-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MqWj0hSqEsMov7ADOpz21kGRYrJBh0hJo4TEuoIKznzLzEbdmsdvqYSGsxnbPhqM 49oIxFjiYeCVw+yUk51Hdw== 0000912057-97-022175.txt : 19970630 0000912057-97-022175.hdr.sgml : 19970630 ACCESSION NUMBER: 0000912057-97-022175 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970627 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEREGRINE SYSTEMS INC CENTRAL INDEX KEY: 0001031107 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 953773312 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-22209 FILM NUMBER: 97631335 BUSINESS ADDRESS: STREET 1: 12670 HIGH BLUFF DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92130 BUSINESS PHONE: 6194815000 MAIL ADDRESS: STREET 1: 12670 HIGH BLUFF DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92130 10-K405 1 FORM 10-K405 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, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________. COMMISSION FILE NUMBER: 0-2222209 PEREGRINE SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3773312 (STATE OR OTHER 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) (619) 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. X ----- 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 31, 1997, as reported on the Nasdaq National Market, was approximately $34,449,778. 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 31, 1997, the Registrant had 15,213,057 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 1997 Annual Meeting of Stockholders, which is currently scheduled to be held on August 12, 1997. PEREGRINE SYSTEMS, INC. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I................................................................ 3 ITEM 1. BUSINESS................................................... 3 ITEM 2. PROPERTIES................................................. 9 ITEM 3. LEGAL PROCEEDINGS.......................................... 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 9 PART II............................................................... 11 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................ 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA....................... 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................... 20 PART III.............................................................. 21 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ....... 21 ITEM 11. EXECUTIVE COMPENSATION..................................... 21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................. 21 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 21 PART IV............................................................... 22 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................... 22 SIGNATURES............................................................ 24 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 FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS REPORT. OVERVIEW Peregrine is a leading provider of Enterprise Service Desk software. The Company develops, markets, and supports SERVICECENTER, an integrated suite of applications that automates the management of complex, enterprise-wide information technology ("IT") infrastructures. SERVICECENTER is designed to address the IT management requirements of large organizations and can be deployed across all major hardware platforms and network operating systems and protocols. SERVICECENTER utilizes advanced client/server and intelligent agent technologies and a modular architecture. The Company was incorporated in California in 1981 and reincorporated in Delaware in 1994. Unless the context otherwise requires, references in this report to "Peregrine" and the "Company" refer to Peregrine Systems, Inc., a Delaware corporation, and its predecessor, Peregrine Systems, Inc., a California corporation. The Company's executive offices are located at 12670 High Bluff Drive, San Diego, California 92130 and its telephone number is (619) 481-5000. The development of the market for the Company's products reflects an increasingly competitive business environment in which information technology has become an important source of competitive advantage. Organizations rely heavily on information technology in efforts to improve operational efficiency, react more quickly to changes in the marketplace, and better understand and respond to customer needs. IT is an integral part of many core business functions, including plant management, inventory management, and customer billing, and is critical to many new tactical and strategic initiatives such as business process reengineering, supply chain management, and enhanced customer care. Most traditional IT management solutions have been designed to address a limited set of problems, principally problem tracking and problem resolution. These applications have been deployed on a departmental or divisional level or have otherwise taken a segmented approach to IT management that requires a specific and separate application to manage each component or system within the IT infrastructure and that does not permit integration with other third party IT applications. The Company's SERVICECENTER suite of applications offers capabilities beyond those of traditional internal help desk solutions and is intended to create an Enterprise Service Desk capable of meeting the broader operational and strategic needs of business enterprises. SERVICECENTER provides an integrated and automated suite of six applications, consisting of problem management, knowledge-based resolution, change management, inventory/configuration management, order and catalog management, and financial management. The Company believes that its future growth and profitability will depend on a number of factors, including, among others, factors relating to the quality of its products and to its ability to further penetrate existing markets and to penetrate new markets. In that regard, the Company's strategy is focused on maintaining and enhancing its technological position and the functionality of its products; broadening its target markets from the Fortune 500 to include smaller organizations worldwide comprising the Global 2000; expanding international sales; leveraging a product authorship model that rewards individual product developers based on sales of products developed by them; leveraging a direct sales model intended to minimize the number of remote sales offices and focus on effective use of telephone and network communications; implementing and expanding existing programs aimed at improving customer relationships through information exchanges among the 3 Company, existing customers, and prospective customers; and expanding its distribution channels through relationships with third party distributors, system integrators, and original equipment manufacturers. PRODUCTS Peregrine's principal product is SERVICECENTER, an Enterprise Service Desk software solution that integrates six management applications, or modules, on a common platform. SERVICECENTER supports most major computing platforms, including UNIX, Microsoft Windows 3.1, Windows 95, Windows NT, MVS and Apple Macintosh. While SERVICECENTER can be implemented readily without modification, SERVICECENTER users can customize the applications, screen formats, databases or reports using the Company's Rapid Application Development ("RAD") environment, a fourth generation application language. 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. KNOWLEDGE-BASED 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 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. 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. ORDER AND CATALOG MANAGEMENT. The order and catalog 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. FINANCIAL MANAGEMENT. The financial management application monitors financial and cost information relating to hardware and software in the network inventory, including component status (e.g., installed, disconnected, on order, in repair), purchase order/lease numbers, physical location, device type, fixed asset number and purchase accrual data. OTHER NETWORK MANAGEMENT PRODUCTS The Company's network management solutions provide network information on a real-time basis. OPENSNA permits users to manage IBM SNA networks graphically from a SNMP-based management console, to determine network status, and to issue commands. STATIONVIEW and SERVERVIEW manage Novell NetWare, Microsoft Windows NT, and Compaq Insight Manager-based servers and workstations from SNMP-based management platforms. 4 PRODUCT DEVELOPMENT; PRODUCT AUTHORSHIP MODEL The Company believes that attracting and retaining talented software developers is an important component of the Company's product development activities. To this end, the Company has instituted a product authorship incentive program that rewards the Company's developers individually with commissions based on the market success of the applications designed, written, marketed and supported by them. The Company's product authorship program is designed to encourage the Company's developers to evaluate the effectiveness of a product in the actual user environment. The Company believes that the ability to deliver new and enhanced products to customers is a key success factor. The Company has historically developed its products through a consultative process with existing and potential customers. The Company expects that continued dialogue with such existing and potential customers may result in enhancements to existing products and the development of new products, including product suites designed for a specific market segment. The Company has in the past devoted and expects in the future to continue to devote a significant amount of resources to developing new and enhanced products. The Company currently has a number of product development initiatives underway. There can be no assurance that any enhanced products, new products or product suites will be embraced by existing or new customers. The failure of these products to achieve market acceptance would have a material adverse effect on the Company's business, operating results and financial condition. The Company's research and development expenditures in fiscal 1995, 1996, and 1997 were $7.1 million, $7.7 million, and $5.9 million, respectively, representing 36%, 33%, and 17% of total revenues in the respective periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The market for the Company's 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, 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 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. The Company's product development efforts are expected to continue to require substantial investments by the Company. 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 the Company's business, results of operations and financial condition. TECHNOLOGY The Company's products rely on a number of standard, commercially available technologies for relational database storage and retrieval and client/server communications. The Company's products are designed to support a range of implementations of the Enterprise Service Desk within medium-sized organizations to large enterprises. In addition, the Company has developed other technologies designed to provide a comprehensive environment to build, deploy and customize a range of applications. THREE-TIERED ARCHITECTURE. The Company's database, business rules and presentation technologies create a three-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 product provides a number of tools that enable customers to customize and extend SERVICECENTER. The design of the database, the contents and 5 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. DISTRIBUTED SERVICES. The Company has announced for delivery in 1997 a distributed technology that provides both replication services and the capability to move work from one SERVICECENTER system to another. These services are database vendor independent and contain knowledge of the application schema. ADAPTERS. The Company provides adaptors to industry standard APIs, such as SMTP e-mail, and leading vendors products. These adaptors 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 adaptors that permit the system to communicate using e-mail, beeper, fax and Lotus Notes. The adaptors also provide communication with third party network management tools such as Hewlett Packard's OpenView, 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 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. SALES AND MARKETING The Company sells its software and services in both North America and internationally primarily through a direct sales force. The North American sales force is located in San Diego and Houston. The international sales force is located in London, Paris, Frankfurt and Copenhagen. The Company utilizes a sales model which minimizes the number of remote sales offices and focuses on telephone and network communications for product demonstrations and product sales. When necessary, however, the Company's sales force will also travel to customer locations and pursue a consultative sales process. In addition to its direct sales strategy, the Company is pursuing indirect distribution channels. In the Pacific Rim and Latin America, the Company has established a network of channel partners. In North America, the Company has established a network of regional, national and strategic integrators. 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. This sales cycle is typically extended 90 days for product sales through indirect channels. In the last year, the Company has 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 the Company's objective to be the leading Enterprise Service Desk solution worldwide. As part of its marketing strategy, the Company has implemented a number of enhanced marketing programs such as seminars, monthly executive briefings, industry trade shows, advertising and public relations. The Company plans to continue to expand its marketing organization in an effort to broaden the Company's market presence. The Company has significantly increased the size of its sales force over the last year and expects 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. The Company also expects to increase the number of its regional, national, and strategic integrators, domestically and internationally. Any failure by the Company to expand its direct sales force or other distribution channels could have a material adverse effect on the Company's business, operating results and financial condition. 6 The Company believes that its continued growth and profitability will require expansion of its international operations, particularly in Europe, Latin America, and the Pacific Rim. The Company intends to expand its 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 the Company will be successful in attracting and retaining qualified international distributors or that it will be successful in implementing direct sales programs in selected international markets. If the Company is unable to obtain qualified international distribution partners or is otherwise unable to successfully penetrate important international markets, the Company's business, operating results, 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, 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, and trade barriers imposed by foreign countries, any of which could have a material adverse effect on the Company's business, operating results and financial condition. In addition, the Company has only limited experience in developing localized versions of its products and marketing and distributing its products internationally. There can be no assurance that the Company will be able to successfully localize, market, sell, and deliver its products internationally. The inability of the Company to expand its international operations successfully and in a timely manner could have a material adverse effect on the Company's business, operating results, and financial condition. PROFESSIONAL SERVICES AND CUSTOMER SUPPORT The Company's Professional Services group provides technical consulting and training to assist customers in implementing SERVICECENTER. The Company provides a range of consulting services. Basic consulting services include analyzing user requirements and providing the customer with a starter system that will quickly demonstrate significant benefits of SERVICECENTER. More advanced consulting services include providing turn-key implementations using the Company's 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. The Company offers training courses in the implementation and administration of its products. On a periodic basis, the Company offers product training at its facilities in San Diego and London for customers and channel partners. On-site training is available for a fee. The Company maintains a staff of customer service personnel, who provide technical support and training, and periodic software updates to the Company's customers and partners. The Company offers technical support services 24 hours a day, seven days a week through its local offices in Europe and San Diego via toll free lines. In addition to telephone support, the Company provides support via fax, e-mail, and a Web server. COMPETITION The market for the Company's products is highly competitive, fragmented and subject to rapid technological change and frequent new product introductions and enhancements. Competitors vary in size and in the scope and breadth of the products and services offered. The Company encounters competition from a number of sources, including (i) providers of internal help desk software applications such as Remedy Corporation and Software Artistry, Inc., (ii) customer interaction software companies such as Clarify Inc. and The Vantive Corporation, whose products include internal help desk applications, and (iii) large information technology and systems management companies such as IBM and Computer Associates International, Inc. Because barriers to entry in the software market 7 are relatively low, the Company anticipates additional competition from other established and emerging companies as the market for Enterprise Service Desk applications expands. In addition, current and potential competitors have established or may in the future establish cooperative relationships among themselves or with third parties, or large software companies could acquire or establish alliances with smaller competitors of the Company. The Company expects software industry consolidation to occur in the future, and it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. Some of the Company's current and many of its potential competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion, and sale of their products than the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company's 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. 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, operating results 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 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, operating results and financial condition. 8 EMPLOYEES As of March 31, 1997, the Company employed 180 persons, including 68 in sales and marketing, 27 in research and development, 15 in customer support, 31 in professional services, and 39 in finance and administration. Of the Company's employees, 38 are located in Europe and the remainder are located in North America. The Company believes that its future success will depend in part on its continued ability to attract, hire and retain qualified personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to identify, attract, and retain such personnel in the future. None of the Company's employees is represented by a labor union. The Company has not experienced any work stoppages and considers its relations with its employees to be good. ITEM 2. PROPERTIES The Company's principal administrative, sales, marketing, support, research and development and training functions are located at its headquarters facility in San Diego, California. The Company currently occupies 95,110 square feet of space in the San Diego facility, and the lease extends through August 2003. Management believes that its current facilities are adequate to meet its needs through the next twelve months. 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. The Company also leases office space for research and development in Cary, North Carolina and Colorado Springs, Colorado and for sales activities in Houston, Texas. In Europe, the Company leases space in London, Paris, Frankfurt and Copenhagen for European 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's stockholders during the fourth quarter of the year ended March 31, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning the Company's executive officers as of March 31, 1997. NAME AGE POSITION ---- --- -------- Alan H. Hunt . . . . . . 55 President, Chief Executive Officer and Director David A. Farley. . . . . 42 Vice President, Finance, Chief Financial Officer and Director David G. Fisher. . . . . 39 Vice President, Marketing Stephen P. Gardner (1) . 43 Vice President, Strategic Acquisitions Douglas F. Garn. . . . . 38 Vice President, North American Sales William G. Holsten . . . 60 Vice President, Professional Services Richard T. Nelson. . . . 37 Vice President, Secretary, and General Counsel Douglas S. Powanda . . . 40 Vice President, International Sales Charles H. Rudolph . . . 44 Vice President, Research and Development - ------------ (1) Mr. Gardner commenced acting as Vice President, Strategic Acquisitions on May 12, 1997. 9 ALAN H. HUNT has served as the Company's President and Chief Executive Officer and as a member of the Board of Directors since October 1995. From July 1994 until November 1995, Mr. Hunt was President and Chief Executive Officer and a director of XVT Software Inc., a development tools software company ("XVT"). From March 1991 until May 1994, Mr. Hunt was Senior Vice President of Sales and Marketing (North America) for BMC Software, Inc., a vendor of software system utilities for IBM mainframe computing environments ("BMC"). DAVID A. FARLEY has served as the Company's Vice President, Finance, and Chief Financial Officer and as a member of the Board of Directors since October 1995. Mr. Farley served as 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. From December 1984 until October 1994, Mr. Farley held various accounting and financial positions at BMC, most recently as Chief Financial Officer and as a director. DAVID G. FISHER has served as the Company's Vice President, Marketing since April 1996. From March 1993 to April 1996, Mr. Fisher was Vice President of Sales and Marketing for Restrac, Inc., a developer and vendor of recruitment and staffing software applications. From February 1991 to March 1993, Mr. Fisher was Vice President of Worldwide Marketing for Continuum, Inc., a developer and vendor of insurance and banking software applications. STEPHEN P. GARDNER has served as the Company's Vice President, Strategic Acquisitions since May 1997. From May 1996 until May 1997, Mr. Gardner was President of Thunder & Lightning Company, an internet software developer. From March 1995 until May 1996, Mr. Gardner was President of Alpharel, Inc., a document management software company. From March 1993 until March 1995, Mr. Gardner was Vice President of Data General Corporation, a computer hardware company, with various marketing responsibilities. From October 1988 until March 1993, Mr. Gardner held various executive management positions with Groupe Bull, an international network and information technology provider, most recently as President and Founder of that company's Integris Business Unit. DOUGLAS F. GARN has served as the Company's Vice President, North American Sales since April 1996. From July 1995 until April 1996, Mr. Garn was Vice President of Sales with Syntax, Inc., a networking software company. From November 1993 until July 1995, Mr. Garn was Regional Sales Manager with BMC. From May 1992 until November 1993, Mr. Garn was Vice President and General Manager of Sales with NYNEX Mobile Communications, a wireless communications company. WILLIAM G. HOLSTEN has served as the Company's Vice President, Professional Services since November 1995. 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. 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 Vice President, International Sales since September 1995. From June 1994 until September 1995, he served as the Company's Vice President, North American Sales. He was the Company's Director of Sales for Europe from September 1993 until June 1994, Regional Sales Manager from December 1992 to August 1993, and Senior Accounts Manager from February 1992 until December 1992. CHARLES H. RUDOLPH has served as the Company's Vice President, Research and Development since December 1994. From June 1994 until December 1994, Mr. Rudolph served as the Company's Director of Marketing. From April 1993 until June 1994, he served as a director of Step-by-Step, Inc., a computer consulting and training firm. From March 1990 until April 1993, Mr. Rudolph served as President of Pacific Data Products, Inc., a manufacturer of printer enhancement products. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been traded on the Nasdaq National Market under the symbol "PRGN" since the Company's initial public offering in April 1997. Prior to April 1997, there was no established public trading market for the Company's Common Stock. As of May 31, 1997, the Company had issued and outstanding 15,213,057 shares of its Common Stock held by 85 stockholders of record. The Company estimates that there are approximately 1,200 beneficial stockholders. The market price of the Company's Common Stock could be subject to significant fluctuations in the future based on a number of factors, including any shortfall in the Company's revenues or net income from revenues or net income expected by securities analysts; announcements of new products by the Company or its competitors; quarterly fluctuations in the Company's financial results or the results of other software companies, including those of direct competitors of the Company; changes in analysts' estimates of the Company's financial performance, the financial performance of competitors, or the financial performance of software companies in general; general conditions in the software industry; changes in prices for the Company's products or competitors' products; changes in revenue growth rates for the Company or its competitors; and conditions in the financial markets. In addition, the stock market may from time to time experience extreme price and volume fluctuations, which particularly affect the market price for the securities of many technology companies and which have often been unrelated to the operating performance of the specific companies. There can be no assurance that the market price of the Company's Common Stock will not experience significant fluctuations in the future. DIVIDEND POLICY The Company has never declared or paid cash dividends on its capital stock. The Company currently expects to retain future earnings, if any, for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future. The Company's line of credit with NationsBank, as currently in effect, does not contain any restrictive covenant that would limit the Company's ability to pay cash dividends or make stock repurchases. John J. Moores, the Company's majority stockholder, currently guarantees the Company's indebtedness under the line of credit. The Company believes that upon expiration of its credit facility in November 1997, this guarantee will be released and not renewed, and that in connection with any future borrowings by the Company under its credit line, the lender will require the Company to agree to more typical restrictive covenants, including limitations on the Company's ability to pay cash dividends and make stock repurchases. RECENT SALES OF UNREGISTERED SECURITIES From March 31, 1996 to March 31, 1997, the Registrant issued and sold 22,812 shares of Common Stock to employees at prices ranging from $1.34 to $2.34 upon exercise of stock options granted pursuant to Registrant's 1991 Nonqualified Stock Option Plan and its 1994 Stock Option Plan. 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data of the Company presented below as of March 31, 1994, 1995, 1996, and 1997 and for each of the years in the four-year period ended March 31, 1997, are derived 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 selected consolidated financial data of the Company presented below as of March 31, 1993 and for the year ended March 31, 1993 are derived from consolidated financial statements of the Company that were audited by another accounting firm. The consolidated financial statements as of March 31, 1996 and 1997 and for each of the years in the three-year period ended March 31, 1997, 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, -------------------------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues: Licenses. . . . . . . . . . . . . . . . . . $ 6,311 $ 6,714 $ 9,137 $ 11,642 $ 20,472 Maintenance and services. . . . . . . . . . 6,533 9,046 10,491 12,124 14,563 ------- ------- ------- -------- -------- Total revenues. . . . . . . . . . . . . 12,844 15,760 19,628 23,766 35,035 Costs and expenses: Cost of licenses. . . . . . . . . . . . . . 303 322 393 415 215 Cost of maintenance and services. . . . . . 2,165 3,457 3,573 3,526 4,661 Sales and marketing . . . . . . . . . . . . 5,218 6,118 9,549 11,820 15,778 Research and development. . . . . . . . . . 3,983 4,670 7,089 7,742 5,877 General and administrative. . . . . . . . . 1,839 1,898 2,943 4,529 3,816 ------- ------- ------- -------- -------- Total costs and expenses. . . . . . . . 13,508 16,465 23,547 28,032 30,347 Operating income (loss) . . . . . . . . . . . . (664) (705) (3,919) (4,266) 4,688 Interest expense. . . . . . . . . . . . . . . . (122) (118) (112) (389) (451) Other income (expense). . . . . . . . . . . . . 50 88 4,082 103 (27) ------- ------- ------- -------- -------- Income (loss) from continuing operations before income taxes . . . . . . . . . . . . (736) (735) 51 (4,552) 4,210 Income tax benefit. . . . . . . . . . . . . . . - - - - 1,592 ------- ------- ------- -------- -------- Income (loss) from continuing operations. . . . (736) (735) 51 (4,552) 5,802 Loss from discontinued operations: Loss from operations. . . . . . . . . . . . - - - (781) - Loss on disposal. . . . . . . . . . . . . . - - - (1,078) - ------- ------- ------- -------- -------- Loss from discontinued operations . . . - - - (1,859) - ------- ------- ------- -------- -------- Net income (loss) . . . . . . . . . . . . . . . $ (736) $ (735) $ 51 $ (6,411) $ 5,802 ------- ------- ------- -------- -------- ------- ------- ------- -------- -------- Net income (loss) per share . . . . . . . . . . $ (0.52) $ .39 -------- -------- Shares used in per share calculation. . . . . . 12,331 14,964 -------- -------- -------- -------- MARCH 31, -------------------------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (in thousands) BALANCE SHEET DATA: Cash . . . . . . . . . . . . . . . . . . . . $ 385 $ 587 $ 57 $ 437 $ 305 Working capital (deficit) . . . . . . . . . . . (2,300) (3,045) (4,118) (9,697) (4,065) Total assets. . . . . . . . . . . . . . . . . . 4,267 6,689 9,787 13,817 19,738 Borrowings under bank line of credit. . . . . . 300 658 1,315 2,829 1,974 Stockholders' deficit . . . . . . . . . . . . . (2,120) (2,859) (2,197) (8,450) (2,849)
12 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 SERVICECENTER, a suite of software applications for managing the Enterprise Service Desk. The Company was founded in 1981 primarily to provide consulting services for IT management software. In 1987, the Company launched its first software product, PNMS, a product designed to manage and monitor complex mainframe computer networks. In 1995, the Company commenced sales of SERVICECENTER, the Company's Enterprise Service Desk product. SERVICECENTER is currently available for the Windows NT, UNIX and MVS platforms. Since the release of SERVICECENTER in July 1995, SERVICECENTER has accounted for substantially all of the Company's license revenues. In addition, for the year ended March 31, 1997, over 80% of the Company's license sales of SERVICECENTER have been attributable to UNIX and Windows NT platforms. In the latter half of fiscal 1996 and the beginning of fiscal 1997, the Company implemented an internal restructuring to capitalize on the market opportunity for products addressing the requirements of the Enterprise Service Desk. This restructuring included rebuilding the Company's senior management team, redefining the product development strategy, initiating a comprehensive marketing strategy and strengthening the Company's financial and budgeting processes. In addition, in April 1996, the Company substantially reorganized its sales force and instituted new sales management procedures. The Company's revenues are derived from product licensing, maintenance and services. 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. In fiscal 1995, 1996, and 1997, maintenance and services revenues represented 53%, 51%, and 42% of total revenues, respectively. The Company has sold its original PNMS software to a sizable installed base of customers, many of whom have recently transitioned to SERVICECENTER. The Company's installed customer base has generated a consistent level of maintenance revenues. In fiscal 1995, 1996, and 1997, more than 90% of the Company's customers renewed their maintenance agreements. Revenues from license agreements are recognized currently, provided that all of the following conditions are met: a non-cancelable 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 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 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. The Company currently derives substantially all of its license revenues from the sale of SERVICECENTER and expects SERVICECENTER to account for a significant portion of the Company's revenues for the foreseeable future. As a result, the Company's future operating results are dependent upon continued market acceptance of SERVICECENTER, including future enhancements. Factors adversely affecting the pricing of, demand for or market acceptance of SERVICECENTER, such as competition or technological change, could have a material adverse effect on the Company's business, operating results and financial condition. 13 The Company conducts business overseas in a number of foreign currencies, principally the British Pound, the Deutsche Mark and the French Franc. 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. Management does not currently have an active foreign exchange hedging program. Accordingly, to the extent not hedged by obligations denominated in local currencies, the Company's foreign operations are subject to the risks of future foreign currency fluctuations. The Company may implement a foreign currency forward hedging program to mitigate the foreign currency transaction risk in the future. 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, ---------------------------- 1995 1996 1997 -------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues: Licenses. . . . . . . . . . . . . . 46.6% 49.0% 58.4% Maintenance and services. . . . . . 53.4 51.0 41.6 ------ ------ ------ Total revenues. . . . . . . . . 100.0 100.0 100.0 Costs and expenses: Cost of licenses. . . . . . . . . . 2.0 1.7 0.6 Cost of maintenance and services. . 18.2 14.9 13.3 Sales and marketing . . . . . . . . 48.7 49.7 45.0 Research and development. . . . . . 36.1 32.6 16.8 General and administrative. . . . . 15.0 19.1 10.9 ------ ------ ------ Total costs and expenses. . . . 120.0 118.0 86.6 ------ ------ ------ Operating income (loss) . . . . . . . . (20.0) (18.0) 13.4 Interest expense. . . . . . . . . . . . (0.5) (1.6) (1.3) Other income (expense). . . . . . . . . 20.8 0.4 (0.1) ------ ------ ------ Income (loss) from continuing operations before income taxes. . . 0.3 (19.2) 12.0 Income tax benefit. . . . . . . . . . . 0.0 0.0 4.5 ------ ------ ------ Income (loss) from continuing operations. . . . . . . . . . . . . 0.3 (19.2) 16.5 Loss from discontinued operations: Loss from operations. . . . . . . . 0.0 (3.3) 0.0 Loss on disposal. . . . . . . . . . 0.0 (4.5) 0.0 ------ ------ ------ Loss from discontinued operations . . . . . . . . . 0.0 (7.8) 0.0 ------ ------ ------ Net income (loss). . . . . . . . . . . . 0.3% (27.0)% 16.5% ------ ------ ------ ------ ------ ------ 14 FISCAL YEARS ENDED MARCH 31, 1995, 1996, AND 1997 REVENUES Total revenues were $19.6 million, $23.8 million, and $35.0 million in fiscal 1995, 1996, and 1997, respectively, representing year-to-year increases of 21% between 1995 and 1996 and 47% between 1996 and 1997. LICENSES. License revenues were $9.1 million, $11.6 million, and $20.5 million in fiscal 1995, 1996, and 1997, respectively, representing 47%, 49%, and 58% of total revenues in the respective periods. The increases in license revenues are attributable to increased demand for new licenses of SERVICECENTER, additional seats purchased by existing SERVICECENTER customers, higher average transaction sizes, more effective corporate marketing programs, improved sales force productivity and expansion of the Company's international sales force. MAINTENANCE AND SERVICES. Maintenance and services revenues were $10.5 million, $12.1 million, and $14.6 million in fiscal 1995, 1996, and 1997, respectively, representing 53%, 51%, and 42% 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 and maintenance revenues included as part of new licenses and an increased number of consulting engagements related to implementation of software from initial license agreements. COSTS AND EXPENSES COST OF LICENSES. Cost of license revenues was $393,000, $415,000, and $215,000 for fiscal 1995, 1996, and 1997, respectively, representing 4%, 4%, and 1% of total license revenues in the respective periods. COST OF MAINTENANCE AND SERVICES. Cost of maintenance and services revenues was $3.6 million, $3.5 million, and $4.7 million in fiscal 1995, 1996, and 1997, respectively, representing 34%, 29%, and 32% of total maintenance and service revenues in the respective periods. The dollar increase in 1997 is attributable to an increase in customer support personnel and professional services personnel in connection with the corresponding increase in professional services revenue. Cost of maintenance and services decreased as a percentage of related revenues because of improved operating efficiencies. SALES AND MARKETING. Sales and marketing expenses were $9.5 million, $11.8 million, and $15.8 million in fiscal 1995, 1996, and 1997, respectively, representing 49%, 50%, and 45% of total revenues in the respective periods. The increases are attributable to the significant expansion of both the North American and international sales forces and to moderate operating expense increases. 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 $7.1 million, $7.7 million, and $5.9 million in fiscal 1995, 1996, and 1997, respectively, representing 36%, 33%, and 17% of total revenues in the respective periods. The increase from fiscal 1995 to fiscal 1996 is due primarily to the hiring of additional mainframe software developers, which was offset, in part, by the Company's divestiture of the entire mainframe software development portion of its business in October 1995. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.9 million, $4.5 million, and $3.8 million in fiscal 1995, 1996, and 1997, respectively, representing 15%, 19%, and 11% of total revenues in the respective periods. The increase from fiscal 1995 to 1996 is attributable primarily to administrative personnel additions to support growth and costs associated with a management restructuring. The decrease from fiscal 1996 to 1997 was attributable to the costs incurred in the fiscal 1996 management restructuring. 15 OTHER INCOME In fiscal 1995, the Company sold the rights to one of its software products, resulting in other income of $4.0 million. The purchase price from the product sale is payable to the Company in annual installments ending in fiscal 1998. PROVISION FOR INCOME TAXES/INCOME TAX BENEFIT The Company has not incurred any significant income taxes during fiscal 1995 and 1996 due to operating losses. 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 carry-forwards as an offset against taxable income. As of March 31, 1997, the Company had net operating loss carry-forwards of approximately $290,000 for federal tax reporting purposes which expire beginning in 2004. Utilization of the net operating losses may be subject to annual limitations resulting from certain changes in ownership of the Company. 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. DISCONTINUED OPERATIONS During fiscal 1996, the Company acquired XVT Software Inc. ("XVT"), substantially all of the outstanding equity of which was owned by the majority stockholder of the Company. In January 1996, the Company determined that maintaining an interest in XVT was not consistent with the Company's business strategy and adopted a plan to discontinue the operations of XVT. The Company incurred a loss from discontinued operations of XVT in fiscal 1996 of $1.9 million. IMPACT OF INFLATION The effect of inflation on the Company's financial position has not been significant to date. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations through bank borrowings and private sales of Common Stock. In fiscal 1995 and 1996, the Company received net proceeds from bank borrowings of $194,000 and $3.7 million. In fiscal 1997, the Company's net repayments totaled $1.3 million. In fiscal 1995 and fiscal 1997, the Company received proceeds of $2.9 million and $700,000, respectively, from the sale of a product line. In fiscal 1995, 1996, and 1997, the Company invested cash in the amounts of $1.8 million, $3.5 million, and $566,000, respectively, for purchases of property and equipment including computer hardware and software to support the Company's growing employee base and to relocate to its new San Diego headquarters and training facility. In fiscal 1995, the Company used $1.6 million of cash in its operating activities. In fiscal 1996, the Company generated $584,000 in cash from operations, but a net cash use of $738,000 by a discontinued business resulted in an overall cash use by the Company of $154,000 in connection with operating activities. 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. The Company has a $4.5 million revolving credit line which expires November 30, 1997, and a term loan from the same bank with an unpaid principal balance of $1.6 million at March 31, 1997 payable in equal monthly installments of $37,000 plus interest at the bank's prime rate with the final payment due November 2000. The Company's revolving credit line had an outstanding balance at March 31, 1997 of $2.0 million with a variable annual interest rate equal to the prime rate announced by NationsBank of Texas, N.A. The term loan is secured by trade 16 receivables and fixed assets of the Company and the revolving credit line is secured by accounts receivable, equipment and certain other assets of the Company. Both facilities are personally guaranteed by the Company's majority stockholder. Both the credit line and term loan were repaid from proceeds of the Company's April 1997 initial public offering. The Company believes that the net proceeds from its initial public offering in April 1997, together with its current cash balances, cash available under its bank facilities 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 additional equity or debt financing, which may not be available on commercially reasonable terms or which may be dilutive. 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: LIMITED PROFITABILITY; HISTORY OF OPERATING LOSSES. The Company has recorded cumulative net losses of approximately $15.8 million through March 31, 1997. In recent years, the Company's product line has changed substantially. The Company's SERVICECENTER product, from which the Company derived substantially all of its license revenues for the year ended March 31, 1997, only began shipping in mid-1995. As a result, prediction of the Company's future operating results is difficult, if not impossible. Although the Company achieved profitability during each of the quarters in the year ended March 31, 1997, that profitability is of limited history. In addition, that profitability has fluctuated extensively. For these reasons, there can be no assurance that the Company will be able to remain profitable on a quarterly basis or maintain profitability on an annual basis. In addition, the Company does not believe that the growth in revenues it has experienced in recent years is necessarily 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; 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 17 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. In addition, the sales cycle is typically extended 90 days for product sales through indirect channels. 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. PRODUCT CONCENTRATION; DEPENDENCE ON MARKET ACCEPTANCE OF ENTERPRISE SERVICE DESK SOFTWARE. The Company currently derives substantially all of its license revenues from the sale of SERVICECENTER and expects SERVICECENTER to account for a significant portion of the Company's revenues for the foreseeable future. As a result, the Company's future operating results are dependent upon continued market acceptance of SERVICECENTER, including future enhancements. Factors adversely affecting the pricing of, demand for, or market acceptance of SERVICECENTER, such as competition or technological change, could have a material adverse effect on the Company's business, operating results and financial condition. 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. The market for Enterprise Service Desk software is relatively new and is characterized by ongoing technological developments, frequent new product announcements and introductions, evolving industry standards and changing customer requirements. The Company's future financial performance will depend in part on continued growth in the number of organizations implementing Enterprise Service Desk solutions. DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT 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. None of the Company's employees, including its senior management, is bound by an employment or non-competition agreement, and the Company does not 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. In addition, several of the Company's executive officers, including its President and Chief Executive Officer, Chief Financial Officer, and certain operating vice presidents, have been employed by the Company for a relatively short period of time. Since joining the Company, the new management team has devoted substantial effort in refocusing the Company's product, sales and marketing strategies. In connection with such changes, the Company restructured its sales and marketing departments, which resulted in the replacement of a significant number of employees. Although management believes that this restructuring has benefitted the Company, many of the Company's current employees have been with the Company for only a limited period of time. In addition, the Company believes that its future success will depend in large part on its 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 the Company has at times in the past experienced difficulty in recruiting qualified personnel. New employees hired by the Company generally require substantial training in the use and implementation of the Company's products. There can be no assurance that the Company will be successful in attracting and retaining such personnel, and the failure to do so could have a material adverse effect on the Company's business, operating results and financial condition. 18 COMPETITION. The market for the Company's products is highly competitive, fragmented and subject to rapid technological change and frequent new product introductions and enhancements. Competitors vary in size and in the scope and breadth of the products and services offered. The Company encounters competition from a number of sources, including (i) providers of internal help desk software applications such as Remedy Corporation and Software Artistry, Inc., (ii) customer interaction software companies such as Clarify Inc. and The Vantive Corporation, whose products include internal help desk applications, and (iii) large information technology and systems management companies such as International Business Machines Corporation ("IBM") and Computer Associates International, Inc. Because barriers to entry in the software market are relatively low, the Company anticipates additional competition from other established and emerging companies as the market for Enterprise Service Desk applications expands. In addition, current and potential competitors have established or may in the future establish cooperative relationships among themselves or with third parties. The Company expects software industry consolidation to occur in the future, and it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. Some of the Company's current and many of its potential competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company's business, operating results and financial condition. MANAGEMENT OF GROWTH. The Company's business has grown substantially in recent periods, with total revenues increasing from $19.6 million in fiscal 1995 to $23.8 million in fiscal 1996 and to $35.0 million in fiscal 1997. If the Company is successful in achieving its growth plans, such growth is likely to place a significant burden on the Company's operating and financial systems, resulting in increased responsibility for senior management and other personnel within the Company. The Company's ability to compete effectively and to manage future growth, if any, and its future operating results will depend in part on the ability of its officers and other key employees to implement and expand operational, customer support and financial control systems and to expand, train and manage its employee base. There can be no assurance that the Company's existing management or any new members of management will be able to augment or improve existing systems and controls or implement new systems and controls in response to future growth, if any. The Company's failure to do so could have a material adverse effect on the Company's business, operating results and financial condition. EXPANSION OF DISTRIBUTION CHANNELS. The Company has historically sold its products through its direct sales force and a limited number of distributors and has provided maintenance and support services through its technical and customer support staff. The Company is currently investing and intends to continue to invest significant resources in developing additional sales and marketing channels through system integrators and original equipment manufacturers ("OEMs") and other channel partners. There can be no assurance that the Company will be able to attract channel partners that will be able to market the Company's products effectively and will be qualified to provide timely and cost-effective customer support and service. To the extent the Company establishes distribution through such indirect channels, its agreements with channel partners may not be exclusive and such channel partners may also carry competing product lines. Any failure by the Company to establish and maintain such distribution relationships could have a material adverse effect on the Company's business, operating results and financial condition. INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. International sales represented approximately 29% of the Company's total revenues in both fiscal 1996 and fiscal 1997, respectively. The Company currently has international sales offices in London, Paris, Frankfurt and Copenhagen. The Company believes that its continued growth and profitability will require expansion of its international operations, particularly in Europe, Latin America and the Pacific Rim. Accordingly, the Company intends to expand its international operations and enter additional international markets, which will require significant management attention and financial resources. In addition, the Company's international operations are subject to a variety of risks associated with conducting business internationally, including fluctuations in currency exchange rates, longer payment cycles, difficulties in staffing and managing international operations, problems in collecting accounts receivable, seasonal reductions in business 19 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 the Company's business, operating results and financial condition. In addition, the Company has only limited experience in developing localized versions of its products and marketing and distributing its products internationally. There can be no assurance that the Company will be able to successfully localize, market, sell and deliver its products internationally. The inability of the Company to expand its international operations successfully and in a timely manner could have a material adverse effect on the Company's business, operating results and financial condition. A significant portion of the Company's business is conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which the Company conducts its business relative to the U.S. dollar have caused and will continue to cause currency transaction gains and losses. Due to the substantial volatility of currency exchange rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurance that the Company will not experience currency losses in the future. The Company has not previously undertaken hedging transactions to cover its currency exposure but may hedge a portion of its currency exposure in the future as management deems appropriate. 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 Not applicable. 20 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 1997 Annual Meeting of Stockholders to be held on August 12, 1997, 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. 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following statements are filed as part of this Report: Page ---- Report of Independent Public Accountants............. F-2 Balance Sheets....................................... F-3 Statements of Operations............................. F-4 Statements of Stockholders' Deficit.................. F-5 Statements of Cash Flows............................. F-6 Notes to 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 (b) Amended and Restated Certificate of Incorporation filed with the Secretary of State of Delaware on February 11, 1997. 3.2 (b) Bylaws, as amended. 4.1 (b) Specimen Common Stock Certificate. 10.1 (b) Nonqualified Stock Option Plan, as amended, and forms of Stock Option Agreement and Stock Buy-Sell Agreement. 10.2 (b) 1991 Nonqualified Stock Option Plan, as amended, and forms of Stock Option Agreement and Stock Buy-Sell Agreement. 10.3 (a) 1994 Stock Option Plan, as amended through February 6, 1997, including 1995 Stock Option Plan for French Employees. 10.4 (a) Form of Stock Option Agreement under 1994 Stock Option Plan, as amended through February 6, 1997. 10.5 (a) 1997 Employee Stock Purchase Plan and forms of participation agreement thereunder. 10.6 (a) 1997 Director Option Plan. 10.7 (b) Form of Indemnification Agreement for directors and officers. 10.8 (b) Loan Agreement dated November 13, 1995 by and between the Registrant and NationsBank of Texas, N.A., as amended through December 16, 1996. 10.9 (b) Sublease between the Registrant and JMI Services, Inc. 10.10 (b) 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 (b) Lease between the Registrant and the Mutual Life Insurance Company of New York dated October 26, 1994, as amended in August 1995, and Notification of Assignment dated December 9, 1996 for the Registrant's headquarters at 12680 High Bluff Drive, San Diego, CA. 10.14 (b) XVT Stock Option Agreement dated January 18, 1995 between the Registrant and Christopher Cole, as amended on October 3, 1996. 10.15 (c) Restricted Stock Agreement dated November 1, 1995 between the Registrant and Alan Hunt. 22 10.16 (c) Restricted Stock Agreement dated November 1, 1995 between the Registrant and David Farley. 10.17 (b) Stock Option Agreement dated as of December 7, 1990 between the Registrant and Christopher Cole as amended on October 26, 1995. 10.18 (b) Form of Stock Option Agreement under 1995 Stock Option Plan for French Employees. 10.19 (b) Form of Stock Option Agreement under 1997 Director Option Plan. 10.20 (b) Continuing and Unconditional Guaranty dated November 13, 1995 between NationsBank of Texas, N.A. and John Moores, as amended through December 16, 1996. 10.21 (b) Promissory Note dated December 16, 1996 delivered by the Registrant to NationsBank of Texas, N.A. 10.22 (b) Revolving Promissory Note dated December 16, 1996 delivered by the Registrant to NationsBank of Texas, N.A. 10.23 (b) Security Agreement dated November 13, 1995 between the Registrant and NationsBank of Texas, N.A. 11.1 (a) Calculation of earnings per share. 21.1 (b) List of Subsidiaries of the Registrant. 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. 333-21483), which the Securities and Exchange Commission declared effective on April 8, 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. The Registrant has received confidential treatment with respect to certain portions of this exhibit. Such portions have been omitted from this exhibit and have been filed separately with the Securities and Exchange Commission. _________________________ (b) REPORTS ON FORM 8-K The Registrant filed no Current Reports on Form 8-K during the year ended March 31, 1997. (c) EXHIBITS See Item 14(a)(3) above. (d) FINANCIAL STATEMENT SCHEDULES See Item 14(a)(2) above. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Diego, California, this 27th day of June, 1997. PEREGRINE SYSTEMS, INC. By /s/ Alan H. Hunt ------------------------------------- Alan H. Hunt President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS ALAN H. HUNT 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/ Alan H. Hunt President, Chief June 27, 1997 ------------------------- Executive Officer, and (Alan H. Hunt) Director (Principal Executive Officer) /s/ David A. Farley Vice President, June 27, 1997 ------------------------- Finance, Chief Financial (David A. Farley) Officer (Principal Financial and Accounting Officer) /s/ John J. Moores Chairman of the ------------------------- Board of Directors June 27, 1997 (John J. Moores) /s/ Christopher A. Cole Director June 27, 1997 ------------------------- (Christopher A. Cole) /s/ Richard A. Hosley II Director June 27, 1997 ------------------------- (Richard A. Hosley II) /s/ Charles E. Noell III Director June 27, 1997 ------------------------- (Charles E. Noell III) /s/ Norris van den Berg Director June 27, 1997 ------------------------- (Norris van den Berg) 24 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' 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, 1996 and 1997, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended March 31, 1997. 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, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Diego, California April 21, 1997 F-2 PEREGRINE SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, --------------------- 1996 1997 -------- -------- ASSETS Current Assets: Cash . . . . . . . . . . . . . . . . . . . . . $ 437,000 $ 305,000 Accounts receivable, net of allowance for doubtful accounts of $130,000 and $220,000, respectively . . . . . . . . . . . . . . . . 6,255,000 10,191,000 Financed receivables. . . . . . . . . . . . . . - 1,182,000 Deferred tax assets.. . . . . . . . . . . . . . - 1,752,000 Other current assets. . . . . . . . . . . . . . 1,461,000 924,000 ----------- ----------- Total current assets. . . . . . . . . . . 8,153,000 14,354,000 Property and Equipment, net. . . . . . . . . . . . 5,349,000 4,364,000 Other Assets . . . . . . . . . . . . . . . . . . . 315,000 1,020,000 ----------- ----------- $13,817,000 $19,738,000 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Bank line of credit . . . . . . . . . . . . . . $ 2,829,000 $ 1,974,000 Accounts payable. . . . . . . . . . . . . . . . 1,415,000 916,000 Accrued expenses. . . . . . . . . . . . . . . . 3,621,000 6,079,000 Deferred revenue. . . . . . . . . . . . . . . . 7,568,000 8,419,000 Current portion of long-term debt . . . . . . . 537,000 497,000 Current portion of capital lease obligation . . 407,000 364,000 Net liabilities of discontinued operation . . . 1,473,000 170,000 ----------- ----------- Total current liabilities. . . . . . . . . . 17,850,000 18,419,000 Capital Lease Obligation, net of current portion . 332,000 - Long-Term Debt, net of current portion . . . . . . 1,842,000 1,395,000 Deferred Revenue, net of current portion . . . . . 2,243,000 2,773,000 ----------- ----------- Total liabilities . . . . . . . . . . . . 22,267,000 22,587,000 ----------- ----------- Commitments and Contingencies Stockholders' Deficit: Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding . . . . . . . . . . . . . . . - - Common stock, $0.001 par value, 50,000,000 shares authorized, 12,898,000 and 12,920,000 shares issued and outstanding, respectively. . . . . . . . . . . . . . . 13,000 13,000 Additional paid-in capital . . . . . . . . . 14,413,000 15,081,000 Accumulated deficit. . . . . . . . . . . . . (21,609,000) (15,807,000) Unearned portion of deferred compensation. . (1,404,000) (1,748,000) Cumulative translation adjustment. . . . . . 137,000 (388,000) ----------- ----------- Total stockholders' deficit. . . . . . (8,450,000) (2,849,000) ----------- ----------- $13,817,000 $19,738,000 ----------- ----------- ----------- ----------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3 PEREGRINE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, -------------------------------------- 1995 1996 1997 -------- -------- -------- Revenues: Licenses . . . . . . . . . . . . . . . . . . . . $ 9,137,000 $11,642,000 $20,472,000 Maintenance and services . . . . . . . . . . . . . 10,491,000 12,124,000 14,563,000 ----------- ----------- ----------- Total revenues. . . . . . . . . . . . . . . . . 19,628,000 23,766,000 35,035,000 ----------- ----------- ----------- Costs and Expenses: Cost of licenses . . . . . . . . . . . . . . . . . 393,000 415,000 215,000 Cost of maintenance and services . . . . . . . . . 3,573,000 3,526,000 4,661,000 Sales and marketing. . . . . . . . . . . . . . . . 9,549,000 11,820,000 15,778,000 Research and development . . . . . . . . . . . . . 7,089,000 7,742,000 5,877,000 General and administrative . . . . . . . . . . . . 2,943,000 4,529,000 3,816,000 ----------- ----------- ----------- Total costs and expenses. . . . . . . . . . . . 23,547,000 28,032,000 30,347,000 ----------- ----------- ----------- Operating income (loss) . . . . . . . . . . . . (3,919,000) (4,266,000) 4,688,000 Interest expense. . . . . . . . . . . . . . . . . . . (112,000) (389,000) (451,000) Other income (expense). . . . . . . . . . . . . . . . 4,082,000 103,000 (27,000) ----------- ----------- ----------- Income (loss) from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . 51,000 (4,552,000) 4,210,000 Income tax benefit. . . . . . . . . . . . . . . . . . - - 1,592,000 ----------- ----------- ----------- Income (loss) from continuing operations. . . . . . . 51,000 (4,552,000) 5,802,000 ----------- ----------- ----------- Loss from discontinued business: Loss from operations . . . . . . . . . . . . . . . - (781,000) - Loss on disposal . . . . . . . . . . . . . . . . . - (1,078,000) - ----------- ----------- ----------- Loss from discontinued business . . . . . . . . . . . - (1,859,000) - ----------- ----------- ----------- Net income (loss) . . . . . . . . . . . . . . . $ 51,000 $(6,411,000) $ 5,802,000 ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) per share: Income (loss) from continuing operations . . . . . $ - $ (0.37) $ 0.39 Loss from discontinued operations. . . . . . . . . - (0.15) - ----------- ----------- ----------- Net income (loss) . . . . . . . . . . . . . . . $ - $ (0.52) $ 0.39 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common and common equivalent shares outstanding. . . . . . . . . . . . . . . . . . . . 12,250,000 12,331,000 14,964,000 ----------- ----------- ----------- ----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4 PEREGRINE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
UNEARNED NUMBER ADDITIONAL PORTION CUMULATIVE TOTAL OF SHARES COMMON PAID-IN ACCUMULATED OF STOCK TRANSLATION STOCK-HOLDERS' OUTSTANDING STOCK CAPITAL DEFICIT COMPENSATION ADJUSTMENT DEFICIT ----------- ------- ---------- ------------ ------------ ----------- -------------- Balance, March 31, 1994 . . . 10,012,000 $10,000 $ 8,519,000 $(11,324,000) $ - $ (64,000) $(2,859,000) Net income . . . . . . . - - - 51,000 - - 51,000 Issuance of common stock. 225,000 - 525,000 - - - 525,000 Equity adjustment from foreign currency translation. . . . . . . - - - - - 86,000 86,000 ----------- ------- ----------- ------------ ----------- --------- ----------- Balance, March 31, 1995 . . . 10,237,000 10,000 9,044,000 (11,273,000) - 22,000 (2,197,000) Net loss. . . . . . . . . - - - (6,411,000) - - (6,411,000) Issuance of shares for XVT. . . . . . . . . 2,018,000 2,000 3,923,000 (3,925,000) - - - Issuance of common stock . . . . . . . . . 43,000 - 43,000 - - - 43,000 Restricted stock shares granted . . . . . 600,000 1,000 1,403,000 - (1,404,000) - - Equity adjustment from foreign currency translation. . . . . . . - - - - - 115,000 115,000 ----------- ------- ----------- ----------- ----------- --------- ----------- Balance, March 31, 1996 . . . 12,898,000 13,000 14,413,000 (21,609,000) (1,404,000) 137,000 (8,450,000) Net income. . . . . . . . - - - 5,802,000 - - 5,802,000 Issuance of common stock. . . . . . . . . . 22,000 - 37,000 - - - 37,000 Compensation expense related to restricted stock and options. . . . - - - - 287,000 - 287,000 Deferred compensation related to options granted. . . . . . . . . - - 631,000 - (631,000) - - Equity adjustment from foreign currency translation. . . . . . . - - - - - (525,000) (525,000) ----------- ------- ----------- ------------ ----------- ----------- ----------- Balance, March 31, 1997 . . . 12,920,000 $13,000 $15,081,000 $(15,807,000) $(1,748,000) $(388,000) $(2,849,000) ----------- ------- ----------- ------------ ----------- ---------- ----------- ----------- ------- ----------- ------------ ----------- ---------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5 PEREGRINE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, ------------------------------------------ 1995 1996 1997 ------------ ------------ ----------- Cash flow from operating activities: Net income (loss) . . . . . . . . . . . . . $ 51,000 $(6,411,000) $ 5,802,000 Adjustments to reconcile net income (loss) to net cash, excluding effects of acquisitions, provided by (used in) operating activities: Depreciation and amortization . . . . . . . 952,000 1,540,000 1,838,000 Loss from discontinued business. . . . . - 1,859,000 - Gain on sale of fixed assets . . . . . - (93,000) - Gain on sale of product line . . . . . (4,025,000) - - Increase (decrease) in cash resulting from changes in: Accounts receivable. . . . . . . . . . (305,000) (2,416,000) (3,936,000) Financed receivables . . . . . . . . . - - (1,182,000) Deferred tax asset . . . . . . . . . . - - (1,752,000) Other current assets . . . . . . . . . (480,000) 311,000 (163,000) Accounts payable . . . . . . . . . . . 744,000 714,000 (499,000) Accrued expenses . . . . . . . . . . . 101,000 2,464,000 2,458,000 Deferred revenue . . . . . . . . . . . 1,282,000 2,364,000 1,381,000 Other. . . . . . . . . . . . . . . . . 113,000 252,000 (705,000) ------------ ----------- ----------- (1,567,000) 584,000 3,242,000 ------------ ----------- ----------- Net cash used by discontinued business - (738,000) (1,303,000) Net cash provided by (used in) ------------ ----------- ----------- operating activities . . . . . . . (1,567,000) (154,000) 1,939,000 ------------ ----------- ----------- Cash flows from investing activities: Purchases of property and equipment . . . . (1,775,000) (3,516,000) (566,000) Proceeds from sale of product line. . . . . 2,925,000 - 700,000 Proceeds from sale of subsidiary and fixed assets, net . . . . . . . . . . . . - 653,000 - Acquisition of certain business assets, net of cash acquired . . . . . . . . . . . (304,000) - - ------------ ----------- ----------- Net cash provided by (used in) investing activities. . . . . . . 846,000 (2,863,000) 134,000 ------------ ----------- ----------- Cash flows from financing activities: Proceeds (repayment) on bank line of credit, net. . . . . . . . . . . . . . . . 657,000 1,514,000 (855,000) Proceeds from long-term debt. . . . . . . . - 3,508,000 287,000 Repayments of long-term debt. . . . . . . . (463,000) (1,354,000) (774,000) Issuance of common stock. . . . . . . . . . - 15,000 37,000 Principal payments under capital lease obligation . . . . . . . . . . . . . (89,000) (401,000) (375,000) ------------ ----------- ----------- Net cash provided by (used in) financing activities. . . . . . . . 105,000 3,282,000 (1,680,000) ------------ ----------- ----------- Effect of exchange rate changes on cash . . . 86,000 115,000 (525,000) ------------ ----------- ----------- Net increase (decrease) in cash . . . . . . . (530,000) 380,000 (132,000) Cash, beginning of year . . . . . . . . . . . 587,000 57,000 437,000 ------------ ----------- ----------- Cash, end of year $ 57,000 $ 437,000 $ 305,000 ------------ ----------- ----------- ------------ ----------- -----------
F-6 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest . . . . . . . . . . . . . . . . $ 131,000 $ 389,000 $ 400,000 Income taxes . . . . . . . . . . . . . . $ 99,000 $ 36,000 $ 27,000 Supplemental Disclosure of Non Cash Investing and Financing Activities: Stock issued for acquisition. . . . . . . . . $ - $3,925,000 $ - Common stock issued for acquisition of business assets . . . . . . . . . . . . . $ 525,000 $ - $ - Liabilities assumed in acquisition of certain business assets . . . . . . . . . $ 103,000 $ - $ - Fixed assets acquired under capital lease . . $1,229,000 $ - $ - 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 Enterprise Service Desk software. The Company develops, markets and supports SERVICECENTER, an integrated suite of applications that automates the management of complex, enterprise-wide information technology ("IT") infrastructures. SERVICECENTER is specifically designed to address the IT management requirements of large organizations and is distinguished by its breadth of functionality and its ability to be deployed across all major hardware platforms and network operating systems and protocols. SERVICECENTER utilizes advanced client/server and sophisticated intelligent agent technologies as well as a unique modular architecture to enable customers to meet their strategic objectives, effectively leverage existing IT investments and reduce the cost of IT management. The Company sells its software and services in both North America and internationally primarily through a direct sales force. 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. 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. In 1996, the American Institute of Certified Public Accountants issued "Statement of Position: Software Revenue Recognition," which will be effective for years beginning after December 31, 1996. The Company has reviewed the statement of position and believes its adoption will not have a material effect on the Company's financial position or results of operations. 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 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. F-8 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 service revenues consists primarily of salaries, benefits, and allocated overhead costs incurred in providing telephone support, consulting services, and training to customers. 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 from its SERVICECENTER product and related services. Any factor adversely affecting the pricing of, demand for or market acceptance of, the SERVICECENTER product could have a material adverse affect on the Company's business, financial condition and results of operations. See "Factors that May Affect Future Results" in Management's Discussion and Analysis of Financial Condition and Results of Operations for a more complete analysis of risks affecting the Company's business. 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, capital lease obligations and borrowings under the Company's line of credit approximates fair value. FINANCED RECEIVABLES Financed receivables represent trade accounts receivable for which the original payment terms extend beyond the Company's customary net 30 payment terms. These receivables are substantially all due within the next twelve months. Amounts due greater than one year from the balance sheet date are included in other assets in the accompanying consolidated financial statements. The majority of these long-term receivables relate to items included in long-term deferred revenues. 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. 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, 1997, 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. F-9 FOREIGN CURRENCY TRANSLATION 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' deficit. 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 does not enter into foreign exchange transactions to hedge its balance sheet exposures or intercompany balances against movements in foreign exchange rates. 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 Net income (loss) per share is computed using the weighted average number of common and common equivalent shares outstanding during the periods. Common equivalent shares are included in the per share calculations where the effect of their inclusion would be dilutive. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which changes the method of calculating earnings per share. SFAS 128 is effective for financial statements issued after December 15, 1997. The earnings per share of the Company for the year ended March 31, 1997 would not be materially different under SFAS 128 as that presented therein. 2. DISCONTINUED OPERATION During fiscal 1996, the Company acquired XVT Software Inc. ("XVT"), with the Company issuing approximately 2,019,000 shares of its common stock in exchange for all of XVT's issued and outstanding shares of common and preferred stock. Effective June 1, 1995 the majority stockholder of the Company controlled substantially all of the issued and outstanding shares of XVT. Due to the common majority ownership of the two companies, XVT's results of operations were consolidated with Peregrine effective June 1, 1995. XVT's acquired assets and liabilities were accounted for at historical cost. On the date of the acquisition, XVT's liabilities exceeded its assets by approximately $915,000. In January 1996, management of the Company determined that maintaining an interest in XVT was not consistent with the Company's business strategy, primarily as a result of, among other things, the dissimilarity of the companies business operations, customer bases, technology, products and services. Accordingly, at that time, the Company's Board of Directors adopted a plan to discontinue the operations of XVT. As a result of this decision, XVT has been presented as a discontinued operation in the accompanying consolidated financial statements. In September 1996, the Company sold substantially all of the net assets of XVT (including $200,000 in cash transferred to the buyer at closing) in exchange for a $600,000, 9.25% nonrecourse note receivable. Due to thin capitalization of XVT and XVT's poor historical financial performance, the Company has provided a full valuation allowance against this note receivable. The Company will reduce this valuation allowance as cash is received. In order to secure its interest in this note the Company has retained a right of first refusal in the event any subsequent changes in control over XVT's assets or business. This right expires in September 2001. The loss on disposal of approximately F-10 $1,100,000, as reflected in the accompanying consolidated statement of operations, includes the loss on the sale of the net assets of approximately $1,200,000 reduced by the results of operations from February 1, 1996 through the date of disposal. The operating results of the discontinued operation are summarized as follows: JUNE 1, 1995- JANUARY 31, 1996 ---------------- Revenues . . . . . . . . . . . . . . . . . $8,483,000 ---------- ---------- Net loss . . . . . . . . . . . . . . . . . $ (781,000) ---------- ---------- The net liabilities of the discontinued operation as of March 31, 1996 and March 31, 1997 are summarized as follows: MARCH 31, ----------------------- 1996 1997 ---------- ---------- Current assets, primarily accounts receivable . . . $1,600,000 $ - Non current assets. . . . . . . . . . . . . . . . . 1,053,000 - Current liabilities, primarily deferred revenue and accrued expenses. . . . . . . . . . . . . . . 4,126,000 170,000 ---------- ---------- Net liabilities of discontinued operation . . . . . $1,473,000 $ 170,000 ---------- ---------- ---------- ---------- 3. BALANCE SHEET COMPONENTS Other current assets consist of the following: MARCH 31, ----------------------- 1996 1997 ---------- ---------- Receivable from sale of product line (Note 4) . . . $ 950,000 $ 400,000 Prepaid expenses and other. . . . . . . . . . . . . 393,000 326,000 Employee advances . . . . . . . . . . . . . . . . . 118,000 198,000 ---------- ---------- $1,461,000 $ 924,000 ---------- ---------- ---------- ---------- Property and equipment consists of the following: MARCH 31, ----------------------- 1996 1997 ---------- ---------- Furniture and equipment. . . . . . . . . . . . . . $6,835,000 $7,319,000 Leasehold improvements . . . . . . . . . . . . . . 1,881,000 1,963,000 ---------- ---------- 8,716,000 9,282,000 Less accumulated depreciation. . . . . . . . . . . (3,367,000) (4,918,000) ---------- ---------- $5,349,000 $4,364,000 ---------- ---------- ---------- ---------- Accrued expenses consist of the following: MARCH 31, ----------------------- 1996 1997 ---------- ---------- Salaries and benefits. . . . . . . . . . . . . . . $ 888,000 $1,631,000 Commissions. . . . . . . . . . . . . . . . . . . . 834,000 2,499,000 Deferred rent . . . . . . . . . . . . . . . . . . 290,000 356,000 Taxes. . . . . . . . . . . . . . . . . . . . . . . 227,000 558,000 Other. . . . . . . . . . . . . . . . . . . . . . . 1,382,000 1,035,000 ---------- ---------- $3,621,000 $6,079,000 ---------- ---------- ---------- ---------- F-11 4. SALE OF PRODUCT LINE In April 1994, the Company sold the rights to one of its products for $4,025,000. The gain on the sale of the software product right of $4,025,000 is included in other income in the March 31, 1995 consolidated statement of operations. Amounts due the Company from the sale at March 31, 1996 and March 31, 1997 were $1,100,000 and $400,000, respectively. 5. EMPLOYEE ADVANCES During fiscal 1995, the Company advanced its former President and Chief Executive Officer and another employee amounts which were expected to be repaid from future bonuses and commissions, as earned. During fiscal 1996, all advances to the former President and Chief Executive Officer totaling $420,000 were forgiven and charged to operations. 6. DEBT LINE OF CREDIT At March 31, 1997, the Company had a line of credit agreement which expires November 30, 1997. The line of credit facility provides for maximum borrowings of $4,500,000. The maximum available commitment is reduced by outstanding letters of credit ($128,000 at March 31, 1997). Borrowings under the agreement bear interest at the bank's prime rate (8.5% at March 31, 1997). During the year ended March 31, 1997, the weighted average interest rate under the agreement was approximately 8.4%, with interest only payable monthly. The line of credit is personally guaranteed by the Company's majority stockholder and is collateralized by the Company's accounts receivable, equipment and certain other assets. Amounts outstanding under the line of credit were repaid in April 1997 using the proceeds received from the Company's initial public offering. See Note 13. LONG-TERM DEBT Long-term debt consists of the following: MARCH 31, ----------------------- 1996 1997 ---------- ---------- Note payable to bank. Note secured by trade receivables, fixed assets and guaranteed by the majority stockholder. Interest at prime (8.5% as of March 31, 1997). Equal monthly installments of principal of $37,000 plus interest, due November 13, 2000 . . . . . . . . . . . . . . . $2,017,000 $1,612,000 Note payable to lessor. Unsecured; interest at 8%. Monthly payments of principal and interest of $4,200 through November 2003. . . . . . . . . . . . 285,000 234,000 Other. . . . . . . . . . . . . . . . . . . . . . . . . 77,000 46,000 ---------- ---------- 2,379,000 1,892,000 Less current portion . . . . . . . . . . . . . . . . . (537,000) (497,000) ---------- ---------- $1,842,000 $1,395,000 ---------- ---------- ---------- ---------- Scheduled principal payments on long-term debt due as of March 31 are as follows: 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 497,000 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 473,000 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 476,000 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . 332,000 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . 114,000 ---------- $1,892,000 ---------- ---------- Amounts outstanding under the note payable to bank were repaid in April 1997 using the proceeds received from the Company's initial public offering. See Note 13. F-12 7. INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets are as follows: MARCH 31, ------------------------ 1996 1997 ----------- ----------- Deferred tax assets: Net operating loss carryforwards . . . . . . . $ 2,942,000 $ 1,356,000 Deferred maintenance revenue . . . . . . . . . 1,158,000 1,148,000 Other. . . . . . . . . . . . . . . . . . . . . 617,000 960,000 ----------- ----------- 4,717,000 3,464,000 Deferred tax liabilities: Depreciation . . . . . . . . . . . . . . . . . (135,000) (295,000) Deferred revenue . . . . . . . . . . . . . . . (440,000) (160,000) ----------- ----------- 4,142,000 3,009,000 Valuation allowance. . . . . . . . . . . . . . . (4,142,000) (1,257,000) ----------- ----------- Total deferred tax assets. . . . . . . . . . . . $ - $ 1,752,000 ----------- ----------- ----------- ----------- A reconciliation between expected income taxes using the statutory federal income tax rate to the effective income tax provision is as follows:
MARCH 31, ------------------------------------------------- 1995 1996 1997 RATE --------- ----------- ----------- --------- Federal statutory rate . . . . . . . $ 31,000 $(2,180,000) $ 980,000 34.00% State tax, net of federal benefit. . 5,000 (385,000) 173,000 6.00% Imputed interest . . . . . . . . . . 85,000 75,000 108,000 3.75% Foreign losses (not benefited) . . . 759,000 418,000 - - Other. . . . . . . . . . . . . . . . (27,000) 152,000 32,000 1.11% Change in valuation allowance. . . . (853,000) 1,920,000 (2,885,000) (100.10)% --------- ----------- ----------- --------- Total income tax provision . . . . . $ - $ - $(1,592,000) (55.24)% --------- ----------- ----------- --------- --------- ----------- ----------- ---------
As of March 31, 1997, the Company has net operating loss carryforwards of approximately $290,000 for federal tax reporting purposes, which expire beginning in 2004. 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 its net operating loss carryforwards. As of March 31, 1997, the Company also has foreign net operating loss carryforwards of approximately $3,698,000. See Note 12 for breakout of foreign and domestic components of operating income (loss). A valuation allowance has been recorded to properly reflect the carrying value of the deferred tax asset due to the 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 the deferred tax assets are realizable, the valuation allowance will be reduced. Income tax benefit for the year ended March 31, 1997 consists of the following: Current Federal . . . . . . . . . . . . . . . . . . . . $ 76,000 State . . . . . . . . . . . . . . . . . . . . . 84,000 ----------- 160,000 Deferred Federal . . . . . . . . . . . . . . . . . . . . (1,523,000) State . . . . . . . . . . . . . . . . . . . . . (229,000) ----------- Deferred tax asset . . . . . . . . . . . . . . . (1,752,000) ----------- Total benefit . . . . . . . . . . . . . . . . . $(1,592,000) ----------- ----------- F-13 8. SALE OF DATABASE SOFTWARE SUBSIDIARY On October 31, 1995, the Company sold all of the issued and outstanding shares of common stock of its database software subsidiary (the "Subsidiary") for approximately $560,000, to a company which was controlled by the Company's majority stockholder. In accordance with the terms of the Acquisition Agreement (the "Agreement"), the Company will receive a royalty of 7 percent of gross license revenue derived from certain licensed sales of the Subsidiary, as defined in the Agreement, commencing November 1, 1995. The royalty payments to be received by the Company under the Agreement will be limited to $600,000 in any single calendar period, as defined, and will be limited to an aggregate of $677,000. There were no royalties earned during the years ended March 31, 1996 or March 31, 1997. There was no material gain or loss realized on the sale of the Subsidiary. The Company provides certain computer and administrative services to the former subsidiary for a monthly fee of $37,500. 9. 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 $855,000, $1,961,000, and $2,051,000 in fiscal 1995, 1996, and 1997, respectively. Future minimum lease payments for capital and operating leases, excluding sublease income, at March 31, 1997 are as follows: OPERATING CAPITAL LEASES LEASES ---------- -------- 1998. . . . . . . . . . . . . . . . . . $1,397,000 $378,000 1999. . . . . . . . . . . . . . . . . . 1,420,000 - 2000. . . . . . . . . . . . . . . . . . 1,379,000 - 2001. . . . . . . . . . . . . . . . . . 1,401,000 - 2002. . . . . . . . . . . . . . . . . . 1,469,000 - Thereafter. . . . . . . . . . . . . . . 1,538,000 - ---------- -------- Total minimum lease payments . . . . $8,604,000 378,000 ---------- ---------- Amount representing interest . . . . . 14,000 -------- Total capital lease obligations . . . . $364,000 -------- -------- In January, 1995, the Company entered into a three year capital lease with a 8.2% interest rate for computer equipment. At March 31, 1997, $332,000 of such leased equipment is included in property and equipment, net of accumulated depreciation of $862,000. 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. During fiscal 1995, the Company acquired the assets of a company for $181,000 in cash plus 225,000 shares of the Company's common stock. The acquisition was accounted for as a purchase. The acquisition agreement included provisions for additional shares to be issued to the seller over a three year period if revenue generated from certain of the products acquired achieve stipulated amounts, as defined in the acquisition agreement. During fiscal 1996, 12,000 shares of common stock were issued in accordance with the provisions of the agreement and expensed accordingly. No shares were required to be issued during the year ended March 31, 1997. Up to an additional 90,000 shares of common stock may be earned in the future. In connection with the acquisition, the Company recorded a one time charge to fiscal 1995 operations of $606,000 for purchased research and development. The remaining net assets acquired were not significant. 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 F-14 and development expense in the accompanying consolidated statements of operations and were approximately $700,000, $600,000, and $1,100,000 for fiscal 1995, 1996, and 1997, 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. 10. 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, 1996 and 1997. 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 three stock option plans, the Nonqualified Stock Option Plan ("1990 Plan"), the 1991 Nonqualified Stock Option Plan ("1991 Plan"), and the 1994 Stock Option Plan ("1994 Plan"). The Company may no longer grant options under the 1990 and 1991 Plans. The Company may grant up to 3,163,204 options under the 1994 Plan. Through March 31, 1997 the Company has granted options to purchase 536,250, 975,000, and 2,550,033 shares, respectively, under these plans. 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 three stock option plans generally vest over four years. During December 1996, the Company recorded $631,000 in deferred compensation related to the grant of 185,000 options. This deferred compensation will be amortized on a straight line basis to expense over the option's four year vesting period. A summary of the status of the Company's three stock option plans at March 31, 1995, 1996, and 1997 as well as changes during the periods then ended is as follows:
WEIGHTED WEIGHTED WEIGHTED SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE (000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE ------- -------------- ------- -------------- ------- -------------- MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997 ------------------------ ------------------------ ------------------------ Outstanding, beginning of year . . 2,411.2 $1.18 3,041.2 $1.42 3,597.4 $1.79 ------- ----- ------- ----- ------- ----- Granted. . . . . . . . . . . . . . 945.0 2.34 1,440.4 2.37 989.9 3.24 Exercised. . . . . . . . . . . . . - - (30.0) 1.01 (22.8) 1.64 Forfeited. . . . . . . . . . . . . - - - - - - Expired. . . . . . . . . . . . . . (315.0) 0.51 (854.2) 1.18 (503.2) 1.44 ------- ----- ------- ----- ------- ----- Outstanding, end of year . . . . . 3,041.2 $1.42 3,597.4 $1.79 4,061.3 $2.08 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Exercisable, end of year . . . . . 1,481.2 $1.26 1,786.0 $1.34 2,171.7 $1.48 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Weighted average fair value of options granted. . . . . . . . . $ - $ - $ - ----- ----- ----- ----- ----- -----
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, 1996 and 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 years ended March 31, 1996 and 1997. F-15 Because the SFAS No. 123 method of accounting has not been applied to options granted prior to March 31, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 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 1996 and 1997; weighted average risk-free interest rate of 6.63 percent; expected dividend yields of 0.00 percent; and an expected life of 10 years. RESTRICTED STOCK During fiscal 1996, the Company granted 600,000 shares of nontransferable common stock under restricted stock agreements to certain employees. These shares were valued at a fair value of $2.34. 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' deficit and is being amortized as compensation expense on a straight-line basis over the vesting period. 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 250,000 shares of common stock for issuance under the Purchase Plan. The Purchase Plan will enable 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. DIRECTOR OPTION PLAN In February 1997, the Board adopted, and the stockholders approved, the 1997 Director Option Plan ("Director Plan"). The Company has reserved 150,000 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. 11. 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 1995, 1996, and 1997 were $170,000, $203,000, and $189,000, respectively. F-16 12. GEOGRAPHIC OPERATIONS The Company operates exclusively in the computer software industry. A summary of the Company's continuing operations by geographic area is presented below: UNITED EUROPE & STATES OTHER CONSOLIDATED ------ ----- ------------ Year ended March 31, 1995 Revenues . . . . . . . . . . $16,216,000 $ 3,412,000 $19,628,000 Operating profit (loss). . . 481,000 (430,000) 51,000 Identifiable assets. . . . . 6,855,000 2,932,000 9,787,000 Year ended March 31, 1996 Revenues . . . . . . . . . . $16,818,000 $ 6,948,000 $23,766,000 Operating profit (loss). . . (5,010,000) 458,000 (4,552,000) Identifiable assets. . . . . 9,427,000 4,390,000 13,817,000 Year ended March 31, 1997 Revenues . . . . . . . . . . $24,925,000 $10,110,000 $35,035,000 Operating profit . . . . . . 3,513,000 697,000 4,210,000 Identifiable assets. . . . . 14,353,000 5,385,000 19,738,000 13. SUBSEQUENT EVENTS INITIAL PUBLIC OFFERING On April 8, 1997, the Company offered and sold 2,300,000 shares of its common stock generating net proceeds of $19,251,000 after underwriting discounts and commissions. The Company used the proceeds for, among other things, the payoff of all bank debt. F-17 EX-10.3 2 EX 10-3 PEREGRINE SYSTEMS, INC. 1994 STOCK OPTION PLAN 1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or non-statutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or any of its Committees appointed pursuant to Section 4 of the Plan. (b) "APPLICABLE LAWS" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended. (e) "COMMITTEE" means a Committee appointed by the Board of Directors in accordance with Section 4 of the Plan. (f) "COMMON STOCK" means the Common Stock of the Company. (g) "COMPANY" means Peregrine Systems, Inc., a Delaware corporation. (h) "CONSULTANT" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services. The term Consultant shall not include directors who are not compensated for their services or are paid only a director's fee by the Company. (i) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means that the employment or consulting relationship with the Company or any Parent or Subsidiary is not interrupted or terminated. Continuous Status as an Employee or Consultant shall not be Page 1 of 11 considered interrupted in the case of: (i) any leave of absence approved by the Company, including sick leave, military leave, or any other personal leave; provided, however, that for purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company policies) or statute; provided, further, that on the ninety-first (91st) day of any such leave (where reemployment is not guaranteed by contract or statute) the Optionee's Incentive Stock Option shall cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option; or (ii) transfers between locations of the Company or between the Company, its Parent, its Subsidiaries or its successor. (j) "DISABILITY" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "EMPLOYEE" means any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System or the Nasdaq SmallCap Market of the Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such exchange or system for the last market trading day prior to the time of determination) as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. Page 2 of 11 (o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (p) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (q) "OPTION" means a stock option granted pursuant to the Plan. (r) "OPTIONED STOCK" means the Common Stock subject to an Option. (s) "OPTIONEE" means an Employee or Consultant who receives an Option. (t) "PARENT" means a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (u) "PLAN" means this 1994 Stock Option Plan, as amended. (v) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 11 below. (w) "SUBSIDIARY" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of shares which may be optioned and sold under the Plan is 3,148,000 shares of Common Stock. The shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) PROCEDURE. (i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be administered by different Committees with respect to different Optionees. (ii) SECTION 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. Page 3 of 11 (iii) RULE 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) OTHER ADMINISTRATION. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, including the approval, if required, of any stock exchange upon which the Common Stock is listed, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(m) of the Plan; (ii) to select the Consultants and Employees to whom Options may from time to time be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; (iv) to modify or amend each Option, including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option of the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to determine whether and under what circumstances an Option may be settled in cash under Section 9 instead of Common Stock; (viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted; Page 4 of 11 (ix) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (x) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; and (xi) to prescribe, amend, and rescind rules and regulations relating to the Plan, including rules and regulations relating to subplans established for the purpose of qualifying for preferred tax treatment under foreign tax laws. (c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations, and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options. 5. ELIGIBILITY. (a) Nonstatutory Stock Options may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option may, if otherwise eligible, be granted additional Options. (b) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of the Shares underlying Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) in excess of $100,000, such excess shall be treated as Nonstatutory Stock Options. (c) For purposes of Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (d) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. Page 5 of 11 (e) LIMITATIONS. (i) No Employee shall be granted, in any fiscal year of the Company, Options to purchase more than 450,000 Shares. (ii) The foregoing limitation shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 11(a). (iii) If an Option is canceled (other than in connection with a transaction described in Section 11), the canceled Option will be counted against the limit set forth in Section 5(e)(i). For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 6. TERM OF PLAN. The Plan became effective upon its adoption by the Board of Directors. It shall continue in effect for a term of ten (10) years from such date, unless sooner terminated under Section 13 of the Plan. 7. TERM OF OPTION. The term of each Option shall be the term stated in the Option Agreement; provided, however, that in the case of an Incentive Stock Option the term shall be no more than ten (10) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 8. OPTION EXERCISE PRICE AND CONSIDERATION. (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. However, in the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within Page 6 of 11 the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option have been owned by the Optionee for more than six months on the date of surrender and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (6) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws, or (7) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. All Options granted hereunder shall be exercisable at the rate of at least 20% per year over five years from the date the Option is granted. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 11 of the Plan. Page 7 of 11 Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. In the event that an Optionee's Continuous Status as an Employee or Consultant terminates (but not in the event of a change of status from Employee to Consultant (in which case an Employee's Incentive Stock Option shall automatically convert to a Nonstatutory Stock Option on the ninety-first (91st) day following such change of status) or from Consultant to Employee) other than upon the Optionee's death or disability, the Optionee may exercise his or her Option, within 90 days of the date of termination, and only to the extent that the Optionee was entitled to exercise it at the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant); provided, however, that (i) the Administrator may in its discretion extend the period of exercisability of the Option beyond a termination of an Optionee's Continuous Status as an Employee or Consultant until a date not later than the expiration of the term of such Option as set forth in the Notice of Grant and (ii) the Administrator may in its discretion extend the termination date for the purpose of vesting accrual to a date beyond the actual termination date of employment (the "deemed termination date") (but in no event may the deemed termination date be later than the expiration of the term of such Option as set forth in the Notice of Grant). In the event the Administrator shall exercise such discretion to extend the term of an Option, such Option shall be exercisable during such extended term to the extent it was exercisable at the date of such termination or the deemed termination date, as applicable. Similarly, in the event the Administrator shall exercise such discretion to extend the termination date of an Optionee, such Option shall be exercisable during such term (or such extended term if applicable) to the extent it would be exercisable at the deemed termination date. If at the date of termination the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If after termination the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. In the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of his or her Disability, Optionee may, but only within six (6) months from the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that Optionee is not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquired the right to exercise the Option by Page 8 of 11 bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall immediately revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. NON-TRANSFERABILITY OF OPTIONS. Unless determined otherwise, by the Administrator, Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions as the Administrator deems appropriate. 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding, and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed action. Page 9 of 11 (c) MERGER, SALE OF ASSETS, OR STOCK TRANSFER. In the event of (i) a merger or consolidation of the Company with or into another corporation resulting in the outstanding voting securities of the Company immediately prior thereto representing (either by remaining or by being converted into voting securities of the surviving entity) less than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (ii) the sale of all or substantially all of the assets of the Company; or (iii) the sale or other transfer by John Moores and any stockholder affiliated (within the meaning of the Securities Act) with Mr. Moores, in a single transaction or a series of related transactions, of shares of Common Stock constituting more than fifty percent (50%) of the then outstanding Common Stock of the Company to any person or entity not affiliated with Mr. Moores or the Company, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. Notwithstanding the provisions of clause (iii) above, any such sale or other transfer by Mr. Moores or any stockholder affiliated with Mr. Moores of shares of Common Stock through a registered public offering of securities under the Securities Act, or in compliance with the requirements of paragraphs (c), (d), (e), and (f) of Rule 144 under the Securities Act, shall not cause the Option to become fully vested and exercisable. If an Option becomes fully vested and exercisable in the event of a merger or consolidation, sale of assets, or sale or transfer of Common Stock by Mr. Moores as provided above, the Administrator shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable. 12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option, or such other date as is determined by the Board. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 13. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Applicable Laws, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not affect Options already granted, and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. Page 10 of 11 14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 15. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. Page 11 of 11 PEREGRINE SYSTEMS, INC. 1995 STOCK OPTION PLAN FOR FRENCH EMPLOYEES 1. PURPOSES OF THE PLAN. The purposes of this 1995 Stock Option Plan for French Employees are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to French Employees, and - to promote the success of the Company's business and the business of its French subsidiary. This Plan is a sub-plan created under and pursuant to the Peregrine Systems, Inc. 1994 Stock Option Plan, which has been approved by the shareholders of Peregrine Systems, Inc., and which provides that French employees may benefit under this Plan. Options shall be granted under the Plan at the discretion of the Administrator and as reflected in terms of written option agreements, and are intended to qualify for preferred treatment under French tax laws. Unless otherwise defined herein, the terms defined in the 1994 Stock Option Plan shall have the same defined meanings in this Plan. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "APPLICABLE LAWS" means the legal requirements relating to the administration of stock option plans under French corporate, securities, and tax laws. (b) "DISABILITY" means total and permanent disability, as defined under Applicable Laws. (c) "EMPLOYEE" means any person employed by Subsidiary in a salaried position, who does not own more than 10% of the voting power of all classes of stock of the Company, or any Parent or Subsidiary, and who is a resident of the Republic of France. (d) "FAIR MARKET VALUE" means, as of any date, the dollar value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq Small Cap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination and reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; Page 1 of 9 (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (e) "OPTION" means a stock option granted pursuant to the Plan which is intended to qualify for preferred tax treatment under applicable French tax laws. (f) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (g) "OPTION PRICE" means the per share price for exercising an Option, determined in accordance with subsection 9(a) of the Plan. (h) "OPTIONED STOCK" means the Common Stock subject to an Option. (i) "OPTIONEE" means a person eligible to participate in the Plan pursuant to Section 5 and who holds an outstanding Option. (j) "PLAN" means this Peregrine Systems, Inc. 1995 Stock Option Plan for French Employees. (k) "SUBSIDIARY" means any participating subsidiary of the Company located in the Republic of France. (l) "U.S. PLAN" means the Peregrine Systems, Inc. 1994 Stock Option Plan, as amended. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is that number of Shares of Common Stock which is currently available for issuance under the U.S. Plan. However, at no time shall the total number of Options outstanding which may be exercised for newly issued Shares of Common Stock exceed that number equal to one-third of the Company's voting stock, whether preferred stock of the Company or Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If any Optioned Stock is to consist of reacquired Shares, such Optioned Stock must be purchased by the Company prior to the date of grant of the corresponding Option and must be reserved and set aside for such purpose. Page 2 of 9 If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant under the Plan (unless the Plan has terminated). 4. ADMINISTRATION OF THE PLAN. (a) PROCEDURE. The Plan shall be administered by the Board or a committee appointed by the Board. (b RULE 16b-3 LIMITATIONS. Notwithstanding the provisions of Subsection (a) of this Section 4, in the event that Rule 16b-3 promulgated under the Exchange Act, or any successor provision ("Rule 16b-3") provides specific requirements for the administrators of plans of this type, and Rule 16b-3 or such successor provision is applicable to the Plan, the Plan shall be administered only by such a body and in such a manner as shall comply with the applicable requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion concerning decisions regarding the Plan shall be afforded to any committee or person that is not "disinterested" as that term is used in Rule 16b-3. (c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(c) of the Plan; (ii) to select the Employees to whom Options may be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions may include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to construe and interpret the terms of the Plan; Page 3 of 9 (viii) to prescribe, amend and rescind rules and regulations relating to the Plan; (ix) to modify or amend each Option (subject to Section 14(c) of the Plan); (x) to authorize any person to execute on behalf of the Company or Subsidiary any instrument required to effect the grant of an Option previously granted by the Administrator; (xi) to determine the terms and restrictions applicable to Options; and (xii) to make all other determinations deemed necessary or advisable for administering the Plan. (d) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. (e) REPORTING TO THE SHAREHOLDERS' MEETING. In its annual proxy statement to the shareholders, the Board shall inform the shareholders as to the number and price of the Options granted hereunder, and as to the Shares subscribed upon exercise of such Options. 5. ELIGIBILITY. Options may be granted only to Employees; provided, however, that the PRESIDENT DIRECTEUR GENERAL, THE DIRECTEUR GENERAL and other directors who are also Employees of a participating Subsidiary may be granted Options. An individual who has been granted an Option may, if otherwise eligible, be granted additional Options. 6. LIMITATIONS. Neither the Plan nor any Option shall confer upon any Optionee any right with respect to continuing the Optionee's employment relationship with the Company. 7. TERM OF PLAN. The Plan shall become effective as of the date of its adoption by the Board. It shall continue in effect until the termination of the U.S. Plan or the date five years from the date of adoption of the U.S. Plan, whichever is sooner, unless terminated earlier under Section 14 of the Plan. 8. TERM OF OPTION. The term of each Option shall be as stated in the Option Agreement; provided, however, that subject to Section 10(d) hereof, the maximum term of an Option shall not exceed nine and one-half (91/2) years from the date of grant of the Option. Page 4 of 9 9. OPTION EXERCISE PRICE AND CONSIDERATION. (a) OPTION PRICE. The Option Price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator upon the date of grant of the Option and stated in the Option Agreement, but in no event shall be lower than ninety-five percent (95%) of the Fair Market Value on the date the Option is granted. This Option Price cannot be modified while the Option is outstanding. (b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. In so doing, the Administrator may specify that an Option may not be exercised until the completion of a service period. (c) FORM OF CONSIDERATION. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. Such consideration may consist of: (i) cash or check (denominated in U.S. Dollars); (ii) wire transfer (denominated in U.S. Dollars); (iii) delivery of a properly executed exercise notice together with such other documentation as the Administrator and a broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of an amount of the sale or loan proceeds required to pay the exercise price; or (iv) any combination of the foregoing methods of payment. 10. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when: (i) the Company receives written notice of exercise (in accordance with the Option Agreement and in the form attached hereto as Exhibit A) from the person entitled to exercise the Option, and full payment for the Shares with respect to which the Option is exercised; Page 5 of 9 (ii) the Subsidiary receives a written subscription agreement to the Shares (in accordance with the Option Agreement and in the form attached hereto as Exhibit B) from the person entitled to exercise the Option. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan, and shall be deemed to be definitively made upon receipt of the payment by the Subsidiary. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue to the Optionee (or cause to be issued) a stock certificate evidencing such Shares promptly after the Option is exercised and after full payment, as indicated above, is received by the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF EMPLOYMENT RELATIONSHIP. In the event that an Optionee's Continuous Status as an Employee terminates (other than upon the Optionee's death or Disability), the Optionee may exercise his or her Option, but only within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Administrator), and only to the extent that the Optionee was entitled to exercise it at the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. In the event that an Optionee's Continuous Status as an Employee terminates as a result of the Optionee's Disability, the Optionee may exercise his or her Option at any time within six (6) months from the date of such termination, but only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option Page 6 of 9 within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee while an Employee, the Option may be exercised at any time within six (6) months following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall immediately revert to the Plan. 11. NON-TRANSFERABILITY OF OPTIONS. An Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER, ASSET SALE OR CHANGE OF CONTROL. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option or Stock Purchase Right shall terminate immediately prior to the consummation of such proposed action. Page 7 of 9 (c) MERGER, SALE OF ASSETS, OR STOCK TRANSFER. In the event of (i) a merger or consolidation of the Company with or into another corporation resulting in the outstanding voting securities of the Company immediately prior thereto representing (either by remaining or by being converted into voting securities of the surviving entity) less than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (ii) the sale of all or substantially all of the assets of the Company; or (iii) the sale or other transfer by John Moores and any stockholder affiliated (within the meaning of the Securities Act) with Mr. Moores, in a single transaction or a series of related transactions, of shares of Common Stock constituting more than fifty percent (50%) of the then outstanding Common Stock of the Company to any person or entity not affiliated with Mr. Moores or the Company, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. Notwithstanding the provisions of clause (iii) above, any such sale or other transfer by Mr. Moores or any stockholder affiliated with Mr. Moores of shares of Common Stock through a registered public offering of securities under the Securities Act, or in compliance with the requirements of paragraphs (c), (d), (e), and (f) of Rule 144 under the Securities Act, shall not cause the Option to become fully vested and exercisable. If an Option becomes fully vested and exercisable in the event of a merger or consolidation, or sale of assets, or sale or transfer of Common Stock by Mr. Moores as provided above, the Administrator shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable. 13. DATE OF GRANT. The date of grant of an Option shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 14. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Administrator may at any time amend, alter, suspend or terminate the Plan. (b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the Applicable Laws. (c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and a representative of the Administrator. Page 8 of 9 15. CONDITIONS UPON ISSUANCE OF SHARES. (a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws, including, without limitation, the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required under Applicable Laws. 16. LIABILITY OF COMPANY. (a) INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. (b) GRANTS EXCEEDING ALLOTTED SHARES. If the Optioned Stock covered by an Option exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Option shall be void with respect to such excess Optioned Stock, unless shareholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 14(b) of the Plan. In the event more than one Option is granted which exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Options shall be void as set forth in the preceding sentence on a pro rata basis. 17. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Page 9 of 9 EX-10.4 3 EX10.4 PEREGRINE SYSTEMS, INC. 1994 STOCK PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Date of Grant: ------------------------------ Vesting Commencement Date: ------------------------------ Exercise Price per Share: $ ------------------------------ Total Number of Shares Granted: ------------------------------ Type of Option: Incentive Stock Option ---- Nonstatutory Stock Option --- Term/Expiration Date: ------------------------------ VESTING SCHEDULE: This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the total number of Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 6.25% of the total number of Shares subject to the Option shall vest each quarter thereafter. TERMINATION PERIOD: This Option may be exercised for 90 days after termination of Optionee's Continuous Status as an Employee or Consultant, or such longer period as may be applicable upon death or disability of Optionee as provided in the Plan, but in no event later than the Term/Expiration Date as provided above. II. AGREEMENT 1. GRANT OF OPTION. Peregrine Systems, Inc., a Delaware corporation (the "Company"), hereby grants to the individual named in the Notice of Stock Option Grant (the "Notice of Grant"), hereafter the Optionee, an option (the "Option") to purchase the total number of shares of Common Stock (the "Shares") set forth in the Notice of Grant, at the Page 1 of 4 exercise price per share set forth in the Notice of Grant (the "Exercise Price") subject to the terms, definitions, and provisions of the 1994 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d), it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. EXERCISE OF OPTION. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the provisions of Section 9 of the Plan. This Option may not be exercised for a fraction of a share. This Option shall be exercisable by written notice (in the form attached as Exhibit A) which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with Applicable Laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 3. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (i) cash; or (ii) check; or (iii) surrender of other shares of Common Stock of the Company which (A) in the case of Shares acquired pursuant to the exercise of a Company option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the Exercise Price of the Shares as to which the Option is being exercised; or (iv) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan. Page 2 of 4 4. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such Shares would constitute a violation of Applicable Laws. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 5. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors, and assigns of the Optionee. 6. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 7. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of this Option of some of the federal and local tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (i) EXERCISE OF ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability or local income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. (ii) EXERCISE OF NONSTATUTORY STOCK OPTION. There may be a regular federal income tax liability and local income tax liability upon the exercise of a Nonstatutory Stock Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If Optionee is an Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (iii) DISPOSITION OF SHARES. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal and local income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and are disposed of at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be Page 3 of 4 treated as long-term capital gain for federal and local income tax purposes. If Shares purchased under an ISO are disposed of within such one-year period or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (1) the Fair Market Value of the Shares on the date of exercise, or (2) the sale price of the Shares. (iv) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (1) the date two years after the Date of Grant, or (2) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, OR THE STOCK OPTION AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Stock Option Agreement and Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below. - ------------------------------- PEREGRINE SYSTEMS, INC. Print Name of Optionee a Delaware corporation - ------------------------------- ------------------------------ Signature of Optionee Alan H. Hunt, President/CEO Page 4 of 4 EXHIBIT A 1994 STOCK PLAN EXERCISE NOTICE Peregrine Systems, Inc. 12670 High Bluff Drive San Diego, CA 92130 Attention: Secretary 1. EXERCISE OF OPTION. Effective as of today, __________, 19__, the undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase ____________ shares of the Common Stock (the "Shares") of Peregrine Systems, Inc. (the "Company") under and pursuant to the 1994 Stock Option Plan (the "Plan") and the [ ] Incentive [ ] Nonstatutory Stock Option Agreement dated ___________, 19__ (the "Option Agreement"). 2. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 3. RIGHTS AS SHAREHOLDER. Until issuance of the Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) the Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date of such issuance, except as provided in Section 11 of the Plan. 4. TAX CONSULTATION. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 5. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. 6. INTERPRETATION. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or by the Company forthwith to the Company's Board of Directors or the committee thereof that administers the Plan, which shall review such dispute at its next Page 1 of 2 regular meeting. The resolution of such a dispute by the Board or committee shall be final and binding on the Company and on Optionee. 7. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by and construed in accordance with the laws of the State of California excluding that body of law pertaining to conflicts of law. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable. 8. FURTHER INSTRUMENTS. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement. 9. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company the full Exercise Price for the Shares. 10. ENTIRE AGREEMENT. The Plan and Notice of Grant/Option Agreement are incorporated herein by reference. This Agreement, the Plan, and the Option Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and is governed by California law except for that body of law pertaining to conflict of laws. Submitted by: Accepted by: OPTIONEE: PEREGRINE SYSTEMS, INC. Name:__________________________ By:__________________________ Signature:_____________________ Title:_______________________ ADDRESS: ADDRESS: _______________________________ 12670 High Bluff Drive San Diego, California 92130 _______________________________ Page 2 of 2 PEREGRINE SYSTEMS, INC. 1995 STOCK OPTION PLAN FOR FRENCH EMPLOYEES STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the 1995 Stock Option Plan for French Employees shall have the same defined meanings in this Option Agreement. 1. NOTICE OF STOCK OPTION GRANT Optionee's Name and Address: ____________________________ ____________________________ ____________________________ You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Stock Option Agreement, as follows: Date of Grant ________________________ Vesting Commencement Date ________________________ Exercise Price per Share $________________________ Total Number of Shares Granted ________________________ Total Exercise Price $________________________ Term/Expiration Date: ________________________ VESTING SCHEDULE: This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares shall vest on the date twelve (12) months from the Vesting Commencement Date, and one forty-eighth (1/48) of the Shares shall vest each month thereafter. TERMINATION PERIOD: This Option may be exercised for thirty (30) days after termination of employment relationship, or such longer period as may be applicable upon death or Disability of Optionee as provided in the Plan. Page 1 of 3 II. AGREEMENT 1. GRANT OF OPTION. The Board of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee"), an option (the "Option") to purchase a number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. 2. EXERCISE OF OPTION. (a) RIGHT TO EXERCISE. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. In the event of Optionee's death, Disability or other termination of Optionee's employment relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Option Agreement. (b) METHOD OF EXERCISE. This Option is exercisable by delivery of an exercise notice to the Company, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), by delivery of a subscription agreement to the Subsidiary, in the form attached as Exhibit B (the "Subscription Agreement") and such other representations and agreements as may be required by the Company or the Subsidiary pursuant to the provisions of the Plan. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue to the Optionee (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. The Exercise Notice and Subscription Agreement shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Subsidiary. The Exercise Notice and Subscription Agreement shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Subsidiary of such fully executed Exercise Notice and Subscription Agreement accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. Page 2 of 3 3. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash or check (denominated in U.S. Dollars); (b) wire transfer (denominated (in U.S. Dollars); (c) delivery of a properly executed exercise notice together with such other documentation as the Administrator and a broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of an amount of the sale or loan proceeds required to pay the exercise price. 4. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. OPTIONEE ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY OR THE SUBSIDIARY. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. OPTIONEE: PEREGRINE SYSTEMS, INC. _____________________________ By:________________________ Signature _____________________________ Title:_____________________ Print Name Page 3 of 3 EXHIBIT A PEREGRINE SYSTEMS, INC. 1995 STOCK OPTION PLAN FOR FRENCH EMPLOYEES EXERCISE NOTICE Peregrine Systems, Inc. 12670 High Bluff Drive San Diego, CA 92130 Attention: Secretary 1. EXERCISE OF OPTION. Effective as of today, ___________, 199__, the undersigned ("Optionee") hereby elects to purchase _________ shares (the "Shares") of the Common Stock of Peregrine Systems, Inc. (the "Company") under and pursuant to the 1995 Stock Option Plan for French Employees (the "Plan") and the Stock Option Agreement dated ___________ (the "Option Agreement"). The purchase price for the Shares shall be $__________, as required by the Option Agreement. 2. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company the full purchase price for the Shares. 3. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. RIGHTS AS SHAREHOLDER. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. 5. TAX CONSULTATION. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. Page 1 of 2 6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and such agreement is governed by the laws of California and the United States of America except for that body of laws pertaining to conflict of laws. Submitted by: Accepted by: OPTIONEE: PEREGRINE SYSTEMS, INC. _____________________________ By:___________________________ Signature _____________________________ Title:________________________ Print Name ADDRESS: ADDRESS: _____________________________ 12670 High Bluff Drive _____________________________ San Diego, California 92130 Page 2 of 2 EXHIBIT B PEREGRINE SYSTEMS, INC. 1995 STOCK OPTION PLAN FOR FRENCH EMPLOYEES SUBSCRIPTION AGREEMENT Peregrine Systems, Inc. 12670 High Bluff Drive San Diego, CA 92130 Attention: Secretary 1. AMOUNT AND TERMS OF THE SUBSCRIPTION In conformity with the Stock Option Plan reserved to the French employees (the "Plan"), Options to subscribe to Shares of Common Stock (the "Shares") of Peregrine Systems, Inc. (the "Company") were granted according to the Stock Option Agreement dated _________________ (the "Option Agreement"). _______ Shares shall be issued to the benefit of the undersigned (the Subscriber") by an increase in capital in accordance with the applicable laws of the United States of America and the State of California. The increase in capital shall take place within the limits of the authorized capital of the Company. The Shares subscribed to may be paid up by: (a) cash or check (denominated in U.S. Dollars); (b) wire transfer (denominated in U.S. Dollars); (c) delivery of a properly executed exercise notice together with such other documentation as the Administrator and a broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of an amount of the sale or loan proceeds required to pay the exercise price. Page 1 of 2 2. TRANSFER OF THE FUNDS The funds coming from the subscription of Shares under the Plan shall be paid over to the Subsidiary by the participating Employees. Full payment shall be deemed to be definitively made upon the date of receipt of the payment in the bank accounts in France of the Subsidiary. 3. SUBSCRIPTION AGREEMENT I, the undersigned, Last name ____________________________ First name ____________________________ Residence ____________________________ subscribe to ________ Shares. Supporting my subscription I shall pay the total amount of the Purchase Price of the Shares following one or more of the methods described in Section 1 above. The Subscriber PEREGRINE SYSTEMS, INC. ___________________________ By:_________________________ Signature ___________________________ Title:______________________ Print Name Address: ___________________________ ___________________________ Page 2 of 2 EX-10.5 4 EX10-5 PEREGRINE SYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. (a) "BOARD" shall mean the Board of Directors of the Company. (b) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (c) "COMMON STOCK" shall mean the Common Stock of the Company. (d) "COMPANY" shall mean Peregrine Systems, Inc., a Delaware corporation, and any Designated Subsidiary of the Company. (e) "COMPENSATION" shall mean all base straight time gross earnings and commissions, exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses, and other compensation. (f) "DESIGNATED SUBSIDIARY" shall mean any Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "EMPLOYEE" shall mean any individual who is an Employee of the Company for tax purposes and whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "ENROLLMENT DATE" shall mean the first day of each Offering Period. (i) "EXERCISE DATE" shall mean the last day of each Offering Period. (j) "FAIR MARKET VALUE" shall mean, as of any date, the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for Page 1 of 8 the last market trading day prior to the time of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in THE WALL STREET JOURNAL or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (4) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement on Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "HOLDING PERIOD" shall mean that period of time beginning on an Exercise Date on which shares are purchased by participants under the Plan and ending twelve (12) calendar months thereafter. (l) "OFFERING PERIOD" shall mean a period of three (3) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after May 1 and terminating on the last Trading Day in the period ending the following July 31; or commencing on the first Trading Day on or after August 1 and terminating on the last Trading Day in the period ending the following October 31; or commencing on the first Trading Day on or after November 1 and terminating on the first Trading Day in the period ending the following January 31; or commencing on the first Trading Day on or after February 1 and terminating on the last Trading Day in the period ending the following April 30; PROVIDED, HOWEVER, that the first Offering Period under the Plan shall commence with the first Trading Day on or after May 1, 1997, and shall terminate on the last Trading Day on or before July 31, 1997. The duration of Offering Periods may be changed pursuant to Section 4 of this Plan. (m) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. (n) "PLAN" shall mean this Employee Stock Purchase Plan. (o) "PURCHASE PRICE" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (p) "RESERVES" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (q) "SUBSIDIARY" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. Page 2 of 8 (r) "TRADING DAY" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. ELIGIBILITY. (a) Any Employee who shall be employed by the Company on a given Enrollment Date and who is not an Officer on such date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. OFFERING PERIODS. The Plan shall be implemented by consecutive Offering Periods with a new Offering Period commencing on the first Trading Day on or after May 1, August 1, November 1, and February 1 of each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 21 hereof; PROVIDED, HOWEVER, that the first Offering Period under the Plan shall commence with the first Trading Day on or after May 1, 1997, and shall terminate on the last Trading Day on or before July 31, 1997. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. PARTICIPATION. (a) An eligible Employee may become a participant in the Plan by completing a participation agreement authorizing payroll deductions in the form of EXHIBIT A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 11 hereof. 6. PAYROLL DEDUCTIONS. (a) At the time a participant files his or her participation agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. Page 3 of 8 (c) A participant may discontinue his or her participation in the Plan as provided in Section 11 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new participation agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new participation agreement unless the Company elects to process a given change in participation more quickly. A participant's participation agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 11 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Stection 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during an Offering Period. Payroll deductions shall recommence at the rate provided in such participant's participation agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 11 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. GRANT OF OPTION. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on the Exercise Date of such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Offering Period more than 25,000 shares (subject to any adjustment pursuant to Section 20), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 14 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 11 hereof. The Option shall expire on the last day of the Offering Period. 8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as provided in Section 11 hereof, notice of exercise of his or her option shall be deemed to have been given by the participant and his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Offering Period, subject to earlier withdrawal by the participant as provided in Section 11 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. Page 4 of 8 9. HOLDING PERIOD. Shares purchased by a participant shall be held in the participant's account under the Plan during the Holding Period. In the event of a sale of all or substantially all of the Company's assets, or a merger of the Company with or into another corporation, the Holding Period shall lapse. 10. DELIVERY. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall credit each participant's account under the Plan with the shares purchased upon exercise of his or her option. As promptly as practicable after expiration of the Holding Period, the Company shall, in its discretion, either (a) arrange for the delivery to each participant of a certificate representing the shares purchased upon exercise of his or her option, or (b) credit the shares purchased to an account in the participant's name with a brokerage firm selected by the Company to hold the shares in street name. 11. WITHDRAWAL. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of EXHIBIT B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new participation agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 12. TERMINATION OF EMPLOYMENT. Upon a participant's ceasing to be an Employee for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 16 hereof, and such participant's option shall be automatically terminated. 13. INTEREST. No interest shall accrue on the payroll deductions of a participant in the Plan. 14. STOCK. (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be two hundred fifty thousand (250,000) shares, subject to adjustment upon changes in capitalization of the Company as provided in Section 20 hereof. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. Page 5 of 8 (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 15. ADMINISTRATION. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret, and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 16. DESIGNATION OF BENEFICIARY. (a) Subject to applicable domestic and foreign law, a participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 17. TRANSFERABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in Section 16 hereof) by the participant. Any such attempt at assignment, transfer, pledge, or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 11 hereof. 18. USE OF FUNDS. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 19. REPORTS. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased, and the remaining cash balance, if any. 20. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, LIQUIDATION, MERGER OR ASSET SALE. Page 6 of 8 (a) CHANGES IN CAPITALIZATION. Subject to any required action by the stockholders of the Company, the Reserves, the maximum number of shares each participant may purchase per Offering Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding, and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, the Offering Period shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. (c) MERGER OR ASSET SALE. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"). The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 11 hereof. 21. AMENDMENT OR TERMINATION. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 20 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 20 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and Page 7 of 8 establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 22. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 23. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 24. TERM OF PLAN. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 21 hereof. Page 8 of 8 EXHIBIT A PEREGRINE SYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN PARTICIPATION AGREEMENT _____ Original Application Enrollment Date: __________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. _____________________________________ hereby elects to participate in the Peregrine Systems, Inc. 1997 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Participation Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 0 to 15%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated in order to exercise the option(s) granted to me pursuant to the Employee Stock Purchase Plan and to purchase shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. I further understand that shares of Common Stock purchased for me under the Employee Stock Purchase Plan upon exercise of my option are subject to the Holding Period described in Section 9 of the Employee Stock Purchase Plan. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Participation Agreement is subject to stockholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only):_________. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares), I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY DISPOSITION OF SHARES AND I WILL MAKE ADEQUATE PROVISION FOR FEDERAL, STATE, OR OTHER TAX WITHHOLDING OBLIGATIONS, IF ANY, WHICH ARISE UPON THE DISPOSITION OF THE COMMON STOCK. The Company may, but Page 1 of 3 will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year holding period, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the 1997 Employee Stock Purchase Plan, including the prohibition on sales by me of any shares purchased under the 1997 Employee Stock Purchase for a period of one year from the date of purchase. I acknowledge that the Administrator of the 1997 Employee Stock Purchase Plan will have no discretion to release any shares purchased by me until the expiration of such one-year holding period. The effectiveness of this Participation Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print) ______________________________________________ (First) (Middle) (Last) _____________________________ Relationship _____________________________ (Address) _____________________________ Page 2 of 3 [PEREGRINE SYSTEMS, INC. ESPP PARTICIPATION AGREEMENT] Employee's Social Security Number: ____________________________________ Employee's Address: ____________________________________ ____________________________________ ____________________________________ I UNDERSTAND THAT THIS PARTICIPATION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:________________ ____________________________________________________ Signature of Employee ____________________________________________________ Spouse's Signature (If beneficiary other than spouse) [Signature Page to ESPP Participation Agreement] Page 3 of 3 EXHIBIT B PEREGRINE SYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the Peregrine Systems, Inc. 1997 Employee Stock Purchase Plan which began on ___________ 19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Participation Agreement. Name and Address of Participant: ____________________________________ ____________________________________ ____________________________________ Signature: ____________________________________ Date: ______________________________ Page 1 of 1 EXHIBIT A-1 PEREGRINE SYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN PARTICIPATION AGREEMENT [EUROPEAN EMPLOYEES] _____ Original Application Enrollment Date: __________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. _________________________________ hereby elects to participate in the Peregrine Systems, Inc. 1997 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Participation Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 0 to 15%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated in order to exercise the option(s) granted to me pursuant to the Employee Stock Purchase Plan and to purchase shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. I further understand that shares of Common Stock purchased for me under the Employee Stock Purchase Plan upon exercise of my option are subject to the Holding Period described in Section 9 of the Employee Stock Purchase Plan. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Participation Agreement is subject to stockholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only):______________________________. 6. I understand and acknowledge that notwithstanding any other provision of this Participation Agreement or the Employee Stock Purchase Plan: (a) neither the Employee Stock Purchase Plan nor this Participation Agreement shall form any part of any contract of employment between me and the Company or any Designated Subsidiary, and it shall not confer on me any legal or equitable rights (other Page 1 of 3 than those constituting the options granted under the Employee Stock Purchase Plan themselves) against the Company or any Designated Subsidiary, directly or indirectly, or give rise to any cause of action in law or in equity against the Company or any subsidiary. (b) my benefits under the Employee Stock Purchase Plan shall not form any part of my wages, pay, or remuneration or count as wages, pay, or remuneration for pension fund or other purposes. (c) in no circumstances shall I, upon ceasing to hold my office or employment by virtue of which I am eligible to participate in the Employee Stock Purchase Plan, be entitled to any compensation for any loss of any right or benefit or prospective right or benefit under the Plan, which I might otherwise have enjoyed, whether such compensation is claimed by way of damages for wrongful dismissal or other breach of contract or by way of compensation for loss of office or otherwise. (d) that the Company expressly retains the right to terminate the Employee Stock Purchase Plan at any time and that I will have no right to continued option grants under the Employee Stock Purchase Plan in such event. 7. I hereby agree to be bound by the terms of the 1997 Employee Stock Purchase Plan, including the prohibition on sales by me of any shares purchased under the 1997 Employee Stock Purchase for a period of one year from the date of purchase. I acknowledge that the Administrator of the 1997 Employee Stock Purchase Plan will have no discretion to release any shares purchased by me until the expiration of such one-year holding period. The effectiveness of this Participation Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print)________________________________________ (First) (Middle) (Last) ____________________ Relationship ____________________ (Address) ____________________ Page 2 of 3 [PEREGRINE SYSTEMS, INC. ESPP PARTICIPATION AGREEMENT] Employee's Social Security Number: ____________________________________ Employee's Address: ____________________________________ ____________________________________ ____________________________________ I UNDERSTAND THAT THIS PARTICIPATION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated: ______________________ _________________________________ Signature of Employee _________________________________ Spouse's Signature (If beneficiary other than spouse) [Signature Page to ESPP Participation Agreement] Page 3 of 3 EX-10.6 5 EX10-6 PEREGRINE SYSTEMS, INC. 1997 DIRECTOR OPTION PLAN 1. PURPOSES OF THE PLAN. The purposes of this 1997 Director Option Plan are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. DEFINITIONS. As used herein, the following definitions shall apply: (A) "BOARD" means the Board of Directors of the Company. (B) "CODE" means the Internal Revenue Code of 1986, as amended. (C) "COMMON STOCK" means the Common Stock of the Company. (D) "COMPANY" means Peregrine Systems, Inc., a Delaware corporation. (E) "DIRECTOR" means a member of the Board. (F) "EMPLOYEE" means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (G) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (H) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination, as reported in THE WALL STREET JOURNAL or such other source as the Board deems reliable, or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (I) "INSIDE DIRECTOR" means a Director who is an Employee. (J) "OPTION" means a stock option granted pursuant to the Plan. (K) "OPTIONED STOCK" means the Common Stock subject to an Option. (L) "OPTIONEE" means a Director who holds an Option. Page 1 of 6 (M) "OUTSIDE DIRECTOR" means a Director who is not an Employee. (N) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (O) "PLAN" means this 1997 Director Option Plan. (P) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (Q) "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 150,000 Shares of Common Stock (the "Pool"). The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. ADMINISTRATION AND GRANTS OF OPTIONS UNDER THE PLAN. (A) PROCEDURE FOR GRANTS. All grants of Options to Outside Directors under this Plan shall be automatic and non-discretionary and shall be made strictly in accordance with the following provisions: (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each Outside Director shall be automatically granted an Option to purchase 25,000 Shares (the "First Option") on the date on which such person first becomes an Outside Director, whether through election by the shareholders of the Company or appointment by the Board to fill a vacancy; provided, however, that a Director who was an Inside Director immediately prior to becoming an Outside Director shall not receive a First Option; provided further, however, that no Director who is an Outside Director on the effective date of this Plan shall be granted a First Option. (iii) Each Outside Director shall be automatically granted an Option to purchase 5,000 Shares (a "Subsequent Option") on the day following each Annual Meeting of the Company's Shareholders commencing with the 1998 Annual Meeting of the Company's Shareholders; provided that he or she is then an Outside Director and if, as of such date, he or she shall have served on the Board for at least the preceding six (6) months. (iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any exercise of an Option granted before the Company has obtained shareholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such shareholder approval of the Plan in accordance with Section 16 hereof. (v) The terms of a First Option granted hereunder shall be as follows: (A) the term of the First Option shall be ten (10) years. (B) the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. Page 2 of 6 (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the First Option. In the event that the date of grant of the First Option is not a trading day, the exercise price per Share shall be the Fair Market Value on the next trading day immediately following the date of grant of the First Option. (D) subject to Section 10 hereof, the First Option shall become exercisable as to twenty-five percent (25%) of the Shares subject to the First Option on the first anniversary of its date of grant, and as to six and one-quarter percent (6.25%) on the last day of each consecutive three-month period thereafter, provided that the Optionee continues to serve as a Director on such dates. (vi) The terms of a Subsequent Option granted hereunder shall be as follows: (A) the term of the Subsequent Option shall be ten (10) years. (B) the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Subsequent Option. In the event that the date of grant of the Subsequent Option is not a trading day, the exercise price per Share shall be the Fair Market Value on the next trading day immediately following the date of grant of the Subsequent Option. (D) subject to Section 10 hereof, the Subsequent Option shall become exercisable as to twenty-five percent (25%) of the Shares subject to the Subsequent Option on the first anniversary of its date of grant, and as to six and one-quarter percent (6.25%) on the last day of each consecutive three-month period thereafter, provided that the Optionee continues to serve as a Director on such dates. (vii) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the Board or the shareholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. 5. ELIGIBILITY. Options may be granted only to Outside Directors; PROVIDED, HOWEVER, no Outside Director shall be granted an Option hereunder if (A) he or she is directly or indirectly the beneficial owner of three percent (3%) or more of the Company's outstanding Common Stock, or (B) he or she is an affiliate of any person or group of persons or entity or group of entities who individually or in the aggregate are directly or indirectly the beneficial owner(s) of three percent (3%) or more of the Company's outstanding Common Stock. All Options shall be automatically granted in accordance with the terms set forth in Section 4 hereof. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate the Director's relationship with the Company at any time. 6. TERM OF PLAN. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 16 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan. 7. FORM OF CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (iv) consideration received Page 3 of 6 by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (v) any combination of the foregoing methods of payment. 8. EXERCISE OF OPTION. (A) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until shareholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (B) TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR. Subject to Section 10 hereof, in the event an Optionee's status as a Director terminates (other than upon the Optionee's death or total and permanent disability (as defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her Option, but only within three (3) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (C) DISABILITY OF OPTIONEE. In the event Optionee's status as a Director terminates as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but only within twelve (12) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (D) DEATH OF OPTIONEE. In the event of an Optionee's death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and only to the extent that the Optionee was entitled to exercise it on the date of death (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of death, and to the extent that the Optionee's estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. 9. NON-TRANSFERABILITY OF OPTIONS. An Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. Page 4 of 6 10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET SALE. (A) CHANGES IN CAPITALIZATION. Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option, the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (B) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it shall terminate immediately prior to the consummation of such proposed action. (C) MERGER OR ASSET SALE. In the event of a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, outstanding Options may be assumed or equivalent options may be substituted by the successor corporation or a Parent or Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or substituted for, the Option or equivalent option shall continue to be exercisable as provided in Section 4 hereof for so long as the Optionee serves as a Director or a director of the Successor Corporation. Following such assumption or substitution, if the Optionee's status as a Director or director of the Successor Corporation, as applicable, is terminated other than upon a voluntary resignation by the Optionee, the Option or option shall become fully exercisable, including as to Shares for which it would not otherwise be exercisable. Thereafter, the Option or option shall remain exercisable in accordance with Sections 8(a) through (d) above. If the Successor Corporation does not assume an outstanding Option or substitute for it an equivalent option, the Option shall become fully vested and exercisable, including as to Shares for which it would not otherwise be exercisable. In such event the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and upon the expiration of such period the Option shall terminate. For the purposes of this Section 10(c), an Option shall be considered assumed if, following the merger or sale of assets, the Option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares). If such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 11. AMENDMENT AND TERMINATION OF THE PLAN. (A) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with any applicable law, regulation or stock exchange rule, the Page 5 of 6 Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. (B) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4 hereof. 13. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 14. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. OPTION AGREEMENT. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to approval by the stockholders of the Company at or prior to the first annual meeting of stockholders held subsequent to the granting of an Option hereunder. Such stockholder approval shall be obtained in the degree and manner required under applicable state and federal law and any stock exchange rules. Page 6 of 6 PEREGRINE SYSTEMS, INC. DIRECTOR STOCK OPTION AGREEMENT Peregrine Systems, Inc., a Delaware corporation (the "Company"), has granted to ______________________________________ (the "Optionee"), an option to purchase a total of __________________ (_________) shares of the Company's Common Stock (the "Optioned Stock"), at the price determined as provided herein, and in all respects subject to the terms, definitions, and provisions of the Company's 1997 Director Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. The terms defined in the Plan shall have the same defined meanings herein. 1. NATURE OF THE OPTION. This Option is a nonstatutory option and is not intended to qualify for any special tax benefits to the Optionee. 2. EXERCISE PRICE. The exercise price is $_______ for each share of Common Stock. 3. EXERCISE OF OPTION. This Option shall be exercisable during its term in accordance with the provisions of Section 8 of the Plan as follows: (i) RIGHT TO EXERCISE. (a) This Option shall become exercisable in installments cumulatively with respect to twenty-five percent (25%) of the Optioned Stock on the first anniversary of the date of grant, and six and one-quarter percent (6.25%) of the Optioned Stock on the last day of each consecutive three month period thereafter so that one hundred percent (100%) of the Optioned Stock shall be exercisable four (4) years after the date of grant. In no event shall any Option be exercisable prior to the date the shareholders of the Company approve the Plan. (b) This Option may not be exercised for a fraction of a share. (c) In the event of Optionee's death, disability, or other termination of service as a Director, the exercisability of the Option shall be governed by Section 8 of the Plan. (ii) METHOD OF EXERCISE. This Option shall be exercisable by written notice which shall state the election to exercise the Option and the number of Shares in respect of which the Option is being exercised. Such written notice, in the form attached hereto as EXHIBIT A, shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the exercise price. 4. METHOD OF PAYMENT. Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee: (i) cash; (ii) check; (iii) surrender of other shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; or (iv) delivery of a properly executed exercise notice together with such other documentation as the Company and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price. Page 1 of 2 5. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulations, or if such issuance would not comply with the requirements of any stock exchange upon which the Shares may then be listed. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 6. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 7. TERM OF OPTION. This Option may not be exercised more than ten (10) years from the date of grant of this Option, and may be exercised during such period only in accordance with the Plan and the terms of this Option. 8. TAXATION UPON EXERCISE OF OPTION. Optionee understands that, upon exercise of this Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then Fair Market Value of the Shares purchased over the exercise price paid for such Shares. Since the Optionee is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, under certain limited circumstances the measurement and timing of such income (and the commencement of any capital gain holding period) may be deferred, and the Optionee is advised to contact a tax advisor concerning the application of Section 83 in general and the availability a Section 83(b) election in particular in connection with the exercise of the Option. Upon a resale of such Shares by the Optionee, any difference between the sale price and the Fair Market Value of the Shares on the date of exercise of the Option, to the extent not included in income as described above, will be treated as capital gain or loss. DATE OF GRANT: -------------- PEREGRINE SYSTEMS, INC. a Delaware corporation By: ------------------------------- Name: ----------------------------- Title: ----------------------------- Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee hereby agrees to accept as binding, conclusive, and final all decisions or interpretations of the Board upon any questions arising under the Plan. Dated: ----------------- ------------------------------ Optionee [PEREGRINE SYSTEMS 1997 DIRECTOR OPTION PLAN -- OPTION AGREEMENT SIGNATURE PAGE] Page 2 of 2 EXHIBIT A DIRECTOR STOCK OPTION EXERCISE NOTICE Peregrine Systems, Inc. 12670 High Bluff Drive San Diego, California 92130 Attention: Corporate Secretary 1. EXERCISE OF OPTION. The undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase ______ shares of the Common Stock (the "Shares") of Peregrine Systems, Inc. (the "Company") under and pursuant to the Company's 1997 Director Option Plan and the Director Option Agreement dated _______________ (the "Agreement"). 2. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has received, read, and understood the Agreement. 3. FEDERAL RESTRICTIONS ON TRANSFER. Optionee understands that the Shares must be held indefinitely unless they are registered under the Securities Act of 1933, as amended (the "1933 Act"), or unless an exemption from such registration is available, and that the certificate(s) representing the Shares may bear a legend to that effect. Optionee understands that the Company is under no obligation to register the Shares and that an exemption may not be available or may not permit Optionee to transfer Shares in the amounts or at the times proposed by Optionee. 4. TAX CONSEQUENCES. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultant(s) Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 5. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company the aggregate purchase price for the Shares that Optionee has elected to purchase and has made provision for the payment of any federal or state withholding taxes required to be paid or withheld by the Company. Page 1 of 2 6. ENTIRE AGREEMENT. The Agreement is incorporated herein by reference. This Exercise Notice and the Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof. This Exercise Notice and the Agreement are governed by California law except for that body of law pertaining to conflict of laws. Submitted by: Accepted by: OPTIONEE: PEREGRINE SYSTEMS, INC. Name: Name: ------------------------------- ---------------------------------- Title: ---------------------------------- Address: Address: - -------------------------------------- 12670 High Bluff Drive San Diego, California 92130 - -------------------------------------- Dated: Dated: ------------------------------- -------------------------------- Page 2 of 2 EX-11.1 6 EXHIBIT 11.1 EXHIBIT 11.1 PEREGRINE SYSTEMS, INC. COMPUTATION OF NET INCOME (LOSS) PER SHARE
YEAR ENDED MARCH 31, --------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Net income (loss) . . . . . . . . . . . . . . . . . $ 51,000 $(6,411,000) $ 5,802,000 ----------- ----------- ----------- Weighted Average Number of Shares and Equivalent Shares Outstanding Weighted Average Number of Shares Outstanding . . . 10,204,700 11,076,000 12,320,000 Effect of Stock Options and Restricted Stock(1) . . 2,045,300 1,254,000 2,644,000 ----------- ----------- ----------- 12,250,000 12,331,000 14,964,000 ----------- ----------- ----------- Net Income (Loss) Per Share . . . . . . . . . . . . $ - $ (0.52) $ 0.39 ----------- ----------- ----------- ----------- ----------- -----------
- --------------------- (1) Shares related to operations granted within the twelve months preceding, the Company's initial public offering at exercise prices below the initial public offering price have been retroactively included in the calculation of net income (loss) per share; whether or not dilutive, as required by the regulations of the Securities and Exchange Commission. EX-27 7 EXHIBIT 27
5 12-MOS MAR-31-1997 APR-01-1996 MAR-31-1997 305,000 0 10,411,000 (220,000) 0 14,354,000 9,282,000 (4,918,000) 19,738,000 18,419,000 1,395,000 0 0 13,000 (2,862,000) 19,738,000 35,035,000 35,035,000 4,876,000 30,347,000 27,000 90,000 451,000 4,210,000 (1,592,000) 5,802,000 0 0 0 5,802,000 (0.39) (0.39)
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