer and Director
Matthew C. Gless................... 33 Vice President, Finance, Chief Accounting Officer
William G. Holsten................. 62 Senior Vice President, Worldwide Professional Services
Gary A. Hughes ................... 35 Vice President, Worldwide Customer Support
Frederic B. Luddy.................. 44 Vice President, North American Research and Development
Richard T. Nelson.................. 39 Vice President, Secretary, and General Counsel
Douglas S. Powanda................. 42 Executive Vice President, Worldwide Operations
Gilles Queru ...................... 40 Vice President, Corporate Development
Steven S. Spitzer.................. 40 Vice President, Channel Sales
STEPHEN P. GARDNER has served as the Company's President and Chief
Executive Officer and a member of the Board of Directors since April 1998. From
January 1998 until April 1998, Mr. Gardner served as Executive Vice President
and the Company's Principal Executive Officer. From May 1997 until January 1998,
Mr. Gardner served as Vice President, Strategic Acquisitions. From May 1996
until May 1997, Mr. Gardner served as president of Thunder & Lightning Company,
an internet software start-up company. From March 1995 until May 1996, Mr.
Gardner served as president of Alpharel, Inc., a document management software
company. From March 1993 until March 1995, Mr. Gardner served as a vice
president of Data General Corporation, a manufacturer of multiuser computer
systems, peripheral equipment, communications systems, and related products.
DAVID A. FARLEY has served as the Company's Senior Vice President,
Finance and Administration since August 1998 and Chief Financial Officer and
member of the Board of Directors since October 1995. Mr. Farley served as Vice
President, Finance from October 1995 until August 1998 and Secretary of the
Company from October 1995 until February 1997. From November 1994 to November
1995, Mr. Farley was Vice President, Finance, and Chief Financial Officer and a
director of XVT Software Inc. ("XVT"), a development tools software company.
From December 1984 until October 1994, Mr. Farley held various accounting and
financial positions at BMC Software, Inc., a vendor of software utilities for
IBM mainframe computing environments ("BMC"), most recently as Chief Financial
Officer and as a director.
MATTHEW C. GLESS has served as the Company's Vice President,
Finance and Chief Accounting Officer since October 1998. From April 1996 until
October 1998, Mr. Gless served as Controller. From 1990 to April 1996, Mr.
Gless held various accounting and financial positions at BMC, most recently
as Assistant Treasurer.
WILLIAM G. HOLSTEN has served as the Company's Senior Vice President,
Worldwide Professional Services since August 1998. Mr. Holsten served as Vice
President, Professional Services from November 1995 until August 1998. From July
1994 until November 1995, Mr. Holsten was Director of Professional Services for
XVT. From August 1992 until June 1994, he was a consultant with Engineering
Software Solutions, a consulting firm co-owned by Mr. Holsten and a partner,
which provided consulting services to XVT from May 1993 to June 1994. From
October 1984 to July 1992, Mr. Holsten held a variety of positions with
Precision Visuals, Inc., a graphics software company, most recently as Director
of Professional Services.
GARY A. HUGHES has served as the Company's Vice President, Worldwide
Customer Support since April 1998. From January 1998 until April 1998 Mr. Hughes
served as Director of Worldwide Customer Support. From
13
August 1997 until January 1998 Mr. Hughes served as Manager, Systems
Engineers. Mr. Hughes served as Alternate Channels Manager from October 1995
until August 1997, Development Manager from December 1994 until October 1995,
and Vice President, Customer Support from December 1993 until December 1994.
Mr. Hughes joined the Company in July 1989 as a customer support
representative and held various positions in the customer support department
until December 1994.
FREDERIC B. LUDDY has served as the Company's Vice President, North
American Research and Development and Chief Technology Officer since January
1998. From October 1995 until January 1998, Mr. Luddy served as Product
Architect for the Company's SERVICECENTER product suite. From April 1990 until
October 1995, Mr. Luddy served as a Product Author for the Company's
SERVICECENTER product suite.
RICHARD T. NELSON has served as the Company's General Counsel since
November 1995, as Vice President since October 1996 and as Secretary since
February 1997. From August 1991 until November 1995, Mr. Nelson was an associate
in the Houston, Texas office of Jackson & Walker LLP, a law firm.
DOUGLAS S. POWANDA has served as the Company's Executive Vice
President, Worldwide Operations since April 1999. From August 1998 until April
1999, Mr. Powanda served as Senior Vice President, Worldwide Sales and from
January 1998 until August 1998, as Vice President, Worldwide Sales. From
September 1995 until January 1998, Mr. Powanda served as Vice President,
International Sales. From June 1994 until September 1995, he served as the
Company's Vice President, North American Sales. He served in various capacities
since his employment by the Company in 1992 until June 1994, most recently as
the Company's Director of Sales for Europe.
GILLES QUERU has served as the Company's Vice President, Corporate
Development since April 1998. Mr Queru joined the Company as President of
Apsylog S.A. ("Apsylog") in September 1997 as a result of the Apsylog
Acquisition. Mr. Queru founded Apsylog in 1987 and served as its Chief Executive
Officer and Chairman of its Board of Directors until the Apsylog Acquisition.
Prior to forming Apsylog, Mr. Queru held several management positions with
Hewlett-Packard, a developer and manufacturer of computer and imaging product
hardware.
STEVEN S. SPITZER has served as the Company's Vice President, Channel
Sales since August 1997. From 1986 until August 1997, Mr. Spitzer held various
positions with FileNet Corporation, a provider of workflow, document-imaging,
and electronic document management software solutions, most recently as Vice
President, Channel Sales.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock has been traded on the Nasdaq National Market under
the symbol "PRGN" since our initial public offering in April 1997. Prior to
April 1997, there was no established public trading market for the Company's
Common Stock. The following table sets forth for the periods indicated, the high
and low closing prices reported on the Nasdaq National Market.
HIGH LOW
------- -------
Fiscal Year Ended March 31, 1999:
Fourth Quarter....................................................... $33.625 $21.250
Third Quarter........................................................ 23.188 14.219
Second Quarter....................................................... 20.688 11.688
First Quarter........................................................ 14.250 9.125
Fiscal Year Ended March 31, 1998:
Fourth Quarter....................................................... $9.563 $6.250
Third Quarter........................................................ 8.750 6.000
Second Quarter....................................................... 10.250 7.000
First Quarter........................................................ 7.813 4.250
As of May 28, 1999, there were 49,336,278 shares of PSI Common Stock
issued and outstanding held by 1,129 stockholders of record. We estimate that
there are approximately 7,494 beneficial stockholders.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In April 1999, we issued approximately 754,000 shares of common
stock in connection with our acquisition of F. Print UK Ltd. The holders of
those shares have a demand registration right, subject to standard terms,
arising thirty days after the filing of our March 31, 1999 Form 10-K.
In March 1999, we issued approximately 762,000 shares of common
stock in connection with our acquisition of Prototype, Inc. The holders of
those shares have a demand registration right, subject to standard terms,
arising thirty days after the filing of our March 31, 1999 Form 10-K.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data is presented below as of March
31, 1995, 1996, 1997, 1998 and 1999 and for each of the years in the five-year
period ended March 31, 1999, and derives from the consolidated financial
statements of Peregrine Systems, Inc. and its subsidiaries, which financial
statements have been audited by Arthur Andersen LLP, independent public
accountants. The consolidated financial statements as of March 31, 1998 and 1999
and for each of the years in the three-year period ended March 31, 1999, 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,
--------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses............................... $ 9,137 $11,642 $20,472 $38,791 $ 87,362
Services............................... 10,491 12,124 14,563 23,086 50,701
------- ------- ------- ------- --------
Total revenues....................... 19,628 23,766 35,035 61,877 138,063
Costs and expenses:
Cost of licenses....................... 393 415 215 326 1,020
Cost of services....................... 3,573 3,526 4,661 10,326 31,561
Sales and marketing.................... 9,549 11,820 15,778 22,728 50,803
Research and development............... 7,089 7,742 5,877 8,394 13,919
General and administrative............. 2,943 4,529 3,816 6,077 10,482
Amortization of intangibles............ - - - 3,168 18,012
Acquired in-process research and
development.......................... - - - 6,955 26,005
------- ------- ------- ------- --------
Total costs and expenses............. 23,547 28,032 30,347 57,974 151,802
------- ------- ------- ------- --------
Operating income (loss)................... (3,919) (4,266) 4,688 3,903 (13,739)
Interest income (expense) and other....... 3,970 (286) (478) 839 664
------- ------- ------- ------- --------
Income (loss) from continuing operations
before income taxes.................... 51 (4,552) 4,210 4,742 (13,075)
Income tax expense (benefit).............. - - (1,592) 5,358 10,295
------- ------- ------- ------- --------
Income (loss) from continuing operations.. 51 (4,552) 5,802 (616) (23,370)
Loss from discontinued operations:
Loss from operations................... - 781 - - -
Loss on disposal....................... - 1,078 - - -
------- ------- ------- ------- --------
Loss from discontinued operations.... - (1,859) - -
------- ------- ------- ------- --------
Net income (loss)......................... $ 51 $(6,411) $ 5,802 $ (616) $(23,370)
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Net income (loss) per share - diluted..... $ (0.26) $ 0.19 $ (0.02) $ (0.54)
------- ------- ------- --------
------- ------- ------- --------
Shares used in per share calculation...... 24,662 29,928 34,760 43,583
------- ------- ------- --------
------- ------- ------- --------
MARCH 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- --------
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term $ 57 $ 437 $ 305 $21,977 $ 23,545
investments...............................
Working capital (deficit).................... (4,118) (9,697) (4,065) 23,779 25,302
Total assets................................. 9,787 13,817 19,738 83,568 207,713
Total debt................................... 1,540 649
5,208 3,866 1,117
Stockholders' equity (deficit)............... (2,197) (8,450) (2,849) 55,639 150,781
16
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 FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT.
OVERVIEW
The Company develops, markets, and supports an integrated suite of
applications that automates the management of complex, enterprise-wide
information and infrastructure assets.
During fiscal 1998, the Company determined that customer needs required
a more comprehensive solution for control and management of their infrastructure
assets, including availability of assets, minimizing investments and expense,
consolidating data, and interfacing to enterprise applications. Accordingly, the
Company refocused its marketing strategy and product positioning to focus on
this Infrastructure Management strategy. The Company's focus on the
Infrastructure Management strategy, the Company's rapid growth, and the
Company's acquisitions have resulted in continuing efforts to redefine the
product development strategy, establish a comprehensive marketing strategy, and
strengthen the Company's financial and budgeting processes.
Executing on that strategy, in September 1997 the Company acquired
United Software, Inc., including its wholly-owned subsidiary Apsylog S.A.
("Apsylog"). During fiscal 1999, the Company continued to execute on its
Infrastructure Management strategy, making several strategic acquisitions to
expand its product offerings. In July 1998, the Company acquired Innovative Tech
Systems, Inc. ("Innovative") providing the Company with software products and
experience to address facilities infrastructure management. In September 1998,
the Company completed the acquisition of certain technology and other assets and
liabilities from International Software Solutions and related persons and
entities (collectively "ISS"), expanding the Company's information technology
infrastructure management offerings. In March 1999, the Company entered into the
fleet infrastructure management market with the acquisition Prototype, Inc.
("Prototype"). The Company's software products are currently available on most
major computer operating platforms, however for the past two years over 85% of
the Company's license sales have been attributable to UNIX and Windows NT
platforms.
The Company's revenues are derived from product licensing and services.
Services are comprised of maintenance, professional services, and training.
License fees are generally due upon the granting of the license and typically
include a one-year maintenance period as part of the license agreement. The
Company also provides ongoing maintenance services, which include technical
support and product enhancements, for an annual fee based upon the current price
of the product.
Revenues from license agreements are recognized currently, provided
that all of the following conditions are met: a noncancelable license agreement
has been signed, the product has been delivered, there are no material
uncertainties regarding customer acceptance, collection of the resulting
receivable is deemed probable and the risk of concession is deemed remote, and
no other significant vendor obligations exist. Revenues from post-contract
support services are recognized ratably over the term of the support period,
generally one year. Maintenance revenues which are bundled with license
agreements are unbundled using vendor-specific objective evidence. Consulting
revenues are primarily related to implementation services most often performed
on a time and material basis under separate service agreements for the
installation of the Company's products. Revenues from consulting and training
services are recognized as the respective services are performed.
We currently derive a substantial portion of our license revenues from
the sale of its Infrastructure Management applications and expect them 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 the Infrastructure
17
Management strategy and applications, including future product enhancements.
Factors adversely affecting the pricing of, demand for or market acceptance
of the Infrastructure Management applications, such as competition or
technological change, could have a material adverse effect on our business,
operating results, and financial condition.
The Company conducts business overseas in a number of foreign
currencies, principally in Europe. These currencies have been relatively
stable against the U.S. dollar for the past several years. As a result,
foreign currency fluctuations have not had a significant impact on the
Company's revenues or results of operations. Although the Company currently
derives no revenues from highly inflationary economies, the Company is
expanding its presence in international markets outside Europe, including the
Pacific Rim and Latin America, whose currencies have tended to fluctuate more
relative to the U.S. Dollar. There can be no assurance that European
currencies will remain stable relative to the U.S. dollar or that future
fluctuations in the value of foreign currencies will not have a material
adverse effect on the Company's business, operating results and financial
condition. The Company has implemented a foreign currency forward hedging
program. The hedging program consists primarily of using forward-rate
currency contracts of approximately one month in length to minimize the
short-term impact of foreign currency fluctuations. Currency contracts are in
accordance with SFAS No. 52 and receive hedge accounting treatment.
Accordingly, to the extent properly hedged by obligations denominated in
local currencies, the Company's foreign operations remain subject to the
risks of future foreign currency fluctuations, and there can be no assurances
that the Company's hedging activities will adequately protect the Company
against such risk. The maximum amounts outstanding during fiscal 1999 have
been less $10 million and have been for approximately one month in duration.
To date the Company's Pacific Rim sales activity has not been
material. Accordingly, the Company's operations and financial conditions have
not been materially impacted by the recent Asian financial crisis.
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,
---------------------------------------------
1997 1998 1999
------ ------ ------
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses..................................... 58.4% 62.7% 63.3%
Services..................................... 41.6 37.3 36.7
------ ------ ------
Total revenues............................. 100.0 100.0 100.0
Costs and expenses:
Cost of licenses............................. 0.6 0.5 0.7
Cost of services............................. 13.3 16.7 22.9
Sales and marketing.......................... 45.0 36.7 36.8
Research and development..................... 16.8 13.6 10.1
General and administrative................... 10.9 9.8 7.6
Amortization of intangible assets............ - 5.1 13.1
Acquired in-process research and development. - 11.3 18.8
------ ------ ------
Total costs and expenses................... 86.6 93.7 110.0
------ ------ ------
Operating income (loss)......................... 13.4 6.3 (10.0)
Interest income (expense) and other............. (1.4) 1.3 .5
------ ------ ------
Income (loss) from before income taxes.......... 12.0 7.6 (9.5)
Income tax expense (benefit).................... (4.5) 8.7 7.4
------ ------ ------
Net income (loss).................................. 16.5% (1.1)% (16.9)%
------ ------ ------
------ ------ ------
18
FISCAL YEARS ENDED MARCH 31, 1997, 1998, AND 1999
REVENUES
Total revenues were $35.0 million, $61.9 million, and $138.1 million
in fiscal 1997, 1998, and 1999, respectively, representing year-to-year
increases of 77% between 1997 and 1998 and 123% between 1998 and 1999.
LICENSES. License revenues were $20.5 million, $38.8 million, and $87.4
million in fiscal 1997, 1998, and 1999, respectively, representing 58%, 63%,
and 63% of total revenues in the respective periods. The increases in license
revenues are attributable to increased demand for new licenses, introduction
of new applications, licenses of products obtained in the acquisitions,
additional seats purchased by existing customers, higher average transaction
sizes, more effective corporate marketing programs, improved sales force
productivity, expansion of the Company's domestic and international sales
forces. License revenues attributable to each acquisition are included in the
Company's combined financial statements of operations subsequent to the
acquisition date.
SERVICES. Services revenues were $14.6 million, $23.1 million, and $50.7
million in fiscal 1997, 1998, and 1999, respectively, representing 42%, 37%,
and 37% of total revenues in the respective periods. The dollar increases are
attributable to renewals of maintenance agreements from the Company's
expanded installed base of customers, maintenance revenues included as part
of new licenses, and an increased number of consulting engagements related to
implementation of software from initial license agreements and training fees.
COSTS AND EXPENSES
COST OF LICENSES. Cost of licenses revenues was $215,000, $326,000, and
$1,020,000 for fiscal 1997, 1998, and 1999, respectively, representing 1%,
1%, and 1% of total license revenues in the respective periods.
COST OF SERVICES. Cost of services revenues was $4.7 million, $10.3 million,
and $31.6 million in fiscal 1997, 1998, and 1999, respectively, representing
32%, 45%, and 62% of services revenues in the respective periods. The dollar
and percentage increases in fiscal 1998 and 1999 are attributable to an
increase in customer support personnel and professional services personnel to
meet the corresponding increase in professional services revenue. The cost of
services all increased as the customer support and professional services
operations of the Apsylog, Innovative, ISS and Prototype acquisitions have
been combined in the Company's financial statements of operations from each
acquisition date. Cost of services increased as a percentage of related
revenues due largely to a greater percentage growth in lower margin
consulting revenue compared to support revenue and to a lesser extent to
increased labor and related management costs.
SALES AND MARKETING. Sales and marketing expenses were $15.8 million, $22.7
million, and $50.8 million in fiscal 1997, 1998, and 1999, respectively,
representing 45%, 37%, and 37% of total revenues in the respective periods.
The dollar increases are attributable to the significant expansion of the
North American and international sales forces, increases in direct marketing
cots, the effect of combining the Apsylog, Innovative, ISS and Prototype
acquisitions in operations from each date thereof, and moderate operating
expense increases. Sales and marketing expenses decreased as a percentage of
total revenues from fiscal 1997 to fiscal 1998 as a result of increased sales
force productivity. If the Company experiences a decrease in sales force
productivity or for any other reason a decline in revenues, it is likely that
operating margins will decline as well.
RESEARCH AND DEVELOPMENT. Research and development expenses were $5.9
million, $8.4 million, and $13.9 million in fiscal 1997, 1998, and 1999,
respectively, representing 17%, 14%, and 10% of total revenues in the
respective periods. The dollar increases from fiscal 1997 through fiscal 1999
are due primarily to the increased dollar amount of product author
commissions, increased Research and Development personnel, and the effect of
combining the Apsylog, Innovative, ISS and Prototype acquisitions in
operations from each date thereof. Research and development expenses have
decreased as a percentage of total revenues from fiscal 1997 through fiscal
1999 as a result of revenues increasing at a faster rate.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $3.8
million, $6.1 million, and $10.5 million in fiscal 1997, 1998, and 1999,
respectively, representing 11%, 10%, and 8% of total revenues in the
respective
19
periods. The dollar increases are attributable primarily to costs associated
with administrative personnel additions to support the Company's growth and
the effect of combining the Apsylog, Innovative, ISS and Prototype
acquisitions in operations from each date thereof.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. Acquired in-process
research and development costs of $7.0 million and $26.0 million were
incurred in fiscal 1998 and fiscal 1999, respectively. The fiscal 1998 amount
relates to the Apsylog acquisition. The fiscal 1999 amount is attributable to
the Innovative, ISS, and Prototype acquisitions. No acquired in-process
research and development costs were incurred in fiscal year 1997.
The value of each acquisitions acquired in-process technology was
computed using 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 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. The
Company currently believes that actual results have been consistent with
forecasts with respect to acquired in-process revenues. Because the Company
does not account for expenses by product, it is not possible to determine the
actual expenses associated with any of the acquired technologies. However,
the Company believes that expenses incurred to date associated with the
development and integration of the acquired in-process research and
development projects are substantially consistent with the Company's previous
estimates.
The Company has completed many of the original research and
development projects in accordance with the plans outlined above. The company
continues to work toward the completion of other projects. The majority of
the projects are on schedule, but delays may occur due to changes in
technological and market requirements for the Company's products. The risk
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 the Company's
revenues and earnings in future quarters.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets amounted
to $3.2 million and $18.0 million in fiscal 1998 and 1999, respectively,
representing 5% and 13% of total revenues in the respective periods, compared
with zero for fiscal 1997. The fiscal 1998 amount is due to the amortization
of intangible assets associated with the Apsylog acquisition. The fiscal 1999
amount is due to the continued amortization of the intangible assets
associated with the Apsylog acquisition and the amortization of the
intangible assets associated with the Innovative, ISS, and Prototype
acquisitions completed during fiscal 1999.
PROVISION FOR INCOME TAXES/INCOME TAX BENEFIT
In fiscal 1997, the Company recorded an income tax benefit of $1.6
million resulting from the utilization of a portion of the Company's
available net operating loss carryforwards as an offset against taxable
income. In fiscal 1998 and 1999, the Company recorded an income tax expense
of $5.4 million and $10.3 million, respectively. The Company has recorded a
valuation allowance to partially offset the carrying value of its net
deferred tax assets due to uncertainty surrounding its realization.
Management evaluates 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 all or part of the deferred
tax assets are realizable, the valuation allowance will be reduced
accordingly.
IMPACT OF INFLATION
The effect of inflation on the Company's financial position has not
been significant to date.
LIQUIDITY AND CAPITAL RESOURCES
Until April 1997, the Company financed its operations through bank
borrowings and private sales of Common Stock. In fiscal 1997, the Company's
net repayments on borrowings totaled $1.3 million. In fiscal 1997, the
Company generated $3.2 million in cash from operations, which was reduced by
a net cash use of $1.3 million by a discontinued business resulting in $1.9
million net cash provided from operations. In April 1997, the Company
completed the initial public offering of its Common Stock, which resulted in
net proceeds to the Company of $19.3 million. In fiscal 1998, the Company
generated $5.0 million in cash from operations, paid $2.4 million for capital
expenditures and repaid $5.9 million on bank and long-term debt. In fiscal
1999, the Company generated $13.7 million in cash from operations, paid $12.4
million for capital expenditures and repaid $1.2 million on long-term debt.
As of March 31, 1998 and 1999, the Company had net operating loss
carryforwards of approximately $8.5 million and $23.7 million, respectively,
for federal income tax purposes which expire beginning in 2012. Utilization
of the net operating losses may be subject to annual limitations resulting
from certain changes in ownership of the Company. At March 31, 1998 and 1999,
the Company also has foreign net operating loss carryforwards of
approximately $5.8 million and $1.6 million, respectively.
The Company believes that its current cash and short-term investment
balances and cash flow from operations will be sufficient to meet its working
capital requirements for at least the next 12 months. Although operating
activities may provide cash in certain periods, to the extent the Company
experiences growth in the future, the Company anticipates that its operating
and investing activities may use cash. Consequently, any such future growth
may require the Company to obtain equity or debt financing, which may not be
available on commercially reasonable terms or which may be dilutive.
20
YEAR 2000 RISKS
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, many companies' software
and computer systems may need to be upgraded or replaced in order to comply
with such Year 2000 requirements. Significant uncertainty exists in the
software industry concerning the potential effects associated with such
compliance.
The Company utilizes third party equipment and software that may not
be Year 2000 compliant and is conducting an internal audit of products
provided by outside vendors to determine if such third party products are
Year 2000 compliant. Although such audit is not yet completed, the Company
has received assurances from suppliers of all third party software that the
Company deems material to its business that such software is Year 2000
compliant. Failure of such third party equipment or software to operate
properly with regard to the Year 2000 and thereafter could require the
Company to incur unanticipated expenses to remedy any problems, which could
have a material adverse effect on its business, results of operations, and
financial condition. If key systems, or a significant number of systems, were
to fail as a result of Year 2000 problems or if the Company was to experience
delays implementing Year 2000 compliant software products, the Company could
incur substantial costs and disruption of its business, which would
potentially have a material adverse effect on its results of operations and
financial conditions.
The Company is still assessing the impact the Year 2000 issue will
have on its proprietary software products and internal information systems
and will take appropriate corrective actions based on the results of such
analyses. To date the Company has spent less than $100,000, management of the
Company has not yet determined the full costs related to achieving Year 2000
compliance but does not believe any additional costs will be material. To the
extent the cost of achieving Year 2000 compliance are material, such costs
will have a material adverse effect on its business, results of operations,
and financial condition.
In the ordinary course of its business, the Company tests and
evaluates its own software products and believes that its software products
are generally Year 2000 compliant, meaning that the use or occurrence of
dates on or after January 1, 2000 will not materially affect the performance
of such software products with respect to four digit date dependent data or
the ability of such products to correctly create, store, process, and output
information related to such data. There can be no assurances, however, that
the Company will not subsequently learn that certain of its software products
do not contain all necessary software routines and codes necessary for the
accurate calculation, display, storage, and manipulation of data involving
dates. In addition, in certain circumstances, the Company has warranted that
the use or occurrence of dates on or after January 1, 2000 will not adversely
affect the performance of its products with respect to four digit date
dependent data or the ability to create, store, process, and output
information related to such data. If any licensees experience Year 2000
problems, such licensees could assert claims for damages.
In addition, the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues. Many companies are expending
significant resources to correct their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase software products such as those offered by the Company, which could
have an adverse effect on the business, results of operations, and financial
condition of the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING
STATEMENT AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THE FOLLOWING:
HISTORY OF OPERATING LOSSES. Through March 31, 1999, the Company has
recorded cumulative net losses of approximately $39.8 million, including
approximately $33.0 million related to the write-off of acquired
21
in-process research and development in connection with the acquisitions. The
Company's applications have changed substantially since the mid-1990s. In
addition, the Company has acquired a significant number of applications
bringing its total number of applications to in excess of 20 in the last
three years. As a result, prediction of the Company's future operating
results is difficult, if not impossible. Although the Company achieved
profitability during the years ended March 31, 1998 and 1999 (excluding the
impact of the $33.0 million charge related to acquired in-process research
and development in connection with the acquisitions), there can be no
assurance that the Company will be able to remain profitable on a quarterly
or annual basis. In addition, the Company does not believe that the growth in
revenues it has experienced in recent years is indicative of future revenue
growth or future operating results.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; LENGTHY SALES CYCLE;
SEASONALITY. The Company's quarterly operating results have varied
significantly in the past and may vary significantly in the future depending
upon a number of factors, many of which are beyond the Company's control.
These factors include, among others, the ability of the Company to develop,
introduce and market new and enhanced versions of its software on a timely
basis; market demand for the Company's software; the size, timing and
contractual terms of significant orders; the timing and significance of new
software product announcements or releases by the Company or its competitors;
changes in pricing policies by the Company or its competitors; changes in the
Company's business strategies; budgeting cycles of its potential customers;
changes in the mix of software products and services sold; reliance on
indirect sales forces like systems integrators and channels; changes in the
mix of revenues attributable to domestic and international sales; the impact
of acquisitions of competitors; seasonal trends; the cancellations of
licenses or maintenance agreements; product life cycles; software defects and
other product quality problems; and personnel changes. The Company has often
recognized a substantial portion of its revenues in the last month or weeks
of a quarter. As a result, license revenues in any quarter are substantially
dependent on orders booked and shipped in the last month or weeks of that
quarter. Due to the foregoing factors, quarterly revenues and operating
results are not predictable with any significant degree of accuracy. In
particular, the timing of revenue recognition can be affected by many
factors, including the timing of contract execution and delivery. The timing
between initial customer contact and fulfillment of criteria for revenue
recognition can be lengthy and unpredictable, and revenues in any given
quarter can be adversely affected as a result of such unpredictability. In
the event of any downturn in potential customers' businesses or the economy
in general, planned purchases of the Company's products may be deferred or
canceled, which could have a material adverse effect on the Company's
business, operating results and financial condition.
The license of the Company's software generally requires the Company
to engage in a sales cycle that typically takes approximately six to nine
months to complete. The length of the sales cycle may vary depending on a
number of factors over which the Company may have little or no control,
including the size of the transaction and the level of competition which the
Company encounters in its selling activities. During the sales cycle, the
Company typically provides a significant level of education to prospective
customers regarding the use and benefits of the Company's products. Any delay
in the sales cycle of a large license or a number of smaller licenses could
have a material adverse effect on the Company's business, operating results
and financial condition.
The Company's business has experienced and is expected to continue
to experience seasonality. The Company's revenues and operating results in
its December quarter typically benefit from purchase decisions made by the
large concentration of customers with calendar year-end budgeting
requirements, while revenues and operating results in the March quarter
typically benefit from the efforts of the Company's sales force to meet
fiscal year-end sales quotas. In addition, the Company is currently
attempting to expand its presence in international markets, including Europe,
the Pacific Rim, and Latin America. International revenues comprise a
significant percentage of the Company's total revenues, and the Company may
experience additional variability in demand associated with seasonal buying
patterns in such foreign markets.
INTEGRATION OF INNOVATIVE TECH SYSTEMS INTO PSI'S BUSINESS. Our
acquisition of Innovative, which was completed in July 1998, will require
continuing integration of Innovative into PSI. Prior to the acquisition,
Innovative and PSI were two geographically separated companies that had been
operated independently. We believe that the acquisition of Innovative will
further our strategy to provide customers with a complete infrastructure
management software solution. However, difficulties may be encountered in
integrating the product offerings, operations and technology of Innovative
with those of PSI. We may not be able to successfully complete technology
development or market new products currently in development or develop any
new products that relate to the Innovative products. Anticipated marketing,
distribution, or other operational benefits and efficiencies from the
acquisition of Innovative may not be achieved. The morale of PSI and
Innovative employees may be adversely affected as a result of the acquisition
and the resulting integration.
Integrating Innovative into our existing business may prove
difficult given that the two companies are geographically separated, have
different corporate cultures and have personnel with different business
backgrounds. We may not be able to retain a sufficient number of Innovative's
key employees. Additionally, we may have problems combining the engineering
teams from Innovative with our existing teams so that such teams will
successfully cooperate and realize any technological benefits from the
combined businesses. Sales of Innovative products may not be markedly
enhanced by the broader distribution and marketing opportunities available
through PSI. We may not be able to benefit from the broader product offerings
available as a result of the acquisition or from any other anticipated
benefits. Any failure to integrate the businesses and technologies of the
companies successfully or any failure to realize the anticipated benefits of
the acquisition could materially adversely affect our business, results of
operations, and financial condition.
In addition, if our management devotes too much time and attention
to the integration of Innovative into our existing business, this also could
materially adversely affect our business, operating results, and financial
condition.
If a significant number of Innovative customers or potential customers cancel
or do not renew their arrangements with Innovative or PSI or delay their
orders of our products, this could have materially adversely affect our
business, results of operations, and financial condition. We expect any such
affects to be felt most strongly in near-term quarters.
RISKS ASSOCIATED WITH PSI ACQUISITIONS. Since September 1997 we have
completed five acquisitions. In the future PSI may make acquisitions of, or
large investments in, other businesses that offer products, services, and
technologies that further our goal of providing integrated infrastructure
management software solutions to businesses. Our past acquisitions and any
future acquisitions or investments that PSI were to complete present risks
commonly encountered with these types of transactions. The following are
examples of such risks:
- difficulty in combining the technology, operations, or work force
of the acquired business
- disruption of our on-going businesses
- difficulty in realizing the potential financial and strategic
position of PSI through the successful integration of the
acquired business
- difficulty in maintaining uniform standards, controls, procedures,
and policies - possible impairment of relationships with employees
and clients as a result of any integration of new businesses and
management personnel
- difficulty in adding significant numbers of new employees,
including training, evaluation, coordination of effort of all
employees towards our corporate mission
- diversion of management attention
- difficulty in obtaining preferred acquisition accounting treatment
for these types of transactions; likelihood that future acquisitions
will require purchase accounting resulting in increased intangible
assets and goodwill, substantial amortizaiton of such assets and
goodwill, and a negative impact on our reported earnings
- potential dilutive effect on our earnings
The risks described above, either individually or in the aggregate,
could materially adversely affect our business, operating results, and
financial condition. We expect that future acquisitions, if any, could
provide for consideration to be paid in cash, shares of PSI common stock, or
a combination of cash and PSI common stock. However, we may not be able to
complete any such additional acquisitions in the future.
PRODUCT CONCENTRATION. The Company currently derives substantially
all of its license revenues from the sale of its Infrastructure Management
applications and expects them to account for a significant portion of the
Company's revenues for the foreseeable future. The Company's future operating
results are dependent upon continued market acceptance of its Infrastructure
Management applications, including future enhancements. Factors adversely
affecting the pricing of, demand for, or market acceptance of the Company's
Infrastructure Management applications, such as competition or technological
change, could have a material adverse effect on
22
the Company's business, results of operations, and financial condition.
DEPENDENCE ON MARKET ACCEPTANCE OF INFRASTRUCTURE MANAGEMENT
SOFTWARE SOLUTIONS. Until recently, the Company's product strategy has
focused on integrating a broad array of IT management applications with other
traditional internal help desk applications to create an Enterprise Service
Desk capable of managing multiple aspects of an enterprise's IT structure. In
recent years, the Company has broadened its product line beyond traditional
IT infrastructure management to offer a more comprehensive product suite
capable of managing a business enterprise's IT infrastructure, physical plant
and facilities, communications infrastructure, distribution systems, and
fleets.
In recent years, the market for enterprise software solutions has
been characterized by rapid technological change, frequent new product
announcements and introductions, and evolving industry standards. In response
to advances in technology, customer requirements have become increasingly
complex, resulting in industry consolidation of product lines offering
similar or related functionality. In particular, the Company believes that a
market for integrated enterprise-wide infrastructure management solutions,
including applications for IT management, asset management, building and
facilities management, communications resource management, distribution
systems management, and fleet management, is evolving from existing
requirements for specific IT management solutions. However, the existence of
such a market is unproven. If such a market does not fully develop, this
would have a materially adverse effect on our business, results of
operations, or financial condition. Regardless of the development of a market
for integrated infrastructure management solutions, factors adversely
affecting the pricing of, demand for, or market acceptance of one or more of
the Company's Infrastructure Management applications, or if the acquisition
could have a material adverse effect on the Company's business, results of
operations, and financial condition.
As a result of rapid technology change in our industry, our position
in existing markets or other markets that we may enter can be eroded rapidly
by product advances. The life cycles of our products are difficult to
estimate. Our growth and future financial performance depends in part upon
our ability to improve existing products, develop and introduce new products
that keep pace with technological advances, meet changing customer needs, and
respond to competitive products. Our product development efforts will
continue to require substantial investments. We may not have sufficient
resources to make the necessary investments.
23
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend to a
significant extent on the continued service of its senior management and
certain other key employees of the Company, including selected sales,
consulting, technical and marketing personnel. Few of the Company's
employees, including its senior management, are bound by an employment or
noncompetition agreement. In addition, the Company does not generally
maintain key man life insurance on any employee. The loss of the services of
one or more of the Company's executive officers or key employees or the
decision of one or more of such officers or employees to join a competitor or
otherwise compete directly or indirectly with the Company could have a
material adverse effect on the Company's business, operating results and
financial condition.
ABILITY TO RECRUIT PERSONNEL.
EXECUTIVE OFFICERS AND KEY PERSONNEL. Our future success will likely
depend in large part on our ability to attract and retain additional highly
skilled technical, sales, management, and marketing personnel. Competition
for such personnel in the computer software industry is intense, and in the
past we have experienced difficulty in recruiting qualified personnel. New
employees generally require substantial training in the use of our products.
We may not succeed in attracting and retaining such personnel. If we do not,
our business, operating results, and financial condition could be materially
adversely affected.
24
FOREIGN EMPLOYEES. To achieve our business objectives we must be
able to recruit and employ skilled technical professionals from other
countries. Any future shortage of qualified technical personnel who are
either United States citizens or otherwise eligible to work in the United
States could increase our reliance on foreign professionals. Many technology
companies have already begun to experience shortages of such personnel. Any
failure to attract and retain qualified personnel as necessary, including as
a result of limitations imposed by federal immigration laws and the
availability of visas issued thereunder, could materially adversely affect
our business and operating results. Foreign computer professionals such as
those employed by us typically become eligible for employment in the United
States by obtaining a nonimmigrant visas. The number of nonimmigrant visas is
limited by federal immigration law. Currently, Congress is considering
approving an increase in the number of visas available. We cannot predict
whether such legislation will ultimately become law. We also cannot predict
what effect any future changes in the federal immigration laws will have on
our business, operating results, or financial condition.
COMPETITION. The market for our products is highly competitive and
diverse. The technology for infrastructure management software products can
change rapidly. New products are frequently introduced and existing products
are continually enhanced. Competitors vary in size and in the scope and
breadth of the products and services offered.
EXISTING COMPETITION. We have faced competition from a number of
sources, including:
- providers of internal help desk software applications such as
Remedy Corporation and Software Artistry, Inc. (now a division of
Tivoli Systems, Inc.)
- customer interaction software companies such as Clarify Inc. and
The Vantive Corporation, whose products include internal help desk
applications
- information technology and systems management companies such as
IBM, Computer Associates International, Inc., Network Associates,
Inc. (recently formed as a result of the business combination of
McAfee Associates, Inc. and Network General Corporation), and
Hewlett-Packard Company through its acquisition of PROLIN
- providers of asset management and facilities management software
- the internal information technology departments of those companies
with infrastructure management needs
FUTURE COMPETITION. Because competitors can easily penetrate the
software market, we anticipate additional competition from other established
and new companies as the market for enterprise infrastructure management
applications develops. In addition, current and potential competitors have
established or may in the future establish cooperative relationships among
themselves or with third parties. Large software companies may acquire or
establish alliances with smaller competitors of PSI. We expect that the
software industry will continue to consolidate. It is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
Our ability to sell our products depends in part on their
compatibility with and support by providers of system management products,
including Tivoli, Computer Associates, and Hewlett-Packard. Both Tivoli and
Hewlett-Packard have recently acquired providers of help desk software
products. These providers of system management products may decide to close
their systems to competing vendors like PSI. They may also decide to bundle
their infrastructure management and/or help-desk software products with other
products for enterprise licenses for promotional purposes or as part of a
long-term pricing strategy. If that were to happen, our ability to sell our
products could be adversely affected. Increased competition may result from
acquisitions of help desk and other infrastructure management software
vendors by system management companies. The results of increased competition
including price reductions of our products, reduced gross margins, and
reduction of market share, could materially adversely affect our business,
operating results, and financial condition.
GENERAL COMPETITION. Some of our current and many of our potential
competitors have much greater financial, technical, marketing, and other
resources than PSI. As a result, they may be able to respond more quickly to
new or emerging technologies and changes in customer needs. They may also be
able to devote greater resources to the development, promotion, and sale of
their products than we can. We may not be able to compete successfully
against current and future competitors. In addition, competitive pressures
faced by PSI may
25
materially adversely affect our business, operating results, and financial
condition.
MANAGEMENT OF GROWTH. We have grown greatly in recent periods, with
total revenues increasing from $35.0 million in fiscal 1997 to $61.9 million
in fiscal 1998, and to $138.1 million in fiscal 1999.
If we achieve our growth plans, including the integration of
Apsylog, Innovative, and the technology acquired from ISS, such growth may
burden our operating and financial systems. This burden will require large
amounts of senior management attention and will require the use of other PSI
resources. Our ability to compete effectively and to manage future growth
(and our future operating results) will depend in part on our ability to
implement and expand operational, customer support, and financial control
systems and to expand, train, and manage our employees. In particular, in
connection with the acquisitions, we will be required to integrate additional
personnel and to augment or replace existing financial and management
systems. Such integration could disrupt our operations and could adversely
affect our financial results. We may not be able to augment or improve
existing systems and controls or implement new systems and controls in
response to future growth, if any. Any failure to do so could materially
adversely affect our business, operating results, and financial condition.
CAPITAL COMMITMENT. In June 1999, we entered into a series of leases
providing approximately 540,000 square feet of office space, including an
option for approximately 118,000 square feet of space. Even excluding the
exercise of the option, the leases require minimum lease payments of
approximately $124 million over the terms of the leases, approximately twelve
years. This office space is intended for a five building (including the
option) campus setting in San Diego, CA. Construction has commenced on the
first building and the final building is scheduled for delivery in 2003. The
capital commitments, construction oversight, and moving of personnel and
facilities involved in a transaction of this type and magnitude present
numerous risks involving estimation of future events, including growth of our
business, and execution of the transaction. Examples of the risks involved
include: failure to properly estimate the growth of our business in the
future; inability to sublease excess office space that may result; disruption
of operations, and inability to match substantially-fixed lease payments with
fluctuating revenues.
EXPANSION OF DISTRIBUTION CHANNELS. We sell our products through our
direct sales force and a limited number of distributors and we provide
maintenance and support services through our technical and customer support
staff. We plan to continue to invest large amounts of resources to our direct
sales force, particularly in North America where we have recently opened
several new sales offices. In addition, we are developing additional sales
and marketing channels through system integrators and original equipment
manufacturers and other channel partners. We may not be able to attract
channel partners that will be able to market our products effectively or that
will be qualified to provide timely and cost-effective customer support and
service. If we establish distribution through such indirect channels, our
agreements with channel partners may not be exclusive. As a result, such
channel partners may also carry competing product lines. If we do not
establish and maintain such distribution relationships, this could materially
adversely affect our business, operating results, and financial condition.
INTERNATIONAL OPERATIONS. International sales represented
approximately 36% of our total revenue both in fiscal 1998 and fiscal 1999.
We currently have international sales offices in Amsterdam, Copenhagen,
Frankfurt, London, Paris, and Sydney. Our continued growth and profitability
will require continued expansion of our international operations,
particularly in Europe, Latin America, and the Pacific Rim. Accordingly, we
intend to expand our current international operations and enter additional
international markets. Such expansion will require significant management
attention and financial resources. Our international operations are subject
to a variety of risks associated with conducting business internationally,
including the following:
- fluctuations in currency exchange rates
- longer payment cycles
- difficulties in staffing and managing international operations
- problems in collecting accounts receivable
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world
- increases in tariffs, duties, price controls, or other restrictions
on foreign currencies trade barriers imposed by foreign countries
These factors could materially adversely affect our business,
operating results, and financial condition. We have only limited experience
in developing local-language versions of our products and marketing and
distributing its products internationally. We may not be able to successfully
translate, market, sell and deliver our products internationally. If we are
unable to expand our international operations successfully and in a timely
manner, our business, operating results, and financial condition could be
adversely affected.
Recent instability in the Asian-Pacific economies and financial
markets could adversely affect our business, operating results, and financial
condition in future quarters as well.
CURRENCY FLUCTUATION. A large portion of our business is conducted
in foreign currencies. Fluctuations in the value of foreign currencies
relative to the U.S. dollar have caused and will continue to cause currency
transaction gains and losses. We cannot predict the effect of exchange rate
fluctuations upon future operating results. We may experience currency losses
in the future. We currently maintain a foreign exchange hedging
26
program, consisting principally of purchases of one month forward-rate
currency contracts. However, our hedging activities may not adequately
protect us against the risks associated with foreign currency fluctuations.
ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION. On January 1,
1999, certain member states of the European Economic Community (the "EEC")
fixed their respective currencies to a new currency, the euro. On that date,
the euro became a functional legal currency within these countries. During
the three years beginning on January 1, 1999, business in these EEC member
states will be conducted in both the existing national currency, such as the
French franc or deutsche mark, and the euro. Companies operating in or
conducting business in EEC member states will need to ensure that their
financial and other software systems are capable of processing transactions
and properly handling the existing currencies, as well as the euro. Our
AssetCenter product was originally developed for the European market and is
capable of managing currency data measured in euros. We are still assessing
the impact that the euro will have on our internal systems and our other
products. We will take corrective actions based on the results of such
assessment. We have not yet determined the costs related to this problem.
Issues related to the introduction of the euro may materially adversely
affect our business, operating results, and financial condition.
CONTROL BY EXISTING STOCKHOLDERS. Based on shares outstanding as of
May 31, 1999, PSI's officers, directors, and entities directly related to
such individuals together beneficially own approximately 28.6% of the
outstanding shares of PSI common stock. In particular, John J. Moores,
Chairman of PSI's board of directors, owns approximately 22.3% of the
outstanding shares. As a result, PSI's officers and directors will be able to
control most matters requiring stockholder approval, including the election
of directors and the approval of mergers, consolidations, and sales of all or
substantially all of the assets of PSI. Such concentrated share ownership may
prevent or discourage potential bids to acquire PSI unless the terms of
acquisition are approved by such officers and directors.
PRODUCT DEVELOPMENT DELAYS. We have experienced product development
delays in the past and may experience delays in the future. Difficulties in
product development could delay or prevent the successful introduction or
marketing of new or improved products. Any such new or improved products may
not achieve market acceptance. Our current or future products may not conform
to industry requirements. If we are unable, for technological or other
reasons, to develop and introduce new and improved products in a timely
manner, our business, operating results, and financial condition could be
adversely affected.
Because our software products are complex, these products may
contain errors that could be detected at any point in a product's life cycle.
In the past we have discovered software errors in certain of our products and
have experienced delays in shipment of our products during the period
required to correct these errors. Despite testing by PSI and by current and
potential customers, errors in our products may be found in the future.
Detection of such errors may result in, among other things, loss of, or delay
in, market acceptance and sales of our products, diversion of development
resources, injury to our reputation, or increased service and warranty costs.
If any of these results were to occur, our business, operating results, and
financial condition could be materially adversely affected.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. Our success will be heavily
dependent upon proprietary technology. We rely primarily on a combination of
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect our proprietary rights. Such laws provide
only limited protection. Despite precautions that we take, it may be possible
for unauthorized third parties to copy aspects of our current or future
products or to obtain and use information that we regard as proprietary. In
particular, we may provide our licensees with access to our data model and
other proprietary information underlying our licensed applications. Such
means of protecting our proprietary rights may not be adequate. Additionally,
our competitors may independently develop similar or superior technology.
Policing unauthorized use of software is difficult and, while we do not
expect software piracy to be a persistent problem, some foreign laws do not
protect our proprietary rights to the same extent as United States laws.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity
and scope of the proprietary rights of others. Litigation could result in
substantial costs and diversion of resources to PSI and could materially
adversely affect our business, operating results, and financial condition.
RISKS OF INFRINGEMENT. While we are not aware that any of our
software product offerings infringes the proprietary rights of third parties,
third parties may claim infringement with respect to our current or future
products. We expect that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
the software industry segment grows and the functionality of products in
different
27
industry segments overlaps. Any such claims, with or without merit, could be
time consuming, result in costly litigation, cause product shipment delays,
or require us to enter into royalty or licensing agreements. Royalty or
license agreements may not be available on acceptable terms or at all. As a
result, infringement claims could have a material adverse affect on our
business, operating results, and financial condition.
PRODUCT LIABILITY. Our license agreements with our customers
typically contain provisions designed to limit exposure to potential product
liability claims. Such limitation of liability provisions may, however, not
be effective under the laws of certain jurisdictions. Although we have not
experienced any product liability claims to date, the sale and support of our
products entails the risk of such claims. We may be subject to such claims in
the future. A product liability claim could materially adversely affect our
business, operating results, and financial condition.
UNDESIGNATED PREFERRED STOCK. PSI's board of directors has the
authority to issue up to 5,000,000 shares of preferred stock in one or more
series. The board of directors can fix the price, rights, preferences,
privileges, and restrictions of such preferred stock without any further vote
or action by PSI's stockholders. The issuance of preferred stock allows PSI
to have flexibility in connection with possible acquisitions and other
corporate purposes. However, the issuance of shares of preferred stock may
delay or prevent a change in control transaction without further action by
the PSI stockholders. As a result, the market price of the PSI common stock
and the voting and other rights of the holders of PSI common stock may be
adversely affected. The issuance of preferred stock may result in the loss of
voting control to others. PSI has no current plans to issue any shares of
preferred stock.
CHARTER PROVISIONS. Certain provisions of PSI's charter documents
eliminate the right of stockholders to act by written consent without a
meeting and specify certain procedures for nominating directors and
submitting proposals for consideration at stockholder meetings. Such
provisions are intended to increase the likelihood of continuity and
stability in the composition of the PSI board of directors and in the
policies set by the board. These provisions also discourage certain types of
transactions which may involve an actual or threatened change of control
transaction. These provisions are designed to reduce the vulnerability of PSI
to an unsolicited acquisition proposal. As a result, these provisions could
discourage potential acquisition proposals and could delay or prevent a
change in control transaction. These provisions are also intended to
discourage certain tactics that may be used in proxy fights. However, they
could have the effect of discouraging others from making tender offers for
PSI's shares. As a result, these provisions may prevent the market price of
PSI common stock from reflecting the effects of actual or rumored takeover
attempts. These provisions may also prevent changes in the management of PSI.
ANTITAKEOVER EFFECTS OF DELAWARE LAW. PSI is subject to the
antitakeover provisions of the Delaware General Corporation Law, which
regulates corporate acquisitions. The Delaware law prevents certain Delaware
corporations, including PSI, from engaging, under certain circumstances, in a
"business combination" with any "interested stockholder" for three years
following the date that such stockholder became an interested stockholder.
For purposes of Delaware law, a "business combination" includes, among other
things, a merger or consolidation involving PSI and the interested
stockholder and the sale of more than 10% of PSI's assets. In general,
Delaware law defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a company
and any entity or person affiliated with or controlling or controlled by such
entity or person. Under Delaware law, a Delaware corporation may "opt out" of
the antitakeover provisions. PSI has not "opted out" of the antitakeover
provisions of Delaware Law.
VOLATILITY OF TRADING PRICES. We completed the initial public
offering of PSI common stock in April 1997. Prior to April 1997 no public
market existed for PSI common stock. In the past, the market price of PSI
common stock has varied greatly and the volume of PSI common stock traded has
fluctuated greatly as well. We expect such fluctuation to continue. The
fluctuation result due to a number of factors including:
- any shortfall in revenues or net income from revenues or net
income expected by securities analysts
- announcements of new products by PSI or our competitors
- quarterly fluctuations in our financial results or the results of
other software companies, including those of our direct competitors
- changes in analysts' estimates of our financial performance, the
financial performance of our competitors, or the financial
performance of software companies in general
28
- general conditions in the software industry - changes in prices
for our products or the products of our competitors
- changes in our revenue growth rates or the growth rates of our
competitors
- sales of large blocks of the PSI common stock conditions in the
financial markets in general
In addition, the stock market may from time to time experience
extreme price and volume fluctuations. Many technology companies in
particular have experienced such fluctuations. Often such fluctuations have
been unrelated to the operating performance of the specific companies. The
market prices of PSI's common stock may experience significant fluctuations
in the future.
RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT RISKS. The
markets for the Company's products are subject to rapid technological change,
changing customer needs, frequent new product introductions, and evolving
industry standards that may render existing products and services obsolete.
As a result, the Company's position in its existing markets or other markets
that it may enter could be eroded rapidly by product advances. The life
cycles of the Company's products are difficult to estimate. The Company's
growth and future financial performance will depend in part upon its 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. The Company's product development
efforts are expected to continue to require substantial investments. There
can be no assurance that the Company will have sufficient resources to make
the necessary investments. The Company has in the past experienced
development delays, and there can be no assurance that the Company will not
experience such delays in the future. There can be no assurance that the
Company 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 such products will
achieve market acceptance, or that the Company's current or future products
will conform to industry requirements. The inability of the Company, for
technological or other reasons, to develop and introduce new and enhanced
products in a timely manner could have a material adverse effect on business,
results of operations, and financial condition of the Company.
Software products as complex as those offered by the Company may
contain errors that may be detected at any point in a product's life cycle.
The Company has in the past discovered software errors in certain of its
products and has experienced delays in shipment of products during the period
required to correct these errors. There can be no assurance that, despite
testing by the Company and by current and potential customers, errors will
not be found, resulting in loss of, or delay in, market acceptance and sales,
diversion of development resources, injury to their reputation, or increased
service and warranty costs, any of which could have a material adverse effect
on the business, results of operations, and financial condition of the
Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in the Company's
Financial Statements and Notes thereto beginning at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item concerning the Company's directors
is incorporated by reference from the section captioned "Election of
Directors" contained in the Company's Proxy Statement related to the 1998
Annual Meeting of Stockholders, which will be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the
Company's fiscal year pursuant to General Instruction G(3) of Form 10-K (the
"Proxy Statement"). The information required by this item concerning
executive officers of the Registrant is set forth in Part I of this report.
The information required by this item concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference
from the section of the Proxy Statement captioned "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the information under the section captioned "Executive Compensation" contained
in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
to the information under the section captioned "Security Ownership of
Management and Certain Beneficial Owners" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
to the information under the sections captioned "Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" contained in
the Proxy Statement.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
PAGE
----
Report of Independent Public Accountants......................... F-2
Consolidated Balance Sheets...................................... F-3
Consolidated Statements of Operations............................ F-4
Consolidated Statements of Stockholders' Equity (Deficit)........ F-5
Consolidated Statements of Cash Flows............................ F-6
Notes to Consolidated Financial Statements....................... F-8
2. FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
3. EXHIBITS
EXHIBIT NO. EXHIBIT TITLE
----------- -------------
3.1 (c) Amended and Restated Certificate of Incorporation
filed with the Secretary of State of Delaware on
February 11, 1997.
3.2 (c) Bylaws, as amended.
4.1 (c) Specimen Common Stock Certificate.
10.1 (c) Nonqualified Stock Option Plan, as amended, and forms
of Stock Option Agreement and Stock Buy-Sell
Agreement.
10.2 (c) 1991 Nonqualified Stock Option Plan, as amended, and
forms of Stock Option Agreement and Stock Buy-Sell
Agreement.
10.3 (d) 1994 Stock Option Plan, as amended through February
6, 1997, including 1995 Stock Option Plan for French
Employees.
10.4 (d) Form of Stock Option Agreement under 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 (e) Credit Agreement dated as of July 1, 1997 by and
between the Registrant and Wells Fargo Bank, 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.
31
10.14 (c) XVT Stock Option Agreement dated January 18, 1995
between the Registrant and Christopher Cole, as
amended on October 3, 1996.
10.16 (d) Restricted Stock Agreement dated November 1, 1995
between the Registrant and David Farley.
10.17 (c) Stock Option Agreement dated as of December 7, 1990
between the Registrant and Christopher Cole as
amended on October 26, 1995.
10.18 (c) Form of Stock Option Agreement under 1995 Stock
Option Plan for French Employees.
10.19 (c) Form of Stock Option Agreement under 1997 Director
Option Plan.
10.21 (f) Certificate of Amendment, dated November 3, 1997, for
amendment of the 1994 Stock Option Plan.
10.22 (b) Executive Officer Incentive Program and Form of
Restricted Stock Agreement.
10.24 (a) 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 (a) 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 (a) 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 (a) 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 (a) 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.
21.1 (a) List of Subsidiaries of the Registrant.
23.1 (a) Consent of Arthur Andersen LLP Independent Public
Accountants.
24.1 (a) Power of Attorney (see page 35).
27.1 (a) Financial Data Schedule.
- -----------------
(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
No. 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
No. 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 original Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
(f) Incorporated by reference to Exhibit 10.23 filed with the Registrant's
Registration Statement on Form S-8, which became effective upon its
filing on January 22, 1998.
- -----------------
32
(b) REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K/A in May 1999 to amend our
Current Report on Form 8-K filed in connection with our acquisition of
Innovative Tech Systems, Inc. filed in August 1998.
We filed a Current Report on Form 8-K/A in May 1999 to amend our
Current Report on Form 8-K filed in connection with our acquisition of
Prototype, Inc. filed in March 1999.
We filed a Current Report on Form 8-K in April 1999 in connection
with our acquisition of F. Print UK Ltd.
We filed a Current Report on Form 8-K in March 1999 in connection
with our acquisition of Prototype, Inc.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to its 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, 1999.
PEREGRINE SYSTEMS, INC.
By /s/ Stephen P. Gardner
----------------------------------------------------
Stephen P. Gardner
President, Chief Executive Officer and Director
(Principal Executive Officer)
By /s/ David A. Farley
----------------------------------------------------
David A. Farley
Senior Vice President, Finance and
Administration, Chief Financial Officer and Director
(Principal Financial Officer)
By /s/ Matthew C. Gless
----------------------------------------------------
Matthew C. Gless
Vice President, Finance and
Chief Accounting Officer
[SIGNATURES CONTINUED ON NEXT PAGE]
34
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS STEPHEN P. GARDNER AND DAVID A.
FARLEY AND EACH OF THEM ACTING INDIVIDUALLY, AS HIS OR HER ATTORNEY-IN-FACT,
EACH WITH FULL POWER OF SUBSTITUTION, FOR HIM OR HER IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THIS REPORT ON FORM 10-K, AND
TO FILE THE SAME, WITH ALL EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION
THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT ON FORM 10-K HAS BEEN SIGNED ON BEHALF OF THE REGISTRANT BY THE
FOLLOWING PERSONS AND IN THE CAPACITIES AND ON THE DATES INDICATED:
Signature Title Date
--------- ----- ----
/s/ Stephen P. Gardner President, Chief Executive Officer, June 29, 1999
- ----------------------------------------- and Director (Principal Executive
(Stephen P. Gardner) Officer)
/s/ David A. Farley Senior Vice President, Finance and June 29, 1999
- ----------------------------------------- Administration, Chief Financial Officer
(David A. Farley) and Director (Principal Financial Officer)
/s/ John J. Moores Chairman of the Board of Directors June 29, 1999
- -----------------------------------------
(John J. Moores)
/s/ Christopher A. Cole Director June 29, 1999
- -----------------------------------------
(Christopher A. Cole)
/s/ Richard A. Hosley II Director June 29, 1999
- -----------------------------------------
(Richard A. Hosley II)
/s/ Charles E. Noell III Director June 29, 1999
- -----------------------------------------
(Charles E. Noell III)
/s/ Norris van den Berg Director June 29, 1999
- -----------------------------------------
(Norris van den Berg)
/s/ Thomas G. Watrous, Sr. Director June 29, 1999
- -----------------------------------------
(Thomas G. Watrous, Sr.)
35
PEREGRINE SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants............................................................ F-2
Consolidated Balance Sheets......................................................................... F-3
Consolidated Statements of Operations............................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)........................................... F-5
Consolidated Statements of Cash Flows............................................................... F-6
Notes to Consolidated Financial Statements.......................................................... F-8
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Peregrine Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
Peregrine Systems, Inc. (a Delaware corporation) and subsidiaries as of March
31, 1998 and 1999, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended March 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Peregrine
Systems, Inc. and subsidiaries as of March 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1999, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Diego, California
April 26, 1999, except with respect to the matter discussed
in Note 6 for which the date is June 9, 1999
F-2
PEREGRINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31,
-------------------------
1998 1999
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents............................................. $ 14,950 $ 21,545
Short-term investments................................................ 7,027 2,000
Accounts receivable, net of allowance for doubtful accounts of $485
and $1,248, respectively........................................ 16,761 38,947
Deferred tax assets................................................... 7,297 5,798
Other current assets.................................................. 2,905 10,370
-------- --------
Total current assets.......................................... 48,940 78,660
Property and equipment, net........................................... 5,455 15,895
Intangible assets, net and other...................................... 29,173 113,158
-------- --------
$ 83,568 $207,713
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................... $ 2,337 $ 6,795
Accrued expenses................................................... 11,103 26,460
Deferred revenue................................................... 11,570 20,048
Current portion of long-term debt.................................. 151 55
-------- --------
Total current liabilities....................................... 25,161 53,358
Long-term debt, net of current portion................................ 966 594
Deferred revenue, net of current portion.............................. 1,802 2,980
-------- --------
Total liabilities............................................. 27,929 56,932
-------- --------
Stockholders' Equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no
shares issued or outstanding.................................... - -
Common stock, $0.001 par value, 200,000,000 shares authorized,
37,580,000 and 48,553,000 shares issued and outstanding,
respectively.................................................... 38 49
Additional paid-in capital......................................... 74,332 193,787
Accumulated deficit................................................ (16,423) (39,793)
Unearned portion of deferred compensation.......................... (1,493) (1,019)
Cumulative translation adjustment.................................. (553) (518)
Treasury stock, at cost............................................ (262) (1,725)
-------- --------
Total stockholders' equity.................................... 55,639 150,781
-------- --------
$ 83,568 $207,713
-------- --------
-------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31,
-------------------------------------
1997 1998 1999
------- ------- --------
Revenues:
Licenses.................................................. $20,472 $38,791 $ 87,362
Services.................................................. 14,563 23,086 50,701
------- ------- --------
Total revenues......................................... 35,035 61,877 138,063
------- ------- --------
Costs and Expenses:
Cost of licenses.......................................... 215 326 1,020
Cost of services.......................................... 4,661 10,326 31,561
Sales and marketing....................................... 15,778 22,728 50,803
Research and development.................................. 5,877 8,394 13,919
General and administrative................................ 3,816 6,077 10,482
Amortization of intangible assets......................... - 3,168 18,012
Acquired in-process research and development ............. - 6,955 26,005
------- ------- --------
Total costs and expenses............................... 30,347 57,974 151,802
------- ------- --------
Operating income (loss)................................ 4,688 3,903 (13,739)
Interest income (expense) and other.......................... (478) 839 664
------- ------- --------
Income (loss) before income taxes............................ 4,210 4,742 (13,075)
Income tax expense (benefit)................................. (1,592) 5,358 10,295
------- ------- --------
Net income (loss)............................................ $ 5,802 $ (616) $(23,370)
------- ------- --------
------- ------- --------
Basic income (loss) per share............................. $ 0.23 $ (0.02) $ (0.54)
------- ------- --------
------- ------- --------
Shares used in computing basic income (loss)
per share............................................... 25,840 34,760 43,583
------- ------- --------
------- ------- --------
Diluted income (loss) per share........................... $ 0.19 $ (0.02) $ (0.54)
------- ------- --------
------- ------- --------
Shares used in computing diluted income (loss) per share..
29,928 34,760 43,583
------- ------- --------
------- ------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
UNEARNED
NUMBER OF ADDITIONAL PORTION OF CUMULATIVE
SHARES COMMON PAID-IN ACCUMULATED DEFERRED TRANSLATION
OUTSTANDING STOCK CAPITAL DEFICIT COMPENSATION ADJUSTMENT
----------- ------ ---------- ----------- ------------ -----------
Balance, March 31, 1996............ 25,796 $26 $ 14,400 $(21,609) $(1,404) $ 137
Net income...................... - - - 5,802 - -
Issuance of common stock........ 44 - 37 - - -
Compensation expense
related to restricted
stock and options............ - - - - 287 -
Deferred compensation
related to options
granted...................... - - 631 - (631) -
Equity adjustment from
foreign currency
translation.................. - - - - - (525)
------- --- -------- -------- ------- -----
Balance, March 31, 1997............ 25,840 26 15,068 (15,807) (1,748) (388)
Net loss........................ - - - (616) - -
Issuance of common stock in
IPO, net of issuance
costs of $1,181.............. 4,600 5 18,066 - - -
Stock options exercised and
restricted stock granted
(net)........................ 3,308 3 2,791 - - -
Stock issued for Apsylog
acquisition.................. 3,832 4 30,502 - - -
Stock option tax benefit...... - - 7, 905 - - -
Compensation expense
related to restricted
stock and options............ - - - - 414 -
Deferred compensation
related to options
granted...................... - - - - (159) -
Stock repurchased............. - - - - - -
Equity adjustment from
foreign currency translation.. - - - - - (165)
------- --- -------- -------- ------- -----
Balance, March 31, 1998............ 37,580 38 74,332 (16,423) (1,493) (553)
Net loss........................ - - - (23,370) - -
Stock options exercised......... 3,509 4 7,917 - - -
Stock issued for
acquisitions.................... 7,464 7 105,442 - - -
Stock option tax benefit........ - - 6,096 - - -
Compensation expense related
to restricted stock and
options......................... - - - - 474 -
Stock repurchased............... - - - - - -
Equity adjustment from
foreign currency
translation..................... - - - - - 35
------- --- -------- -------- ------- -----
Balance, March 31, 1999............ 48,553 $49 $193,787 $(39,793) $(1,019) $(518)
------- --- -------- -------- ------- -----
------- --- -------- -------- ------- -----
TOTAL
STOCKHOLDERS'
TREASURY EQUITY COMPREHENSIVE
STOCK (DEFICIT) INCOME/LOSS
-------- ------------ -------------
Balance, March 31, 1996............ $ - $ (8,450) $ -
Net income...................... - 5,802 5,802
Issuance of common stock........ - 37 -
Compensation expense
related to restricted
stock and options............ - 287 -
Deferred compensation
related to options
granted...................... - - -
Equity adjustment from
foreign currency
translation.................. - (525) (525)
------- -------- --------
Balance, March 31, 1997............ - (2,849) 5,277
------- -------- --------
------- -------- --------
Net loss........................ - (616) (616)
Issuance of common stock in
IPO, net of issuance
costs of $1,181.............. - 18,071 -
Stock options exercised and
restricted stock granted
(net)........................ - 2,794 -
Stock issued for Apsylog
acquisition.................. - 30,506 -
Stock option tax benefit...... - 7,905 -
Compensation expense
related to restricted
stock and options............ - 414 -
Deferred compensation
related to options
granted...................... - (159) -
Stock repurchased............. (262) (262) -
Equity adjustment from
foreign currency translation.. - (165) (165)
------- -------- --------
Balance, March 31, 1998............ (262) 55,639 (781)
------- -------- --------
------- -------- --------
Net loss........................ - (23,370) (23,370)
Stock options exercised......... - 7,921 -
Stock issued for
acquisitions.................... - 105,449 -
Stock option tax benefit........ - 6,096 -
Compensation expense related
to restricted stock and
options......................... - 474 -
Stock repurchased............... (1,463) (1,463) -
Equity adjustment from
foreign currency
translation..................... - 35 35
------- -------- --------
Balance, March 31, 1999............ $(1,725) $150,781 $(23,335)
------- -------- --------
------- -------- --------
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,
-------------------------------------
1997 1998 1999
------- -------- --------
Cash flows from operating activities:
Net income (loss).................................................... $ 5,802 $ (616) $(23,370)
Adjustments to reconcile net income (loss) to net cash, excluding
effects of acquisitions, provided by operating activities:
Depreciation and amortization.................................. 1,838 4,901 21,776
Deferred tax benefit........................................... (1,752) (856) 1,499
Charge for acquired research and development................... - 6,955 26,005
Increase (decrease) in cash resulting from changes in:
Accounts receivable.......................................... (3,936) (7,164) (18,984)
Financed receivables......................................... (1,182) 1,182 -
Other current assets......................................... (163) (1,116) (7,177)
Accounts payable............................................. (499) 674 2,939
Accrued expenses............................................. 2,458 (1,767) 6,390
Deferred revenue............................................. 1,381 1,361 4,874
Other........................................................ (705) 534 (245)
------- -------- --------
3,242 4,088 13,707
------- -------- --------
Net cash used by discontinued business..................... (1,303) (170) -
------- -------- --------
Net cash provided by operating activities............ 1,939 3,918 13,707
------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments................................. - (45,732) (49,000)
Maturities of short-term investments................................ - 38,705 54,027
Purchases of property and equipment................................. (566) (2,427) (12,426)
Proceeds from sale of product line.................................. 700 - -
Cash acquired in acquisitions....................................... - 582 103
Cash expenditures related to acquisitions........................... - (2,410) (11,231)
------- -------- --------
Net cash provided by (used in) investing activities..... 134 (11,282) (18,527)
------- -------- --------
Cash flows from financing activities:
Repayments on bank line of credit, net.............................. (855) (3,387) -
Repayments of long-term debt........................................ (487) (2,541) (1,174)
Issuance of common stock and related tax benefit.................... 37 28,770 14,017
Treasury stock purchased ........................................... - (262) (1,463)
Principal payments under capital lease obligation................... (375) (406) -
------- -------- --------
Net cash provided by (used in) financing activities........ (1,680) 22,174 11,380
------- -------- --------
Effect of exchange rate changes on cash................................ (525) (165) 35
------- -------- --------
Net increase (decrease)................................................ (132) 14,645 6,595
Cash and cash equivalents, beginning of year........................... 437 305 14,950
------- -------- --------
Cash and cash equivalents, end of year................................. $ 305 $ 14,950 $ 21,545
------- -------- --------
------- -------- --------
F-6
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (CONTINUED)
YEAR ENDED MARCH 31,
------------------------------
1997 1998 1999
---- ------- --------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest......................................................... $400 $ 38 $ 26
Income taxes..................................................... $ 27 $ 622 $ 155
Supplemental Disclosure of Noncash Investing and Financing Activities:
Stock issued as consideration for acquisitions.................... $ - $30,506 $105,449
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-7
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Peregrine Systems, Inc. ("Peregrine" or the "Company") is a leading
provider of Infrastructure Management solutions. Infrastructure Management
unites the unique disciplines of the Consolidated Service Desk, Enterprise
Asset Management, Facilities Management and Fleet Management through
utilizing common shared data. The Company develops, markets, and supports its
various Infrastructure Management applications. These products are designed
to meet the Infrastructure Management requirements of large organizations and
are distinguished by their breadth of functionality and their ability to be
deployed across all major hardware platforms and network operating systems
and protocols. The Company sells its 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
Peregrine Systems, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Certain amounts
previously reported have been reclassified in order to ensure comparability
among the years reported.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company generates revenues from licensing the rights to use its
software products primarily to end users. The Company also generates revenues
from post-contract support (maintenance), consulting and training services
performed for customers who license its products. The Company does not
provide professional services unrelated to its products.
Revenues from software license agreements are recognized currently,
provided that all of the following conditions are met: a noncancelable
license agreement has been signed, the software has been delivered, there are
no material uncertainties regarding customer acceptance, collection of the
resulting receivable is deemed probable and the risk of concession is deemed
remote, and no other significant vendor obligations exist. Revenues from
maintenance services are recognized ratably over the term of the maintenance
period, generally one year. Maintenance revenues which are bundled with
license agreements are unbundled using vendor specific objective evidence.
Consulting revenues are primarily related to implementation services
performed on a time and material basis under separate service agreements for
the installation of the Company's software products. Revenues from consulting
and training services are recognized as the respective services are performed.
Cost of license revenues consists primarily of amounts paid to
third-party vendors, product media, manuals, packaging materials, personnel
and related shipping costs. Cost of maintenance and services revenues
consists primarily of salaries, benefits, and allocated overhead costs
incurred in providing telephone support, consulting services, and training to
customers.
Deferred revenue primarily relates to maintenance fees, which have
been paid by customers in advance of the performance of these services.
F-8
BUSINESS RISK AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of trade and other
receivables. The Company performs ongoing credit evaluations of its customers
financial condition. Management believes that the concentration of credit
risk with respect to trade receivables is further mitigated as the Company's
customer base consists primarily of Fortune 1000 companies. The Company
maintains reserves for credit losses and such losses historically have been
within management expectations.
A significant portion of the Company's revenues are derived from its
Infrastructure Management products and related services. Any factor adversely
affecting the pricing of, demand for or market acceptance of these products
could have a material adverse effect on the Company's business, financial
condition and results of operations.
CASH AND CASH EQUIVALANTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
primarily consist of overnight repurchase agreements and money market
accounts. The carrying amount reported for cash and cash equivalents
approximates its fair value.
SHORT-TERM INVESTMENTS
The company accounts for its short-term investments in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS No. 115). Short-term
investments consist of auction rate preferred stock with original maturities
at date of purchase beyond three months. These securities are classified as
available-for-sale and are carried at market. The amount of gross unrealized
gains or gross unrealized losses were not significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of the Company's financial
instruments, including accounts receivable, accounts payable and accrued
expenses approximates fair value due to their short maturities. Based on
borrowing rates currently available to the Company for loans with similar
terms, the carrying value of its notes payable approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method over estimated
useful lives, generally three to five years for furniture and equipment.
Amortization of leasehold improvements is provided using the straight-line
method over the lesser of the useful lives of the assets or the terms of the
related leases.
Maintenance and repairs are charged to operations as incurred. When
assets are sold, or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included
in operations for the applicable period.
LONG- LIVED ASSETS
The Company evaluates 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. SFAS No. 121 also
requires that long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair value less
estimated selling costs. As of March 31, 1999, management believes that there
has not been any impairment of the Company's long-lived assets or other
identifiable intangibles.
F-9
INTANGIBLE ASSETS
Intangible assets are comprised of purchase price in excess of
identifiable assets associated with the Company's acquisitions. Intangible
assets are carried at cost less accumulated amortization, which is being
amortized on a straight line basis over five years.
CAPITALIZED COMPUTER SOFTWARE
In accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", software development costs are capitalized from the time
the product's technological feasibility has been established until the
product is released for sale to the general public. During the three years in
the period ended March 31, 1999, no 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.
FOREIGN CURRENCY TRANSLATION AND RISK MANAGEMENT
Assets and liabilities of the Company's foreign operations are
translated into United States dollars at the exchange rate in effect at the
balance sheet date, and revenue and expenses are translated at the average
exchange rate for the period. Translation gains or losses of the Company's
foreign subsidiaries are not included in operations but are reported as a
separate component of stockholders' equity. 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 the Company's foreign operations, while not significant in
amount, are included in the results of operations.
The Company enters into forward exchange contracts of approximately
one month in length to minimize the short-term impact of foreign currency
fluctuations on assets and liabilities denominated in currencies other than
the functional currency of the reporting entity. All foreign exchange forward
contracts are designated as and effective as a hedge and are inversely
correlated to the hedged item as required by generally accepted accounting
principles.
Gains and losses on the contracts are included in other income and
offset foreign exchange gains or losses from the revaluation of intercompany
balances or other current assets and liabilities denominated in currencies
other than the functional currency of the reporting entity.
INCOME TAXES
Deferred taxes are provided utilizing the liability method as
prescribed by SFAS 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 the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
The Company applies the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per share." 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 was computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution that could occur if the income were divided by the
weighted-average number of common shares and potential dilutive common shares
from outstanding stock options for the year ended March 31, 1997. Potential
dilutive common shares were calculated using the treasury stock method and
represent incremental shares issuable upon exercise of the Company's
outstanding options. For the years ended March 31, 1998 and March 31, 1999,
the diluted loss per share calculation excludes
F-10
effects of outstanding stock options as such inclusion would be
anti-dilutive. The following table provides reconciliation of numerators and
denominators used in calculating basic and diluted income (loss) per share
for the years presented.
For the Years Ended March 31,
--------------------------------------
1997 1998 1999
------- ------- --------
Net income (loss) $ 5,802 $ (616) $(23,370)
------- ------- --------
------- ------- --------
BASIC INCOME (LOSS) PER SHARE:
Weighted average common shares outstanding............ 25,840 34,760 43,583
------- ------- --------
Basic income (loss) per share............................... $ 0.23 $ (0.02) $ (0.54)
------- ------- --------
------- ------- --------
DILUTED INCOME (LOSS) PER SHARE:
Weighted average common shares outstanding............ 25,840 34,760 43,583
Common stock options outstanding (unless anti-dilutive) 4,088 - -
------- ------- --------
Total weighted average common shares and equivalents........ 29,928 34,760 43,583
------- ------- --------
Diluted income (loss) per share............................. $ 0.19 $ (0.02) $ (0.54)
------- ------- --------
------- ------- --------
STOCK SPLIT
On January 29, 1999, the Company's Board of Directors declared a
two-for-one stock split. This stock split was effected in the form of a stock
dividend. Stockholders of record received one share of common stock for each
share held. All stock related data in the consolidated financial statements
and related notes reflect this stock split for all periods presented.
COMPREHENSIVE INCOME
The Company has implemented Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income". This statement requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Accordingly, in addition to reporting net income (loss) under the current
rules, the Company is required to display the impact of any fluctuations in
its foreign currency translation adjustments as a component of comprehensive
income and to display an amount representing total comprehensive income for
each period presented. The Company has presented the required information in
the consolidated statements of stockholders' equity (deficit).
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued
AICPA Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). This statement
provides guidance on accounting for the costs of computer software developed
or obtained for internal use and identifies characteristics of internal use
software as well as assists in determining when computer software is for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998, with earlier application permitted. The Company has not determined
the impact of the adoption of SOP 98-1 as this is highly dependent upon the
nature, timing and extent of future internal use software development.
In March 1998, the Accounting Standards Executive Committee issued
AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." This Statement of Position provides guidance on the financial
reporting of start-up costs and organization costs. It requires that the cost
of start-up activities and organization costs be expensed as incurred. The
SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company does not expect the adoption of this SOP to
have a material impact on its financial position or results of operations.
F-11
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement changes the
previous accounting definition of derivative - which focused on freestanding
contracts such as options and forwards (including futures and
swaps)-expanding it to include embedded derivatives and many commodity
contracts. Under the Statement, every derivative is recorded in the balance
sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in a derivative's fair value be recognized
currently in operations unless specific hedge accounting criteria are met.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
Earlier application is allowed as of the beginning of any quarter beginning
after issuance. The Company does not anticipate that the adoption of SFAS 133
will have a material impact on its financial position or results of
operations.
The Company has adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" and has determined that it operates in one business segment
dedicated to Infrastructure Management software (see Note 9, Geographic
Operations).
2. ACQUISITIONS
In September 1997, the Company completed the acquisition of all of
the outstanding stock of Apsylog, a developer of decision software solutions
designed for asset management. The consideration given for the stock of
Apsylog included 3,832,440 shares of Company Common Stock valued at a total
purchase price of $38.6 million, including merger costs and assumed
liabilities.
On July 30, 1998, the Company completed the acquisition of
Innovative Tech Systems, Inc. ("Innovative"), a developer of facilities
infrastructure management software. The acquisition was structured as a
tax-free stock-for-stock exchange resulting in the issuance of 5,918,328
shares of Company 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, the Company 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. The Company issued 784,160 shares of
Company Common Stock in exchange for these assets valued at a total purchase
price, including merger costs, of $15.6 million.
On March 2, 1999, the Company completed the acquisition of
Prototype, Inc. ("Prototype"), a developer of fleet infrastructure management
software. The Company issued 761,141 shares of Company Common Stock and $1.1
million in cash for all of the outstanding shares of Prototype. The total
purchase price, including merger costs and assumed liabilities, totaled $25.9
million.
ACCOUNTING TREATMENT OF ACQUISTIONS
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 financial statements for the
periods subsequent to acquisition.
F-12
The Company allocated the fair values of the net assets acquired
between acquired in-process research and development, developed technology
and purchase price in excess of identifiable assets. The results of the
allocation of values between the intangible assets are as follows:
In thousands:
ACQUIRED IN-PROCESS PURCHASE PRICE IN EXCESS
ACQUISITION RESEARCH & DEVELOPMENT OF THE ACQUIRED ASSETS TOTAL
- ----------- ---------------------- ------------------------ -----
FISCAL 1998
Apsylog $ 6,955 $ 31,684 $ 38,639
-------- -------- --------
$ 6,955 $ 31,684 $ 38,639
-------- -------- --------
-------- -------- --------
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. The
Company currently believes that actual results have been consistent with
forecasts with respect to acquired in-process revenues. Because the Company
does not account for expenses by product, it is not possible to determine the
actual expenses associated with any of the acquired technologies. However,
the Company believes that expenses incurred to date associated with the
development and integration of the acquired in-process research and
development projects are substantially consistent with the Company's previous
estimates.
The Company has completed many of the original research and
development projects in accordance with the plans outlined above. The company
continues to work toward the completion of other projects. The majority of
the projects are on schedule, but delays may occur due to changes in
technological and market requirements for the Company's 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 the Company's
revenues and earnings in future quarters.
During fiscal years 1998 and 1999 the Company expended $2.4 million
and $11.2 million, respectively, for acquisition costs and liabilities
assumed related to the acquisitions detailed above.
PRO FORMA FINANCIAL INFORMATION
The following table presents the unaudited pro forma results
assuming the Company had acquired each of Apsylog and Innovative at
(operations of ISS and Prototype are insignificant) the beginning of fiscal
years 1998 and 1999, respectively. Net loss and diluted loss per share
amounts have been adjusted to exclude acquired in process research and
development write-offs of $7 million and $26 million, in fiscal years 1998
and 1999, respectively and to include goodwill amortization of $26 million
and reflect the two-for-one split of the Company's common stock for both
periods presented. This information may not necessarily be indicative of the
future combined results of the Company.
F-13
In thousands, except per share data:
PROFORMA
FOR THE YEARS ENDED MARCH 31,
-----------------------------
(UNAUDITED)
1998 1999
-------- --------
Revenues $ 78,254 $144,063
Net loss $(16,936) $(14,321)
Basic loss per share $ (0.41) $ (0.31)
Diluted loss per share $ (0.41) $ (0.31)
3. BALANCE SHEET COMPONENTS
Other current assets consists of the following (in thousands):
MARCH 31,
------------------------------
1998 1999
------- --------
Prepaid expenses ............................................... $ 2,661 $ 4,928
Other........................................................... 244 5,442
------- --------
$ 2,905 $ 10,370
------- --------
------- --------
Property and equipment consists of the following (in thousands):
MARCH 31,
------------------------------
1998 1999
------- --------
Furniture and equipment............................................... $10,219 $ 23,075
Leasehold improvements................................................ 2,249 5,035
------- --------
12,468 28,110
Less accumulated depreciation......................................... (7,013) (12,215)
------- --------
$ 5,455 $ 15,895
------- --------
------- --------
Intangible assets, net and other consists of the following (in thousands):
MARCH 31,
------------------------------
1998 1999
------- --------
Intangible assets and other........................................... $32,341 $134,338
Less accumulated amortization......................................... (3,168) (21,180)
------- --------
$29,173 $113,158
------- --------
------- --------
Accrued expenses consists of the following (in thousands):
MARCH 31,
------------------------------
1998 1999
------- --------
Employee compensation.................................................. $ 2,745 $ 7,370
Commissions............................................................ 3,494 6,066
Taxes.................................................................. 1,843 5,030
Acquisition related liabilities........................................ 1,112 3,379
Other.................................................................. 1,909 4,615
------- --------
$11,103 $ 26,460
------- --------
------- --------
F-14
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
MARCH 31,
---------------------
1998 1999
------ ----
Note payable to lessor. Unsecured; interest at 8%. Monthly
payments of principal and interest of $4 through November 2003...... $ 227 $194
French Government Agency loans and other............................... 890 455
------ ----
1,117 649
Less current portion................................................... (151) (55)
------ ----
$ 966 $594
------ ----
------ ----
Scheduled fiscal year principal payments on long-term debt due as of
March 31, 1999 are as follows (in thousands):
2000....................................................................................... $ 55
2001....................................................................................... 66
2002....................................................................................... 372
2003....................................................................................... 128
2004....................................................................................... 28
----
$649
----
----
5. INCOME TAXES
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,
-----------------------------
1998 1999
------ -------
Deferred tax assets:
Net operating loss carryforwards ................................. $5,497 $ 3,148
Section 197 Intangible Assets .................................... - 3,143
Deferred maintenance revenue ..................................... 1,452 2,752
Other ............................................................ 1,324 1,030
------ -------
8,273 10,073
Deferred tax liabilities:
Depreciation ..................................................... (168) (324)
------ -------
8,105 9,749
Valuation allowance ................................................. (808) (3,951)
------ -------
Net deferred tax assets ............................................. $7,297 $ 5,798
------ -------
------ -------
As of March 31, 1999, the Company had net operating loss
carryforwards of approximately $23.7 million for domestic federal income tax
reporting purposes, which expire beginning in 2012. Approximately $15.6
million of the net operating loss carryforwards relate to the exercise or
early disposition 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, a fifty percent or more ownership change by
certain combinations of the Company's stockholders during any three year
period could result in a limitation on the Company's ability to utilize
portions of its domestic net operating loss carryforwards. As of March 31,
1999, the Company also had foreign net operating loss carryforwards of
approximately $1.6 million, which can be carried forward indefinitely.
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. Management evaluates 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.
F-15
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,
------------------------------------
1997 1998 1999
------- ------ -------
Federal tax provision (benefit) at the statutory rate .............. $ 980 $1,612 $(4,446)
State tax provision (benefit) , net of federal benefit (detriment) . 173 237 (654)
Foreign earnings taxed at lower rates .............................. - - (912)
Tax credits ....................................................... - - (860)
Non-deductible acquired in-process R&D and amortization of
purchased intangibles............................................ - 3,943 14,023
Other .............................................................. 140 15 1
Change in valuation allowance ...................................... (2,885) (449) 3,143
------- ------ -------
Total income tax provision (benefit) ............................... $(1,592) $5,358 $10,295
------- ------ -------
------- ------ -------
The amounts stated in the table above for the years ended March
31, 1998 and 1999 include expenses (a significant portion of which are not
tax deductible) of $10,123,000 and $44,016,219, respectively, related to the
acquisition of in-process research and development and amortization of
purchased intangibles. Excluding these acquisition-related expenses, the
overall effective tax rate for the years ended March 31, 1998 and 1999 was
37.0 percent and 33.3 percent, respectively.
The income tax provision (benefit) consisted of the following (in thousands):
MARCH 31,
------------------------------------
1997 1998 1999
------- ------- -------
Current
Federal ......................................................... $ 76 $5,197 $ 5,304
State ........................................................... 84 1,017 792
Foreign ......................................................... - - 2,700
------- ------- -------
Total current ...................................................... 160 6,214 8,796
------- ------- -------
Deferred
Federal ......................................................... (1,523) (728) 1,262
State ........................................................... (229) (128) 188
Foreign ......................................................... - 49
------- ------- -------
Total deferred ..................................................... (1,752) (856) 1,499
------- ------- -------
Total provision (benefit) .......................................... $(1,592) $ 5,358 $10,295
------- ------- -------
------- ------- -------
The Company realizes an income tax benefit from the exercise or
early disposition of certain stock options. This benefit results in a
decrease in current income taxes payable and an increase in additional
paid-in capital at the time the benefit is realized. The amount of the
benefit realized for the years ended March 31, 1998 and 1999 was $7,905,000
and $6,096,000, respectively.
The income tax provision (benefit) was based upon income before
taxes under the following jurisdictions:
MARCH 31,
------------------------------------
1997 1998 1999
------- ------ -------
Domestic ........................................................... $ 3,513 $ (772) $(21,041)
Foreign ............................................................ 697 5,514 7,966
------- ------ -------
Total .............................................................. $ 4,210 $4,742 $(13,075)
------- ------ -------
------- ------ -------
F-16
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain buildings and equipment under
noncancelable operating lease agreements. The leases generally require the
Company to pay all executory 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 $2,051,000, $2,565,000 and $4,570,000
in fiscal 1997, 1998, and 1999, respectively.
Future minimum lease payments under noncancelable operating leases,
at March 31, 1999 are as follows (in thousands):
OPERATING
LEASES
---------
2000......................................................................... 6,508
2001......................................................................... 11,465
2002......................................................................... 13,589
2003......................................................................... 13,567
2004......................................................................... 12,215
Thereafter................................................................... 97,225
---------
Total minimum lease payments........................................... $154,569
---------
---------
The Company subleases office space at its corporate headquarters to
an affiliated company. The term of the sublease is from June, 1996 to
October, 2003 and requires monthly rental payments of approximately $17,000.
On June 9, 1999, the Company entered into a series of leases
covering up to approximately 540,000 square feet of office space in San
Diego, including an option on approximately 118,000 square feet of office
space. Construction has commenced on this campus location and the Company
intends to begin moving into the location in the fall of 1999 as construction
is completed over the next four years. The future minimum lease commitments
detailed above contain the Company's future commitments of approximately
$124 million associated with these leases. To the extent the Company does not
require all of the space under these leases, it has the right to sublet
excess space.
The Company pays commissions to employees who have authored certain
of the Company's 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 $1,100,000, $1,700,000, and $3,200,000 for fiscal
1997, 1998, and 1999, respectively.
The Company is involved in various legal proceedings and claims
arising in the ordinary course of business, none of which, in the opinion of
management, is expected to have a material adverse effect on the Company's
consolidated financial position or results of operations.
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 5,000,000, $0.001 par value, undesignated
preferred shares, none of which were issued or outstanding at March 31, 1998
and 1999. The 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 the Company's stockholders.
STOCK OPTIONS
The Company has four stock option plans, the Nonqualified Stock
Option Plan ("1990 Plan"), the 1991 Nonqualified Stock Option Plan ("1991
Plan"), the 1994 Stock Option Plan ("1994 Plan"), and the 1997 Director
Option Plan (the "Director Plan").
F-17
The Company may no longer grant options under the 1990 and 1991
Plans. The Company may grant up to 14,178,768 and 500,000 options under the
1994 Plan and Director Plan, respectively. Under the Plans, the option
exercise price is determined by the Board of Directors on a per-grant basis,
but shall not be less than fair market value. Option grants under all four
stock option plans generally vest over four years. During December 1996, the
Company recorded $631,000 in deferred compensation related to the grant of
370,000 options. This deferred compensation is being amortized on a straight
line basis to expense over the options' four year vesting period.
The following table summarizes the Company's four stock option plans
at March 31, 1997, 1998, and 1999 as well as changes during the periods
then ended. The table excludes all option plans acquired as the result of the
Company's acquisitions during the periods presented, which represent options
to purchase 379,000 shares at March 31, 1999.
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
MARCH 31, 1997 MARCH 31, 1998 MARCH 31, 1999
----------------------------- --------------------------- --------------------------
Outstanding, beginning of year 7,194.8 $0.90 8,122.6 $1.04 7,196.8 $ 3.39
-------- ----- -------- ----- -------- ------
Granted....................... 1,979.8 1.62 3,257.6 6.80 5,958.6 14.86
Exercised..................... (45.6) 0.82 (3,612.4) 0.75 (2,916.1) 1.59
Canceled...................... (1,006.4) 0.70 (571.0) 6.13 (987.9) 3.34
-------- ----- -------- ----- -------- ------
Outstanding, end of year...... 8,122.6 $1.04 7,196.8 $3.39 9,251.4 $11.36
-------- ----- -------- ----- -------- ------
-------- ----- -------- ----- -------- ------
Exercisable, end of year...... 4,343.4 $0.74 2,321.0 $1.04 1,019.8 $ 4.18
-------- ----- -------- ----- -------- ------
-------- ----- -------- ----- -------- ------
Weighted average fair value of
options granted............ $ - $3.82 $ 9.17
----- ----- ------
----- ----- ------
The Company has adopted the disclosure only provisions of SFAS No.
123 "Accounting for Stock-Based Compensation." Accordingly, the Company
continues to account for stock options using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25.
Because certain of the options awarded to date have been granted at
significant premiums, under the minimum value pricing model the options were
determined to collectively have no value. As a result, had compensation cost
for stock options granted during the year ended March 31, 1997 been
determined consistent with SFAS No. 123, the Company's net income (loss) and
related per share amounts on a pro forma basis would not be materially
different as the per share amounts reported in the accompanying consolidated
statements of operations for the year ended March 31, 1997.
Compensation cost determined consistent with SFAS No. 123 would have
reduced the Company's net income and related per share amounts on a pro-forma
basis by $5.5 million and $0.13 in fiscal 1999 and $1.3 million and $0.07 in
fiscal 1998. The fair value of each option grant is estimated using the
minimum value method of option pricing model with the following assumptions
used in fiscal 1999 and 1998, respectively: weighted average risk-free
interest rate of 5.65 percent and 6.11 percent; volatility of 78.92 percent
and 63.06 percent; expected dividend yields of 0.00 percent for both years;
and an expected life of 4 years for both years.
RESTRICTED STOCK
During fiscal 1996, the Company granted 1,200,000 shares of
nontransferable common stock under restricted stock agreements to certain
employees. These shares were valued at a fair value of $1.17. The
restrictions lapse on the shares ten years from the date of grant or, if the
Company achieves certain objectives for earnings growth from fiscal 1997
through fiscal 2002, or, on a change in control of the Company. The unearned
portion of restricted stock is included in stockholders' equity and is being
amortized as compensation expense on a straight-line basis over the vesting
period. During fiscal 1998, 404,000 of the above shares were canceled.
F-18
During the fiscal year 1998, the Company granted an additional
100,000 shares of nontransferrable common stock under restricted stock
agreements valued at $6.3125. These shares vest over a six-year term and
deferred compensation of $631,000 is currently being amortized as
compensation expense over this term.
1997 EMPLOYEE STOCK PURCHASE PLAN
In February 1997, the Board adopted, and the stockholders approved,
the 1997 Employee Stock Purchase Plan ("Purchase Plan"). The Company has
reserved 500,000 shares of common stock for issuance under the Purchase Plan.
The Purchase Plan enables eligible employees to purchase common stock at 85%
of the lower of the fair market value of the Company's common stock on the
first or last day of each option purchase period, as defined. No shares were
issued under the Purchase Plan during fiscal 1997 and 70,000 and 62,000 shares
were issued under the Purchase Plan during fiscal 1998 and 1999, respectively.
DIRECTOR OPTION PLAN
In February 1997, the Board adopted, and the stockholders approved,
the 1997 Director Option Plan ("Director Plan"). The Company has reserved
300,000 shares of common stock for issuance under the Director Plan. The
Director Plan provides an initial grant of options to purchase 25,000 shares
of common stock to each new eligible outside director of the Company upon
election to the Board. In addition, commencing with the 1998 Annual
Stockholders meeting, such eligible outside directors are granted an option
to purchase 5,000 shares of 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 the Company's common stock on the date of grant.
Options may be granted for periods up to ten years and generally vest over
four years. No grants were made under the Director Plan in fiscal 1997 and
1998. A grant for 50,000 shares of common stock was made under the Director
Plan in fiscal 1999.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Employee Savings Plan ("Plan") covering
substantially all employees. The Plan provides for savings and pension
benefits and is subject to the provisions of the Employee Retirement Income
Security Act of 1974. Those employees who participate in the Plan are
entitled to make contributions of up to 20 percent of their compensation,
limited by IRS statutory contribution limits. In addition to employee
contributions, the Company also contributes to the Plan by matching 25% of
employee contributions. Amounts contributed to the Employee Savings Plan by
the Company during fiscal 1997, 1998 and 1999 were $189,000, $200,000, and
$467,000 respectively.
F-19
9. GEOGRAPHIC OPERATIONS
The Company operates exclusively in the Intrastructure management
software industry. A summary of the Company's operations by geographic area
is presented below:
UNITED EUROPE &
STATES OTHER CONSOLIDATED
-------- -------- ------------
Year ended March 31, 1997
Revenues............................... $ 24,925 $10,110 $ 35,035
Identifiable assets.................... 14,353 5,385 19,738
Year ended March 31, 1998
Revenues............................... $ 39,512 $22,365 $ 61,877
Identifiable assets.................... 72,434 11,134 83,568
Year ended March 31, 1999
Revenues............................... $ 88,649 $49,414 $138,063
Identifiable assets.................... 179,376 28,337 207,713
Amounts included in Europe and other above relate principally to the
Company's European operations.
F-20
10. SUBSEQUENT EVENT
On April 2, 1999 the Company completed the acquisition of F.Print UK
Ltd. ("FPrint"), a developer of desktop inventory and asset discovery
software. The Company issued 754,231 shares of Company Common Stock and $1.3
million in cash for all of the outstanding shares of FPrint. The acquisition
will be accounted for under the purchase method of accounting and,
accordingly, the Company will record the assets, including in-process
research and development, and liabilities based on their fair values at the
date of the acquisition. The results of operations for the acquisition will
be included in the financial statements for the periods subsequent to the
date thereof.
11. QUARTERLY RESULTS (UNAUDITED)
The following unaudited quarterly financial information includes, in
management's opinion, all normal and recurring adjustments (in thousands)
necessary to fairly state the Company's consolidated results of operations
and related information for the periods presented.
THREE MONTHS ENDED
--------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1998
-------- ------------- ------------ ---------
License revenues .......................... $ 6,328 $ 7,039 $ 12,374 $ 13,050
Services revenues .......................... 4,687 5,164 6,135 7,100
Total costs and expenses.................... (8,944) (16,555) (15,693) (16,782)
-------- ------------- ------------ ---------
Income (loss) from operations............... 2,071 (4,352) 2,816 3,368
Interest income (expense) and other......... 178 226 204 231
Income tax expense.......................... 832 1,048 1,632 1,846
-------- ------------- ------------ ---------
Net income (loss) .......................... $ 1,417 $ (5,174) $ 1,388 $ 1,753
-------- ------------- ------------ ---------
-------- ------------- ------------ ---------
Basic income (loss) per share............... $ 0.05 $ (0.17) $ 0.04 $ 0.05
-------- ------------- ------------ ---------
-------- ------------- ------------ ---------
Diluted income (loss) per share............. $ 0.04 $ (0.17) $ 0.03 $ 0.04
-------- ------------- ------------ ---------
-------- ------------- ------------ ---------
THREE MONTHS ENDED
--------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1999
-------- ------------- ------------ ---------
License revenues ........................... $ 13,882 $ 17,375 $ 26,064 $ 30,041
Services revenues .......................... 7,868 12,279 14,485 16,069
Total costs and expenses.................... (18,432) (49,960) (37,051) (46,359)
-------- ------------- ------------ ---------
Income (loss) from operations............... 3,318 (20,306) 3,498 (249)
Interest income (expense) and other......... 260 193 100 111
Income tax expense.......................... 1,742 2,209 2,969 3,375
-------- ------------- ------------ ---------
Net income (loss) .......................... $ 1,836 $(22,322) $ 629 $ (3,513)
-------- ------------- ------------ ---------
-------- ------------- ------------ ---------
Basic income (loss) per share............... $ 0.05 $ (0.52) $ 0.01 $ (0.07)
-------- ------------- ------------ ---------
-------- ------------- ------------ ---------
Diluted income (loss) per share............. $ 0.04 $ (0.52) $ 0.01 $ (0.07)
-------- ------------- ------------ ---------
-------- ------------- ------------ ---------
F-21