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Peregrine Systems Inc – ‘10-K/A’ for 3/31/05

On:  Tuesday, 10/18/05, at 6:02am ET   ·   For:  3/31/05   ·   Accession #:  1047469-5-24877   ·   File #:  0-22209

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

10/18/05  Peregrine Systems Inc             10-K/A      3/31/05   16:1.3M                                   Merrill Corp/New/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K/A      Amendment to Annual Report                          HTML    990K 
 2: EX-10.82    Material Contract                                   HTML     37K 
 3: EX-10.83    Material Contract                                   HTML     37K 
 4: EX-10.84    Material Contract                                   HTML     37K 
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 8: EX-10.88    Material Contract                                   HTML     38K 
 9: EX-10.89    Material Contract                                   HTML     17K 
10: EX-10.90    Material Contract                                   HTML     45K 
11: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     15K 
12: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     15K 
13: EX-31.3     Certification per Sarbanes-Oxley Act (Section 302)  HTML     15K 
14: EX-31.4     Certification per Sarbanes-Oxley Act (Section 302)  HTML     15K 
15: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML     11K 
16: EX-32.2     Certification per Sarbanes-Oxley Act (Section 906)  HTML     11K 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A
(Amendment No. 1)

Commission File Number 000-22209

PEREGRINE SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.0001 per share
(Title of Class)

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No ý

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o

        Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

        Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No ý

        The aggregate market value of voting and non-voting common stock held by non-affiliates of the Registrant was approximately $259,647,879 on September 30, 2004, based upon the average bid and asked prices of such common stock as reported on the over-the-counter securities market operated by Pink Sheets LLC. Shares of common stock held by officers, directors and holders of more than 10% of the outstanding common stock have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        The number of shares of the Registrant's common stock outstanding on May 31, 2005 was 15,074,426.

        Documents Incorporated by Reference: List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated: 1) any annual report to security holders; 2) any proxy or information statement; and 3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.

        None.

EXPLANATORY NOTE

        We are filing this Amendment No. 1 to our Annual Report on Form 10-K (the "Amended Report") to amend the following, among other items, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005, filed with the Securities and Exchange Commission on July 1, 2005 (the "Original Report"):

•

Part II, Item 8, Financial Statements and Supplementary Data, to (i) include a report of our independent registered public accounting firm with respect to the consolidated financial statements that contains their report on management's assessment of the effectiveness of internal control over financial reporting and on the effectiveness of internal control over financial reporting, (ii) amend the classification of amortization of developed technology to include it as a component of "Cost of licenses" in the consolidated statements of operations for all periods presented, and (iii) present a gross profit line item in the quarterly financial data presented in Note 16, "Quarterly Financial Data (Unaudited)," to the consolidated financial statements.



•

Part II, Item 9A to (i) update the disclosure included therein and (ii) include Management's Report on Internal Control over Financial Reporting.

        Certain other changes have been made in Part II, Items 7 and 8. Generally, no attempt has been made in this Amended Report to modify or update other disclosures presented in the Original Report except as required to reflect the items amended in this Amended Report as described above. This Amended Report does not reflect events occurring after the filing of the Original Report or modify or update those disclosures, except for events disclosed in Note 18, Subsequent Events, to the Consolidated Financial Statements. Information not affected by this Amended Report is unchanged and reflects the disclosure made at the time of the filing of the Original Report with the Securities and Exchange Commission on July 1, 2005. Accordingly, this Amended Report should be read in conjunction with our Original Report and the Company's filings made with the Securities and Exchange Commission subsequent to the filing of the Original Report.

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TABLE OF CONTENTS

PEREGRINE SYSTEMS, INC.
Index to Annual Report on Form 10-K/A

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PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition, results of operations, liquidity and capital resources should be read in conjunction with the consolidated financial statements and related notes included in this report. Some of the information contained in this discussion and analysis, or set forth elsewhere in this report, includes forward-looking statements that involve risk and uncertainties. Readers should carefully review the information set forth under the caption "Risk Factors," beginning on page 34 of this report for a discussion of important factors that could cause actual results to differ materially from our historical or anticipated results described herein, or implied, by the forward-looking statements in this report. We undertake no obligation to revise or update any forward-looking statements for any reason.

OVERVIEW

        From our initial public offering in 1997 through 2001, we significantly expanded our product lines and business through a series of acquisitions.

        As our operations grew through these acquisitions, our operating costs increased significantly. At the same time, the software industry began a downturn and we faced a challenging sales environment. These factors created a liquidity crisis for us that was exacerbated by covenant defaults under our credit facility during the quarter ended December 31, 2001. This resulted in our required repayment of approximately $100.0 million of outstanding debt.

        In January 2002, the SEC began an informal investigation into Peregrine and our then chief executive officer, Stephen Gardner, pertaining to transactions with Critical Path, Inc. that had taken place in the first half of fiscal 2001 and involved $3.3 million in Peregrine revenue. In February 2002, Peregrine's Audit Committee initiated an independent investigation into the transactions with Critical Path. In early May 2002, the Audit Committee and, upon its recommendation, the Board of Directors initiated a broad internal investigation, obtained the resignations of Mr. Gardner and our chief financial officer at that time, Matthew Gless, among others, and publicly disclosed that we were conducting an internal investigation into potential accounting irregularities or frauds, including alleged accounting abuses by our senior management resulting in a substantive overstatement of revenue in prior periods. In mid-May 2002, we announced that we would restate our consolidated financial statements for all of fiscal years 2000 and 2001 and for the first three quarters of fiscal 2002 (that is, the period from April 1999 through December 2001) as a result of the discovery of accounting irregularities during those periods, and we also announced that our financial statements and related audit reports for the restatement period should not be relied upon.

        In June 2002 our newly appointed chief executive officer and chief financial officer, and the rest of the management team, simultaneously focused on four immediate goals:

•

Accelerating the process of reducing our operating costs;



•

Obtaining third-party funding arrangements;



•

Selling non-core assets to fund ongoing operations; and



•

Managing the business to conserve cash.

We streamlined our operations by divesting a number of businesses and non-core product lines and significantly reduced our personnel and cost structure. We also implemented a restructuring plan to reduce expenses in line with future revenue expectations. The non-core Supply Chain Enablement (Harbinger and Extricity) and Remedy businesses were sold in June 2002 and November 2002,

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respectively, and are treated as discontinued operations in the consolidated financial statements. During the fiscal year ended March 31, 2003, we sold other non-core product lines, including products used in fleet management, facility management, telecommunications management, and travel management.

        On September 22, 2002, we filed for voluntary protection under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware. Our reorganization plan was confirmed by the Bankruptcy Court on July 18, 2003. We emerged from bankruptcy law protection on August 7, 2003. On February 28, 2003, we filed a Current Report on Form 8-K with audited annual financial statements for the three fiscal years ended March 31, 2002, which included restatements for fiscal years 2001 and 2000 and for the first three quarters of fiscal year 2002 (i.e., the period from April 1, 1999 through December 31, 2001). The accounting restatement pertained mainly to revenue recognition, accounting for business combinations, balance sheet presentation of factored accounts receivable and accounting for stock options and the related income tax effects. Generally, these adjustments reduced previously reported overstated revenue and increased understated total liabilities and operating expenses that were not accounted for properly under generally accepted accounting principles (GAAP).

        As a result of our bankruptcy law filing under Chapter 11, we were subject to the provisions of American Institute of Certified Public Accountants (AICPA) Statement of Position 90-7, "Financial Reporting of Entities in Reorganization under the Bankruptcy Code" (SOP 90-7), for the reporting periods subsequent to September 22, 2002 through July 18, 2003. Pursuant to SOP 90-7, we were required, among other things, to classify on the consolidated balance sheet liabilities arising prior to the September 22, 2002 petition date that were subject to compromise separately from those that were not, as well as liabilities arising post-petition. The liabilities that were potentially affected by the reorganization plan were reported at the estimated amounts that would be allowed under the reorganization plan, even if they were ultimately settled for lesser amounts. Revenue, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from the reorganization of the business were reported separately as reorganization items.

        We applied the fresh-start reporting provisions of SOP 90-7 in the quarter ended September 30, 2003. As a result of the implementation of fresh-start reporting, the financial statements of our Successor Company after July 18, 2003 are not comparable to our Predecessor Company's financial statements for prior periods.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Our consolidated financial statements are prepared in accordance with generally accepted accounting principles. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

•

Revenue Recognition;



•

Allowance for Doubtful Accounts;



•

Accounting for Income Taxes;



•

Legal Contingencies;

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•

Fresh-Start; and



•

Valuation of Long-Lived Assets.

Revenue Recognition

        As described below, significant management judgment and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences could result in the amount and the timing of our revenue for any period if our management made different judgments or utilized different estimates. Our revenue is derived principally from software product licensing and related services. Our standard end-user license agreement provides for an initial fee for use of our products in perpetuity. License fees are generally due upon the granting of the license. Maintenance revenue consists of fees for technical support and software updates. Consulting and training revenue is for fees earned for professional services provided to customers primarily on a time and material basis. We recognize revenue in accordance with the provisions of Statement of Position 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9 (SOP 97-2), and Staff Accounting Bulletins No. 101, "Revenue Recognition in Financial Statements" and No. 104, "Revenue Recognition," issued by the SEC.

        We recognize revenue from license agreements with direct customers when all of the following conditions are met: a non-cancelable license agreement has been signed; the product has been delivered; there are no material uncertainties regarding customer acceptance; the fee is fixed or determinable; collection of the resulting receivable is deemed probable; risk of concession is deemed remote; and we have no other significant obligations. Estimates on collectibility are made by management on a transaction-by-transaction basis. If provided in a license agreement, acceptance provisions generally grant customers a right of refund only if the licensed software does not perform in accordance with its published specifications. We believe the likelihood of non-acceptance in these situations is remote and we generally recognize revenue when all other criteria for revenue recognition are met. If such determination cannot be made, revenue is recognized upon the earlier of receipt of written acceptance or when the acceptance period has lapsed.

        For contracts with multiple obligations (e.g., current and future product delivery obligations, post-contract support or other services), we recognize revenue using the residual method. Under the residual method, we allocate revenue to the undelivered elements of the contract based on vendor-specific objective evidence of their fair value. This objective evidence is the sales price of each element when sold separately or the annual renewal rate specified in the agreement for maintenance. We recognize revenue allocated to undelivered products when all of the other criteria for revenue recognition have been met.

        Revenue from maintenance services is recognized ratably over the support period, which is generally one year. Consulting revenue is primarily derived from software product integration services, which we typically perform on a time and material basis under separate service agreements. In our judgment, consulting services are not usually considered essential to the functionality of the software. Training revenue derives from instructor-led and online educational services provided relating to our products. As a result, we recognize license revenue upon delivery of the software, which generally is prior to the delivery of the consulting and training services. Revenue from consulting and training services is recognized as the respective services are performed.

        We also derive revenue from the sale of software licenses and maintenance services through distributors. Revenue from sales made through distributors is recognized when the distributors have sold the software licenses or services to their customers and the criteria for revenue recognition under SOP 97-2 are met. Revenue from maintenance services sold through distributors is recognized ratably over the contractual period with the end user.

6

Allowance for Doubtful Accounts

        The Company makes estimates regarding the collectibility of its accounts receivable. The Company evaluates the adequacy of the allowance for doubtful accounts by analyzing specific accounts receivable balances, historical bad debts, customer credit worthiness, current economic trends and changes in customer payment cycles. Material differences may result in the amount and timing of expense for any period if management were to make different judgments or utilize different estimates. If the financial condition of our customers deteriorates resulting in an impairment of their ability to make payments, additional allowances might be required.

Accounting for Income Taxes

        Significant judgment is required in determining our worldwide income tax provision. In a global business like ours, there are many transactions and calculations in which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities and segregation of foreign and domestic income and expense to avoid double taxation. We have accrued reserves for tax contingencies based upon our estimates of the tax ultimately to be paid. These estimates are updated as new information becomes available. While these estimates are based upon the information available when these statements are issued, no assurance can be given that the final outcome of these matters will not differ from the estimates reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and financial position, results of operations or liquidity in the period for which such determination is made.

        We have recorded a valuation allowance on substantially all of our net deferred tax asset balances as of March 31, 2005 and 2004 because of uncertainties related to utilization of deferred tax assets, primarily related to net operating loss carryforwards, before they expire. At such time, if any, as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. Reductions for deferred tax assets generated prior to the adoption of fresh-start reporting will be recorded as reductions to goodwill.

Legal Contingencies

        We are currently involved in various claims and legal proceedings. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination of whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based on the best information available at the time in accordance with SFAS No. 5, "Accounting for Contingencies." As additional information becomes available, we will reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position. See Note 17 of our notes to consolidated financial statements for a description of our material legal proceedings.

Fresh-Start

        We adopted the fresh-start reporting provisions of SOP 90-7 on July 18, 2003. This resulted in a new basis of accounting. Under fresh-start reporting, the reorganization value of the entity, as described below, is allocated to the entity's assets based on fair values, and liabilities are stated at the present value of amounts to be paid determined at current interest rates. The determination of the reorganization value and fair value of assets relies on a number of estimates and assumptions, the

7

ultimate outcome of which are inherently subject to significant uncertainties and contingencies beyond our control.

        Management determined, with the assistance of third-party financial advisors, that the Company's business enterprise value ("BEV") was within the range of $245 million to $309 million. The range was also approved by the Bankruptcy Court in connection with the Reorganization Plan. For purposes of applying SOP 90-7, the Company used a BEV of $277 million, representing the mid-point of the range in valuations as management's best estimate of the Company's reorganized BEV. The BEV was based primarily on a discounted cash flow ("DCF") analysis using projected financial information for fiscal years 2004 through 2007, a discount rate of 20%, a tax rate of 35%, and a terminal value of 2.1 times the forecasted revenue for fiscal year 2007. Financial information used to compute the BEV did not differ materially from that presented to the Bankruptcy Court in connection with the approval of the Reorganization Plan. Management also validated the range of BEV, which was determined using the DCF analysis, by using a comparable company analysis, which considers the value of similar companies to determine the value of the Company, and a transaction analysis, which considers transactions involving comparable companies where willing sellers have transferred control to willing buyers. Management also considered the Company's market capitalization as indicated through the trading price of its common shares to validate the BEV.

        The valuation relied on a number of estimates and assumptions, including the discount rate, projected growth rates for revenues and expenses, and tax rate. A variation in any of these assumptions would have resulted in a significant change to the determined BEV.

        Fresh-start reporting requires that the reorganization value be allocated to the entity's assets in conformity with procedures specified by Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141). We engaged an independent appraiser to assist in determining the fair market value of our identifiable intangible assets. Identifiable intangible assets consist of developed technology, trademarks and trade names, customer contracts and customer lists. The fair value of these identifiable intangible assets was estimated to be $125.1 million and was determined using the Successor Company's estimated future cash flow discounted at the Successor Company's weighted cost of capital of 12.0%. The identifiable intangible assets have estimated useful lives ranging from five to six years.

        Any amount remaining after allocation of the reorganization value of the Successor Company to identified tangible and intangible assets is recorded as goodwill. Goodwill is not amortized, but is subject to periodic evaluation for impairment at least annually.

Valuation of Long-Lived Assets

        We evaluate the recoverability of our long-lived assets, including property and equipment and certain identifiable intangible assets, exclusive of goodwill, in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). Goodwill is tested for impairment, at least annually, in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." SFAS 144 requires us to review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors that could trigger an impairment review include:

•

Significant underperformance relative to historical or projected future operating results;



•

Significant changes in the manner of use of the assets or the strategy for our overall business;



•

Significant decrease in the market value of the assets; and



•

Significant negative industry or economic trends.

8

When we determine that the carrying amount of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators, we assess the assets for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset's carrying amount over its fair value. Fair value is generally determined based on the estimated future discounted cash flows over the remaining useful life of the asset using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. The assumptions supporting the cash flows, including the discount rates, are determined using our best estimates as of the date of the impairment review. Based on these estimates, we recognized impairment charges on long-lived assets of our continuing operations of $35.6 million for fiscal 2003.

RESULTS OF OPERATIONS

        As stated above, on July 18, 2003, the Bankruptcy Court confirmed our reorganization plan and it became effective on August 7, 2003. Results of operations presented for periods prior to and including July 18, 2003 pertain to our company prior to its reorganization, our Predecessor Company. The results of operations presented for periods after July 18, 2003 pertain to our company after its reorganization, our Successor Company. Where discussion applies to both the Predecessor Company and the Successor Company, we refer to the Company. As a result of the implementation of fresh-start reporting on July 18, 2003, the Successor Company's results of operations are not comparable to results reported in prior periods for the Predecessor Company, because of differences in the basis of reporting and the capital structure for the Predecessor Company and the Successor Company. See Note 1 of our notes to consolidated financial statements included in this report for additional information about the consummation of the reorganization plan and the implementation of fresh-start reporting.

        As required by Item 303(b) of SEC Regulation S-K, the discussion and analysis of results of operations covers all periods for which financial statements are presented, even those that relate to periods shorter than a full fiscal year. However, for clarity of presentation, where the adoption of fresh- start reporting did not have a material effect, we have only compared the results of operations of our Successor Company for the fiscal year ended March 31, 2005 with the historical operations of the Successor and Predecessor Company on a pro forma combined basis for the fiscal year ended March 31, 2004. Similarly, where the adoption of fresh-start reporting did not have a material effect, we have only compared the results of operations of our Successor Company and Predecessor Company on a pro forma combined basis for the fiscal year ended March 31, 2004 with the historical results of operations of the Predecessor Company for the fiscal year ended March 31, 2003.

        The discussion and analysis of results of operations for the shortened periods are not directly comparable to the full current fiscal year. For example, our Successor Company's license revenue, maintenance revenue, amortization, income taxes, discontinued operations and reorganization items, net were all affected by the adoption of fresh-start reporting. In order to provide an informative comparison of results of operations with our Successor Company's results for the fiscal year ended March 31, 2005, and with our Predecessor Company's results for the fiscal year ended March 31, 2003, our Predecessor Company's results of operations are presented for the 109-day period ended July 18, 2003 beside our Successor Company's results of operations for the 257-day period ended March 31, 2004, as well as on a pro forma combined basis for the combined fiscal year ended March 31, 2004. References to fiscal 2005 refer to operating results for our Successor Company for the fiscal year ended March 31, 2005, references to fiscal 2003 refer to operating results for our Predecessor Company for the fiscal year ended March 31, 2003, and references to fiscal 2004 refer to the pro forma combined results for our Predecessor Company and our Successor Company for the twelve-month period ended March 31, 2004. This information is provided for comparative purposes only, but the value of such a comparison may be limited. The pro forma combined financial information does not reflect the results

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of operations that either our Predecessor Company or our Successor Company would have achieved for the full 2004 fiscal year. The pro forma combined financial information for the fiscal year ended March 31, 2004 is presented on a merely additive basis and does not give pro forma effect to our Predecessor Company's results as if the consummation of the reorganization plan and the related fresh-start and other adjustments had occurred at the beginning of the period presented.

        The following table sets forth for the periods indicated the selected consolidated statement of operations data as a percentage of total revenue.

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COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 2005 WITH THE PRO FORMA COMBINED FISCAL YEAR ENDED MARCH 31, 2004

REVENUE

        Revenue comprises license fees, maintenance service fees and fees for consulting and training services.

        The following table summarizes Successor Company revenue for the fiscal year ended March 31, 2005 and pro forma combined revenue for the fiscal year ended March 31, 2004 (dollars in thousands):

        Revenue totaled $191.1 million for the fiscal year ended March 31, 2005, an increase of $16.5 million, or 9%, from the $174.5 million for the pro forma combined fiscal year ended March 31, 2004. License revenue for the fiscal year ended March 31, 2004 includes $5.6 million for license transactions entered into prior to fiscal 2003 but for which all revenue recognition criteria were not satisfied until the pro forma combined fiscal year ended March 31, 2004. Revenue for the fiscal year ended March 31, 2005 increased by $22.1 million, or 13%, from the pro forma combined revenue for the fiscal year ended March 31, 2004, excluding license transactions initiated prior to fiscal 2003. The reasons for the revenue increases or decreases are discussed below.

Licenses

        We generally license our products to end-users under perpetual license agreements for an up-front fee. License revenue for the pro forma combined fiscal year ended March 31, 2004 includes $5.6 million from license transactions originally entered into prior to fiscal 2003 but for which all revenue recognition criteria were not satisfied until the later period. The delay in recognizing revenue from license transactions originally entered into prior to fiscal 2003 arises from long-term installment payments, which are recognized as installments come due, and amounts related to products for which the expiration of certain product exchange or upgrade rights occurred in the later period. Commencing in fiscal 2003, we changed certain business practices by limiting the number of long-term installment contracts and contracts containing product exchange or upgrade rights. Upon the application of fresh-start reporting as of July 18, 2003, amounts that would have been recognized as revenue in future fiscal quarters by the Successor Company for such arrangements were eliminated because we had no significant future performance obligations under these agreements. Anticipated collections of Predecessor Company extended pay receivables were recorded as other assets in connection with the adoption of fresh-start reporting. At March 31, 2004, other assets included $5.0 million of such receivables, which were collected during the fiscal year ended March 31, 2005.

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        The following table summarizes Successor Company license revenue for the fiscal year ended March 31, 2005 and pro forma combined license revenue for the fiscal year ended March 31, 2004 (dollars in thousands):

        License revenue totaled $64.6 million for the fiscal year ended March 31, 2005, an increase of $2.0 million, or 3%, from the $62.7 million for the pro forma combined fiscal year ended March 31, 2004. License revenue for the fiscal year ended March 31, 2005 resulted mostly from license transactions entered into during the period and, as a result of the adoption of fresh-start reporting, did not include any revenue from license transactions initiated prior to fiscal 2003. License revenue for the fiscal year ended March 31, 2005 increased by $7.6 million, or 13%, from the pro forma combined fiscal year ended March 31, 2004, excluding transactions initiated prior to fiscal 2003. The increase primarily reflected higher unit sales as a result of demand for new and additional licenses, largely from our existing customer base, precipitated, in part, by our emergence from bankruptcy proceedings in August 2003 and our subsequent increased sales and marketing efforts. License revenue for the pro forma combined fiscal year ended March 31, 2004 included $57.1 million of license fees attributable mostly to new license transactions entered into during the period and $5.6 million attributable to license transactions initiated prior to fiscal 2003 but for which revenue was first recognizable in the pro forma combined fiscal year ended March 31, 2004.

Maintenance

        Most customers purchase maintenance services when buying new or additional licenses. Maintenance services consist primarily of providing enhancements and upgrades for our products along with customer support services for our products. Generally, maintenance contracts are entered into for one-year periods, contain economic index fee escalation provisions and are renewable annually at the customer's option. Maintenance contracts are generally prepaid by the customer and revenue is recognized ratably over the contract period. Maintenance revenue may include fees for services rendered in prior periods in instances in which customers did not renew their maintenance contracts until the current period.

        As described earlier, we adopted the fresh-start reporting provisions of SOP 90-7 as of July 18, 2003. Fresh-start reporting requires that the reorganization value be allocated to the entity's assets in accordance with SFAS No. 141. In accordance with these pronouncements, we determined the fair market value of our assets and liabilities at July 18, 2003, including our deferred maintenance revenue balances. Accordingly, we reduced our deferred maintenance revenue balances by $6.3 million to reflect the fair value of maintenance contracts existing at July 18, 2003. This $6.3 million adjustment has the effect of reducing maintenance revenue over the maintenance contract period for those contracts that existed when we adopted fresh-start reporting. In the fiscal year ended March 31, 2005 maintenance revenue was reduced by $1.4 million. The balance of the adjustment of $0.4 million at March 31, 2005 will be amortized through March 31, 2007.

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        The following table summarizes Successor Company maintenance revenue for the fiscal year ended March 31, 2005 and pro forma combined maintenance revenue for the fiscal year ended March 31, 2004 (dollars in thousands):

        Maintenance revenue totaled $109.0 million for the fiscal year ended March 31, 2005, an increase of $13.5 million, or 14%, from the $95.5 million reported for the pro forma combined fiscal year ended March 31, 2004. This increase is net of the $1.4 million reduction discussed above and a $4.4 million reduction resulting from the adoption of fresh-start reporting for the fiscal year ended March 31, 2005 and the pro forma combined fiscal year ended March 31, 2004, respectively. Excluding the reduction in maintenance revenue resulting from the adoption of fresh-start reporting, maintenance revenue increased $10.5 million, or 11%, from the pro forma combined fiscal year ended March 31, 2004. The increase occurred mainly as a result of our efforts to increase the percentage of customers renewing their maintenance contracts and because the revenue attributable to additional licenses covered by maintenance contracts exceeded the revenue lost from cancellations, in whole or in part, of maintenance contracts during the renewal process.

Consulting and Training

        Consulting and training services include a range of professional and educational services intended to help our customers use our software products more effectively. Beginning in June 2002, as part of expense-cutting initiatives, we reduced our consulting staff and began to refer customers more frequently to third-party service providers for general consulting services. We began to focus on supplementing our customers' and the third-party service providers' project teams with consultants possessing specialized knowledge of the more complex aspects of our products and the best practices for integrating our products into the customers' business operations.

        During the latter half of fiscal 2004, we began to reinvest in expanding our consulting business due to increasing customer demand after our emergence from bankruptcy proceedings. We hired additional business development personnel, new managers and other staff to address increased demand.

        The following table summarizes Successor Company consulting and training revenue for the fiscal year ended March 31, 2005 and pro forma combined consulting and training revenue for the fiscal year ended March 31, 2004 (dollars in thousands):

        Revenue for consulting and training services totaled $17.4 million for the fiscal year ended March 31, 2005, an increase of $1.0 million, or 6%, from the $16.4 million pro forma combined consulting and training revenue for the fiscal year ended March 31, 2004. This increase primarily reflects the reinvestment efforts that began in the latter half of fiscal 2004.

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Revenue by Segment

        We organize our business operations according to two reportable operating segments:

•

Americas, which includes our U.S. operations as well as our operations in Canada, Mexico and South America; and



•

EMEA/AP, which includes our operations in Europe, the Middle East, Africa and the Asia Pacific Region.

        The following table summarizes Successor Company revenue by reportable operating segment for the fiscal year ended March 31, 2005 and pro forma combined revenue by reportable operating segment for the fiscal year ended March 31, 2004 (dollars in thousands):

        Revenue for the Americas territory totaled $103.7 million for the fiscal year ended March 31, 2005, an increase of $3.4 million, or 3%, from the pro forma combined revenue for the fiscal year ended March 31, 2004. License revenue for the Americas territory totaled $31.8 million for the fiscal year ended March 31, 2005, a decrease of $1.9 million, from the pro forma combined license revenue for the fiscal year ended March 31, 2004. License revenue for the Americas territory for the fiscal year ended March 31, 2004 includes $5.2 million for license transactions entered into prior to fiscal 2003 but for which all revenue recognition criteria were not satisfied until the pro forma combined fiscal year ended March 31, 2004. License revenue for the Americas territory for the fiscal year ended March 31, 2005 increased by $3.2 million from the pro forma combined license revenue for the fiscal year ended March 31, 2004, excluding transactions initiated prior to fiscal 2003. The increase primarily reflected higher unit sales as a result of demand for new and additional licenses, largely from our existing customer base, precipitated, in part, by our emergence from bankruptcy proceedings in August 2003 and our subsequent increased sales and marketing efforts. Maintenance revenue for the Americas territory for the fiscal year ended March 31, 2005 increased $3.7 million from the pro forma combined fiscal year ended March 31, 2004, primarily as a result of increased focus on renewal efforts and because the revenue attributable to additional licenses covered by maintenance contracts exceeded the revenue lost from cancellations, in whole or in part, of maintenance contracts during the renewal process. Americas consulting and training revenue for the fiscal year ended March 31, 2005 increased $1.6 million from the pro forma combined fiscal year ended March 31, 2004 and primarily reflects the reinvestment efforts which began in the latter half of fiscal 2004.

        Revenue for the EMEA/AP territory totaled $87.3 million for the fiscal year ended March 31, 2005, an increase of $13.1 million, or 18%, from the pro forma combined revenue for the fiscal year ended March 31, 2004. License revenue in EMEA/AP for the fiscal year ended March 31, 2005 increased $3.9 million from the pro forma combined fiscal year ended March 31, 2004 as a result of

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higher unit sales of new and additional licenses, largely to our existing customer base, precipitated, in part, by our emergence from bankruptcy proceedings in August 2003 and our subsequent increased sales and marketing efforts. This increase was also caused in part by favorable fluctuations in exchange rates with the U.S. dollar. Revenue also increased as the result of hiring new personnel and improved execution of the sales model. EMEA/AP maintenance revenue in the fiscal year ended March 31, 2005 increased by $9.8 million from the pro forma combined fiscal year ended March 31, 2004 primarily as a result of increased focus on renewal efforts and because the revenue attributable to additional licenses covered by maintenance contracts exceeded the revenue lost from cancellations, in whole or in part, of maintenance contracts during the renewal process. EMEA/AP consulting and training revenue for the fiscal year ended March 31, 2005 decreased $0.6 million from the pro forma combined fiscal year ended March 31, 2004 and primarily reflects the June 2002 change in our consulting services strategy, offset in part by the impact associated with the reinvestment efforts which began in the latter half of fiscal 2004.

COSTS AND EXPENSES

Cost of Licenses

        The cost of licenses primarily consists of amortization expense related to developed technology, third-party software royalties, product packaging, documentation and production, and distribution costs.

        The cost of licenses totaled $11.3 million for the fiscal year ended March 31, 2005, an increase of $2.3 million, or 25%, from the pro forma combined cost of licenses for the fiscal year ended March 31, 2004. The cost of licenses represented 17% and 14% of license revenue for the fiscal year ended March 31, 2005 and the pro forma combined fiscal year ended March 31, 2004, respectively. This increase resulted primarily from amortization expense related to developed technology recorded in connection with the Company's emergence from bankruptcy and adoption of the fresh-start reporting provisions of SOP 90-7 on July 18, 2003, partially offset by reductions in software royalties and from ongoing cost reductions implemented in the latter portion of fiscal 2003 through the quarter ended June 30, 2003. We began to outsource most of our product distribution beginning in the three months ended June 30, 2003, and fully implemented the outsourcing prior to the quarter ended June 30, 2004.

Cost of Maintenance

        The cost of maintenance services primarily consists of personnel, facilities and system costs related to technical support services to our customers on maintenance contracts.

        The cost of maintenance totaled $18.7 million for the fiscal year ended March 31, 2005, an increase of $1.7 million, or 10%, from the pro forma combined fiscal year ended March 31, 2004. This increase resulted primarily from increases in personnel costs. The cost of maintenance represented 17% and 18% of maintenance revenue for the fiscal year ended March 31, 2005 and the pro forma combined fiscal year ended March 31 2004, respectively.

Cost of Consulting and Training

        The cost of consulting and training services primarily consists of personnel, facilities and system costs associated with providing these services. The cost of consulting and training services also includes fees paid to third-party subcontractors providing services on our behalf.

        The cost of consulting and training totaled $18.1 million for the fiscal year ended March 31, 2005, an increase of $1.9 million, or 12%, from the pro forma combined fiscal year ended March 31, 2004. The cost of consulting and training represented 105% and 100% of consulting and training revenue for the fiscal year ended March 31, 2005 and the pro forma combined fiscal year ended March 31, 2004, respectively. The cost increase is the result of our reinvesting in expanding our consulting business during the latter half of fiscal 2004 primarily through the addition of personnel.

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Sales and Marketing

        Sales and marketing expenses primarily consist of personnel costs, including sales commissions and travel costs, facilities and system costs related to our sales, including technical pre-sales, and marketing functions. The costs of advertising and marketing promotions are also included in sales and marketing expenses.

        Sales and marketing expenses totaled $67.6 million for the fiscal year ended March 31, 2005, an increase of $16.4 million, or 32%, from the pro forma combined fiscal year ended March 31, 2004. The increase reflects higher strategic marketing consulting fees, personnel costs, commission expense and advertising costs. The increase in commission expense resulted primarily from the increase in license revenue, exclusive of transactions initiated prior to fiscal 2003.

Research and Development

        Research and development (R&D) expenses primarily consist of personnel, facilities and systems costs associated with our R&D efforts, which include software development and product management efforts. R&D expenses also include the cost of services for consultants or other third parties that we hire from time to time to augment our own R&D personnel. No software development costs were capitalized during the periods presented, as costs incurred between technological feasibility and product releases were minimal.

        R&D expenses totaled $29.6 million for the fiscal year ended March 31, 2005, and were substantially the same as those for the pro forma combined fiscal year ended March 31, 2004.

General and Administrative

        General and administrative (G&A) expenses consist of personnel, facilities and systems costs related to our operations. G&A also includes the cost of business insurance and professional fees, including legal, accounting, investment banking and other advisory fees, except for fees directly related to our bankruptcy reorganization, which are accounted for under Reorganization Items, Net.

        G&A expenses totaled $52.4 million for the fiscal year ended March 31, 2005, an increase of $4.9 million, or 10%, from like expenses for the pro forma combined fiscal year ended March 31, 2004. The increase primarily reflects an increase in personnel costs offset in part by a decrease in professional fees.

Amortization of Intangible Assets

        Fresh-start reporting requires that the reorganization value be allocated to the entity's assets in conformity with procedures specified by SFAS 141. Identifiable intangible assets identified in connection with fresh-start reporting which are subject to amortization consist of developed technology, trademarks and trade names, maintenance contracts and customer lists. With the adoption of fresh-start reporting, our Successor Company determined the fair value of these identifiable intangibles to be $125.1 million, and to have useful lives ranging from five to six years. For the fiscal year ended March 31, 2005 and the 257 days ended March 31, 2004 our Successor Company recorded non-cash charges for amortization of intangible assets of $13.4 million and $9.3 million, respectively. Amortization expense of $9,799 and $6,899 related to developed technology is recorded in cost of licenses for the fiscal year ended March 31, 2005 and the 257 days ended March 31, 2004, respectively.

Restructuring, Impairments and Other

        Restructuring, impairments and other for our Successor Company totaled $1.1 million for the fiscal year ended March 31, 2005 and represents a gain realized upon the sale of a minority investment in another company.

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        Restructuring and other for our Predecessor Company totaled $1.2 million for the 109 days ended July 18, 2003 and represents a gain realized upon the sale of certain minority investments in other companies.

Foreign Currency Transaction Gains (Losses), Net

        Foreign currency transaction gains (losses), net consist primarily of exchange rate gains or losses resulting from remeasurement of foreign-denominated short-term intercompany and third-party receivable and payable balances and cash balances of our operating entities into their functional currencies at period-end market rates. Foreign currency transactions resulted in gains of $2.2 million for the fiscal year ended March 31, 2005, with such gains resulting primarily from the impact of the weakening U.S. dollar on our foreign-denominated short-term intercompany receivable and payable balances. Foreign currency transactions resulted in losses of $0.4 million for the pro forma combined fiscal year ended March 31, 2004.

Reorganization Items, Net

        As discussed above, as a result of our bankruptcy-law filing we became subject to the provisions of SOP 90-7 for the reporting periods subsequent to September 22, 2002. Pursuant to SOP 90-7, revenue, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from our Predecessor Company's reorganization of the business through the bankruptcy proceedings are reported separately as reorganization items, except for the sale of the assets of our wholly-owned Remedy subsidiary, which is recorded among discontinued operations. Our Successor Company has also incurred charges recorded in reorganization items, net, primarily related to bankruptcy-proceeding professional fees.

        Reorganization items, net totaled $1.6 million for the fiscal year ended March 31, 2005, and consist primarily of professional fees directly related to the bankruptcy filing, net of $0.7 million of gains on settlements with creditors. Reorganization items, net totaled $7.2 million for the 257 days ended March 31, 2004 and also consisted primarily of professional fees directly related to the bankruptcy filing.

        Reorganization items, net for our Predecessor Company consist of the following (in thousands):

        In the 109 days ended July 18, 2003, our Predecessor Company recorded a net reorganization gain of $378.8 million. Of this gain, $358.5 million resulted from the fair value adjustment to our assets and liabilities in connection with the adoption of fresh-start reporting. We also recognized a $35.4 million gain on our settlement with creditors upon exiting bankruptcy. These gains were offset somewhat by professional fees directly related to our bankruptcy proceeding and other costs directly related to the implementation of our reorganization plan.

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Interest Income

        Interest income totaled $1.5 million for the fiscal year ended March 31, 2005, a decrease of $0.3 million, or 19%, from the pro forma combined fiscal year ended March 31, 2004. This decrease is primarily the result of lower available cash balances invested.

Interest Expense

        Interest expense primarily includes interest expense and amortized costs related to our borrowings. Interest expense totaled $4.0 million for the fiscal year ended March 31, 2005, a decrease of $5.3 million, or 57%, from the pro forma combined fiscal year ended March 31, 2004. Interest expense decreased primarily as a result of lower debt balances, offset in part by higher interest rates on currently outstanding debt.

Other Income

        Other income for the fiscal year ended March 31, 2005 represents a $0.9 million gain resulting from the collection of employee receivables that had previously been written off as uncollectible prior to our bankruptcy filing.

Income Taxes

        Tax expense is derived primarily from taxes on foreign operations for which no U.S. federal benefit can be recorded and interest accrued on our tax contingencies.

        Income tax expense totaled $5.3 million for the fiscal year ended March 31, 2005, and $3.8 million for the pro forma combined fiscal year ended March 31, 2004. This tax expense represented 26.4% of the loss from continuing operations before income taxes for the fiscal year ended March 31, 2005 and 1.1% of income from continuing operations before income taxes for the pro forma combined fiscal year ended March 31, 2004.

Discontinued Operations

        Income from discontinued operations related to Remedy for the 109 days ended July 18, 2003 of $0.3 million pertained to the collection of a trade receivable that had extended payment terms.

Effect of Foreign Currency Exchange Rate Fluctuations on Results of Operations

        Approximately 46% and 42% of our revenue for the fiscal year ended March 31, 2005 and the pro forma combined fiscal year ended March 31, 2004, respectively, were derived from operations outside the United States. As a consequence, our results are affected by changes in foreign currency exchange rates. To provide a framework for assessing how our underlying operations performed, excluding the effect of foreign currency exchange rate fluctuations, we have disclosed below the change in "total revenue" (comprised of licenses, maintenance, and consulting and training), "cost of revenue" (comprised of cost of licenses, maintenance, and consulting and training), and "operating costs and expenses" (comprised of sales and marketing, research and development, general and administrative, amortization of intangible assets, and restructuring, impairments and other) attributable to foreign currency exchange rate fluctuations. To do so, we have calculated the impact of foreign currency exchange rate fluctuations in U.S. Dollars by multiplying the fiscal year 2005 activity in local currencies by the difference between the average exchange rates in effect during fiscal year 2005 and the average exchange rates in effect during the pro forma combined fiscal year ended March 31, 2004.

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Total Revenue

        Total revenue for the fiscal year ended March 31, 2005 increased $16.5 million from total revenue for the pro forma combined fiscal year ended March 31, 2004. Approximately $5.3 million of the increase was the result of foreign currency exchange rate fluctuations.

Cost of Revenue

        Cost of revenue for the fiscal year ended March 31, 2005 increased $5.8 million from cost of revenue for the pro forma combined fiscal year ended March 31, 2004. Approximately $0.8 million of the increase was the result of foreign currency exchange rate fluctuations.

Operating Costs and Expenses

        Operating costs and expenses for the fiscal year ended March 31, 2005 increased $25.9 million from operating costs and expenses for the pro forma combined fiscal year ended March 31, 2004. Approximately $3.6 million of the increase was the result of foreign currency exchange rate fluctuations.

COMPARISON OF RESULTS OF OPERATIONS OF THE PRO FORMA COMBINED FISCAL YEAR ENDED MARCH 31, 2004 WITH THE FISCAL YEAR ENDED MARCH 31, 2003

REVENUE

        Revenue comprises license fees, maintenance service fees and fees for consulting and training services. The year ended March 31, 2003 includes revenue for non-core product lines that were sold during such fiscal year. As a result of the disposition of the non-core product lines, the results for the 109-day period ended July 18, 2003 and the 257-day period ended March 31, 2004 do not include any non-core product line revenue.

Predecessor Company

        Revenue totaled $48.7 million for the 109-day period ended July 18, 2003, all of which was related to core products (i.e., our current product line, which excludes product lines divested during fiscal 2003). Revenue for the 109-day period ended July 18, 2003 includes $5.6 million of revenue for license transactions entered into prior to fiscal 2003, but for which all revenue recognition criteria were not satisfied until the period ended July 18, 2003.

Successor Company

        Revenue totaled $125.9 million for the 257-day period ended March 31, 2004, all of which was related to core products.

        Revenue for the Pro Forma Combined Fiscal Year ended March 31, 2004 and Predecessor Company Revenue for the Fiscal Year ended March 31, 2003 (dollars in thousands)

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        Revenue totaled $174.5 million for the pro forma combined fiscal year ended March 31, 2004, down 24% from the $230.0 million in revenue reported for our Predecessor Company for the fiscal year ended March 31, 2003. Pro forma revenue for the combined fiscal year ended March 31, 2004 were attributable solely to core products and services and were down 19% from the $216.1 million of revenue for core products and services reported for our Predecessor Company for fiscal 2003. The reasons for the decreases are discussed below.

Licenses

        We generally license our products to end-users under perpetual license agreements. License revenue for our Predecessor Company includes revenue from license transactions entered into prior to fiscal 2003. For these transactions, revenue was recognized in fiscal 2003 or the 109 days ended July 18, 2003, when all the revenue recognition criteria were satisfied. The delay in recognizing this revenue arises from long-term installment payments, which are recognized as installments come due, and amounts related to products for which the expiration of certain product exchange or upgrade rights occurred in the later period. Commencing in fiscal 2003, we changed certain business practices by limiting the number of long-term installment contracts and contracts containing product exchange or upgrade rights. The application of fresh-start reporting as of July 18, 2003 eliminated any additional amounts to be recognized as revenue in future fiscal quarters by our Successor Company, because we have no significant future performance obligations under these agreements. In addition, anticipated future collections of Predecessor Company receivables with extended payment terms have been recorded as other assets in connection with the adoption of fresh-start reporting and, as a result, will not be recognized as revenue upon receipt by the Successor Company.

Predecessor Company

        License revenue for the 109-day period ended July 18, 2003 totaled $13.5 million, of which $7.9 million was attributable to new license transactions entered into during the period and $5.6 million was attributable to license transactions initiated prior to fiscal 2003, but for which all revenue recognition criteria were met in the reported period.

Successor Company

        License revenue for the 257-day period ended March 31, 2004 totaled $49.1 million. This license revenue resulted mostly from license transactions entered into during the period and, as a result of the adoption of fresh-start reporting, does not include any revenue from license transactions initiated prior to fiscal 2003.

        License revenue for the Pro Forma Combined Fiscal Year ended March 31, 2004 and Predecessor Company license revenue for the Fiscal Year ended March 31, 2003 (dollars in thousands):

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        Pro forma license revenue for the combined fiscal year ended March 31, 2004 totaled $62.7 million. For combined fiscal 2004, $57.1 million of the pro forma license revenue was attributable to license transactions entered into during the period and $5.6 million was attributable to license transactions initiated prior to fiscal 2003, but for which all revenue recognition criteria were met in the period. License revenue for our Predecessor Company for fiscal 2003 totaled $88.6 million, including $3.3 million of license fees for non-core product lines that were subsequently divested in fiscal 2003. For fiscal 2003, $59.4 million of the core license revenue was attributable to license transactions entered into during the fiscal year and $25.8 million was attributable to core license transactions initiated prior to fiscal 2003, but for which revenue was first recognizable in fiscal 2003. Pro forma license revenue for core products for combined fiscal 2004, excluding transactions initiated prior to fiscal 2003, decreased by $2.3 million, or 4%, from such license revenue for fiscal 2003. Pro forma license revenue for transactions initiated prior to the reported period, but for which all revenue recognition criteria were met in the combined fiscal 2004, decreased by $20.2 million, or 78%, from the license revenue for transactions initiated prior to the fiscal year, but for which all revenue recognition criteria were met in fiscal 2003. As discussed above, this decrease resulted from the adoption of fresh-start reporting and changes in our business practices limiting the number of long-term installment contracts and contracts containing product exchange or upgrade rights.

Maintenance

        Most customers purchase maintenance services when buying new or additional licenses. Maintenance services consist primarily of providing enhancements, upgrades and customer support services for our products. Generally, maintenance contracts are entered into for one-year periods and are renewable annually unless cancelled by the customer. The customer generally prepays maintenance contracts and revenue is recognized ratably over the contract period.

        As described earlier, we adopted the fresh-start reporting provisions of SOP 90-7 as of July 18, 2003. Fresh-start reporting requires that the reorganization value be allocated to the entity's assets in accordance with SFAS No. 141. In accordance with the pronouncement, we determined the fair market value of our assets and liabilities at July 18, 2003, including our deferred maintenance revenue balances. Accordingly, we reduced our deferred maintenance revenue balances by $6.3 million to reflect the fair value of existing maintenance contracts in place at July 18, 2003. This $6.3 million adjustment by our Successor Company will have the effect of reducing maintenance revenue over the maintenance contract periods. Of this amount, $4.4 million reduced maintenance revenue in the 257-day period ended March 31, 2004.

Predecessor Company

        Maintenance revenue for the 109-day period ended July 18, 2003 totaled $29.2 million. Maintenance revenue for this period was for core products only, as non-core products were divested in the year ended March 31, 2003.

Successor Company

        Maintenance revenue for the 257-day period ended March 31, 2004 totaled $66.3 million, all of which was related to core products.

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        Maintenance revenue for the Pro Forma Combined Fiscal Year ended March 31, 2004 and Predecessor Company maintenance revenue for the fiscal year ended March 31, 2003 (dollars in thousands):

        Pro forma maintenance revenue for the combined fiscal year ended March 31, 2004 totaled $95.5 million. Maintenance revenue for our Predecessor Company for fiscal 2003 totaled $99.8 million, including $5.3 million for non-core product lines. Pro forma maintenance revenue for the combined fiscal year ended March 31, 2004 increased by $1.1 million, or 1%, from maintenance revenue for core products for our Predecessor Company for fiscal 2003. Pro forma core maintenance revenue for the combined fiscal year ended March 31, 2004 reflects a $4.4 million reduction resulting from the adoption of fresh-start reporting. The negative impact of fresh-start mostly offset the overall maintenance growth in our core products of $5.5 million, or 6%. The increase occurred partially because the revenue attributable to additional licenses covered by maintenance contracts exceeded the revenue lost from cancellations, in whole or in part, of maintenance contracts during the renewal process. Maintenance fees are amortized evenly over the contract period, so the pro forma results for the combined fiscal year ended March 31, 2004 also reflects the full impact of our expanded customer base and related increases in new or additional licenses from the beginning of fiscal 2004 to March 31, 2004. In addition, the pro forma combined fiscal year ended March 31, 2004 included maintenance revenue related to prior maintenance periods for which customers did not renew their maintenance contracts until such later period.

Consulting and Training

        Consulting and training services include a range of professional and educational services intended to help our customers use our software products more effectively. Beginning in June 2002 as part of expense-cutting initiatives, we reduced our consulting staff and began to refer customers more frequently to third-party service providers for general consulting services. We began to focus on supplementing our customers' and the third-party service providers' project teams with consultants possessing specialized knowledge of the more complex aspects of our products and the best practices for integrating our products into the customers' business operations.

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        The following table summarizes pro forma consulting and training revenue for the combined fiscal year period ended March 31, 2004 and consulting and training revenue for our Predecessor Company for the fiscal year ended March 31, 2003 (dollars in thousands):

        Pro forma revenue for consulting and training services totaled $16.4 million for the combined fiscal year ended March 31, 2004. Revenue for consulting and training services totaled $41.7 million for our Predecessor Company for fiscal 2003, including $5.3 million of consulting and training revenue for non-core product lines. Pro forma consulting and training revenue decreased in the combined fiscal year ended March 31, 2004 by $20.0 million, or 55%, compared to the consulting and training revenue for our Predecessor Company for fiscal 2003, primarily as a result of the change in our consulting services strategy.

Revenue by Segment

        We organize our business operations according to two reportable operating segments:

•

Americas, which includes our U.S. operations as well as our operations in Canada, Mexico and South America; and



•

EMEA/AP, which includes our operations in Europe, the Middle East, Africa and the Asia Pacific Region.

        The following table summarizes pro forma combined revenue by reportable operating segment for the fiscal year ended March 31, 2004 and revenue by segment for our Predecessor Company for the fiscal year period ended March 31, 2003 (dollars in thousands):

        Pro forma revenue for the Americas territory totaled $100.3 million for the combined fiscal year ended March 31, 2004, a decrease of $46.1 million, or 31%, from the revenue for our Predecessor Company for fiscal 2003. Of the decrease, $14.0 million resulted from the fact we were no longer

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selling the non-core products we had divested in fiscal 2003. Pro forma core consulting and training revenue for the Americas territory declined $12.4 million for the combined fiscal year ended March 31, 2004 as we began to refer our customers more frequently to third-party service providers for general consulting services. Although core license revenue for the Americas territory remained relatively consistent, decreasing only $0.1 million, total license revenue for the Americas territory for the pro forma combined period was lower due to an $11.1 million decrease in revenue recognized in connection with fiscal 2003 transactions primarily as a result of our change in business practice and the adoption of fresh-start reporting. Pro forma Americas maintenance revenue related to core products decreased $5.6 million in this combined period compared to the Americas maintenance revenue for our core products for our Predecessor Company for fiscal 2003, with an additional $3.0 million decrease resulting from the fresh-start adjustment. The remainder of the decrease in Americas maintenance revenue was the result of lower renewal rates in the combined period.

        Pro forma revenue for the EMEA/AP territory totaled $74.2 million for the combined fiscal year ended March 31, 2004, a decrease of $9.4 million, or 11%, from the revenue for the EMEA/AP territory for our Predecessor Company for fiscal 2003. The effect of currency exchange rate changes increased EMEA/AP fiscal 2004 revenue by $9.9 million. Pro forma license revenue in EMEA/AP for the combined fiscal year ended March 31, 2004 related to pre-fiscal 2003 transactions decreased $9.2 million. This decrease in recognized revenue related to transactions initiated prior to fiscal 2003 is the result of a change in business practice and the adoption of fresh-start reporting. Of the total revenue decline, $7.7 million reflected the lower consulting and training revenue caused by our change in strategy. Pro forma maintenance revenue increased in the EMEA/AP region for the combined period, offsetting a portion of these revenue decreases. The increase in maintenance revenue occurred because the revenue attributable to additional licenses covered by maintenance contracts exceeded the revenue lost from cancellations, in whole or in part, of maintenance contracts during the renewal process. In addition, the pro forma combined fiscal year ended March 31, 2004 included maintenance revenue related to prior maintenance periods but for which customers did not renew their maintenance contracts until the combined fiscal 2004 period.

COSTS AND EXPENSES

Stock Based Compensation Expense

        Prior to July 2002, the Predecessor Company granted a number of stock options at an exercise price below the then fair market value of the common stock. The difference between the fair market value at the date of grant and the exercise price is recorded as deferred compensation on the date of grant, and compensation expense is recognized over the vesting period of the option. In November 2003, the Predecessor Company completed the sale of its Remedy business (see Note 3 to the consolidated financial statements), which accelerated the recognition of substantially all deferred compensation charges related to stock options. Since July 2002, substantially all stock options have been granted with exercise prices equal to the fair market value at the date of grant. As a result, there has been a substantial decrease in compensation charges related to stock options since November 2003. Compensation charges for the stock options are reflected in operating cost and expenses as noted below.

Cost of Licenses

        The cost of software licenses primarily consists of amortization expense related to developed technology, third-party software royalties, product packaging, documentation and production and distribution costs. The cost of licenses represented 14% of pro forma license revenue for the pro forma combined fiscal year ended March 31, 2004. The cost of licenses represented 7% of license revenue for our Predecessor Company for fiscal 2003. This increase resulted primarily from amortization expense related to developed technology recorded in connection with the Company's emergence from bankruptcy and adoption of the fresh-start reporting provisions of SOP 90-7 on July 18, 2003, partially

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offset by cost reductions implemented in the latter portion of fiscal 2003, including the outsourcing of most of our product distribution. License costs were also lower in the fiscal 2004 period because of the disposition of non-core products in fiscal 2003.

Cost of Maintenance

        The cost of maintenance services primarily consists of personnel, facilities and system costs related to technical support services to our customers on maintenance contracts. The cost of maintenance represented 18% of maintenance revenue in the pro forma combined fiscal year ended March 31, 2004. The cost of maintenance represented 27% of maintenance revenue in fiscal 2003. The cost of maintenance for the pro forma combined period totaled $17.0 million; a decrease of $9.4 million compared with the cost of maintenance for fiscal 2003. Of the decrease, $4.2 million was related to stock option compensation charges in fiscal 2003. The remaining cost decreases resulted from actions implemented in fiscal 2003 to reduce operating costs, including a reduction in workforce and facilities costs related to maintenance functions. We also experienced cost reductions from fiscal 2003 because of divestiture of non-core product lines.

Cost of Consulting and Training

        The cost of consulting and training services primarily consists of personnel, facilities and system costs associated with providing these services. The cost of consulting and training services also includes fees paid to third-party subcontractors providing services on our behalf. The cost of consulting and training represented 100% of consulting and training revenue for the pro forma combined fiscal year ended March 31, 2004. The cost of consulting and training represented 92% of consulting and training revenue for fiscal 2003. The cost of consulting and training services in the pro forma combined period decreased $22.1 million from the year-earlier period. Of the decrease, $4.2 million was related to stock option compensation charges in fiscal 2003. The remaining cost decreases resulted mostly from our reduction in workforce as we revised our strategy for these services.

Sales and Marketing

        Sales and marketing expenses primarily consist of personnel costs, including sales commissions and travel costs, facilities and system costs related to our sales, including technical pre-sales, and marketing functions. The costs of advertising and marketing promotions are also included in sales and marketing expenses. Sales and marketing expenses in the pro forma combined fiscal year ended March 31, 2004 totaled $51.2 million, down $56.7 million from fiscal 2003. Of the decrease $14.7 million was related to stock option compensation charges in fiscal 2003. The decrease also reflects cost reductions implemented in fiscal 2003 as part of our restructuring plan, including a reduction in workforce, facilities consolidation and a decrease in marketing promotion activities. We closed several sales offices around the world as we focused direct sales efforts on North America and major European markets. Beginning in the first half of fiscal 2003, we began to rely more on third-party distributors to sell our products and services in markets in which we chose not to maintain a significant direct sales presence, such as in Asia and Latin America.

Research and Development

        Research and development (R&D) expenses primarily consist of personnel, facilities and systems costs associated with our R&D and product management efforts. R&D expenses also include the cost of services for consultants or other third parties whom we hire to augment our own R&D personnel. No software development costs were capitalized during the periods presented, as costs incurred between technological feasibility and product releases were minimal. R&D expenses were $29.3 million for the pro forma combined fiscal year ended March 31, 2004, a drop of $23.1 million from fiscal 2003. Of the decrease, $8.4 million was related to stock option compensation charges in fiscal 2003. The

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remainder of the decrease resulted primarily from a reduction in workforce in connection with the sale of several non-core product lines in fiscal 2003.

General and Administrative

        General and administrative (G&A) expenses consist of personnel, facilities and systems costs related to our operations. G&A also includes the cost of business insurance and professional fees, including legal, accounting, investment banking and other advisory fees, except for fees directly related to our bankruptcy reorganization, which are accounted for under Reorganization Items, Net.

        G&A expenses for the pro forma combined fiscal year ended March 31, 2004 totaled $47.8 million, down $41.0 million from fiscal 2003. The decrease reflects the benefit of restructuring efforts implemented in fiscal 2003. Of the decrease, $10.5 million was related to stock option compensation charges in fiscal 2003. G&A savings were also realized by reducing professional fees, personnel, closing underutilized facilities, reducing telecommunication costs and the cost of supporting our internal systems. G&A costs for fiscal 2004 includes approximately $16.1 million in professional fees for service providers who assisted with our restructuring, investigation and other activities related to the previously mentioned accounting irregularities, the strategic positioning of our core products, and audit and tax services. G&A costs for fiscal 2003 include approximately $38.7 million in professional fees for service providers who assisted with our restructuring, investigation and other activities related to the previously mentioned accounting irregularities, the strategic positioning of our core products, and audit and tax services. Fees directly related to our bankruptcy-law filing under Chapter 11 are included in Reorganization Items, Net discussed below.

Amortization of Intangible Assets

        Fresh-start reporting requires that the reorganization value be allocated to the entity's assets in conformity with procedures specified by SFAS 141. We engaged an independent appraiser to assist in the allocation of the reorganization value to our Successor Company's assets and liabilities by determining the fair market value of its intangible assets. Identifiable intangible assets consist of developed technology, trademarks and trade names, customer contracts and customer lists. With the adoption of fresh-start reporting we determined the fair value of these identifiable intangibles to be $125.1 million, and to have useful lives ranging from five to six years. For the 257-day period ended March 31, 2004, our Successor Company recorded non-cash charges for amortization of intangibles of $9.3 million. Amortization expense of $6,899 related to developed technology is included in cost of licenses for the 257 day period ended March 31, 2004.

Restructuring, Impairments and Other

        Restructuring, impairments and other for our Predecessor Company consist of the following (in thousands):

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        For the 109-day period ended July 18, 2003, restructuring, impairments and other represented a gain for our Predecessor Company realized upon the sale of certain minority investments in other companies.

        During June 2002, our Predecessor Company began to implement a restructuring plan to reduce expenses in line with future revenue expectations and focus operations on the core market. In fiscal 2003, restructuring, impairments and other expenses included charges of $33.3 million for losses from abandoned leases, $34.7 million for losses from abandoning fixed assets and $19.8 million for employee severance. These charges were reduced somewhat by a fiscal 2003 gain on the sale of non-core product lines.

Foreign Currency Transaction Gains (Losses), Net

        Foreign currency transaction gains (losses), net consist primarily of exchange rate gains or losses resulting from remeasurement of foreign-denominated short-term intercompany and third-party receivable and payable balances and cash balances of our operating entities into their functional currencies at period-end market rates. Foreign currency transactions resulted in losses of $0.4 million for the pro forma combined fiscal year ended March 31, 2004.

Reorganization Items, Net

        As discussed above, as a result of our bankruptcy-law filing, as of September 22, 2002, we became subject to the provisions of SOP 90-7 for the reporting periods subsequent to September 22, 2002. Pursuant to SOP 90-7, revenue, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from our Predecessor Company's reorganization of the business through the bankruptcy proceedings are reported separately as reorganization items, except for the sale of the assets of our Remedy subsidiary, which is recorded among discontinued operations. Our Successor Company may also incur future charges, primarily related to bankruptcy-proceeding professional fees in future periods, which will be recorded as reorganization items.

Predecessor Company

        Reorganization items, net for our Predecessor Company consist of the following (in thousands):

        For the 109 days ended July 18, 2003, the Predecessor Company recorded a net reorganization gain of $378.8 million. Of this gain, $358.5 million resulted from the fair value adjustments to our assets and liabilities with the adoption of fresh-start reporting. We also recognized a $35.4 million gain on our settlement with creditors upon exiting bankruptcy law protection. These gains were partially offset by our costs directly related to the implementation of our reorganization plan.

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        Net reorganization items for fiscal 2003 include charges of $12.1 million for professional fees directly related to the Chapter 11 filing, a $5.4 million write-off of debt issuance costs, and lease abandonment charges of $4.3 million. These charges were offset by a $21.4 million gain resulting from the reversal of a fiscal 2002 exit cost provision related to an abandoned facility that was settled more favorably, as the accrued cost was reduced to the allowed claim amount upon the Chapter 11 filing.

Successor Company

        Reorganization items, net for the 257-day period ended March 31, 2004 totaled $7.2 million and consisted entirely of professional fees directly related to our bankruptcy proceedings.

Interest Income

        Interest income for the combined pro forma fiscal year ended March 31, 2004 was $1.9 million, an increase of $1.1 million, or 137%, over fiscal 2003. Interest income was greater in the fiscal 2004 period, reflecting higher available cash balances to invest.

Interest Expense

        Interest expense included interest charges and amortization of debt issuance costs related to our borrowings. Interest expense decreased to $9.4 million for the pro forma combined fiscal year 2004, down $27.1 million from fiscal 2003. Interest expense was higher in fiscal 2003 because of a higher amount of outstanding debt of $270 million and because in June 2002 we had entered into relatively high cost financing arrangements to address the liquidity crisis until we completed the sale of our Remedy business in November 2002.

Income Taxes

        Income tax expense totaled $3.8 million for the pro forma combined fiscal year ended March 31, 2004, down from the $8.1 million recorded for the fiscal year ended March 31, 2003. Our tax expense represented 1.1% of income from continuing operations before income taxes for the pro forma combined fiscal year ended March 31, 2004. For fiscal 2003 tax expense represented 3.7% of loss from continuing operations before income taxes. Income tax expense for fiscal 2004 and 2003 mainly reflected taxes on operations in certain foreign jurisdictions. Tax expense was higher in fiscal 2003 due to accruing for tax contingencies in that fiscal year resulting from certain tax exposures.

Discontinued Operations

        As part of our effort to raise cash and reduce expenses, we sold our Supply Chain Enablement (SCE) and Remedy businesses in June and November 2002, respectively. These businesses are treated as discontinued operations.

        The SCE business offered software applications and services that automated and integrated business-to-business relationships. In June 2002, Peregrine sold all of the shares of its wholly-owned Peregrine Connectivity (the SCE business) subsidiary to PCI International, Inc., an entity affiliated with Golden Gate Capital LLC, for approximately $35 million in cash. The $47.8 million loss on the disposal of SCE was provided for in fiscal 2002. For fiscal 2003, results from discontinued operations include income from SCE of $1.4 million.

        In September 2002, Peregrine and Remedy entered into an agreement with BMC Software, Inc. (BMC) pursuant to which BMC, subject to bid procedures approved by the Bankruptcy Court, acquired the assets and assumed substantially all the liabilities of the Remedy business for $355 million, subject to certain adjustments provided for in the acquisition agreement. In November 2002, the sale of Remedy to BMC was approved by the Bankruptcy Court and completed. In June 2003, Peregrine and

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BMC agreed on a final adjusted sale price of $348 million. Income from discontinued operations of Remedy for the 109-day period ended July 18, 2003 totaled $0.3 million and relates to the collection of a trade receivable that had extended payment terms. No amounts related to Remedy will affect the results of our Successor Company, due to the adoption of fresh-start reporting treatment. Remedy's discontinued operations provided income of $256.2 million in fiscal 2003, primarily from the gain on sale.

Effect of Foreign Currency Exchange Rate Fluctuations on Results of Operations

        Approximately 42% and 36% of our revenue for the pro forma combined fiscal year ended March 31, 2004 and the fiscal year ended March 31, 2003, respectively, were derived from operations outside the United States. As a consequence, our results are affected by changes in foreign currency exchange rates. To provide a framework for assessing how our underlying operations performed, excluding the effect of foreign currency exchange rate fluctuations, we have disclosed below the change in "total revenue" (comprised of licenses, maintenance, and consulting and training), "cost of revenue" (comprised of cost of licenses, maintenance, and consulting and training), and "operating costs and expenses" (comprised of sales and marketing, research and development, general and administrative, amortization of intangible assets, and restructuring, impairments and other) attributable to foreign currency exchange rate fluctuations. To do so, we have calculated the impact of foreign currency exchange rate fluctuations in U.S. Dollars by multiplying the pro forma combined fiscal year ended March 31, 2004 activity in local currencies by the difference between the average exchange rates in effect during the pro forma combined fiscal year ended March 31, 2004 and the average exchange rates in effect during fiscal year 2003.

Total Revenue

        Total revenue for the pro forma combined fiscal year ended March 31, 2004 decreased $55.5 million from total revenue for the fiscal year ended March 31, 2003. This decrease is net of a revenue increase of approximately $11.0 million resulting from foreign currency exchange rate fluctuations.

Cost of Revenue

        Cost of revenue for the pro forma combined fiscal year ended March 31, 2004 decreased $28.8 million from cost of revenue for the fiscal year ended March 31, 2003. This decrease is net of a cost of revenue increase of approximately $1.8 million resulting from foreign currency exchange rate fluctuations.

Operating Costs and Expenses

        Operating costs and expenses for the pro forma combined fiscal year ended March 31, 2004 decreased $203.6 million from operating costs and expenses for the fiscal year ended March 31, 2003. This overall decrease is net of an operating expense increase of approximately $4.5 million resulting from foreign currency exchange rate fluctuations.

LIQUIDITY AND CAPITAL RESOURCES

        We primarily generate cash from software licensing, maintenance renewals and the provision of consulting and training services. Our primary uses of cash are for general working capital purposes and debt service. We also use cash to purchase capital assets to support our business. In fiscal 2005 and fiscal 2004, our principal liquidity requirements were for operating expenses, working capital and debt and bankruptcy related payments. We have funded these liquidity requirements from cash on hand that

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was primarily generated from the disposal of our non-core product lines and our SCE and Remedy businesses in 2002.

        The following table summarizes the Successor Company cash and cash equivalents, restricted cash and working capital (deficit) as of March 31, 2005 and 2004 (dollars in thousands):

        Cash equivalents primarily consist of overnight money market accounts, time deposits, commercial paper and government agency notes. The restricted cash relates primarily to security for certain real property leases and certain other obligations. Working capital (deficit) consists primarily of cash and cash equivalents, accounts receivable, deferred taxes, and other current assets net of accounts payable, accrued expenses, and current portions of deferred revenue and notes payable.

        For the fiscal year ended March 31, 2005, the 257 days ended March 31, 2004 and the 109 days ended July 18, 2003 our cash flows were as follows (dollars in thousands):

        We believe our cash on hand and operating cash flows will be sufficient to fund our operations and planned capital expenditures and to satisfy our scheduled non-trade payment obligations for at least 12 months from the date of this report. However, our ability to generate adequate cash depends upon our future performance, which in turn is subject to general economic conditions and financial, business and other factors affecting our operations, including factors beyond our control. Please review the information set forth under the caption "Risk Factors," beginning on page 34 of this report. We currently have no lines of credit or similar facilities with any financial institutions. There can be no assurance that additional financing will be available in the future or that, if available, we will be able to obtain it on terms favorable to us.

Operating Activities

        For the fiscal year ended March 31, 2005 the Successor Company used $1.9 million of cash in operating activities. Our Successor Company reported a net loss of $25.4 million, which was offset by cash inflows from changes in working capital of $4.3 million and non-cash charges of $27.6 million for amortization and depreciation. Working capital inflows were primarily impacted by decreases in accounts receivable and other assets of $4.9 million and $4.3 million, respectively, and increases in accrued expenses of $2.3 million. These inflows were offset, in part, by decreases in accounts payable and deferred revenue of $2.5 million and $4.7 million, respectively. Of the amortization charge, $23.2 million was related to the new identifiable intangibles established with the adoption of fresh-start reporting treatment as of July 18, 2003.

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        For the 257-day period ended March 31, 2004, the Successor Company generated $4.9 million in cash from operating activities. Our Successor Company reported a net loss of $17.9 million, including non-cash charges of $20.8 million for amortization and depreciation. Of the amortization charge, $16.2 million was related to identifiable intangibles established with the adoption of fresh-start reporting as of July 18, 2003. Changes in working capital also contributed to the increase in cash from operating activities including the collection of $7.5 million of long-term installment sales of the Predecessor Company subsequently paid to several financial institutions under accounts receivable financing facilities.

        Our Predecessor Company used $51.7 million of net cash in operating activities in the 109 days ended July 18, 2003. Our Predecessor Company reported net income from continuing operations of $373.9 million for this period. However, most of the income was non-cash in nature, because it resulted from the adoption of fresh-start reporting treatment. During the period, our Predecessor Company used $42.9 million of cash for reorganization items related to implementing our reorganization plan, which accounts for most of the decrease in the period.

Investing Activities

        For the fiscal year ended March 31, 2005 the Successor Company generated $1.2 million of net cash from investing activities, which primarily reflects $4.2 million of cash from the sale of investments and $0.9 million from the collection of employee receivables that had previously been written off as uncollectible prior to our bankruptcy filing, net of $4.6 million used for capital expenditures, mostly for computers and data processing equipment and leasehold improvements.

        For the 257 days ended March 31, 2004 the Successor Company generated $6.6 million of net cash from investing activities, which primarily reflects the collection of $10.0 million released from escrow as part of the Remedy sale, net of $2.6 million in capital expenditures and the commitment of an additional $1.9 million to restricted cash, related mostly to new real estate leases.

        For the 109 days ended July 18, 2003 the Predecessor Company provided $32.6 million of net cash from investing activities. Cash from investing activities increased $27.2 million because that amount of restricted cash became available for general use in accordance with our reorganization plan and also increased $5.4 million from the sale of investments.

Financing Activities

        For the fiscal year ended March 31, 2005 the Successor Company used $22.0 million of net cash in financing activities. This primarily reflects repayment of $17.6 million of principal on long-term debt as well as $4.7 million of principal on factor loans.

        For the 257 days ended March 31, 2004 the Successor Company repaid $7.1 million of its factor loan obligations and $7.4 million in other long-term debt.

        For the 109 days ended July 18, 2003, under the terms of the reorganization plan, our Predecessor Company paid down $24.3 million on factor loans and paid $86.5 million, in addition to other consideration, to the holders of its convertible subordinated notes.

Contractual Commitments

Operating Lease Obligations

        We lease certain buildings and equipment under non-cancelable operating lease agreements. The leases generally require us to pay all executory costs, such as taxes, insurance and maintenance related to the leased assets. Certain of the leases contain provisions for periodic rate escalations to reflect cost-of-living increases. At March 31, 2005, future minimum lease payments under non-cancelable

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operating leases, excluding leases subsequently rejected under our plan of reorganization, were as follows (in thousands):

Non-trade Obligations and Commitments

        As of March 31, 2005 our principal future non-trade obligations and commitments include the following (in thousands):

(1)

Senior notes refer to our 6.5% senior notes scheduled to mature in 2007. We are required to make principal and accrued interest payments on our senior notes in eight equal semi-annual installments over a four-year period. The senior notes are general unsecured obligations, which rank senior in right of payment to all of our existing and future subordinated indebtedness and pari passu in right of payment with all of our current and future unsubordinated indebtedness.

(2)

Bankruptcy claims consist of amounts agreed to as part of the reorganization plan in order to settle certain claims. The claims are unsecured obligations and bear interest ranging from zero to the federal judgment rate. The payments are due annually every August through 2007.

(3)

The Motive payments consist of payment obligations to Motive Communications, Inc. in connection with the settlement of a lawsuit. In September 2002, Motive filed an action against Peregrine, Remedy and certain of our former officers claiming, among other things, that it was fraudulently induced into licensing software to us. In January 2003, we entered into a settlement agreement that provided for a mutual release of claims in exchange for, among other things, the payments set forth above.

(4)

This amount relates to the bankruptcy claims and Motive payments. See Note 7 of notes to consolidated financial statements.

Bankruptcy Claims

        We began paying claims on the effective date of the reorganization plan and continue to pay as claims are settled, liquidated, or otherwise resolved. Through May 31, 2005, we have paid, settled or otherwise disposed of Class 8 claims with an original aggregate face amount of approximately $383.1

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million (including approximately $133.0 million of duplicate, erroneous and otherwise invalid claims). To resolve these claims we have paid or agreed to pay over time approximately $45.0 million in cash. As of May 31, 2005, there were general unsecured claims asserted in the original aggregate face amount of approximately $0.5 million remaining to be resolved.

RECENT ACCOUNTING PRONOUNCEMENTS

        On December 16, 2004 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" (SFAS 123R), requiring that the compensation cost relating to share-based payment transactions be measured and recognized in the financial statements using the fair value of the awards. This statement eliminates the alternative to use Accounting Principles Board (APB) Opinion No. 25's, "Accounting for Stock Issued to Employees" intrinsic value method of accounting that was provided in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Under APB Opinion No. 25, issuing stock options to employees generally resulted in recognition of no compensation cost. SFAS 123R requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). SFAS 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance based awards and employee share purchase plans. SFAS 123R replaces Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." In April 2005 the Securities and Exchange Commission amended Regulation S-X to amend the date for compliance with SFAS 123R to the first interim or annual reporting period of a registrant's first fiscal year beginning after June 15, 2005. As a result, we are required to adopt SFAS 123R on April 1, 2006. We are currently assessing the impact of SFAS 123R on our compensation strategies and financial statements and determining which transition alternative we will elect. We believe the adoption of SFAS 123R may have a material effect on our operating results if current compensation strategies are continued.

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RISK FACTORS

        The following factors currently affect or may affect our business, financial condition or future operating results. Readers should carefully consider these factors before making an investment decision with respect to our common stock

Risks Related to Investing in Our Common Stock

We have preliminarily identified material weaknesses in our internal control over financial reporting.

        Management is in the process of completing its assessment of the effectiveness of our internal control over financial reporting for the fiscal year ended March 31, 2005 as required by Section 404 of the Sarbanes-Oxley Act of 2002. Although management has not completed its assessment, management has identified the following control deficiencies that represent material weaknesses at March 31, 2005:

•

Ineffective controls over period-end financial reporting processes;



•

Ineffective controls over purchasing and liability recognition;



•

Ineffective controls over access to financial applications and data;



•

Ineffective controls over recording our income tax provisions;



•

Ineffective control over spreadsheets.

        As we complete our assessment of our internal control over financial reporting we may identify additional control deficiencies and we may determine that those deficiencies, either alone or in combination with others (including other control deficiencies that we have identified as of the date of filing of this Annual Report on Form 10-K, but which do not by themselves or when aggregated with other identified control deficiencies currently constitute a material weakness), constitute one or more additional material weaknesses. When we complete our assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm completes its audit of our assessment, we expect it to issue an adverse opinion on the effectiveness of our internal control over financial reporting. The control deficiencies increase the risk that transactions will not be accounted for consistently and in accordance with established policy or generally accepted accounting principles, and they increase the risk of error. For more information about deficiencies in our internal control over financial reporting, and about the status of these control deficiencies as of the date of filing of this report, readers should carefully review the information set forth under the caption "Controls and Procedures" beginning on page 50 of this report.

        We have taken steps to ensure that the consolidated financial statements contained in this report are accurate in all material respects, and we have taken specified remedial actions to ensure that future consolidated financial statements will be accurate in all material respects. However, our internal control over financial reporting remains ineffective. See "Controls and Procedures." Our management cannot guarantee that controls and procedures put into place have prevented or will prevent all error and fraud. A control system can provide only reasonable, not absolute, assurance that the objectives of the control system are met. For more information regarding the process put into place to determine the accuracy of the consolidated financial statements included in this report, readers should carefully review the information set forth under the caption "Management's Remediation Initiatives and Changes in Internal Control Over Financial Reporting," in Item 9A beginning on page 53 of this report.

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Management has not completed its assessment of our internal control over financial reporting and we have not filed the associated report of our independent registered public accounting firm as required by Section 404 of the Sarbanes-Oxley Act, which, when filed, could have an adverse effect on the trading price of our common stock and our business.

        Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to include "Management's Report on Internal Control over Financial Reporting" in this Annual Report on Form 10-K which must include, among other things, an assessment of the effectiveness, as of the end of the fiscal year, of the Company's internal control over financial reporting. We have not completed our assessment of the effectiveness of our internal control over financial reporting for the fiscal year ended March 31, 2005 as required by Section 404 of the Sarbanes-Oxley Act of 2002. Failure to comply fully with Section 404 might subject the Company to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. Any such action could adversely affect the Company's financial results and the market price of the Company's common stock.

        Once we have completed our assessment of our internal control over financial reporting and our independent registered public accounting firm has completed its review of our assessment, we intend to file an amendment to this Annual Report on Form 10-K that will include the report of management on internal control over financial reporting and the associated report of our independent registered public accounting firm as required by Section 404 of the Sarbanes-Oxley Act of 2002. Although management has not completed its assessment of the effectiveness of our internal control over financial reporting as of March 31, 2005, management has identified certain control deficiencies which represent material weaknesses at March 31, 2005. Therefore, upon completion of our assessment, we will have to conclude in the "Management Report on Internal Control over Financial Reporting" in our amended Annual Report on Form 10-K that our internal control over financial reporting is not effective. In view of the fact that the financial information presented in this Annual Report on Form 10-K was prepared in the absence of effective internal control over financial reporting, we have devoted a significant amount of time and resources to the analysis of the financial statements. As a result of this, management believes that the financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows. Our inability to remedy our material weaknesses promptly and effectively could have a material adverse effect on our business, results of operations and financial condition, as well as impair our ability to meet our SEC quarterly and annual reporting requirements in a timely manner. This could in turn adversely affect the trading price of our common stock. Prior to the remediation of these material weaknesses, there remains the risk that the transitional controls on which we currently rely will fail to be sufficiently effective, which could result in a material misstatement of our financial position and results of operation and require a restatement. In addition, even if we are successful in strengthening our controls and procedures, such controls and procedures may not be adequate to prevent or identify irregularities or facilitate the fair presentation of our financial statements.

Our continuing internal control material weaknesses may have a continuing adverse effect on our operations.

        Customers that purchase software products are making a significant long-term investment in technology. Because of the long-term nature of such an investment, customers are often concerned about the stability of their suppliers. Our previous financial and accounting problems, any future problems regarding our ability to file our SEC reports on a timely basis, and the material weaknesses in our internal control over financial reporting as described in this Annual Report on Form 10-K could adversely affect our results of operations and financial condition. Any loss in sales could also have a material adverse effect on our operating results. Additionally, concerns such as these may impair our ability to negotiate favorable terms from suppliers, landlords and others. The failure to obtain such favorable terms could adversely affect our financial performance.

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Our fiscal 2004 financial statements and our financial statements for earlier periods are not comparable to our financial statements for fiscal 2005 and later periods.

        In connection with our emergence from bankruptcy proceedings, we adopted fresh-start reporting for our consolidated financial statements during fiscal 2004, for periods beginning July 18, 2003, in accordance with generally accepted accounting principles. Under fresh-start reporting, a new reporting entity is deemed to be created, and the recorded amounts of tangible and intangible assets and liabilities are adjusted to reflect their fair value. This reporting method also calls for a re-establishment of total assets at the reorganization value and the recording of any portion of the reorganization value that cannot be attributed to specific tangible or identified intangible assets as goodwill. As a result, our reported historical consolidated financial statements for periods prior to July 18, 2003, which are contained in this report, generally are not comparable to those reported under fresh-start reporting.

We may not be able to file our future SEC reports on a timely basis.

        The significant deficiencies and material weaknesses in our internal control over financial reporting cause us to expend extra time, money and effort to ensure our financial reports are accurate. In particular, until we remediate the material weaknesses in our internal control over financial reporting, we expect we will have to review all significant account balances and transactions reflected in the financial statements for each quarterly and annual period, and otherwise analyze the transactions underlying our financial statements to verify the accuracy of our financial statements. The significant deficiencies and material weaknesses in our internal control over financial reporting may result in our inability to consistently maintain timely filings of our SEC reports, which could have a material adverse impact on our business, our customers, results of operations and financial condition.

Failure or circumvention of our controls and procedures could seriously harm our business.

        We have made significant changes in our internal control over financial reporting and our disclosure controls and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, and not absolute, assurances that the objectives of the system are met. In addition, the effectiveness of our remediation efforts and of our internal control over financial reporting is subject to limitations, including the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, our remediation efforts to improve our internal control over financial reporting may not prevent all improper acts or ensure that all material information will be made known to management in a timely fashion. Also, because substantial additional costs may be necessary to implement these remedial measures, our limited resources may cause a further delay in remediating all of our material weaknesses. The failure or circumvention of our controls, policies and procedures or of our remediation efforts could have a material adverse effect on our business, results of operations and financial condition.

Certain historic Peregrine periodic reports filed with the Securities and Exchange Commission prior to our bankruptcy reorganization are inaccurate and cannot be relied upon.

        Although we restated our financial results in February 2003 for fiscal years 2000 and 2001 and the first three quarters of fiscal 2002 (that is, the period from April 1999 through December 2001), we have not amended the prior periodic reports we have on file with the SEC for those periods. As a result, the financial and other information included in these reports is inaccurate and unreliable. In addition, the information contained in periodic reports for fiscal 1999 and periods prior to that may also be inaccurate and unreliable.

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The Securities and Exchange Commission investigation into accounting irregularities that occurred prior to our bankruptcy reorganization remains open. We entered into a settlement with the SEC to resolve a civil action they filed against us, but we are not in full compliance with the settlement agreement because we have failed to meet our periodic reporting obligations on a timely basis.

        In June 2003, the SEC filed a civil action against Peregrine alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules promulgated thereunder related to the accounting irregularities that occurred prior to our bankruptcy reorganization. In the same month, we entered into a settlement with the SEC, which was approved by the United States District Court for the Southern District of California and which resolved all the matters raised in the civil action, except the request for a civil penalty and disgorgement. The SEC separately withdrew the request for monetary damages and disgorgement in July 2003. As part of our settlement with the SEC, we were enjoined from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), and 13(b) of the Securities Exchange Act of 1934 as well as Exchange Act Rules 10b-5, 12b-20, 13a-1 and 13a-13. We have not filed our periodic reports on time with the SEC since the date of the consent decree. Thus we have been in violation of these provisions of the securities laws and have not complied with our settlement agreement with the SEC. We can give no assurances that our future periodic reports will be filed on a timely basis.

        The SEC investigation remains open and we continue to receive document and other information requests from the SEC, the DOJ and the Federal Bureau of Investigation. We are cooperating fully with these agencies and continue to provide them with relevant information they request. While we remain in discussions with the SEC and to our knowledge the SEC is not considering a further enforcement action against us, we can offer no assurance that a further enforcement action will not be brought. We may be required to devote a substantial amount of time to the continuing investigation and responding to any enforcement action would be expensive and time-consuming for management. If an enforcement action is brought, we could face financial penalties, personnel retention problems and customer defections as a result. It also could damage our reputation and our ability to generate sales.

        Other civil litigation matters pertaining to us, but to which we are not a party, are pending in the California Superior Court in San Diego and the Federal District Court in San Diego. See "Legal Proceedings," beginning on page 11 of Annual Report on Form 10-K filed on July 1, 2005. We are responding to subpoena requests in connection with these matters and some of our current employees may be called upon to give depositions or other testimony in these proceedings. These obligations may require a substantial amount of time and attention by certain of our management and other employees.

The Department of Justice investigation into accounting irregularities that occurred prior to our bankruptcy reorganization remains open. We may be required to devote a substantial amount of time to the ongoing investigation and criminal charges could be brought against us.

        In early 2002, the DOJ opened an investigation into the accounting irregularities that occurred prior to our bankruptcy reorganization. As a result of the DOJ investigation, a number of our former employees, including our former chief financial officer, treasurer, assistant treasurer and two sales executives have pleaded guilty to various felony charges and are awaiting sentencing. A number of other former employees, including our former chief executive officer and chairman, chief operating officer, two executive vice presidents of worldwide sales, vice president of finance and chief accounting officer, and other sales and finance personnel, have been charged with various felonies in connection with these accounting irregularities and are awaiting trial. An Arthur Andersen partner who formerly was our lead auditor also was indicted in connection with these events. The criminal charges generally relate to the manipulation of our apparent financial condition, misleading investors, hindering the government's investigation or conspiracy. In most of these cases, the SEC filed a civil action against

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these same individuals alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules promulgated thereunder.

        The DOJ investigation remains open and we continue to receive document and other information requests from the DOJ, the SEC and the Federal Bureau of Investigation. We are cooperating fully with these agencies and continue to provide them with relevant information they request. To our knowledge neither Peregrine nor any current employee is a target of the DOJ criminal investigation, but there can be no assurance that criminal charges will not be brought in the future. We may be required to devote a substantial amount of time to the continuing investigations. If criminal charges were brought against us, we could face personnel retention problems and customer defections as a result. It also could damage our reputation and our ability to generate sales.

Our new common stock is not listed on any exchange or quoted on the Nasdaq National Market System.

        Under the provisions of our reorganization plan, shares of our old common stock were cancelled at the close of business on August 7, 2003. Our new common stock is not listed for trading on any exchange or quoted on the Nasdaq National Market System, although trading in the new common stock is reported on the Pink Sheets under the symbol PRGN. Our new common stock is thinly traded compared to larger, more widely known companies in our industry. Our new common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our new common stock without regard to our operating performance. We cannot assure you that investors will be able to liquidate their investment in our Company without considerable delay, if at all. Also, we cannot assure you that our new common stock will be listed on a national securities exchange or quoted on the Nasdaq National Market System at any time in the future. Even if a robust market for such stock were to develop, we could not assure you that it would continue to exist. Furthermore, even if a robust trading market were to develop and persist, the prices at which such securities might trade would depend upon a number of factors, including industry conditions, the performance of, and investor expectations for, our Successor Company and market factors, such as the number of holders who might wish to dispose of their securities to raise funds or recognize losses for tax or other purposes.

Our stock price may continue to be highly volatile, which might make the new common stock difficult to resell.

        The trading price of our old common stock was highly volatile. The trading price of our new common stock also has been highly volatile. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the following:

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Actual or anticipated variations in our operating results;



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Potential action taken by the Securities and Exchange Commission or the United States Department of Justice;



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Continuing deficiencies, including material weaknesses, in our internal control over financial reporting;



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Delays in filing our periodic reports with the SEC on a timely basis.



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The inability to remedy all of our material weaknesses in a timely manner or material delays in the remediation of these material weaknesses;



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Announcements of technological innovations by us or our competitors;



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New products or services offered by us or our competitors;

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Conditions or trends in the software industry generally, or specifically in the market for information technology asset and service management software;



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Changes in the economic performance and/or market valuations of our competitors and the software industry in general;



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Announcements by us or by our competitors of significant contracts, changes in pricing policies, acquisitions, strategic partnerships, joint ventures or capital commitments;



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Adoption of industry standards and the inclusion of our technology in, or compatibility of our technology with, such standards;



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Adverse or favorable publicity regarding us or our products;



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Our gain or loss of a major customer, alliance partner or supplier;



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Additions or departures of key personnel;



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Sales of our new common stock in the public market;



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Sales of our new common stock by our four principal stockholders who hold, in aggregate, approximately 30% of our new common stock; and



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Other events or factors that may be beyond our control.

        In addition, the stock markets in general, and in particular the markets for securities of technology and software companies, have experienced extreme price and volume volatility. This volatility has affected many companies irrespective of or disproportionately to their operating performance. These broad market and industry factors could hurt the market price of our new common stock, regardless of our actual operating performance.

Our charter documents permit us to issue shares of preferred stock without shareholder approval, which could adversely affect the rights of the holders of our new common stock and may inhibit a takeover or change in our control.

        Our Board of Directors has the authority to issue as many as 5,000,000 shares of preferred stock in one or more series. Our charter documents permit our Board to determine or alter the rights, preferences, privileges and restrictions of this preferred stock without any further vote or action by our stockholders. The issuance of preferred stock allows us flexibility in connection with possible acquisitions and for other corporate purposes. However, the rights of holders of our new common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. This may include the loss of voting control to others. In addition, we could issue preferred stock to prevent a change in control of our company, depriving holders of our new common stock of an opportunity to sell their stock at a price in excess of the prevailing market price.

Risks Related to Our Business