- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2 TO
FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
NOVEMBER 20, 2002
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 001-16393 74-2126120
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
</Table>
<Table>
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS 77042-2827
(Address of principal executive offices) (Zip code)
</Table>
Registrant's telephone number, including area code:
(713) 918-8800
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
On November 20, 2002, BMC Software, Inc. ("BMC") acquired the assets
related to Remedy(R) products ("Remedy") from Peregrine Systems, Inc.
("Peregrine") for $355 million in cash and the assumption of certain operating
liabilities related to Remedy. This Amendment No. 2 to BMC's Current Report on
Form 8-K dated as of November 20, 2002, which was originally filed with the
Securities and Exchange Commission ("SEC") on December 4, 2002 and was amended
by Amendment No. 1 filed with the SEC on February 14, 2003, is being filed to
amend and restate unaudited historical financial statements and related notes
for Remedy as of September 30, 2002 and for the six months then ended, and pro
forma financial information of BMC after giving effect to the acquisition of
Remedy, that were previously filed in Amendment No. 1 to BMC's Current Report on
Form 8-K.
BMC recently discovered an error principally related to the recording of
revenues associated with Remedy operations in Europe. Beginning on April 1,
2002, the revenues for these operations had been recorded in the financial
records of a subsidiary of Peregrine and had not been properly pushed down to
Remedy's historical financial statements for the period from April 1, 2002 to
September 30, 2002. As a result, these revenues were inadvertently omitted from
the historical financial statements and pro forma financial information
previously filed with Amendment No. 1. The error did not impact the expenses
previously reported in Remedy's consolidated statements of operations (other
than income tax expense), however the increase in revenue reduces the net loss
for the previously-mentioned period as well as impacts certain items in Remedy's
consolidated balance sheet at September 30, 2002, consolidated statement of
stockholders' equity and comprehensive income (loss) for the six months ended
September 30, 2002 and consolidated statement of cash flows for the six months
ended September 30, 2002. For a more complete description of the changes caused
by this restatement, see Note 14 to the restated historical financial statements
included herein.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
<Table>
Reports of Independent Accountants and Independent
Auditors.................................................. 3
Consolidated Balance Sheets................................. 6
Consolidated Statements of Operations....................... 7
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss)............................... 9
Consolidated Statements of Cash Flows....................... 11
Notes to Consolidated Financial Statements.................. 13
</Table>
2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of Peregrine Remedy, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholder's equity and comprehensive
income (loss) and of cash flows present fairly, in all material respects, the
financial position of Peregrine Remedy, Inc. and its subsidiaries ("Successor"
or the "Company") at March 31, 2002, and the results of their operations and
their cash flows for the period from August 28, 2001 through March 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. 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 of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, Peregrine
Systems, Inc. ("Peregrine") acquired the Company on August 27, 2001, in a
business combination accounted for as a purchase. As a result, the financial
statements of the Company subsequent to that date are derived from the historic
books and records of Peregrine on a carved-out basis and reflect significant
assumptions and allocations and, therefore, are not comparable. Accordingly, the
consolidated financial statements do not necessarily reflect the financial
position, results of operations, changes in stockholder's equity and cash flows
of the Company had it been a separate, stand-alone entity during the periods
presented.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 14, 2003
3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of Peregrine Remedy, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and comprehensive
income (loss) and of cash flows present fairly, in all material respects, the
financial position of Remedy Corporation and its subsidiaries ("Predecessor") at
March 31, 2001, and the results of their operations and their cash flows for the
periods from January 1, 2001 through March 31, 2001 and from April 1, 2001
through August 27, 2001 in conformity with accounting principles generally
accepted in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 14, 2003
4
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Remedy Corporation
We have audited the accompanying consolidated balance sheets of Remedy
Corporation as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss)
and cash flows for each of the two years in the period ended December 31, 2000.
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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Remedy
Corporation at December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
San Francisco, California
January 18, 2001
5
PEREGRINE REMEDY, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------------------------- ------------------------------
MARCH 31, DECEMBER 31,
SEPTEMBER 30, ---------------------- -------------------
2002 2002 2001 2000 1999
------------- ----------- -------- -------- --------
(UNAUDITED)
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 5,859 $ 48,486 $ 49,082 $ 43,119 $ 47,302
Short-term investments........................... -- 324 167,169 164,780 125,116
Accounts receivable, net of allowance for
doubtful accounts of $2,342, $1,399, $2,306,
$1,374 and $1,499.............................. 38,382 50,040 51,094 79,326 64,105
Prepaid expenses and other current assets........ 1,498 2,022 9,525 5,861 7,383
Income tax receivable............................ -- -- 1,379 -- --
Deferred tax asset............................... 14,900 6,868 7,457 7,157 4,380
----------- ----------- -------- -------- --------
Total current assets........................... 60,639 107,740 285,706 300,243 248,286
Property and equipment, net........................ 9,621 13,915 21,562 19,418 14,945
Intangible assets, net............................. 139,433 157,233 -- -- --
Goodwill, net...................................... -- -- 26,114 25,439 18,809
Other non-current assets........................... 745 1,070 408 524 2,996
Deferred tax asset -- non-current portion.......... -- -- 3,829 3,437 2,451
----------- ----------- -------- -------- --------
$ 210,438 $ 279,958 $337,619 $349,061 $287,487
=========== =========== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 2,418 $ 3,493 $ 7,099 $ 4,036 $ 1,861
Accrued compensation and related liabilities..... 8,081 8,562 7,377 10,293 15,432
Income taxes payable............................. 6,200 356 -- 3,616 1,341
Other accrued liabilities........................ 11,653 17,894 19,857 20,942 15,395
Current portion of deferred revenue.............. 63,804 70,952 59,275 56,915 38,828
Current portion of obligations under capital
leases......................................... -- -- -- -- 67
----------- ----------- -------- -------- --------
Total current liabilities...................... 92,156 101,257 93,608 95,802 72,924
Non-current portion of deferred revenue............ 5,139 4,432 982 -- --
Non-current portion of deferred tax liability...... 54,770 56,399 -- -- --
Long-term debt..................................... 46,214 -- -- -- --
Non-current portion of obligations under capital
leases........................................... -- -- -- -- 23
----------- ----------- -------- -------- --------
Total liabilities.............................. 198,279 162,088 94,590 95,802 72,947
Commitments and Contingencies
Stockholders' equity:
Preferred stock, par value $.00005 per share;
20,000 shares authorized through August 27,
2001; none issued and outstanding.............. -- -- -- -- --
Common stock, par value $.001 per share; 1 shares
authorized subsequent to August 27, 2001; 1 and
1 shares issued and outstanding as of September
30 and March 31, 2002.......................... -- -- -- -- --
Common stock, par value $.00005 per share;
240,000 shares authorized through August 27,
2001; 30,308, 30,314 and 30,065 shares issued
and outstanding as of March 31, 2001, December
31, 2000 and 1999.............................. -- -- 2 2 2
Additional paid-in capital....................... 1,021,541 1,135,421 188,573 184,228 141,544
Deferred compensation............................ (7,504) (16,905) -- -- --
Treasury stock, at cost (4,132, 3,872 and 2,002
shares as of March 31, 2001, December 31, 2000
and 1999)...................................... -- -- (74,924) (68,441) (31,267)
Notes receivable from stockholders............... -- -- -- -- (45)
Accumulated other comprehensive income (loss).... 673 (231) (92) (396) 9
Retained earnings (loss)......................... (1,002,551) (1,000,415) 129,470 137,866 104,297
----------- ----------- -------- -------- --------
Total stockholders' equity..................... 12,159 117,870 243,029 253,259 214,540
----------- ----------- -------- -------- --------
$ 210,438 $ 279,958 $337,619 $349,061 $287,487
=========== =========== ======== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
6
PEREGRINE REMEDY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
SUCCESSOR PREDECESSOR
-------------------------- -----------
FOR THE PERIODS
-----------------------------------------
4/01/02 8/28/01 4/01/01
TO TO TO
9/30/02 9/30/01 8/27/01
----------- ----------- -----------
(UNAUDITED)
(RESTATED) (UNAUDITED)
(IN THOUSANDS)
Revenue:
Product................................................ $ 39,735 $ 20,613 $ 36,422
Maintenance and service................................ 66,872 14,992 59,347
-------- -------- --------
Total revenue....................................... 106,607 35,605 95,769
Costs and expenses:
Cost of product revenue................................ 3,453 416 2,595
Cost of maintenance and service revenue................ 20,104 4,217 22,460
Research and development............................... 13,736 3,925 21,047
Sales and marketing.................................... 26,460 9,309 47,487
General and administrative............................. 18,254 4,353 13,433
In-process research and development.................... -- 86,000 --
Amortization of goodwill and other intangibles......... 17,800 2,966 7,181
Amortization of stock-based compensation............... 8,358 3,035 --
Restructuring costs.................................... -- -- 975
-------- -------- --------
Total costs and expenses............................ 108,165 114,221 115,178
-------- -------- --------
Loss from operations..................................... (1,558) (78,616) (19,409)
Interest income (expense) and other, net................. (2,102) 815 3,198
-------- -------- --------
Loss before income taxes................................. (3,660) (77,801) (16,211)
Income tax provision (benefit)........................... (1,524) 3,280 (6,694)
-------- -------- --------
Net loss................................................. $ (2,136) $(81,081) $ (9,517)
======== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
7
PEREGRINE REMEDY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------- ----------------------------------------------
FOR THE PERIODS
---------------------- FOR THE THREE FOR THE YEARS ENDED
8/28/01 4/01/01 MONTHS ENDED DECEMBER 31,
TO TO MARCH 31, -------------------
3/31/02 8/27/01 2001 2000 1999
----------- -------- ------------- -------- --------
(IN THOUSANDS)
Revenue:
Product.......................... $ 73,926 $ 36,422 $ 26,190 $167,958 $141,451
Maintenance and service.......... 84,939 59,347 35,555 120,552 87,482
----------- -------- -------- -------- --------
Total revenue................. 158,865 95,769 61,745 288,510 228,933
Costs and expenses:
Cost of product revenue.......... 4,520 2,595 2,026 10,531 6,869
Cost of maintenance and service
revenue....................... 23,709 22,460 15,271 47,709 37,136
Research and development......... 20,730 21,047 15,900 52,038 40,948
Sales and marketing.............. 48,194 47,487 34,207 110,477 88,787
General and administrative....... 26,963 13,433 5,435 17,405 12,271
In-process research and
development................... 86,000 -- -- -- --
Amortization of goodwill and
other intangibles............. 20,767 7,181 2,575 8,906 4,072
Impairment of goodwill........... 914,260 -- -- -- --
Amortization of stock-based
compensation.................. 19,020 -- -- -- --
Restructuring costs.............. (280) 975 3,393 -- --
----------- -------- -------- -------- --------
Total costs and expenses...... 1,163,883 115,178 78,807 247,066 190,083
----------- -------- -------- -------- --------
Income (loss) from operations...... (1,005,018) (19,409) (17,062) 41,444 38,850
Interest income and other, net..... 3,633 3,198 2,954 8,742 4,961
Non-recurring charges.............. -- -- -- (2,000) --
----------- -------- -------- -------- --------
Income (loss) before income
taxes............................ (1,001,385) (16,211) (14,108) 48,186 43,811
Income tax provision (benefit)..... (970) (6,694) (5,712) 14,617 14,288
----------- -------- -------- -------- --------
Net income (loss).................. $(1,000,415) $ (9,517) $ (8,396) $ 33,569 $ 29,523
=========== ======== ======== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
8
PEREGRINE REMEDY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE OTHER TOTAL
---------------- PAID-IN TREASURY FROM COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK STOCKHOLDERS INCOME (LOSS) EARNINGS EQUITY
------- ------ ---------- -------- ------------ ------------- -------- -------------
(IN THOUSANDS)
PREDECESSOR:
Balance at December 31,
1998....................... 28,488 $ -- $ 99,952 $(13,977) $(45) $ -- $ 74,774 $160,704
Components of comprehensive
income:
Net income............... -- -- -- -- -- -- 29,523 29,523
Unrealized hedging
gains.................. -- -- -- -- -- 23 -- 23
Translation adjustment... -- -- -- -- -- (14) -- (14)
--------
Comprehensive income......... 29,532
Issuance of common stock upon
exercise of options and
purchases under the
employee stock purchase
plan....................... 2,463 2 30,064 -- -- -- -- 30,066
Tax benefit from employee
stock transactions......... -- -- 11,528 -- -- -- -- 11,528
Treasury stock purchased..... (886) -- -- (17,290) -- -- -- (17,290)
------- ----- -------- -------- ---- ----- -------- --------
Balance at December 31,
1999....................... 30,065 2 141,544 (31,267) (45) 9 104,297 214,540
Components of comprehensive
income:
Net income............... -- -- -- -- -- -- 33,569 33,569
Unrealized hedging
gains.................. -- -- -- -- -- 9 -- 9
Translation adjustment... -- -- -- -- -- (414) -- (414)
--------
Comprehensive income......... 33,164
Issuance of common stock upon
exercise of options and
purchases under the
employee stock purchase
plan....................... 2,119 -- 28,967 -- -- -- -- 28,967
Tax benefit from employee
stock transactions......... -- -- 13,717 -- -- -- -- 13,717
Repayment of note
receivable................. -- -- -- -- 45 -- -- 45
Treasury stock purchased..... (1,870) -- -- (37,174) -- -- -- (37,174)
------- ----- -------- -------- ---- ----- -------- --------
Balance at December 31,
2000....................... 30,314 2 184,228 (68,441) -- (396) 137,866 253,259
Components of comprehensive
loss:
Net loss................. -- -- -- -- -- -- (8,396) (8,396)
Unrealized gains on
available-for-sale
securities............. -- -- -- -- -- 744 -- 744
Unrealized hedging
gains.................. -- -- -- -- -- (8) -- (8)
Translation adjustment... -- -- -- -- -- (432) -- (432)
--------
Comprehensive loss........... (8,092)
Issuance of common stock upon
exercise of options and
purchases under the
employee stock purchase
plan....................... 254 -- 3,724 -- -- -- -- 3,724
Tax benefit from employee
stock transactions......... -- -- 621 -- -- -- -- 621
Treasury stock purchased..... (260) -- -- (6,483) -- -- -- (6,483)
------- ----- -------- -------- ---- ----- -------- --------
Balance at March 31, 2001.... 30,308 $ 2 $188,573 $(74,924) $ -- $ (92) $129,470 $243,029
======= ===== ======== ======== ==== ===== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
9
PEREGRINE REMEDY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER RETAINED TOTAL
---------------- PAID-IN TREASURY DEFERRED COMPREHENSIVE EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK COMPENSATION INCOME (LOSS) (LOSS) EQUITY
------- ------ ---------- -------- ------------ ------------- ----------- -------------
(IN THOUSANDS)
Balance at March 31,
2001.................... 30,308 $ 2 $ 188,573 $(74,924) $ -- $ (92) $ 129,470 $ 243,029
Components of
comprehensive loss:
Net loss.............. -- -- -- -- -- -- (9,517) (9,517)
Unrealized gains on
available-for-sale
securities.......... -- -- -- -- -- (45) -- (45)
Unrealized hedging
gains............... -- -- -- -- -- (24) -- (24)
Translation
adjustment.......... -- -- -- -- -- (6) -- (6)
-----------
(9,592)
Comprehensive loss........
Issuance of common stock
upon exercise of options
and purchases under the
employee stock purchase
plan.................... 1,183 -- 17,980 -- -- -- -- 17,980
Acquisition of all
outstanding shares by
Peregrine............... (31,490) (2) 1,164,339 74,924 -- 167 (119,953) 1,119,475
Deferred compensation
recorded as part of the
Peregrine acquisition... -- -- -- -- (31,822) -- -- (31,822)
------- ---- ---------- -------- ------- ----- ----------- -----------
SUCCESSOR:
Balance at August 27,
2001.................... 1 -- 1,370,892 -- (31,822) -- -- 1,339,070
Components of
comprehensive loss:
Net loss.............. -- -- -- -- -- -- (1,000,415) (1,000,415)
Translation
adjustment.......... -- -- -- -- -- (231) -- (231)
-----------
(1,000,646)
Comprehensive loss........
Compensation expense...... -- -- -- -- 19,020 -- -- 19,020
Deferred compensation
related to stock option
grants.................. -- -- 5,087 -- (5,087) -- -- --
Deferred compensation
related to terminated
employees............... -- -- (984) -- 984 -- -- --
Tax benefit from employee
stock transactions...... -- -- 1,216 -- -- -- -- 1,216
Return of capital, net of
expenses incurred by
Peregrine on the
Company's behalf........ -- -- (240,790) -- -- -- -- (240,790)
------- ---- ---------- -------- ------- ----- ----------- -----------
Balance at March 31,
2002.................... 1 -- 1,135,421 -- (16,905) (231) (1,000,415) 117,870
Components of
comprehensive loss:
Net loss
(Unaudited)(Restated)... -- -- -- -- -- -- (2,136) (2,136)
Translation adjustment
(Unaudited)......... -- -- -- -- -- 904 -- 904
-----------
(1,232)
Comprehensive loss
(Unaudited).............
Compensation expense
(Unaudited)............. -- -- -- -- 8,358 -- -- 8,358
Deferred compensation
related to terminated
employees (Unaudited)... -- -- (1,043) -- 1,043 -- -- --
Return of capital, net of
expenses incurred by
Peregrine on the
Company's behalf
(Unaudited)(Restated)... -- -- (112,837) -- -- -- -- (112,837)
------- ---- ---------- -------- ------- ----- ----------- -----------
Balance at September 30,
2002
(Unaudited)(Restated)... 1 $ -- $1,021,541 $ -- $(7,504) $ 673 $(1,002,551) $ 12,159
======= ==== ========== ======== ======= ===== =========== ===========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
10
PEREGRINE REMEDY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------- -----------
FOR THE PERIODS
---------------------------------------
4/01/02 8/28/01 4/01/01
TO TO TO
9/30/02 9/30/01 8/27/01
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(RESTATED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (2,136) $(81,081) $ (9,517)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation............................................ 4,314 1,004 4,793
In-process research and development..................... -- 86,000 --
Amortization of goodwill and other intangibles.......... 17,800 2,966 7,181
Impairment of goodwill.................................. -- -- --
Amortization of stock-based compensation................ 8,356 3,035 --
Restructuring costs..................................... -- -- (324)
Changes in assets and liabilities:
Accounts receivable.................................. 11,658 (23,754) 22,844
Prepaid expenses and other current assets............ 524 1,573 2,566
Deferred taxes....................................... (9,661) -- (6,423)
Accounts payable..................................... (1,075) (46) (3,725)
Accrued compensation and related liabilities......... (481) 225 698
Income taxes payable................................. 5,844 4,442 (2,846)
Other accrued liabilities............................ (6,250) 984 (3,435)
Other non-current assets............................. 325 -- (503)
Deferred revenue..................................... (6,441) 6,055 (8,779)
-------- -------- --------
Net cash provided by operating activities.......... 22,777 1,403 2,530
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments......................... -- -- (245,853)
Sales and maturities of short-term investments.............. 324 17,869 267,106
Capital expenditures........................................ (16) (180) (3,406)
-------- -------- --------
Net cash provided by investing activities.......... 308 17,689 17,847
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... -- -- 17,497
Cash transferred (to)/from parent........................... (66,617) 973 --
-------- -------- --------
Net cash provided by (used in) financing
activities....................................... (66,617) 973 17,497
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (43,532) 20,065 37,874
Effect of exchange rate changes on cash and cash
equivalents............................................... 905 179 (795)
Cash and cash equivalents at beginning of period............ 48,486 86,161 49,082
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 5,859 $106,405 $ 86,161
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 20 $ -- $ 30
Income taxes paid......................................... $ 514 $ 905 $ 906
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
11
PEREGRINE REMEDY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------------------- -------------------------------------
FOR THE PERIODS
----------------------- FOR THE THREE FOR THE YEARS ENDED
8/28/01 4/01/01 MONTHS ENDED DECEMBER 31,
TO TO MARCH 31, ---------------------
3/31/02 8/27/01 2001 2000 1999
----------- --------- ------------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $(1,000,415) $ (9,517) $ (8,396) $ 33,569 $ 29,523
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................ 6,328 4,793 2,142 8,924 7,844
In-process research and development................. 86,000 -- -- -- --
Amortization of goodwill and other intangibles...... 20,767 7,181 2,575 8,906 4,072
Impairment of goodwill.............................. 914,260 -- -- -- --
Amortization of stock-based compensation............ 19,020 -- -- -- --
Restructuring costs................................. -- (324) 3,033 2,000 --
Changes in assets and liabilities:
Accounts receivable............................... (21,790) 22,844 28,232 (15,221) (21,827)
Prepaid expenses and other current assets......... 4,937 2,566 (3,664) 1,522 (1,367)
Deferred taxes.................................... 3,685 (6,423) (71) (3,763) (2,300)
Accounts payable.................................. 119 (3,725) 3,063 2,175 9
Accrued compensation and related liabilities...... 487 698 (2,916) (5,139) 7,589
Income taxes receivable/payable................... 4,581 (2,846) (4,995) 15,990 9,305
Other accrued liabilities......................... (9,771) (3,435) (4,118) 4,637 5,219
Other non-current assets.......................... (160) (503) 116 472 (996)
Deferred revenue.................................. 30,027 (8,779) 3,342 18,087 9,873
----------- --------- -------- --------- ---------
Net cash provided by (used in) operating
activities........................................ 58,075 2,530 18,343 72,159 46,944
----------- --------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments..................... -- (245,853) (85,377) (504,511) (291,582)
Sales and maturities of short-term investments.......... 145,592 267,106 82,988 464,846 244,127
Cash paid for businesses acquired, net of cash
assumed............................................... -- -- (3,441) (15,339) (11,028)
Purchase of investments................................. -- -- -- -- (2,000)
Capital expenditures.................................... (321) (3,406) (4,095) (13,043) (10,218)
----------- --------- -------- --------- ---------
Net cash used in investing activities............... 145,271 17,847 (9,925) (68,047) (70,701)
----------- --------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations...... -- -- -- (88) (693)
Proceeds from issuance of common stock.................. -- 17,497 3,724 28,967 30,066
Cash transferred (to)/from parent....................... (240,790) -- -- -- --
Purchase of treasury stock.............................. -- -- (6,483) (37,174) (17,290)
----------- --------- -------- --------- ---------
Net cash provided by (used in) financing
activities........................................ (240,790) 17,497 (2,759) (8,295) 12,083
----------- --------- -------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... (37,444) 37,874 5,659 (4,183) (11,674)
Effect of exchange rate changes on cash and cash
equivalents........................................... (231) (795) 304 -- --
Cash and cash equivalents at beginning of period........ 86,161 49,082 43,119 47,302 58,976
----------- --------- -------- --------- ---------
Cash and cash equivalents at end of period.............. $ 48,486 $ 86,161 $ 49,082 $ 43,119 $ 47,302
=========== ========= ======== ========= =========
Supplemental disclosure of cash flow information:
Interest paid......................................... $ 54 $ 30 $ 20 $ 12 $ 30
Income taxes paid, net of refunds..................... $ 1,175 $ 906 $ (985) $ 2,260 $ 7,443
Supplemental disclosure of non-cash financing
activities:
Equipment acquired under capital lease arrangements... $ -- $ -- $ -- $ -- $ 86
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
12
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND. Peregrine Remedy, Inc., formerly Remedy Corporation, ("Remedy"
or the "Company") develops, markets and supports rapidly deployable and highly
adaptable software products and solutions that simplify service-intensive
business processes. Remedy offers adaptable applications for IT Service
Management and Customer Relationship Management. The Company has wholly-owned
subsidiaries in the United Kingdom, Canada, Germany, France, Spain, Italy, The
Netherlands, Sweden, Switzerland, Mexico, Singapore, Australia, Japan, Hong Kong
and Ireland. These subsidiaries serve primarily as sales offices.
Remedy Corporation was incorporated in Delaware on November 20, 1990. On
August 27, 2001, Remedy Corporation was acquired by Peregrine Systems Inc.,
("Peregrine"), a publicly-held software company. Peregrine Remedy, Inc. is the
surviving entity of the merger of Remedy Corporation with a wholly-owned merger
subsidiary of Peregrine. Peregrine issued approximately 28 million shares of its
common stock valued at $795.1 million, assumed 9.2 million Remedy stock options
valued at $263.8 million and paid approximately $283.4 million in cash in
exchange for all the outstanding shares of Remedy for a total purchase price of
approximately $1.4 billion, including merger-related costs of approximately
$22.9 million and an existing investment in Remedy of $5.7 million. Remedy
incurred $3.2 million of professional fees related to the Peregrine acquisition,
which are reflected as general and administrative expenses in the accompanying
statement of operations for the period from April 1, 2001 through August 27,
2001.
On September 22, 2002, Peregrine filed a voluntary petition to reorganize
under Chapter 11 of the U.S. Bankruptcy Code and announced an agreement to sell
all of the assets and substantially all of the liabilities of Remedy to BMC
Software, Inc. ("BMC"). To facilitate the transaction, the Company also filed a
voluntary Chapter 11 petition. None of the Company's wholly-owned subsidiaries
filed for bankruptcy. In connection with the acquisition, BMC provided Peregrine
with $53.8 million of debtor-in-possession financing. On November 20, 2002, BMC
completed the acquisition for $355 million in cash and the assumption of certain
operating liabilities of Remedy. In accordance with the purchase agreement, the
cash purchase price is subject to adjustment. The amount outstanding under the
debtor-in-possession financing was repaid by Peregrine at the closing of the
acquisition. As BMC assumed substantially all of the Company's liabilities at
the closing date of the acquisition, the liabilities included in the
accompanying consolidated balance sheet as of September 30, 2002, that would be
subject to compromise are not significant. In addition, the results of
operations and cash flows for the period of September 23, 2002 through September
30, 2002 were not material. Reorganization costs included in the accompanying
consolidated statement of operations for the six months ended September 30, 2002
are also not significant.
In February, 2003, BMC made a written commitment to provide the necessary
resources to support the Remedy assets acquired by BMC through February, 2004.
The Company believes this committed future investment will be sufficient to meet
the operating requirements of the acquired assets through February, 2004. The
acquired assets' ability to meet operating requirements for a significant period
after February, 2004 will depend on continued funding from BMC. Without this
continued funding, the acquired assets' ability to achieve intended business
objectives, may be severely harmed.
BASIS OF PRESENTATION. The financial statements of Remedy Corporation are
derived from the historic books and records of the Company through August 27,
2001. As a result of the acquisition of Remedy Corporation by Peregrine on
August 27, 2001, the financial statements of the Company subsequent to that date
reflect the application of purchase accounting pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
are derived from the historic books and records of Peregrine. As a result,
certain revenues and expenses have been derived from the historical books and
records of Peregrine on a carved-out basis and reflect significant allocations
and assumptions. As such, the accompanying consolidated financial statements for
periods prior to August 27, 2001, are not comparable to those subsequent to the
acquisition date, and refer to Remedy as "Predecessor." For periods subsequent
to April 27, 2001, Remedy is referred to as "Successor."
13
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed in Note 13, subsequent to the acquisition by Peregrine,
certain amounts of the Company's corporate expenses, including legal,
accounting, employee benefits, real estate, insurance, information technology
services, treasury and other corporate and infrastructure costs, although not
directly attributable to the Company's operations, were incurred by Peregrine on
Remedy's behalf and therefore have been allocated to Remedy in the accompanying
consolidated statements of operations on a basis that management believes
reflects a reasonable utilization of services provided or benefit received by
Remedy for the periods after August 27, 2001. The contribution of these amounts
from Peregrine to Remedy has been recorded as additional paid-in capital within
stockholder's equity. The Company does not believe such expenses would have been
significantly different had they been incurred by Remedy on a stand-alone basis,
however, the financial information included herein may not reflect the financial
position, operating results, changes in stockholder's equity and cash flows of
the Company in the future or what they would have been had Remedy been a
separate, stand-alone entity after August 27, 2001.
The unaudited interim consolidated financial information has been prepared
on the same basis as the accompanying audited consolidated financial statements
and reflects all normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of such financial information.
The results of operations for the interim periods of April 1, 2001 through
August 27, 2001, August 28, 2001 through September 30, 2001 and March 31, 2002,
and April 1, 2002 through September 30, 2002 are not necessarily indicative of
the results of operations to be expected for any other interim period or for the
full year. The accompanying financial information as of September 30, 2002 and
for the periods of August 28, 2001 through September 30, 2001 and April 1, 2002
through September 30, 2002 is unaudited.
In a press release dated May 23, 2002, Peregrine disclosed that the staff
of the Securities and Exchange Commission commenced a formal order of private
investigation into Peregrine's accounting practices. The Company does not
believe that the ultimate outcome of this investigation will have an impact on
the accompanying consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries after elimination
of all significant intercompany accounts and transactions.
FOREIGN CURRENCY TRANSLATION. The functional currency of most of the
Company's foreign subsidiaries is the local currency. Assets and liabilities of
the foreign subsidiaries are translated at period-end exchange rates, and
revenues and expenses are translated at average monthly exchange rates. The
resulting cumulative translation adjustments are recorded as a component of
accumulated other comprehensive income (loss). Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations and, to date, have not been significant.
REVENUE RECOGNITION. The Company recognizes revenue in accordance with
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," as amended. The Company
derives revenue from the sale of software licenses, post-contract support
("support") and other services. Support includes telephone technical support,
bug fixes and rights to upgrades on a when-and-if available basis for a stated
term of generally one year. Services range from installation, training and basic
consulting to software modification to meet specific customer needs. In software
arrangements that include rights to multiple software products, support and/or
other services, the Company allocates the total arrangement fee among each
deliverable based on the relative fair value of each of the deliverables
determined based on objective evidence which is specific to the Company.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed or
determinable and collection is probable. Revenue from license fees in
14
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
multiple element contracts is recognized using the residual method when there is
vendor specific objective evidence ("VSOE") of the fair value of all undelivered
elements in an arrangement but VSOE of fair value does not exist for one or more
of the delivered elements in an arrangement. Under the residual method, the
total fair value of the undelivered elements, as indicated by vendor specific
objective evidence, is deferred and the difference between the total arrangement
fee and the amount deferred for the undelivered elements is recognized as
revenue related to the delivered elements regardless of any separate prices
stated within the contract for each element. VSOE of fair value for the services
element is based on the standard hourly rate the Company charges for services
when such services are sold separately. VSOE of fair value for maintenance is
based upon the original stated renewal rates or renewal rates charged in
comparable transactions. If the fee due from the customer is not fixed or
determinable due to extended payment terms, revenue is recognized as payments
become due from the customer. If collection is not considered probable, revenue
is recognized when the fee is collected.
Revenue allocable to support is recognized on a straight-line basis over
the periods in which the support is provided.
Arrangements that include consulting services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When services are considered essential, revenue under the
arrangement is recognized in accordance with SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts." When
services are not considered essential, the revenue allocable to the services is
accounted for separately and recognized as the services are performed.
CHANGE IN FISCAL YEAR END. Prior to its acquisition by Peregrine, Remedy's
fiscal year ended on December 31. As of August 27, 2001, the Company adopted
Peregrine's fiscal year end of March 31. The accompanying consolidated financial
statements include an audited balance sheet as of March 31, 2001, and audited
statements of operations, stockholders' equity and comprehensive income (loss)
and cash flows for the three-month transition period ended March 31, 2001. The
following unaudited condensed financial information presents the three-month
period ended March 31, 2000, for comparative purposes.
<Table>
<Caption>
FOR THE THREE
MONTHS ENDED
MARCH 31,
2000
--------------
(UNAUDITED)
(IN THOUSANDS)
Total revenue............................................... $61,932
Total costs and expenses.................................... 55,565
-------
Income from operations...................................... 6,367
Interest income and other, net.............................. 1,674
-------
Income before income taxes.................................. 8,041
Income tax provision........................................ 2,573
-------
Net income.................................................. $ 5,468
=======
</Table>
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 amounts reported in financial
statements and accompanying notes. Actual results could differ from these
estimates.
RECLASSIFICATIONS. Certain amounts for prior years have been reclassified
to conform to current year presentation.
CASH, CASH EQUIVALENTS AND SHORT-TERM AND OTHER INVESTMENTS. The Company
considers all highly liquid investments with an original maturity from date of
purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of cash on deposit with banks and high-quality
money
15
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market instruments. All other liquid investments with an original maturity of
less than one year are classified as short-term investments. Short-term
investments consist of municipal bonds, auction market preferred stock,
corporate bonds, floating rate securities and government securities. The Company
accounts for its cash equivalents and short-term investments in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Management determines the appropriate classification of investment
securities at the time of purchase and re-evaluates such designation as of each
balance sheet date. For all periods presented, all investment securities were
designated as available-for-sale. Available-for-sale securities are carried at
fair value, using available market information and appropriate valuation
methodologies, with unrealized gains and losses reported as a component of
accumulated other comprehensive income (loss). For the years ended December 31,
2000 and 1999, the difference between the fair value and the amortized cost of
cash equivalents and short-term available-for-sale securities was insignificant;
therefore, no unrealized gains or losses were recorded as a component of
accumulated other comprehensive income (loss).
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in the
consolidated statements of operations. The cost of securities sold is based on
the specific identification method. Interest and dividends on short-term
investments classified as available-for-sale are included in interest income as
earned.
Prior to Peregrine's acquisition of Remedy on August 27, 2001, cash
generated from the Company's operations was invested in cash equivalents and
short-term investments. From the acquisition date through March 31, 2002,
Remedy's cash generated from operations continued to be invested in cash
equivalents and short-term investments, but the accounts were under the control
of Peregrine. Cash transferred to Peregrine is reflected as a distribution to
stockholder in additional paid-in capital the accompanying consolidated
financial statements.
The Company's cash equivalents and short-term available-for-sale
investments consisted of the following:
<Table>
<Caption>
MARCH 31, 2001
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
Municipal bonds................................... $ 70,103 $203 $ -- $ 70,306
Auction rate securities........................... 13,740 -- -- 13,740
Corporate bonds and floating rate securities...... 35,679 243 -- 35,922
Government securities............................. 46,578 298 -- 46,876
Certificates of deposit and marketable
securities...................................... 1,091 -- -- 1,091
-------- ---- ----- --------
$167,191 $744 $ -- $167,935
======== ==== ===== ========
</Table>
<Table>
<Caption>
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Municipal bonds............................................. $101,582 $ 60,653
Auction rate securities..................................... 31,050 22,949
Corporate bonds and floating rate securities................ 31,824 32,514
Government securities....................................... -- 9,000
Certificates of deposit and marketable securities........... 975 534
-------- --------
$165,431 $125,650
======== ========
</Table>
16
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of September 30, 2002, the Company had no cash equivalents and
short-term investments. As of March 31, 2002, the Company had certificates of
deposit and marketable securities with amortized cost and fair value of $0.3
million classified as short-term investments. As of March 31, 2001, $0.7 million
and $167.2 million were classified as cash equivalents and short-term
investments, respectively. As of December 31, 2000, $0.6 million and $164.8
million were classified as cash equivalents and short-term investments,
respectively. As of December 31, 1999, $0.5 million and $125.1 million were
classified as cash equivalents and short-term investments, respectively. For all
periods presented, the weighted average remaining maturity of the investments
did not exceed one year.
During the year ended December 31, 1999, the Company made a minority equity
investment of $2.0 million in a privately-held software company accounted for
using the cost method. During the year ended December 31, 2000, Remedy wrote off
the $2.0 million investment after determining that the investment was
permanently impaired. Remedy has no other material equity investments in any of
the periods presented.
RESTRICTED CASH. At March 31, 2002 and 2001, a cash balance of
approximately $300,000 was restricted from withdrawal and held by a bank in the
form of certificates of deposit which served as collateral to a letter of credit
issued to one of the Company's landlords as a security deposit.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The fair values of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses are not
materially different than their carrying amounts for all periods presented
because of their short maturities.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are depreciated over the lesser of the term
of the lease or the estimated useful life of the asset. Prior to the Company's
acquisition by Peregrine, the weighted average useful life for all property and
equipment was three years. In connection with the Peregrine acquisition, the
acquired assets were recorded at fair value and the weighted average useful life
for furniture and fixtures was changed to ten years. The weighted average useful
lives for all other asset categories remained three years. This change in useful
life did not have a material impact on the Company's results of operations.
Internal-use software is accounted for under AICPA SOP 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." This
standard requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. This SOP also requires that costs related to the
preliminary project stage, data conversion and the post-implementation/operation
stage of an internal-use software development project be expensed as incurred.
Property and equipment consist of the following:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------------------- ------------------------------
MARCH 31, DECEMBER 31,
SEPTEMBER 30, ------------------ -------------------
2002 2002 2001 2000 1999
------------- ------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
Machinery and equipment................. $ 8,120 $ 8,463 $ 32,692 $ 31,408 $ 25,437
Furniture and fixtures.................. 2,589 2,605 4,880 4,089 2,444
Purchased software...................... 5,383 5,407 10,659 9,821 5,340
Automobiles............................. -- -- 298 298 --
Leasehold improvements.................. 3,338 3,338 5,352 3,613 2,612
------- ------- -------- -------- --------
19,430 19,813 53,881 49,229 35,833
Less: accumulated depreciation.......... (9,809) (5,898) (32,319) (29,811) (20,888)
------- ------- -------- -------- --------
$ 9,621 $13,915 $ 21,562 $ 19,418 $ 14,945
======= ======= ======== ======== ========
</Table>
17
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS. Through August 27, 2001, intangible assets consisted of
acquired workforce and goodwill recorded in conjunction with various Remedy
acquisitions accounted for under the purchase method of accounting, as discussed
in Note 11, and were amortized over their estimated useful lives. At August 27,
2001, these intangible assets were removed from the Company's consolidated
balance sheet in conjunction with Peregrine's purchase price allocation for its
acquisition of Remedy. Subsequent to August 27, 2001, intangible assets consist
of the acquired technology, customer base and goodwill recorded as part of the
pushdown of the fair value of all assets attributable to Remedy as recorded on
Peregrine's books, as discussed in Note 11. The acquired technology and customer
base are being amortized over their estimated useful lives of five years.
Estimated annual amortization expense is $35.6 million through March 31, 2006
and $14.8 million for the year ending March 31, 2007. The goodwill of $914.3
million has not been amortized. The goodwill and its subsequent impairment to
its fair value of $0 were pushed down to Remedy's consolidated financial
statements during the year ended March 31, 2002.
Goodwill and other intangible assets consist of the following:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------------------ ------------------------------
MARCH 31, DECEMBER 31,
SEPTEMBER 30, ------------------- -------------------
2002 2002 2001 2000 1999
------------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
Goodwill............................... $ -- $ -- $ 40,038 $ 36,790 $ 22,528
Less: accumulated amortization....... -- -- (15,366) (12,923) (4,437)
-------- -------- -------- -------- --------
Goodwill, net........................ -- -- 24,672 23,867 18,091
-------- -------- -------- -------- --------
Acquired workforce..................... -- -- 2,072 2,073 798
Less: accumulated amortization....... -- -- (630) (501) (80)
-------- -------- -------- -------- --------
Acquired workforce, net.............. -- -- 1,442 1,572 718
-------- -------- -------- -------- --------
Acquired technology.................... 53,000 53,000 -- -- --
Less: accumulated amortization....... (11,483) (6,183) -- -- --
-------- -------- -------- -------- --------
Acquired technology, net............. 41,517 46,817 -- -- --
-------- -------- -------- -------- --------
Customer base.......................... 125,000 125,000 -- -- --
Less: accumulated amortization (27,084) (14,584) -- --
-------- -------- -------- -------- --------
Customer base, net................... 97,916 110,416 -- -- --
-------- -------- -------- -------- --------
Total goodwill and other intangible
assets, net.......................... $139,433 $157,233 $ 26,114 $ 25,439 $ 18,809
======== ======== ======== ======== ========
</Table>
IMPAIRMENT OF LONG-LIVED ASSETS. Through March 31, 2002, the Company
assessed impairment of long-lived assets and certain identifiable intangibles
under SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of," and goodwill under APB Opinion No. 17,
"Intangible Assets." The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the use of an
asset are less than its carrying value. If an asset is considered to be
impaired, the impairment to be recognized is measured as the amount by which the
carrying amount of the asset exceeds the fair market value of the asset. As
discussed under Recent Pronouncements below, as of April 1, 2002, the Company
adopted SFAS No. 142 and SFAS No. 144, which address the assessment of
impairment for goodwill and other intangibles, respectively.
18
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK. The Company sells its products primarily to
end users, value-added resellers, system integrators, independent software
vendors and original equipment manufacturers. The Company performs on-going
credit evaluations of its customers' financial condition, and generally no
collateral is required. The Company maintains reserves for credit losses, and
such losses have been within management's expectations.
REVENUE CONCENTRATION. The Company derives the majority of its revenue
from the licensing of products in its AR System, applications built upon the AR
System foundation and fees from related services. These products and services
are expected to account for the majority of the Company's revenue for the
foreseeable future. Consequently, a reduction in demand for these products and
services, or a decline in sales of these products and services, will adversely
affect operating results.
RESEARCH AND DEVELOPMENT. Research and development expenditures are
generally charged to operations as incurred. SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release has been
insignificant. Research and development costs have been expensed for all periods
presented.
ADVERTISING COSTS. The Company accounts for advertising costs as expense
in the period in which they are incurred. Advertising expense for the six months
ended September 30, 2002 was $0.3 million (Unaudited), for the period of August
28, 2001 through September 30, 2001 was $0.3 million (Unaudited), for the period
of April 1, 2001 through August 27, 2001 was $5.2 million, for the period of
August 28, 2001 through March 31, 2002 was $1.2 million, for the three months
ended March 31, 2001 was $3.4 million, and for the years ended December 31, 2000
and 1999 was $16.3 million and $10.7 million, respectively.
STOCK-BASED COMPENSATION. SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require, companies to record
compensation expense for stock-based employee compensation plans at fair value.
The Company has chosen to continue to apply Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation plans and,
accordingly, does not recognize compensation expense related to its employees
under its stock option plans or employee stock purchase plans. Note 7 contains a
summary of the pro-forma effects to reported net income (loss) for all periods
presented as if the Company had elected to recognize compensation expense based
on the fair value of the options granted as prescribed by SFAS No. 123.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- An Interpretation of APB Opinion 25." This interpretation
clarifies the application of APB 25 for certain issues including: (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. Interpretation No. 44 was
effective July 1, 2000 but certain conclusions in this interpretation covered
specific events that occurred after either December 15, 1998 or January 12,
2000. Interpretation No. 44 did not have a significant effect on the Company's
consolidated financial position or results of operations.
COMPREHENSIVE INCOME (LOSS). Comprehensive income is defined as the change
in equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. While the primary component of the Company's
comprehensive income (loss) is
19
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported net income (loss), the other components of comprehensive income (loss)
relate to foreign currency translation adjustments, unrealized hedging gains and
losses and unrealized gains and losses on available-for-sale securities. Tax
effects on comprehensive income (loss) are not material.
INCOME TAXES. Subsequent to the Company's acquisition by Peregrine, the
Company's operating results have been included in Peregrine's consolidated
federal and state income tax returns. The income tax provision (benefit)
reflected in the periods subsequent to August 27, 2001, has been determined on a
separate return basis. The taxes on income are computed in accordance with the
tax rules and regulations of the taxing authorities where the income is earned.
The income tax rates imposed by these taxing authorities vary substantially.
Taxable income (loss) may differ from income (loss) before income taxes for
financial accounting purposes. Deferred tax assets and liabilities are
recognized for the expected tax consequences of temporary differences between
the tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements.
RECENT PRONOUNCEMENTS. In June 2001, the Financial Accounting Standards
Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 addresses financial accounting and
reporting for business combinations and requires that all business combinations
be accounted for using one method, the purchase method. The Statement applies to
all business combinations initiated after June 30, 2001. As such, Peregrine's
acquisition of the Company on August 27, 2001 was accounted for in accordance
with SFAS No. 141. SFAS No. 142 addresses financial accounting and reporting at
the point of acquisition for intangible assets acquired individually or with a
group of other assets, other than those acquired in a business combination, and
the financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. Under this Statement, all goodwill and those
intangible assets with indefinite useful lives will no longer be amortized, but
rather will be tested for impairment annually and when events and circumstances
indicate that their fair value has been reduced below carrying value. Intangible
assets with finite useful lives will continue to be amortized over those useful
lives. The provisions of SFAS No. 142 are required to be applied for fiscal
years beginning after December 15, 2001, except that goodwill and intangibles
with indefinite lives that arise from business combinations after June 30, 2001
will not be amortized. As such, the goodwill related to Peregrine's acquisition
of Remedy that has been pushed down to the Company's consolidated financial
statements has not been amortized.
The Company adopted SFAS No. 142 in its entirety on April 1, 2002. At that
date, the Company's only goodwill and intangibles were those pushed down from
Peregrine, which for amortization purposes have been accounted for under SFAS
No. 142 from the acquisition date. As discussed in Note 11, the Company recorded
an impairment charge as of March 31, 2002, related to the goodwill that was
pushed down, to reflect such goodwill at its estimated fair value of $0 at that
date and therefore the net book value of the Company's goodwill was $0 upon full
adoption of SFAS No. 142.
The following reconciles the Company's reported net income (loss) to those
amounts that would have resulted had there been no amortization of goodwill for
the periods prior to August 27, 2001.
<Table>
<Caption>
FOR THE PERIOD FOR THE THREE FOR THE YEARS ENDED
4/01/01 MONTHS ENDED DECEMBER 31,
TO MARCH 31, -------------------
8/27/01 2001 2000 1999
-------------- ------------- -------- --------
(IN THOUSANDS)
Net income (loss):
As reported.................................. $(9,517) $(8,396) $33,569 $29,523
Add back amortization of goodwill, net of
taxes..................................... 4,668 1,674 5,789 2,647
------- ------- ------- -------
Adjusted..................................... $(4,849) $(6,722) $39,358 $32,170
======= ======= ======= =======
</Table>
20
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 143 requires the recognition of a
liability for the fair value of an asset retirement obligation in the period in
which the obligation is incurred, if a reasonable estimate of fair value can be
made. If a reasonable estimate of fair value cannot be made in the period the
obligation is incurred, the liability must be recognized when a reasonable
estimate of fair value can be made. Upon initial recognition of such a
liability, an equal amount must be capitalized into the carrying amount of the
related long-lived asset and subsequently expensed over its useful life. The
provisions of SFAS No. 143 are required to be applied for fiscal years beginning
after June 15, 2002. SFAS No. 144 supersedes SFAS No. 121 and the accounting and
reporting provisions of APB Opinion No. 30 for the disposal of a segment of a
business. This Statement establishes a single accounting model, based on the
framework in SFAS No. 121, for long-lived assets to be disposed of by sale and
resolves significant implementation issues related to Statement 121. The
provisions of SFAS No. 144 are required to be applied for fiscal years beginning
after December 15, 2001. The Company believes that adoption of SFAS No. 143 and
SFAS No. 144 will not have a material effect on the its consolidated financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 generally requires that the
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at its fair value in the period in which the liability is
incurred. The provisions of this Statement are effective for exit or disposal
activities initiated after December 31, 2002. The Company believes that adoption
of SFAS No. 146 will not have a material effect on its consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- An Amendment of FASB Statement No.
123." This Statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has elected not to adopt the recognition and measurement provisions of SFAS No.
123 and continues to account for its stock-based employee compensation plans
under APB Opinion No. 25 and related interpretations, and therefore the
transition provisions will not have an impact on its consolidated financial
position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 requires certain
guarantees to be recorded at fair value and requires a guarantor to make
disclosures, even when the likelihood of making any payments under the guarantee
is remote. The initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, and the disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company believes that adoption of Interpretation No. 45 will not have a material
effect on its consolidated financial position or results of operations.
3. LOANS AND LINES OF CREDITS
In August 2001, Peregrine Systems, Inc. obtained a term loan with two
financial institutions for an amount equal to $150.0 million. The Company agreed
to guarantee the term loan and provided assets to serve as collateral. The term
loan was fully repaid in October 2001.
In October 2001, Peregrine Systems, Inc. obtained a revolving line of
credit under which Peregrine could draw a maximum of $150.0 million. The Company
agreed to guarantee the revolving line of credit. All of the
21
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's outstanding shares were provided as collateral. The revolving line of
credit was fully repaid in February 2002.
In June 2002, the Company obtained, as a co-borrower in conjunction with
Peregrine Systems, Inc. and its domestic subsidiaries (the "Borrowers"), a Loan
and Security Agreement (the "Agreement"). As part of the Agreement, the
Borrowers paid a facility fee of $300,000. The Agreement permitted the Borrowers
to draw funds under a revolving line of credit up to $100.0 million and $56.0
million under a term loan. The revolving line of credit and the term loan bore
interest at 6.75% and 9.75%, respectively. In addition, the Borrowers were
required to pay a fee equal to 0.75% of the unused balance of the line of
credit. No draws were made against the revolving line of credit and the entire
$56.0 million of the term loan was drawn down. Borrowings under the term loan
were required to be repaid in monthly installments of $1.1 million beginning
February 2003 through December 2003. The outstanding unpaid principal balance
and all accrued and unpaid interest under the term loan were due and payable on
December 31, 2003. The Borrowers were also required to remit all of the cash
proceeds from the sale of any other assets, except as to specifically permitted
dispositions under the Agreement. The Agreement also provided the Borrowers with
Letters of Credit totalling $18.6 million. The Borrowers were required to make a
loan to the issuing lenders in an amount equal to 105% of the requested Letter
of Credit. All of each Borrower's assets and any assets acquired were
collateralized under the Agreement. On September 27, 2002, the Borrowers elected
to terminate the Agreement. As a result, the Borrowers were required to pay an
early termination fee of $1.0 million. All payments were made by Peregrine
Systems, Inc. and have been reflected in the accompanying consolidated financial
statements as a contribution from stockholder in additional paid in capital.
Interest expense of $1.3 million was recorded in the accompanying consolidated
financial statements for the period from April 1, 2002 through September 30,
2002.
On September 27, 2002, the Company obtained, as a co-borrower in
conjunction with Peregrine Systems, Inc. and its domestic subsidiaries (the
"Borrowers"), a Debtor-In-Possession Credit Agreement (the "Credit Agreement").
The Credit Agreement provided the Borrowers with a credit facility of $110.0
million. The credit facility bore interest at the LIBOR rate plus 3.5%, which
totaled 5.29% at September 30, 2002. The Credit Agreement also included a
facility fee of $385,000 which is being recognized as additional interest over
the term of the Credit Agreement. The outstanding balance at September 30, 2002
of $46.2 million has been reflected in the accompanying consolidated financial
statements. All of the Company's outstanding stock was provided as collateral
for the Credit Facility.
On November 22, 2002, the outstanding principal plus the accrued and unpaid
interest of $54.2 million were applied against the proceeds to be received from
BMC as part of its acquisition of the Company
4. COMMITMENTS
LEASE COMMITMENTS. The Company leases its facilities under operating lease
arrangements. Certain of the leases provide for annual rent increases of
approximately 3%. The Company had capitalized property and equipment totaling
$1.5 million with associated accumulated amortization of $1.4 million and $1.3
million at December 31, 2000 and 1999, respectively. There are no commitments
for capital leases as of March 31, 2002,
22
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the approximate annual minimum rental commitments under operating leases at
that date are as follows (in thousands):
<Table>
<Caption>
YEAR ENDING MARCH 31,
- ---------------------
2003........................................................ $13,115
2004........................................................ 6,451
2005........................................................ 4,842
2006........................................................ 2,436
2007........................................................ 56
Thereafter.................................................. --
-------
Total minimum lease payments................................ $26,900
=======
</Table>
Total rent expense for the six months ended September 30, 2002 was $6.4
million (Unaudited), for the period of August 28, 2001 through September 30,
2001 was $1.5 million (Unaudited), for the period of April 1, 2001 through
August 27, 2001 was $5.8 million, for the period of August 28, 2001 through
March 31, 2002 was $8.1 million, for the three months ended March 31, 2001 was
$2.8 million and for the years ended December 31, 2000 and 1999 was $10.6
million and $7.8 million, respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
Since January 1, 2001, the Company has entered into foreign exchange
forward contracts to mitigate the risk of adverse foreign currency exchange rate
fluctuations. These forward contracts do not qualify for hedge accounting and
accordingly are recorded at fair value at each reporting date with the change in
fair value during each reporting period recognized as a gain or loss in the
statement of operations. Subsequent to August 27, 2001, the Peregrine
acquisition date, all of the Company's treasury functions were assumed by
Peregrine. Through December 31, 2000, the Company used derivative financial
instruments principally to minimize its exposures to the United States Dollar
value of revenues and expenses denominated in foreign currencies. The Company
began pricing its products in multiple currencies during the quarter ended
December 31, 1999, and in preparation, foreign exchange forward and simple
purchase option contracts were entered beginning in the quarter ended September
30, 1999 to hedge the risk that the United States Dollar value of the foreign
currency denominated revenues and expenses might have been adversely affected by
changes in foreign currency exchange rates. As part of its overall strategy to
manage the level of exposure to the risk of foreign currency exchange rate
fluctuations, the Company hedged a portion of its foreign currency exposures
anticipated over the ensuing twelve-month period. However, the Company was
impacted by foreign currency exchange rate fluctuations related to the unhedged
portion. The success of the hedging program depended, in part, on forecasts of
transaction activity in various currencies (primarily the Pound Sterling and the
Euro). The Company experienced unanticipated foreign currency exchange gains or
losses to the extent that there were timing differences between forecasted and
actual activity during periods of currency volatility.
The Company recorded these foreign exchange contracts at fair value in its
consolidated balance sheet and the related gains or losses on these contracts
were reflected, net of the related tax effect, in stockholders' equity as a
component of accumulated other comprehensive income (loss). These gains and
losses were reclassified into earnings in the period in which the underlying
revenues and expenses being hedged were recognized. However, if any of these
contracts were considered to be ineffective in offsetting the change in the
forecasted cash flows relating to the revenues or expenses being hedged, any
changes in fair value relating to the ineffective portion of these contracts was
immediately recognized in earnings. In the event the underlying forecasted cash
flow did not occur, or it became probable that it would not occur, the gain or
loss on the related cash flow hedge would be reclassified from accumulated other
comprehensive income (loss) to earnings at that time. Since the critical terms
of the hedging instruments were the same as the underlying
23
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
forecasted cash flows, the changes in the fair value of the foreign exchange
contracts were highly effective in offsetting changes in the expected cash flows
from the forecasted transactions. The Company did not recognize any gains or
losses resulting from hedge ineffectiveness and recognized a loss of $49,000
resulting from a change in forecast probability during the year ended December
31, 2000.
The Company formally documented all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking its various hedge transactions. The Company also
formally assessed, both at the hedge's inception and on an ongoing basis,
whether the derivatives that were used in hedging transactions were highly
effective in offsetting changes in cash flows of hedged items. Changes in the
time value of option contracts were excluded from this effectiveness assessment
and recorded directly in earnings. During the year ended December 31, 2000, no
charge, representing the change in option time values, was recorded in earnings.
As of December 31, 2000, the Company included the fair value of forward
contracts of $244,000 in other current assets in its consolidated balance sheet.
The Company had no simple purchase option contracts at December 31, 2000. As of
December 31, 1999, the Company included the fair value of simple purchase option
contracts of $34,000 and the fair value of forward contracts of $108,000 in
other current assets in its consolidated balance sheet.
At December 31, 2000, the Company had $18,000 of other comprehensive income
related to future revenue transactions and the balance was expected to be
recognized into earnings within the next twelve months. A gain of $237,000 was
reclassified into revenue and a loss of $152,000 was reclassified into expense
from other comprehensive income for the year ended December 31, 2000 upon
recognition of the related revenue and expenses.
At December 31, 1999, the Company had $23,000 of other comprehensive income
related to future revenue transactions and the balance was expected to be
recognized into earnings within the next twelve months. A gain of $76,000 was
reclassed into earnings from other comprehensive income for the year ended
December 31, 1999 upon recognition of the related revenue.
6. SHARE REPURCHASE
On August 5, 1998, the Remedy Board of Directors (the "Board") authorized
management of the Company to repurchase up to 3 million shares, or approximately
10 percent, of the Company's then outstanding shares of common stock over the
following twelve months. On August 5, 1999, the Board authorized the Company to
continue the share repurchase program for an additional six months through
February 2000. On July 26, 2000, the Board authorized management of the Company
to repurchase up to an additional 3 million shares, or approximately 10 percent,
of the Company's then outstanding shares of common stock over the following
twelve months. During the authorized periods, the Company repurchased shares on
the open market from time to time, depending on market conditions. The
repurchases were funded from the Company's cash, cash equivalents and short-term
investments. Under the program, the Company repurchased a total of approximately
4.13 million shares of the Company's stock at an average price of $18.14 per
share, totaling approximately $74.9 million.
7. COMPENSATION AND BENEFIT PLANS
401(k) RETIREMENT SAVINGS PLAN. The Company maintained a 401(k) retirement
savings plan to provide retirement benefits for substantially all of its
employees. Subsequent to the Peregrine acquisition, participants of the plan
continued to contribute to the plan until October 31, 2001, at which time
eligible employees of the Company became eligible to participate in the
Peregrine Systems, Inc. 401(k) Plan. Effective January 31, 2002, the plan merged
with the Peregrine plan and all plan assets were transferred. Participants in
the plan may elect to contribute from 2% to 15% of their annual compensation to
the plan,
24
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
limited to the maximum amount allowed by the Internal Revenue Code. The Company,
at its discretion, may make annual contributions to the plan. To date, the
Company has made no contributions to the plan.
PEREGRINE STOCK OPTION PLANS. Subsequent to the Peregrine acquisition on
August 27, 2001, Remedy employees were eligible for stock option grants under
the 1994 Peregrine Systems Nonqualified Stock Option Plan ("1994 PSI Plan") and
the 1999 Peregrine Systems Nonqualified Stock Option Plan ("1999 PSI Plan"). All
options granted pursuant to the plans have an exercise price determined by the
Peregrine Board of Directors on a per-grant basis. Option grants generally vest
over four years and have a term of 10 years.
The following Remedy plans were in effect through August 27, 2001, the date
of the Peregrine acquisition.
1995 STOCK OPTION/STOCK ISSUANCE PLAN. In January 1995, the Board adopted
the 1995 Stock Option/ Stock Issuance Plan (the 1995 Plan), as the successor to
the 1991 Stock Option/Stock Issuance Plan. Under the 1995 Plan, 15,718,426
shares of common stock, plus an additional number of shares equal to the lesser
of 4,000,000 shares or 6% of the number of shares of common stock and common
stock equivalents outstanding on the first day of each of 1999 and 2000 were
authorized for issuance.
Under the 1995 Plan, options to purchase common stock were allowed to be
granted and common stock was allowed to be granted at prices not less than 85%
of the fair market value at the date of grant/issuance. Options issued to new
employees under the plan became exercisable according to a vesting schedule,
which typically provided for the first 25% of the option shares to become
available after one year with the remaining shares and options vesting on a
pro-rata basis over the following 36 months. Options issued to existing
employees typically vested in equal monthly installments over 4 years. All
options issued had a term of 10 years.
1995 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN. During 1995, the Company
adopted the 1995 Non-Employee Directors Stock Option Plan (the Directors Plan),
and reserved 412,500 shares for issuance, plus an additional 37,500 shares on
the first day of 1999 and 2000. Under the Directors Plan, each non-employee
member of the Board was automatically granted an option to purchase 20,000
shares of the Company's stock upon initial appointment or election to the Board,
and 10,000 shares of the Company's stock upon reelection to the Board. An
additional 5,000 shares were granted to each non-employee director serving on a
Board committee, up to a maximum of 10,000 shares each year for committee
assignments. Stock options to non-employee directors were granted at no less
than 100% of the fair market value on the grant date. Stock options granted upon
reelection to the Board vested in 48 equal monthly installments. All options
issued had a term of 10 years.
2000 SUPPLEMENTAL STOCK OPTION PLAN. In February 2000, the Board adopted
the 2000 Supplemental Stock Option Plan (the 2000 Plan). Under the 2000 Plan,
3,000,000 shares of common stock were authorized for issuance. Shares of common
stock issued under the plan could have been (i) unissued common stock, (ii)
treasury shares of common stock, or (iii) re-acquired shares of common stock.
Options that were forfeited or terminated before being exercised were returned
to the pool of authorized shares to be issued. Under the 2000 Plan, employees
and consultants could have been granted either non-qualified stock options or
restricted shares of common stock. Outside directors and executive officers were
not eligible for awards under the 2000 Plan. The 2000 Plan prohibited options
from being granted at less than 85% of the fair market value on the date of
grant. Options issued to new employees under the plan became exercisable
according to a vesting schedule, which typically provided for the first 25% of
the option shares to become available after one year with the remaining shares
and options vesting on a pro-rata basis over the following 36 months. Options
issued to existing employees typically vested in equal monthly installments over
4 years. All options issued had a term of 10 years.
25
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity under all option plans is as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE NUMBER EXERCISE
AVAILABLE NUMBER EXERCISE PRICE OF PRICE PER
FOR GRANT OF SHARES PRICE PER SHARE PER SHARE SHARES SHARE
--------- --------- --------------- --------- ------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Remedy options:
Balance at December 31,
1998....................... 1,607 8,276 $ 0.01 - $42.50 $14.17
Additional shares reserved... 1,790 --
Options granted.............. (3,312) 3,312 $13.88 - $47.38 $20.36
Options exercised............ -- (1,897) $10.63 - $50.06 $12.63
Options canceled or
expired.................... 1,584 (1,584) $ 6.33 - $40.00 $15.80
------ ------
Balance at December 31,
1999....................... 1,669 8,107 $ 0.13 - $47.38 $16.74 2,785 $14.04
Additional shares reserved... 4,931 --
Options granted.............. (5,552) 5,552 $16.13 - $56.69 $30.53
Options exercised............ -- (1,411) $ 0.13 - $47.38 $14.39
Options canceled or
expired.................... 2,158 (2,158) $ 8.43 - $56.69 $23.55
------ ------
Balance at December 31,
2000....................... 3,206 10,090 $ 0.13 - $56.69 $23.22 3,273 $18.82
Options granted.............. (592) 592 $19.19 - $26.94 $22.32
Options exercised............ -- (254) $ 0.13 - $26.78 $14.66
Options canceled or
expired.................... 225 (225) $ 9.06 - $56.69 $25.47
------ ------
Balance at March 31, 2001.... 2,839 10,203 $ 0.33 - $56.69 $23.20 3,448 $19.50
Options granted.............. (254) 254 $15.91 - $34.90 $19.13
Options exercised............ -- (605) $ 1.50 - $29.00 $16.05
Options canceled or
expired.................... 681 (681) $ 9.31 - $56.69 $28.05
------ ------
Balance at August 27, 2001... 3,266 9,171 $ 0.33 - $56.69 $23.20
====== ======
Peregrine options:
Conversion to Peregrine stock
options.................... 12,031 $ 0.26 - $43.21 $17.69
Options granted.............. 2,084 $ 5.00 - $19.83 $10.35
Options exercised............ (240) $ 0.26 - $15.15 $ 9.03
Options canceled or
expired.................... (719) $ 6.91 - $43.21 $19.49
------
Balance at March 31, 2002.... 13,156 $ 0.26 - $43.21 $16.52 8,240 $17.01
======
</Table>
At the completion of the acquisition, Peregrine assumed all of Remedy's
outstanding stock options, whether vested or unvested. As a result, all of
Remedy's outstanding stock options were converted into options to purchase
Peregrine's common stock. All of the Remedy stock options that were assumed by
Peregrine at the completion of the acquisition were subject to the same terms
and conditions that were applicable to the stock options prior to the
acquisition, except that the aggregate number of shares issuable upon the
exercise of each stock option, and the exercise price of each stock option, were
adjusted based upon an exchange ratio that is equivalent in value to the per
share cash and stock consideration paid to holders of Remedy common stock in the
acquisition. In connection with the Peregrine acquisition, deferred stock
compensation of
26
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$31.8 million was pushed down to the Company's books. These charges are being
amortized over the remaining vesting periods using the straight-line method.
Subsequent to the Peregrine acquisition on August 27, 2001, Remedy
employees were eligible for stock option grants under Peregrine option plans.
These plans do not designate shares available for grant specifically for Remedy
employees.
The options outstanding and held by Remedy employees under all Peregrine
option plans at March 31, 2002 have been segregated into ranges for additional
disclosure as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE SHARES AVERAGE
RANGE OF SHARES CONTRACTUAL LIFE/ EXERCISE CURRENTLY EXERCISE
EXERCISE PRICES OUTSTANDING YEARS PRICE EXERCISABLE PRICE
- --------------- ----------- ----------------- --------- ----------- ---------
$ 0.26 - $10.77................... 2,734,434 6.72 $ 7.52 1,842,279 $ 7.40
$10.80 - $12.63................... 1,635,290 9.18 $11.80 226,476 $11.94
$12.77 - $13.06................... 2,744,887 7.66 $12.84 2,003,737 $12.85
$13.16 - $18.54................... 2,660,888 7.76 $15.11 1,859,477 $15.04
$18.68 - $43.21................... 3,380,349 7.88 $30.20 2,308,324 $30.37
---------- ---------
$ 0.26 - $43.21................... 13,155,848 7.73 $16.52 8,240,293 $17.01
========== =========
</Table>
PEREGRINE 1997 EMPLOYEE STOCK PURCHASE PLAN. Subsequent to the Peregrine
acquisition on August 27, 2001, Remedy employees were eligible to participate in
the Peregrine 1997 Employee Stock Purchase Plan. In February 1997, Peregrine's
Board of Directors and stockholders adopted the Employee Stock Purchase Plan and
reserved 1,000,000 shares for issuance. Employees are granted the right to
purchase shares of common stock at a price per share that is 85% of the lesser
of the fair market value on the first or last day of each purchase period, as
defined. During the period of August 28, 2001 through March 31, 2002, there were
no shares of Pergrine stock issued under the plan to Remedy employees.
REMEDY 1995 EMPLOYEE STOCK PURCHASE PLAN. In January 1995, the Board and
stockholders adopted the Employee Stock Purchase Plan (the Purchase Plan) and
reserved 1,200,000 shares for issuance. In May 1998 and May 1999, the Board and
stockholders approved amendments to increase by 920,593 and 1,359,269,
respectively, the number of shares issuable under the Purchase Plan. Under the
Purchase Plan, employees were granted the right to purchase shares of common
stock at a price per share that is 85% of the lesser of the fair market value of
the shares at: (i) the participant's entry date into the two-year offering
period, or (ii) the end of each six-month segment within such offering period.
During the period of April 1, 2001 through August 27, 2001, the three months
ended March 31, 2001, and the years ended December 31, 2000 and 1999, shares
totaling 577,800, 0, 706,591 and 566,649, respectively, were issued under the
Purchase Plan at average prices of $14.33, 0, $12.21 and $10.37 per share,
respectively. The Purchase Plan was in effect until the Peregrine acquisition on
August 27, 2001.
ACCOUNTING FOR STOCK OPTIONS AND STOCK PURCHASE RIGHTS. The Company's
accounting for stock options is in accordance with APB Opinion No. 25 and
related interpretations, which generally require that the amount of compensation
cost that must be recognized, if any, is the quoted market price of the stock at
the measurement date, less the amount the grantee is required to pay to acquire
the stock. Alternatively, SFAS No. 123, "Accounting for Stock-Based
Compensation," employs fair value-based measurement and generally results in the
recognition of compensation expense for all stock-based awards to employees.
SFAS No. 123 does not require an entity to adopt those provisions, but rather,
permits continued application of APB Opinion No. 25. The Company has elected not
to adopt the recognition and measurement provisions of SFAS No. 123 and
continues to account for its employee stock-based compensation plans under APB
Opinion No. 25 and related interpretations. In accordance with APB Opinion No.
25, deferred compensation is generally recorded
27
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for stock-based compensation grants based on the excess of the market value of
the common stock on the measurement date over the exercise price. The deferred
compensation is amortized to expense over the vesting period of each unit of
stock-based compensation granted. If the exercise price of the stock-based
compensation is equal to or exceeds the market price of the Company's common
stock on the date of grant, no compensation expense is recorded. During the
period of August 28, 2001 through March 31, 2002, Peregrine granted stock
options covering 1.9 million shares of Peregrine common stock to Remedy
employees at exercise prices below the market price of Peregrine stock at their
respective grant dates. Remedy recorded deferred stock compensation of $5.1
million related to these grants. This deferred compensation is being amortized
over the vesting periods, generally of four years, using the straight-line
method. For all periods presented through August 27, 2001, the Company was not
required to record compensation expense for stock option grants and stock issued
under the employee stock purchase plans. The amortization of deferred stock
compensation related to the stock grants above and the options assumed by
Peregrine in conjunction with its acquisition of Remedy has been presented as
amortization of stock-based compensation in the accompanying consolidated
statements of operations. Based on the job functions of the respective
employees, the expense would be allocated as follows:
<Table>
<Caption>
FOR THE PERIODS
-----------------------------------
4/01/02 8/28/01 8/28/01
TO TO TO
9/30/02 9/30/01 3/31/02
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
Cost of product revenue..................................... $ 94 $ 34 $ 210
Cost of maintenance and service revenue..................... 1,084 365 2,286
Research and development.................................... 2,227 750 4,701
Sales and marketing......................................... 3,349 1,346 8,442
General and administrative.................................. 1,604 540 3,381
------ ------ -------
$8,358 $3,035 $19,020
====== ====== =======
</Table>
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options granted and stock purchase rights
issued subsequent to December 31, 1994 under the fair value based method of SFAS
No. 123. The fair value for the options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
------------- -----------------------------------------------------------------
FOR THE PERIODS FOR THE
----------------------------- THREE MONTHS
8/28/01 4/01/01 ENDED FOR THE YEARS ENDED DECEMBER 31,
TO TO MARCH 31, ---------------------------------
3/31/02 8/27/01 2001 2000 1999
------------- ------------- ------------- --------------- ---------------
Volatility factor...... 95% - 107% 86% 86% 86% 81%
Risk-free interest
rate................. 3.10% - 4.64% 5.26% - 7.56% 5.26% - 7.56% 6.03% - 7.86% 4.79% - 6.50%
Dividend yield......... 0% 0% 0% 0% 0%
Expected term.......... 4 - 5 years 4 - 5 years 4 - 5 years 4 - 5 years 4 - 5 years
</Table>
For the period of August 28, 2001 through March 31, 2002, the 95%
volatility factor and 3.1% risk-free interest rate were utilized in Peregrine's
purchase accounting for the Remedy stock options assumed.
The weighted-average fair values of options granted at market price in the
periods above were $5.52, $13.19, $15.40, $26.46 and $10.55, respectively. The
weighted average fair value of the options granted below market price discussed
above for the period of August 28, 2001 through March 31, 2002 was $10.62.
28
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of employee purchase rights under the stock purchase plans
was also estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------- ----------------------------------------------------------------
FOR THE PERIODS FOR THE
------------------------- THREE MONTHS
8/28/01 4/01/01 ENDED FOR THE YEARS ENDED DECEMBER 31,
TO TO MARCH 31, ---------------------------------
3/31/02 8/27/01 2001 2000 1999
--------- ------------- ------------ --------------- ---------------
Volatility factor............ 98% 86% n/a 86% 81%
Risk-free interest rate...... 1.92% 4.16% - 8.07% n/a 7.42% - 8.07% 4.95% - 5.66%
Dividend yield............... 0% 0% n/a 0% 0%
Expected term................ 6 months 6 months n/a 6 months 6 months
</Table>
The weighted-average fair values of purchase rights granted under the
employee stock purchase plans for the periods above were $6.46, $12.46, n/a,
$23.30 and $8.16, respectively.
Had compensation cost for the stock-based compensation plans been
determined based on the grant date fair values of awards estimated using the
Black-Scholes option pricing model, which is consistent with the method
described in SFAS No. 123, the Company's reported net income (loss) would have
been reduced to the pro forma amounts shown below:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
----------- ---------------------------------------------
FOR THE PERIODS FOR THE
----------------------- THREE MONTHS FOR THE YEARS ENDED
8/28/01 4/01/01 ENDED DECEMBER 31,
TO TO MARCH 31, -------------------
3/31/02 8/27/01 2001 2000 1999
----------- -------- ------------ -------- --------
(IN THOUSANDS)
Net income (loss):
As reported....................... $(1,000,415) $ (9,517) $ (8,396) $33,569 $29,523
Pro Forma......................... $(1,055,636) $(19,822) $(14,876) $18,625 $ 8,322
</Table>
8. STOCKHOLDER RIGHTS PLAN
In July 1997, the Company's Board of Directors adopted a Stockholder Rights
Plan, effective July 25, 1997, and declared a dividend distribution of one
Preferred Share Purchase Right (a "Right") on each outstanding share of Remedy's
common stock. The Rights would not become exercisable, and would continue to
trade with the common stock, unless a person or group acquired 20 percent or
more of Remedy's common stock or announced a tender offer, the consummation of
which would result in ownership by a person or group of 20 percent or more of
the Company's common stock. Each Right would entitle a stockholder to buy one
one-thousandth of a share of a newly created Series A Junior Participating
Preferred Stock of the Company at an exercise price of $230 per one
one-thousandth of a share. If a person or group acquired 20 percent or more of
Remedy's outstanding common stock or announced a tender offer, the consummation
of which would result in ownership by a person or group of 20 percent or more of
the Company's common stock, each Right would entitle its holder (other than the
acquiring person or group) to purchase, at the Right's then current exercise
price, a number of Remedy's common shares having a market value of twice that
price. In addition, if Remedy was acquired in a merger or other business
combination transaction after a person had acquired 20 percent or more of
Remedy's outstanding common stock, each Right would entitle its holder to
purchase, at the Right's then current exercise price, a number of the acquiring
company's common shares having a market value of twice that price.
Following the acquisition by a person or group of 20 percent or more of
Remedy's common stock and prior to an acquisition of 50 percent or more of the
common stock, the Board could exchange the Rights
29
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(other than Rights owned by such person or group), in whole or in part, for
consideration per Right consisting of one-half of the common stock that would be
issuable upon exercise of one Right. Alternatively, the Rights could have been
redeemed for 1/10th of a cent per Right, at the option of the Board, prior to
the acquisition by a person or group of beneficial ownership of 20 percent or
more of Remedy's common stock or if a person or group announced a tender offer,
the consummation of which would result in ownership by a person or group of 20
percent or more of the Company's common stock. The non-taxable dividend
distribution was made on August 29, 1997, payable to Stockholders of record on
that date. The Rights terminated on August 27, 2001 upon Peregrine's acquisition
of Remedy.
9. INCOME TAXES
Deferred income taxes are recognized for the temporary differences between
the recorded amounts of assets and liabilities for financial reporting purposes
and such amounts for income tax purposes. Research and development tax credits
are accounted for as a reduction of income tax expense in the year realized. The
income tax benefit from nonqualified stock options exercised, wherein the fair
market value at date of issuance is less than that at date of exercise, is
credited to additional paid-in capital.
The income tax provision (benefit) consists of the following:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------- ----------------------------------------------
FOR THE PERIODS
------------------- FOR THE YEARS ENDED
8/28/01 4/01/01 FOR THE THREE DECEMBER 31,
TO TO MONTHS ENDED -------------------
3/31/02 8/27/01 MARCH 31, 2001 2000 1999
--------- ------- -------------- -------- --------
(IN THOUSANDS)
Federal:
Current................................ $ 1,216 $(1,924) $(5,499) $15,248 $15,040
Deferred............................... (4,132) (5,232) (455) (2,763) (1,927)
------- ------- ------- ------- -------
(2,916) (7,156) (5,954) 12,485 13,113
State:
Current................................ 2,809 (122) (243) 368 124
Deferred............................... (2,876) (591) (237) (1,000) (373)
------- ------- ------- ------- -------
(67) (713) (480) (632) (249)
Foreign:
Current................................ 2,013 1,175 722 2,764 1,424
------- ------- ------- ------- -------
Income tax provision (benefit)........... $ (970) $(6,694) $(5,712) $14,617 $14,288
======= ======= ======= ======= =======
</Table>
Pre-tax income (loss) from foreign operations was $23.8 million, $(6.1)
million, $3.2 million, $17.9 million and $4.5 million, respectively, for the
periods above.
30
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the income tax provision (benefit) and the amount
computed by applying the federal statutory income tax rate to income (loss)
before income taxes is explained below:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------- ----------------------------------------------
FOR THE PERIODS
------------------- FOR THE YEARS ENDED
8/28/01 4/01/01 FOR THE THREE DECEMBER 31,
TO TO MONTHS ENDED -------------------
3/31/02 8/27/01 MARCH 31, 2001 2000 1999
--------- ------- -------------- -------- --------
(IN THOUSANDS)
Tax at federal statutory rate.......... $(350,485) $(5,674) $(4,937) $16,865 $15,334
State tax, net of federal benefit...... (43) (463) (312) 1,038 943
Research and development credit........ -- -- -- (1,121) (1,605)
In-process research and development.... 30,100 -- -- -- --
Impairment of goodwill................. 319,991 -- -- -- --
Tax exempt interest income............. (670) (866) (559) (2,011) (1,119)
Other.................................. 137 309 96 (154) 735
--------- ------- ------- ------- -------
Income tax provision (benefit)......... $ (970) $(6,694) $(5,712) $14,617 $14,288
========= ======= ======= ======= =======
</Table>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<Table>
<Caption>
SUCCESSOR PREDECESSOR
--------- --------------------------
MARCH 31, DECEMBER 31,
------------------- ----------------
2002 2001 2000 1999
--------- ------- ------- ------
(IN THOUSANDS)
Reserves and accruals not yet deductible for
tax......................................... $ 14,870 $15,245 $12,690 $6,847
Tax credit carryforward....................... -- -- 1,488 --
Deferred revenue.............................. 909 795 622 699
Employee stock options........................ 7,595 -- -- --
Net operating loss carryforward............... 2,257 -- -- --
Other......................................... 8 8 6 8
-------- ------- ------- ------
Gross deferred tax assets................ 25,639 16,048 14,806 7,554
-------- ------- ------- ------
Valuation allowance........................... (2,257) -- -- --
-------- ------- ------- ------
Total deferred tax assets................ 23,382 16,048 14,806 7,554
Unremitted foreign earnings................... (8,626) (4,762) (4,212) (723)
Purchased intangibles......................... (63,516) -- -- --
Other......................................... (771) -- -- --
-------- ------- ------- ------
Total deferred tax liabilities........... (72,913) (4,762) (4,212) (723)
-------- ------- ------- ------
Net deferred tax asset (liability)............ $(49,531) $11,286 $10,594 $6,831
======== ======= ======= ======
</Table>
As of March 31, 2002, the Company's net operating loss carryforwards for
federal income tax purposes were approximately $6.4 million. These net operating
losses resulted primarily from the exercise of employee stock options. If not
utilized, the federal net operating loss carryforwards will expire beginning in
2021. As of March 31, 2002, deferred tax assets totaling approximately $2.3
million have been recorded related to the carryforwards and a valuation
allowance of $2.3 million has been established against these deferred tax
assets. If ultimately recognized, the tax benefit of the carryforwards will be
recognized as a credit to additional
31
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
paid-in capital. No valuation allowance is recorded on the remaining deferred
tax assets as the Company believes it is more likely than not that these assets
will be realized on a separate company basis.
10. LITIGATION
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management currently believes that the ultimate
amount of liability, if any, with respect to any pending actions, either
individually or in the aggregate, will not materially affect the consolidated
financial position, results of operations or liquidity of the Company. However,
the ultimate outcome of any litigation is uncertain. If an unfavorable outcome
were to occur, the impact could be material. Furthermore, any litigation,
regardless of the outcome, can have an adverse impact on the Company's
consolidated results of operations as a result of defense costs, diversion of
management resources, and other factors.
During the six months ended September 30, 2002, putative shareholder class
action lawsuits were filed against Peregrine Systems, Inc., certain of its
officers and its directors. The plaintiffs allege that the financial information
provided in Peregrine's public filings was false and misleading and in violation
of the securities laws. Peregrine Systems, Inc. and its officers and directors
intend to defend the action vigorously and believe that Peregrine has adequate
legal defenses and that the ultimate outcome of these actions will not have a
material effect on Remedy's consolidated financial position, results of
operations or cash flows, although there can be no assurance as to the outcome
of such litigation.
11. BUSINESS COMBINATIONS
On August 27, 2001, the Company was acquired by Peregrine, a publicly-held
software company. Peregrine issued approximately 28 million shares of its common
stock valued at $795.1 million, assumed 9.2 million Remedy stock options valued
at $263.8 million and paid approximately $283.4 million in cash in exchange for
all the outstanding shares of Remedy for an aggregate purchase price of
approximately $1.4 billion, including merger-related costs of approximately
$22.9 million and an existing investment in Remedy of $5.7 million. The dollar
amount assigned to the issued shares was based on the market price of the
securities over the five days before and after the terms of the acquisition were
agreed to and announced. The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the date of
acquisition.
<Table>
<Caption>
AUGUST 27,
2001
--------------
(IN THOUSANDS)
Tangible assets............................................. $ 288,255
Deferred tax assets......................................... 17,710
Intangible assets........................................... 264,000
Goodwill.................................................... 914,260
----------
Total assets acquired.................................. 1,484,225
----------
Liabilities assumed......................................... (69,302)
Deferred tax liability...................................... (73,648)
Acquisition-related accruals................................ (2,205)
----------
Total liabilities assumed.............................. (145,155)
----------
Deferred compensation....................................... 31,822
----------
Net assets acquired.................................... $1,370,892
==========
</Table>
32
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Of the $264.0 million of acquired intangible assets, $86.0 million was
assigned to research and development assets that were written off at the date of
acquisition in accordance with FASB Interpretation No. 4, "Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase Method."
Those write-offs are reflected as acquired research and development in the
accompanying consolidated statement of operations for the period from August 28,
2001 through March 31, 2002. The remaining $178.0 million of acquired intangible
assets have estimated useful lives of five years. The intangible assets that
make up that amount include acquired technology of $53.0 million and customer
base of $125.0 million. None of the goodwill recorded is expected to be
deductible for tax purposes. These balances and the related amortization
recorded on Peregrine's books have been pushed down to the Company's
consolidated financial statements.
The value of the acquired in-process research and development was computed
using a discounted cash flow analysis on the anticipated income stream of the
related product sales. The value assigned to the acquired in-process research
and development was determined by estimating the costs to develop the purchased
in-process research and development into commercially viable products,
estimating the resulting net cash flows from the projects and discounting the
net cash flows to their present value. With respect to the acquired in-process
research and development, the calculation of value was adjusted to reflect the
value creation efforts of Remedy prior to the close of the acquisition.
The nature of the efforts required to develop acquired in-process research
and development into commercially viable products principally relates to the
completion of all planning, designing and testing activities that are necessary
to establish that the products can be produced to meet their design
requirements, including functions, features and technical performance
requirements. If the research and development projects and technologies are not
completed as planned, they will neither satisfy the technical requirements of a
changing market nor be cost effective.
At the acquisition date, Remedy was completing research and development
("R&D") efforts on its Action Request System ("ARS") 5.0 release. In addition,
the Information Technology Service Management ("ITSM") and Customer Relationship
Management ("CRM") development groups were working on the development,
engineering and testing activities associated with the completion of release 5.0
of the ITSM and CRM applications.
It was estimated that the ARS 5.0 release and the ITSM/CRM joint project
were 85% and 45% complete, respectively, at the time of the acquisition. At that
date, it was estimated that the ARS 5.0 release would be completed during the
quarter ended December 31, 2001, and the ITSM/CRM joint project would be
completed during the quarter ended March 31, 2002. At the date of acquisition,
approximately $33 million had been spent on the ARS 5.0 release and the ITSM/CRM
joint project combined.
At the time of the acquisition, the engineers were completing testing
activities related to the ARS 5.0 release. R&D efforts related to release 5.0 of
the ITSM and CRM applications included completion of development work. In order
for the R&D to be technologically or commercially viable, certain components of
the R&D projects needed to be fully architected, coded, developed, and tested to
create a seamless, workable product. Revenues attributed to the in-process
technologies were estimated based on forecasted sales and anticipated timing of
new product introductions. Expenses as a percentage of revenue for Remedy were
expected to decrease over the projected period due primarily to cost
efficiencies gained from a larger revenue base. A 20% discount rate was used in
the calculations based on independent studies that analyze market returns for
similar companies.
With the exception of the business impairment review discussed below, the
assumptions used in determining the value of in-process research and development
acquired in connection with Peregrine's acquisition of Remedy have been
consistent, in all material respects, with the actual results to date. The
33
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumptions primarily consist of the expected completion date for the in-process
projects, estimated costs to complete the projects, and revenue and expense
projections once the products have entered the market.
During the period from August 28, 2001 through March 31, 2002, payments of
$2,205,000 were made, reducing the acquisition-related accruals to $0 at March
31, 2002.
The following unaudited pro forma results of operations for the year ended
March 31, 2002, three months ended March 31, 2001, and year ended December 31,
2000 assume Peregrine's acquisition of the Company occurred at January 1, 2000.
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future. The pro forma net loss excludes the effect of the $86.0
million write-off of in-process research and development associated with the
acquisition.
<Table>
<Caption>
THREE MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
MARCH 31, 2002 MARCH 31, 2001 2000
-------------- -------------- ------------
Net loss............................................. $(917,184) $(12,428) $(730)
</Table>
During the quarter ended March 31, 2002, Peregrine identified indicators of
possible impairment of the goodwill related to previous acquisitions, including
Remedy. These indicators included the deterioration in the business climate,
changes in sales and cash flow forecasts and strategic plans for certain of the
acquired businesses. Accordingly, Peregrine assessed goodwill at the enterprise
level and pushed down an impairment charge under APB Opinion No. 17 of $914.3
million to reflect the Remedy goodwill at its estimated fair value of $0 as of
March 31, 2002.
The following acquisitions were completed by Remedy prior to the Company's
acquisition by Peregrine. At August 27, 2001, the related goodwill and
intangibles were removed from the Company's balance sheet in conjunction with
Peregrine's purchase price allocation for its acquisition of Remedy.
In January 2001, the Company acquired Deodis SA, a privately-held European
asset management and CRM integrator based in Paris, France. The total purchase
price, including related expenses, was approximately $3.5 million, of which $3.2
million was allocated to goodwill. The acquisition was accounted for under the
purchase method and, accordingly, Deodis' operating results have been included
in the Company's consolidated financial statements since the date of the
acquisition.
In February 2000, the Company acquired Axtive Software, Inc. ("Axtive"), a
privately-held provider of web personalization software and Ostream Software,
Inc. ("Ostream"), a privately-held software company specializing in the
development and marketing of business process automation solutions that are
companion to Remedy products. The combined purchase price for the two
acquisitions was approximately $10.3 million in cash. Approximately $0.5 million
of the purchase price was allocated to acquired workforce, $0.4 million was
allocated to the fair value of fixed assets and the remainder, $9.4 million, was
categorized as goodwill. The acquired workforce valuation was recorded
representing the cost to locate, hire and train qualified replacement employees.
All intangibles were being amortized on a straight-line basis over a period of
four years from the date of acquisition. The fixed assets were being amortized
on a straight-line basis over a period of three years. Total costs related to
the Ostream and Axtive acquisitions were approximately $11.2 million, which
consists of the $10.3 million combined purchase price as well as
employee-related costs of $0.9 million. Employee-related costs, comprised
primarily of retention bonuses, were expensed as earned over the appropriate
service period. The acquisitions were accounted for under the purchase method
and accordingly, operating results of Axtive and Ostream have been included in
the Company's consolidated financial statements since the date of acquisition.
Pro forma results of operations have not been presented since the effect of
these acquisitions was not material to the Company's consolidated financial
position or results of operations.
In June 2000, the Company acquired ESQ System Integrators, Inc. consulting
practice ("ESQ"), a privately-held professional service firm specializing in
implementation services for Remedy's CRM and ITSM
34
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
solutions. The purchase price for the acquisition was approximately $5.6
million, consisting of $5.0 million cash and $0.6 million of accrued
liabilities. Approximately $0.8 million of the purchase price was allocated to
acquired workforce and the remainder, $4.8 million, was categorized as goodwill.
The acquired workforce valuation was recorded representing the cost to locate,
hire and train qualified replacement employees. All intangibles were being
amortized on a straight-line basis over a period of four years from the date of
acquisition. The total cost of the ESQ acquisition was approximately $7.3
million, which consists of the $5.6 million purchase price as well as
employee-related costs of $1.7 million. Employee-related costs comprised
primarily of retention bonuses, which were expensed as earned over the
appropriate service period. The acquisition was accounted for under the purchase
method and accordingly, ESQ's operating results have been included in the
Company's consolidated financial statements since the date of acquisition. Pro
forma results of operations have not been presented since the effect of this
acquisition was not material to the Company's consolidated financial position or
results of operations.
In September 1999 and July 1999, the Company acquired Fortress
Technologies, Inc. ("Fortress"), a privately-held enterprise asset management
process consulting firm, and Pipestream Technologies, Inc. ("Pipestream"), a
privately-held provider of sales force automation solutions, respectively. The
combined purchase price for the two acquisitions was approximately $11.5
million, which consisted of $11.0 million cash, $0.4 million of relocation
expenses and $0.1 million assumption of net liabilities. Approximately $0.8
million was allocated to acquired workforce and the remainder, $10.7 million,
was categorized as goodwill. The acquired workforce valuation was recorded
representing the cost to locate, hire and train qualified replacement employees.
All intangibles were being amortized on a straight-line basis over a period of
four years from the dates of acquisition. Total costs related to the Fortress
and Pipestream acquisitions were approximately $13.1 million, which consists of
the combined purchase price of $11.5 million accounted for in the quarter ended
September 30, 1999 as well as employee-related costs of approximately $1.6
million, comprised of retention bonuses and forgivable loans that were expensed
over the appropriate service periods. The acquisitions were accounted for under
the purchase method and accordingly, their operating results have been included
in the Company's consolidated financial statements since the date of
acquisition. Pro forma results of operations have not been presented since the
effect of these acquisitions was not material to the Company's consolidated
financial position or results of operations.
12. RESTRUCTURING COSTS
During the three months ended March 31, 2001, the Company recorded a
restructuring charge of $3.4 million related to the discontinuance of the
eProcurement product. The restructuring charge includes approximately $2.9
million for future customer settlement and support costs, $0.3 million for the
write-off of prepaid assets, and $0.2 million for other exit-related costs. On
June 30, 2001, the Company evaluated its restructuring liability based on the
then current facts and determined that $0.5 million was not needed due to a
lower level of settlement payments and support costs than originally estimated.
Accordingly, the liability was reduced by $0.5 million as a reduction of
restructuring costs in the accompanying statement of operations for the period
of April 1, 2001 through August 27, 2001.
In April 2001, Remedy announced restructuring activities to reduce future
operating costs. The restructuring included a reduction in workforce by
approximately 100 employees, or 7%, primarily in the sales and marketing
function, cancellation of certain contracts and commitments and other
cost-saving actions. The Company incurred a restructuring charge of $1.4
million, including $1.0 million for severance-related costs and $0.4 million for
cancellation of contracts and commitments to reduce future expenses.
35
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
BALANCE AT PAID OUT OR BALANCE AT CHARGED PAID OUT OR BALANCE AT
DEC. 31, CHARGED TO CHARGED TO MARCH 31, (CREDITED) CHARGED TO AUGUST 27,
2000 EXPENSE RELATED ASSETS 2001 TO EXPENSE RELATED ASSETS 2001
---------- ---------- -------------- ---------- ---------- -------------- ----------
(IN THOUSANDS)
Discontinuance of
eProcurement........... $ -- $3,393 $ (685) $2,708 $(471) $(1,704) $533
Reduction in force....... -- -- -- -- 1,446 (1,383) 63
---- ------ ------- ------ ----- ------- ----
Total.................... $ -- $3,393 $ (685) $2,708 $ 975 $(3,087) $596
==== ====== ======= ====== ===== ======= ====
</Table>
<Table>
<Caption>
BALANCE AT PAID OUT OR BALANCE AT
AUGUST 27, CREDITED CHARGED TO MARCH 31,
2001 TO EXPENSE RELATED ASSETS 2002
---------- ---------- -------------- ----------
(IN THOUSANDS)
Discontinuance of eProcurement......................... $533 $(280) $(253) $ --
Reduction in force..................................... 63 -- (63) --
---- ----- ----- ----
Total.................................................. $596 $(280) $(316) $ --
==== ===== ===== ====
</Table>
In addition to the restructuring plan considered at the time of the
acquisition of Remedy by Peregrine, Peregrine implemented a number of workforce
reductions that resulted in a reduction in Remedy's headcount across all
functional areas and geographies. Remedy's headcount decreased from 1,315 at
August 27, 2001 to 861 at March 31, 2002. The reductions in Remedy's headcount
resulted in severance costs of approximately $3.3 million that were expensed as
incurred for the period from August 28, 2001 through March 31, 2002.
13. RELATED-PARTY TRANSACTIONS
Subsequent to the acquisition by Peregrine, certain amounts of the
Company's corporate expenses, including legal, accounting, employee benefits,
real estate, insurance, information technology services, treasury and other
corporate and infrastructure costs, although not directly attributable to the
Company's operations, were incurred by Peregrine on Remedy's behalf and
therefore have been allocated to Remedy in the accompanying consolidated
financial statements on a basis that management believes reflects a reasonable
utilization of services provided or benefit received by Remedy for the period
after August 27, 2001. The allocation methods are based on the nature of the
costs being allocated and include headcount and other allocation methods.
Allocated costs included in the accompanying consolidated statements of
operations were as follows:
<Table>
<Caption>
FOR THE PERIODS
---------------------------------------------
4/01/02 8/28/01 8/28/01
TO TO TO
9/30/02 9/30/01 3/31/02
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
Cost of product revenue.................................... $ 184 $ 13 $ 89
Cost of maintenance and service revenue.................... 1,660 114 798
Research and development................................... 1,475 101 710
Sales and marketing........................................ 4,663 624 4,367
General and administrative................................. 809 57 397
</Table>
14. RESTATEMENT OF SEPTEMBER 30, 2002 UNAUDITED FINANCIAL INFORMATION
(UNAUDITED)
The accompanying unaudited financial statements as of September 30, 2002,
and for the six months then ended, have been restated to appropriately reflect
the inclusion of the revenue associated with Remedy operations in Europe.
Effective April 1, 2002, in connection with Peregrine's integration of Remedy's
operations, substantially all of Remedy's revenues from European customers were
recorded for tax purposes in the accounting records of an Irish subsidiary of
Peregrine, through intercompany transfer by Remedy. These
36
PEREGRINE REMEDY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenues for the six months ended September 30, 2002 were not previously pushed
down to Remedy's books in connection with the preparation of the financial
statements. Costs of product, maintenance and service revenues and operating
expenses had been properly identified and recorded.
The European revenues and other related balances for the six months ended
September 30, 2002 have now been pushed down and recorded in the accompanying
restated consolidated financial statements, resulting in the following restated
results for the six months ended September 30, 2002:
<Table>
<Caption>
LOSS BEFORE
REVENUE INCOME TAXES NET LOSS
-------- ------------ --------
(IN THOUSANDS)
As Previously Reported (Unaudited)......................... $ 77,207 $(33,060) $(19,836)
As Restated (Unaudited).................................... $106,607 $ (3,660) $ (2,136)
</Table>
37
(b) PRO FORMA FINANCIAL INFORMATION.
On November 20, 2002, BMC completed its acquisition of Remedy from
Peregrine for $355 million in cash and the assumption of certain operating
liabilities of Remedy. The accompanying unaudited pro forma condensed combined
balance sheet as of September 30, 2002 assumes the purchase was effected as of
September 30, 2002. The unaudited pro forma condensed combined statements of
operations for the year ended March 31, 2002, and the six months ended September
30, 2002, assume the purchase was effected as of April 1, 2001.
During the year ended March 31, 2002, Remedy was acquired by Peregrine on
August 27, 2001. Remedy's historical consolidated statements of operations
included in the unaudited pro forma condensed combined statement of operations
for this period, reflect the push down of the fair value of all assets and
liabilities attributable to Remedy at the acquisition date, as recorded in
purchase accounting on Peregrine's books. As such, the unaudited pro forma
condensed combined statement of operations for the year ended March 31, 2002,
includes Remedy's consolidated statements of operations for the periods of April
1, 2001 through August 27, 2001 and August 28, 2001 through March 31, 2002.
These consolidated statements of operations are presented separately as they
reflect different bases of accounting, prior to and subsequent to the push down.
Under the purchase method of accounting, the total estimated purchase
price, calculated as described in Note 2 to these unaudited pro forma condensed
combined financial statements, is allocated to the net tangible and intangible
assets of Remedy acquired based on their fair values as of the acquisition date.
Independent valuation specialists have conducted independent valuations to
assist BMC in determining the fair values of a significant portion of these
assets. The work performed by the independent valuation specialists has been
considered in the fair value estimates reflected in these unaudited pro forma
condensed combined financial statements.
The following unaudited pro forma condensed combined financial statements
have been prepared from, and should be read in conjunction with, the historical
consolidated financial statements and notes thereto of BMC and Remedy. The
following unaudited pro forma condensed combined statements of operations are
not necessarily indicative of the results that would have occurred had the
purchase occurred on April 1, 2001, nor is it necessarily indicative of the
future operating results of the combined company. See the Notes to Unaudited Pro
Forma Condensed Combined Financial Statements in this section for an explanation
of the pro forma adjustments.
38
BMC SOFTWARE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2002
<Table>
<Caption>
BMC PEREGRINE PRO FORMA PRO FORMA
SOFTWARE, INC. REMEDY, INC. ADJUSTMENTS COMBINED
-------------- ------------ ----------- ----------
(RESTATED) (RESTATED) (RESTATED)
(IN MILLIONS)
ASSETS
Current assets:
Cash and marketable securities........ $ 769.6 $ 5.9 $ (363.4)(a) $ 412.1
Receivables and other current
assets............................. 390.1 54.7 (14.9)(d) 429.9
-------- ----------- --------
Total current assets............... 1,159.7 60.6 842.0
Property and equipment, net............. 418.2 9.6 427.8
Long-term marketable securities......... 455.8 -- 455.8
Acquired technology, net................ 30.3 41.5 109.0(b) 139.3
(41.5)(c)
Goodwill, net........................... 122.5 -- 199.9(b) 322.4
Intangible assets, net.................. 7.7 97.9 55.0(b) 62.7
(97.9)(c)
Other long-term assets.................. 477.3 0.8 9.3(e) 487.4
-------- ----------- --------
$2,671.5 $ 210.4 $2,737.4
======== =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities........................ $ 199.2 $ 28.4 $ (2.5)(b) $ 238.2
2.5(b)
1.3(d)
9.3(e)
Current portion of deferred revenue... 483.0 63.8 (30.3)(e) 516.5
-------- ----------- --------
Total current liabilities.......... 682.2 92.2 754.7
Long-term deferred revenue.............. 557.8 5.1 (2.2)(e) 560.7
Long-term debt.......................... -- 46.2 (46.2)(b) --
Other long-term liabilities............. 20.5 54.7 (54.7)(d) 20.5
-------- ----------- --------
Total liabilities.................. 1,260.5 198.2 1,335.9
Commitments and contingencies
Stockholders' equity:
Preferred stock....................... -- -- --
Common stock.......................... 2.5 -- 2.5
Additional paid-in capital............ 537.0 1,021.5 (1,021.5)(b) 537.0
Retained earnings..................... 1,114.3 (1,002.5) (9.5)(b) 1,104.8
1,002.5(b)
Other stockholders' equity............ (242.8) (6.8) 6.8(b) (242.8)
-------- ----------- --------
Total stockholders' equity......... 1,411.0 12.2 1,401.5
-------- ----------- --------
$2,671.5 $ 210.4 $2,737.4
======== =========== ========
</Table>
39
BMC SOFTWARE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2002
<Table>
<Caption>
PEREGRINE REMEDY, INC.
----------------------
4/1/01 8/28/01
BMC TO TO PRO FORMA PRO FORMA
SOFTWARE, INC. 8/27/01 3/31/02 ADJUSTMENTS COMBINED
-------------- --------- ---------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues:
License......................... $ 625.0 $ 36.4 $ 73.9 $ 735.3
Maintenance and services........ 663.9 59.4 85.0 4.2(g) 812.5
-------- -------- --------- --------
Total revenues................ 1,288.9 95.8 158.9 1,547.8
-------- -------- --------- --------
Operating expenses:
Selling and marketing expenses..... 538.8 47.5 48.2 634.5
Research and development expenses
and cost of revenues............ 574.5 46.1 49.0 669.6
General and administrative
expenses........................ 151.7 8.4 26.7 186.8
In-process research and
development..................... -- -- 86.0 (86.0)(g) --
Amortization and impairment of
acquired technology, goodwill
and intangibles................. 241.8 7.2 935.1 48.0(f) 289.8
(28.0)(g)
(914.3)(g)
Restructuring costs................ 52.9 1.0 (0.3) 53.6
Merger-related costs and
stock-based compensation
charges......................... 12.8 -- 19.0 (18.3)(g) 13.5
Non-recurring charges.............. -- 5.0 0.2 5.2
-------- -------- --------- --------
Total operating expenses........ 1,572.5 115.2 1,163.9 1,853.0
-------- -------- --------- --------
Operating loss.................. (283.6) (19.4) (1,005.0) (305.2)
Other income, net.................... 53.1 3.2 3.6 (7.3)(h) 52.6
-------- -------- --------- --------
Loss before income taxes........ (230.5) (16.2) (1,001.4) (252.6)
Income tax benefit................... (46.4) (6.7) (1.0) 8.1(i) (46.0)
-------- -------- --------- --------
Net loss........................ $ (184.1) $ (9.5) $(1,000.4) $ (206.6)
======== ======== ========= ========
Basic loss per share................. $ (0.75) $ (0.84)
======== ========
Diluted loss per share............... $ (0.75) $ (0.84)
======== ========
Shares used in computing basic loss
per share.......................... 245.0 245.0
======== ========
Shares used in computing diluted loss
per share.......................... 245.0 245.0
======== ========
</Table>
40
BMC SOFTWARE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002
<Table>
<Caption>
BMC PEREGRINE PRO FORMA PRO FORMA
SOFTWARE, INC. REMEDY, INC. ADJUSTMENTS COMBINED
-------------- ------------ ----------- ----------
(RESTATED) (RESTATED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues:
License..................................... $256.4 $ 39.7 $ $296.1
Maintenance and services.................... 340.0 66.9 1.0(g) 407.9
------ ------ ------
Total revenues........................... 596.4 106.6 704.0
------ ------ ------
Operating expenses:
Selling and marketing expenses.............. 232.3 26.4 258.7
Research and development expenses and cost
of revenues.............................. 272.9 37.3 310.2
General and administrative expenses......... 71.4 18.2 89.6
Amortization of acquired technology,
goodwill and intangibles................. 24.8 17.8 24.0(f) 48.8
(17.8)(g)
Restructuring costs......................... 0.2 -- 0.2
Merger-related costs and stock-based
compensation charges..................... 0.6 8.4 (7.8)(g) 1.2
------ ------ ------
Total operating expenses................. 602.2 108.1 708.7
------ ------ ------
Operating loss........................... (5.8) (1.5) (4.7)
Other income (expense), net................... 26.6 (2.1) (3.6)(h) 20.9
------ ------ ------
Earnings (loss) before income taxes...... 20.8 (3.6) 16.2
Income tax provision (benefit)................ 5.5 (1.5) 4.6(i) 8.6
------ ------ ------
Net earnings (loss)...................... $ 15.3 $ (2.1) $ 7.6
====== ====== ======
Basic earnings (loss) per share............... $ 0.06 $ 0.03
====== ======
Diluted earnings (loss) per share............. $ 0.06 $ 0.03
====== ======
Shares used in computing basic earnings (loss)
per share................................... 240.0 240.0
====== ======
Shares used in computing diluted earnings
(loss) per share............................ 241.2 241.2
====== ======
</Table>
41
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial statements of BMC have
been prepared based on the historical consolidated balance sheets and statements
of operations of BMC and Remedy as of September 30, 2002 and for the year ended
March 31, 2002, and the six months ended September 30, 2002, after giving effect
to the adjustments and assumptions described below. As discussed in Note 14 to
the accompanying Remedy consolidated financial statements, the unaudited
financial statements of Remedy as of September 30, 2002, and for the six months
then ended have been restated to reflect the inclusion of Remedy's revenue from
its European operations. Accordingly, BMC's unaudited pro forma condensed
combined balance sheet as of September 30, 2002, and unaudited pro forma
condensed combined statement of operations for the six months then ended have
been restated to reflect this change.
BMC and Peregrine Remedy, Inc. employ accounting policies that are in
accordance with generally accepted accounting principles in the United States.
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. In management's opinion, all
material adjustments necessary to reflect fairly the pro forma financial
position and pro forma results of operations of BMC and Remedy have been made.
NOTE 2. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
Pro forma adjustments are necessary to reverse the impact of Peregrine's
acquisition of Remedy on August 27, 2001, to reflect BMC's estimated purchase
price, to adjust Remedy's net tangible and intangible assets to their fair
values, to reflect the amortization expense related to the amortizable
intangible assets, and to reflect the income tax effect related to the pro forma
adjustments. Intercompany balances or transactions between BMC and Remedy were
not significant. No pro forma adjustments were required to conform Remedy's
accounting policies to BMC's accounting policies.
BMC has not identified any preacquisition contingencies where the related
asset, liability or impairment is probable and the amount of the asset,
liability or impairment can be reasonably estimated. Prior to the end of the
purchase price allocation period, if information becomes available which would
indicate it is probable that such events have occurred and the amounts can be
reasonably estimated, such items will be included in the purchase price
allocation. The unaudited pro forma condensed combined financial statements
include the following adjustments.
(a) PURCHASE PRICE. The unaudited pro forma financial information reflects
a total purchase price for Remedy of $363.4 million, comprised of cash
consideration of $355.0 million and direct transaction costs of $8.4
million. In accordance with the purchase agreement, the cash purchase
price is subject to adjustment and this adjustment has not yet been
finalized. The purchase price was funded entirely out of BMC's cash and
cash equivalents at the acquisition date.
42
(b) PURCHASE PRICE ALLOCATION. The purchase price was allocated at the
assumed acquisition date of September 30, 2002, as follows (in
millions):
<Table>
In-process research and development......................... $ 12.0
Acquired technology......................................... 109.0
Intangible assets........................................... 55.0
Goodwill.................................................... 199.9
Facilities accrual.......................................... (2.5)
Tangible assets acquired and liabilities assumed after
adjustments for tax liabilities, long-term debt and
deferred maintenance revenue (see notes d. and e.)........ (10.0)
------
Cash purchase price......................................... $363.4
======
</Table>
The $12.0 million allocated to in-process research and development ($9.5
million net of tax) is assumed to be written off at September 30, 2002 in
accordance with generally accepted accounting principles and is reflected
as a $9.5 million adjustment to retained earnings and a $2.5 million
reduction of income taxes payable. The $46.2 million of long-term debt
for which Remedy was a co-borrower with Peregrine has been eliminated, as
this liability was not assumed by BMC. Remedy's equity balances have been
eliminated in accordance with purchase accounting.
(c) PUSH-DOWN OF PEREGRINE PURCHASE PRICE ALLOCATION. The unaudited pro
forma condensed combined balance sheet reflects an adjustment to remove
the acquired technology and customer base recorded by Peregrine as of
September 30, 2002, as a result of Peregrine's acquisition of Remedy.
As of March 31, 2002, Peregrine assessed goodwill at the enterprise
level and pushed down an impairment charge of $914.3 million to reflect
the Remedy goodwill at its estimated fair value of $0. As such, no
adjustment is necessary to remove goodwill.
(d) ASSUMED TAX LIABILITY. As dictated by the purchase agreement, the
maximum liability BMC has assumed for taxes of any kind related to
Remedy is $7.5 million. The unaudited pro forma condensed combined
balance sheet includes adjustments to reverse current deferred tax
assets of $14.9 million and long-term deferred tax liabilities of $54.7
million and to adjust current tax liabilities by $1.3 million to
reflect the Remedy tax balances at the maximum agreed liability amount.
(e) DEFERRED MAINTENANCE REVENUE. The unaudited pro forma condensed
combined balance sheet reflects adjustments of $30.3 million and $2.2
million to the current and long-term deferred maintenance revenue
balances, respectively, as of September 30, 2002 to reflect those
obligations at fair value and to record the $9.3 million deferred tax
impact of these write-downs. The unaudited pro forma condensed combined
statements of operations are not adjusted to reflect the impact of the
deferred revenue adjustment on recognized maintenance revenue as the
adjustment is directly related to the acquisition and the effect is
non-recurring. Such adjustment will be reflected in the
post-acquisition consolidated statements of operations of the combined
company.
(f) AMORTIZATION OF INTANGIBLE ASSETS ACQUIRED BY BMC. Of the $55.0 million
of intangible assets recorded at the acquisition date, $20.0 million
was assigned to tradenames that are not subject to amortization as they
have an indefinite life, and $35.0 million was assigned to customer
relationships having an estimated useful life of three years. The
$109.0 million of acquired technology also has an estimated useful life
of three years. Amortization of the acquired technology and customer
relationships reflected in the unaudited pro forma condensed combined
statements of operations is approximately $48.0 million for the year
ended March 31, 2002, and $24.0 million for the six months ended
September 30, 2002. Goodwill is not amortized.
(g) MAINTENANCE REVENUE, STOCK-BASED COMPENSATION, IN-PROCESS RESEARCH AND
DEVELOPMENT AND AMORTIZATION AND IMPAIRMENT OF INTANGIBLE ASSETS
ACQUIRED BY PEREGRINE. The unaudited pro forma condensed combined
statements of operations reflect adjustments to remove the impact of
the deferred maintenance revenue write-down to fair value, the
amortization of stock-based compensa-
43
tion, the in-process research and development and the amortization and
impairment charges included in the historical Remedy statements of income as a
result of the push down of Peregrine's purchase accounting related to its
acquisition of Remedy.
(h) INTEREST INCOME. Interest income in the unaudited condensed combined
statements of operations has been adjusted to reflect the reduction of
$363.4 million in cash and cash equivalents with an approximate return
of 2% per annum.
(i) INCOME TAXES. Income tax provision (benefit) in the unaudited
condensed combined statements of operations has been adjusted to
reflect the income tax impact of the adjustments above.
NOTE 3. PRO FORMA EARNINGS PER SHARE ("EPS")
Basic and diluted pro forma EPS were calculated using BMC's basic weighted
average shares outstanding for the year ended March 31, 2002, as there was a pro
forma net loss for that period and therefore the effect of potential common
shares is anti-dilutive, and BMC's basic and diluted weighted average shares for
the six months ended September 30, 2002.
(c) EXHIBITS.
The following exhibits are filed with this Current Report on Form 8-K:
<Table>
<Caption>
2.1 Acquisition Agreement, dated as of September 20, 2002, by
and among BMC Software, Inc., Peregrine Systems, Inc. and
Peregrine Remedy, Inc. (incorporated by reference to Exhibit
10.1 of BMC Software, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
2.2 First Amendment to Acquisition Agreement, dated as of
September 24, 2002, by and among BMC Software, Inc.,
Peregrine Systems, Inc. and Peregrine Remedy, Inc.
(incorporated by reference to Exhibit 10.2 of BMC Software,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).
2.3 Second Amendment to Acquisition Agreement, dated as of
October 25, 2002, by and among BMC Software, Inc., Peregrine
Systems, Inc. and Peregrine Remedy, Inc. (incorporated by
reference to Exhibit 10.3 of BMC Software, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002).
*2.4 Third Amendment to Acquisition Agreement, dated as of
November 18, 2002, by and among BMC Software, Inc.,
Peregrine Systems, Inc. and Peregrine Remedy, Inc.
*2.5 Escrow Agreement, dated as of November 20, 2002, by and
among J.P. Morgan Chase Bank, Peregrine Systems, Inc. and
BMC Software, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of Ernst & Young LLP, independent auditors.
</Table>
- ---------------
* Previously filed.
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BMC SOFTWARE, INC.
By: /s/ JOHN W. COX
------------------------------------
John W. Cox
Vice President and Chief Financial
Officer
Date: August 1, 2003
45
EXHIBIT INDEX
<Table>
2.1 Acquisition Agreement, dated as of September 20, 2002, by
and among BMC Software, Inc., Peregrine Systems, Inc. and
Peregrine Remedy, Inc. (incorporated by reference to Exhibit
10.1 of BMC Software, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
2.2 First Amendment to Acquisition Agreement, dated as of
September 24, 2002, by and among BMC Software, Inc.,
Peregrine Systems, Inc. and Peregrine Remedy, Inc.
(incorporated by reference to Exhibit 10.2 of BMC Software,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).
2.3 Second Amendment to Acquisition Agreement, dated as of
October 25, 2002, by and among BMC Software, Inc., Peregrine
Systems, Inc. and Peregrine Remedy, Inc. (incorporated by
reference to Exhibit 10.3 of BMC Software, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002).
*2.4 Third Amendment to Acquisition Agreement, dated as of
November 18, 2002, by and among BMC Software, Inc.,
Peregrine Systems, Inc. and Peregrine Remedy, Inc.
*2.5 Escrow Agreement, dated as of November 20, 2002, by and
among J.P. Morgan Chase Bank, Peregrine Systems, Inc. and
BMC Software, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of Ernst & Young LLP, independent auditors.
</Table>
- ---------------
* Previously filed.