<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
---------------
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) JULY 31, 1998
----------------------------------------
PEREGRINE SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 000-22209 95-3773312
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(State of incorporation) (Commission File Number) (IRS Employer
Identification No.)
12670 HIGH BLUFF DRIVE, SAN DIEGO, CALIFORNIA 92130
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(Address of principal executive offices of Registrant)
(619) 481-5000
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(Registrant's telephone number, including area code)
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<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On May 5, 1998, the Company's Board of Directors approved the acquisition of
Innovative Tech Systems, Inc., an Illinois corporation ("ITS"), based in
Warminster, Pennsylvania. Pursuant to an Agreement and Plan of Reorganization
dated as of May 7, 1998 (the "Merger Agreement") by and among the Company, Homer
Acquisition Corporation, a wholly-owned subsidiary of the Company ("Merger
Sub"), and ITS, and approved by the shareholders of ITS at a special meeting
held July 27, 1998, the Company completed the acquisition of ITS by means of a
merger of Merger Sub merged with and into ITS (the "Merger"), with ITS remaining
as the surviving corporation and a wholly-owned subsidiary of the Company under
the name "Peregrine Systems Facilities Management, Inc." The Merger was
completed July 31, 1998.
Pursuant to the Merger Agreement, each share of Common Stock of ITS ("ITS
Common Stock") outstanding immediately prior to the Effective Time (as defined
in the Merger Agreement) was converted into the right to receive 0.2341 shares
of the Company's Common Stock (the "Exchange Ratio"). In addition, all options
to purchase the ITS Common Stock outstanding immediately prior to the Effective
Time were assumed by the Company, subject only to adjustments to maintain the
economic equivalence of the assumed options on the basis of the Exchange Ratio.
In connection with the Merger, holders of outstanding redeemable warrants to
acquire shares of ITS Common Stock (the "ITS Warrants") approved an amendment to
the terms of the Warrant Agreement, dated as of July 26, 1994, as amended,
governing the ITS Warrants whereby, at the Effective Time, each ITS Warrant was
exchanged for and converted into the right to receive that number of shares of
Common Stock of the Company, based on the Exchange Ratio, as would have been the
case if the ITS Warrants had been exercised for ITS Common Stock immediately
prior to the Effective Time on a net issuance basis.
Additionally, in connection with the Merger certain other warrants to
acquire ITS Common Stock and/or ITS Warrants were exchanged for and converted
into the right to receive Common Stock of the Company.
In connection with the Merger, the Company issued or reserved an aggregate
of approximately 3,470,000 shares of Common Stock, including shares issued upon
conversion of the above described warrants and the shares issuable upon exercise
of outstanding options. The Common Stock of the Company issued in the Merger was
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement on Form S-4 (File No. 333-57459) which the
Securities and Exchange Commission (the "Commission") declared effective on June
24, 1998. The Common Stock of the Company issuable upon exercise of options to
purchase ITS Common Stock was registered under the Securities Act pursuant to a
Registration Statement on Form S-8 which was filed with the Commission on July
31, 1998.
The Merger constitutes a tax-free reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended, and will be accounted for as a
"purchase" by the Company.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
(i) The audited consolidated balance sheets of Innovative Tech Systems,
Inc. as of January 31, 1997 and 1998, the audited consolidated statements of
operations, of changes in shareholders' equity and cash flows of Innovative
Tech Systems, Inc. for the years ended January 31, 1996, 1997 and 1998, the
notes related thereto, and the Reports of Independent Public Accountants
thereon are set forth at pages F-35 through F-51 of the ITS Shareholder
Proxy Statement and Warrant Holder Information Statement/Peregrine
Prospectus dated June 24, 1998 included in the Registrant's Registration
Statement on Form S-4 (No. 333-57459). Such financial statements, notes and
reports set forth at such pages are incorporated herein by reference.
2
<PAGE>
(ii) The unaudited consolidated balance sheet of Innovative Tech
Systems, Inc. as of April 30, 1998, the unaudited consolidated statements of
operations, of changes in shareholders' equity and cash flows of Innovative
Tech Systems, Inc. for the three months then ended and the notes related
thereto are set forth at pages F-35 through F-51 of the ITS Shareholder
Proxy Statement and Warrant Holder Information Statement/Peregrine
Prospectus dated June 24, 1998 included in the Registrant's Registration
Statement on Form S-4 (No. 333-57459). Such balance sheet and notes set
forth at such pages are incorporated herein by reference.
(b) PRO FORMA FINANCIAL INFORMATION.
(i) An unaudited pro forma condensed combined balance sheet as of March
31, 1998 and the notes related thereto are set forth at pages 88 through 90
of the ITS Shareholder Proxy Statement and Warrant Holder Information
Statement/Peregrine Prospectus dated June 24, 1998 included in the
Registrant's Registration Statement on Form S-4 (No. 333-57459). Such
balance sheet and notes set forth at such pages are incorporated herein by
reference.
(ii) Unaudited pro forma condensed combined statements of operations for
the year ended March 31, 1998 and the notes related thereto are set forth at
pages 88 through 90 of the ITS Shareholder Proxy Statement and Warrant
Holder Information Statement/Peregrine Prospectus dated June 24, 1998
included in the Registrant's Registration Statement on Form S-4 (No.
333-57459). Such statements of operations and notes set forth at such pages
are incorporated herein by reference.
(c) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated as of May 7, 1998, among Peregrine Systems, Inc,
Homer Acquisition Corporation, Innovative Tech Systems, Inc., and related exhibits. (The
disclosure letter of Innovative Tech Systems, Inc. delivered to Peregrine, which cites to
certain factual matters as exceptions to the contractual representations of ITS in the Agreement
and Plan of Reorganization has been omitted. The Company agrees to supplementally furnish a copy
of such disclosure schedule to the Commission upon request.)
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Press release of Peregrine Systems, Inc., dated July 31, 1998.
99.2 Pages F-35 through F-51 of the ITS Shareholder Proxy Statement and Warrant Holder Information
Statement/Peregrine Prospectus dated June 24, 1998 included in the Registrant's Registration
Statement on Form S-4 (No. 333-57459).
99.3 Pages 88 through 90 of the ITS Shareholder Proxy Statement and Warrant Holder Information
Statement/Peregrine Prospectus dated June 24, 1998 included in the Registrant's Registration
Statement on Form S-4 (No. 333-57459).
</TABLE>
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
PEREGRINE SYSTEMS, INC.
<TABLE>
<S> <C>
Dated: August 4, 1998 By: /s/ RICHARD T. NELSON
-------------------------------------------
Richard T. Nelson, Vice President,
Secretary and General Counsel
</TABLE>
4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-37105, No. 333-44699, No. 333-60423) of
Peregrine Systems, Inc. of our reports dated April 2, 1996 and April 27, 1998
relating to the consolidated financial statements of Innovative Tech Systems,
Inc., which appear in Exhibit 99.2 of this Current Report on Form 8-K.
PricewaterhouseCoopers LLP
Philadelphia, PA
July 31, 1998
<PAGE>
EXHIBIT 99.1
Thursday July 30, 7:27 pm Eastern Time
Company Press Release
SOURCE: Peregrine Systems, Inc.
PEREGRINE SYSTEMS COMPLETES ACQUISITION OF INNOVATIVE TECH SYSTEMS
SAN DIEGO, July 30 /PRNewswire/--Peregrine Systems, Inc. (Nasdaq:
PRGN--news) today announced it has completed the acquisition of Innovative Tech
Systems, Inc. (Nasdaq: ITSY--news) Innovative Tech's shareholders approved the
acquisition at a shareholders meeting held earlier this week. In addition,
holders of outstanding warrants of Innovative Tech consented by vote to exchange
their warrants for Common Stock of Peregrine Systems-Registered Trademark-.
The acquisition was completed as a stock-for-stock exchange at the fixed
ratio of 0.2341 shares of Peregrine Systems Common Stock for each share of
Innovative Tech stock, as previously announced by the companies.
The acquisition expands Peregrine Systems's Infrastructure Management suite
to include facilities management software and remote data collection systems to
automate the tracking and management of facilities, cable and technology assets,
maintenance and operations, space design, security, and life safety. The
acquisition of Innovative Tech is a natural evolution of Peregrine Systems's
Infrastructure Management strategy further positioning Peregrine Systems as the
leading Infrastructure Management company.
ABOUT PEREGRINE SYSTEMS, INC.
Peregrine Systems is the leading provider of Infrastructure Management
solutions. True Infrastructure Management unites the unique disciplines of the
Consolidated Service Desk and Enterprise Asset Management through common shared
data. The merging of these disciplines permits all organizational infrastructure
to be managed throughout its lifecycle, from the moment it enters the
organization to the moment it is retired. Infrastructure Management is focused
upon the effectiveness of infrastructure in achieving a business mission, while
minimizing the total cost of ownership of infrastructure. Founded in 1981,
Peregrine Systems is headquartered in San Diego, California with offices
throughout the United States as well as in the United Kingdom; France; Germany;
Denmark; and the Netherlands. Peregrine Systems also has partners and
distributors located in Asia Pacific, Australia and Latin America. Information
about Peregrine Systems and its products is available on the world wide web at
www.peregrine.com
Peregrine Systems is a registered trademark of Peregrine Systems, Inc.
SOURCE: Peregrine Systems, Inc.
<PAGE>
EXHIBIT 99.2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Innovative Tech Systems, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
statements of operations, of changes in shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Innovative
Tech Systems, Inc. and its subsidiaries as of January 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
April 27, 1998
F-35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Innovative Tech Systems, Inc.:
We have audited the accompanying statements of operations, changes in
shareholders' equity and cash flows of Innovative Tech Systems, Inc. for the
year ended January 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Innovative
Tech Systems, Inc. for the year ended January 31, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 2, 1996
F-36
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------
1997 1998
------------- ------------- APRIL 30,
1998
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 1,787,561 $ 3,438,319 $ 1,948,254
Accounts receivable, net.......................................... 3,514,541 4,349,702 5,897,735
Inventory......................................................... 264,205 314,320 231,638
Officer advance................................................... 89,307 85,727 92,957
Deferred taxes.................................................... -- 152,000 152,000
Other current assets.............................................. 99,006 195,829 361,309
------------- ------------- -------------
Total current assets............................................ 5,754,620 8,535,897 8,683,893
Property and equipment, net......................................... 884,801 1,340,463 1,622,989
Computer software, net of accumulated amortization of $591,434 and
$1,053,498 at January 31, 1997 and 1998, respectively, and
$1,183,931 at April 30, 1998 (unaudited).......................... 1,049,253 1,138,876 1,211,688
Other assets........................................................ 77,637 85,350 158,451
------------- ------------- -------------
Total assets.................................................... $ 7,766,311 $ 11,100,586 $ 11,677,021
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Current portion of long-term debt................................. $ 42,857 $ 155,000 $ 155,000
Accounts payable.................................................. 713,751 745,005 1,063,604
Accrued liabilities............................................... 128,656 248,477 298,384
Accrued income taxes.............................................. -- 217,000 309,556
Accrued payroll and related costs................................. 118,526 479,746 385,267
Deferred revenue.................................................. 651,232 1,749,970 1,655,131
------------- ------------- -------------
Total current liabilities..................................... 1,655,022 3,595,198 3,866,942
Long-term debt...................................................... 257,143 620,000 581,250
------------- ------------- -------------
Total liabilities............................................. 1,912,165 4,215,198 4,448,192
------------- ------------- -------------
Commitments and contingent liabilities
Shareholders' equity:
Senior preferred stock, par value $.001; authorized 200,000,000
shares; issued and outstanding -0- shares as of January 31, 1997
and 1998, respectively and as of April 30, 1998................. -- -- --
Common stock, par value $.0185; authorized 100,000,000 shares;
issued and outstanding 10,888,456 shares as of January 31, 1997
and 1998, respectively, and 11,343,373 as of April 30, 1998..... 201,436 201,436 209,686
Additional paid-in capital........................................ 7,290,038 7,410,038 8,011,587
Warrants.......................................................... 851,500 1,640,766 1,178,269
Accumulated deficit............................................... (2,488,828) (2,366,852) (2,170,713)
------------- ------------- -------------
Total shareholders' equity.................................... 5,854,146 6,885,388 7,228,829
------------- ------------- -------------
Total liabilities and shareholders' equity.................... $ 7,766,311 $ 11,100,586 $ 11,677,021
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------------
1996 1997 1998
------------- ------------- ------------- FOR THE THREE MONTHS
ENDED APRIL 30,
----------------------------
1997 1998
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software........................... $ 1,459,671 $ 3,599,002 $ 8,101,028 $ 1,424,993 $ 1,496,992
Hardware........................... 16,493 1,171,439 2,280,103 735,611 1,283,070
Services and support............... 1,308,801 4,133,241 4,701,611 1,059,635 1,802,406
------------- ------------- ------------- ------------- -------------
Total revenues................... 2,784,965 8,903,682 15,082,742 3,220,239 4,582,468
------------- ------------- ------------- ------------- -------------
Cost of revenues:
Software........................... 154,516 442,776 512,020 165,958 149,592
Hardware........................... 10,429 747,790 1,311,003 448,325 678,916
Services and support............... 836,212 1,930,862 2,472,511 472,575 393,789
------------- ------------- ------------- ------------- -------------
Total cost of revenues........... 1,001,157 3,121,428 4,295,534 1,086,858 1,222,297
------------- ------------- ------------- ------------- -------------
Gross margin......................... 1,783,808 5,782,254 10,787,208 2,133,381 3,360,171
Operating expenses:
Selling, general and
administrative................... 2,585,587 4,963,942 8,730,088 1,786,286 2,576,899
Research and development........... 424,415 793,970 1,105,013 281,777 500,984
Write-off of in-process research
and development.................. -- 485,000 -- -- --
------------- ------------- ------------- ------------- -------------
Total operating expenses......... 3,010,002 6,242,912 9,835,101 2,068,063 3,077,883
------------- ------------- ------------- ------------- -------------
Income (loss) from operations........ (1,226,194) (460,658) 952,107 65,318 282,288
Interest income.................... 368,020 99,073 56,363 18,739 22,218
Interest expense................... -- (2,598) (32,228) (9,012) (11,761)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes.... (858,174) (364,183) 976,242 75,045 292,745
Provision for income taxes........... -- -- 65,000 -- 96,606
------------- ------------- ------------- ------------- -------------
Net income (loss).................... $ (858,174) $ (364,183) $ 911,242 $ 75,045 $ 196,139
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Basic per share data:
Basic earnings per share........... $ (0.08) $ (0.03) $ 0.08 $ 0.01 $ 0.02
Weighted average common stock
outstanding...................... 10,227,837 10,569,089 10,888,456 10,888,456 11,078,963
Diluted per share data:
Diluted earnings per share......... $ (0.08) $ (0.03) $ 0.08 $ 0.01 $ 0.01
Weighted average common stock and
securities outstanding........... 10,227,837 10,569,089 11,583,382 10,938,613 13,686,693
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1996, 1997 AND 1998 AND THE THREE MONTHS ENDED
APRIL 30, 1998
<TABLE>
<CAPTION>
SENIOR PREFERRED
STOCK COMMON STOCK ADDITIONAL
-------------------- -------------------- PAID-IN NOTES ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS RECEIVABLE DEFICIT
--------- --------- --------- --------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1995... 3,409,279 63,071 $6,601,645 $ 790,750 $(100,000) $(1,266,471)
Repayment of notes
receivable................ 100,000
Stock split................. 6,818,558 126,144 (126,144)
Warrant conversion.......... 59,400
Net loss.................... (858,174)
--------- --------- --------- --------- ----------- --------- ----------- ------------
Balance, January 31, 1996... -- -- 10,227,837 189,215 6,475,501 850,150 -- (2,124,645)
Warrant conversion.......... 1,350
Acquisition of Facility
Management Services,
Inc....................... 645,619 11,944 789,764
Stock options exercised..... 15,000 277 24,773
Net loss.................... (364,183)
--------- --------- --------- --------- ----------- --------- ----------- ------------
Balance, January 31, 1997... -- -- 10,888,456 201,436 7,290,038 851,500 -- (2,488,828)
Reverse split of warrants... 789,266 (789,266)
Stock-based compensation.... 120,000
Net income.................. 911,242
--------- --------- --------- --------- ----------- --------- ----------- ------------
Balance, January 31, 1998... -- -- 10,888,456 201,436 7,410,038 1,640,766 $ -- $(2,366,852)
Warrant conversion
(unaudited)............... 375,251 6,942 485,574 (462,497)
Stock options exercised
(unaudited)............... 70,666 1,308 115,975
Net income (unaudited)...... 196,139
--------- --------- --------- --------- ----------- --------- ----------- ------------
Balance, April 30, 1998
(unaudited)............... -- $ -- 11,343,373 $ 209,686 $8,011,587 $1,178,269 -- $(2,170,713)
--------- --------- --------- --------- ----------- --------- ----------- ------------
--------- --------- --------- --------- ----------- --------- ----------- ------------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance, January 31, 1995... $ 6,088,995
Repayment of notes
receivable................ 100,000
Stock split.................
Warrant conversion.......... 59,400
Net loss.................... (858,174)
-------------
Balance, January 31, 1996... 5,390,221
Warrant conversion.......... 1,350
Acquisition of Facility
Management Services,
Inc....................... 801,708
Stock options exercised..... 25,050
Net loss.................... (364,183)
-------------
Balance, January 31, 1997... 5,854,146
Reverse split of warrants... --
Stock-based compensation.... 120,000
Net income.................. 911,242
-------------
Balance, January 31, 1998... $ 6,885,388
Warrant conversion
(unaudited)............... 30,019
Stock options exercised
(unaudited)............... 117,283
Net income (unaudited)...... 196,139
-------------
Balance, April 30, 1998
(unaudited)............... $ 7,228,829
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-39
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, FOR THE THREE MONTHS
--------------------------------- ENDED APRIL 30,
1996 1997 1998 ------------------------
---------- ---------- --------- 1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ (858,174) $ (364,183) $ 911,242 $ 75,045 $ 196,139
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 208,348 458,227 745,407 157,139 232,803
Write-off of in-process research and development.......... -- 485,000 -- 8,562 --
Loss on disposal of equipment............................. 764 52 12,420 -- --
Stock-based compensation.................................. -- -- 120,000 -- --
Bad debt expense.......................................... 5,000 35,366 223,069 -- --
Changes in operating assets and liabilities, net
of effects from acquisition:
Accounts receivable....................................... (902,289) (1,736,964) (1,058,230) (184,000) (1,548,033)
Inventory................................................. -- (151,502) (50,115) 57,615 82,682
Advances--officers........................................ (35,052) (39,386) 3,580 5,312 (7,230)
Due from related party.................................... 50,000 -- -- -- --
Other assets.............................................. (21,822) (65,331) (104,536) (58,540) (238,581)
Accounts payable.......................................... 27,502 394,043 31,254 (55,315) 318,599
Accrued liabilities....................................... (34,920) (4,958) 119,821 26,553 49,907
Accrued income taxes...................................... -- -- 217,000 -- 92,556
Accrued payroll and related costs......................... 46,678 (19,634) 361,220 62,070 (94,479)
Deferred revenue.......................................... (7,169) 179,226 1,098,738 (59,471) (94,839)
Deferred income taxes..................................... -- -- (152,000) -- --
---------- ---------- --------- ----------- -----------
Net cash provided by (used in) operating activities..... (1,521,134) (830,044) 2,478,870 34,970 (1,010,476)
---------- ---------- --------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment.......................... (391,541) (223,061) (751,425) (83,574) (384,896)
Proceeds from disposal of equipment......................... 4,173 80 -- -- --
Purchase of software........................................ -- -- (230,181) (49,977) (10,249)
Capitalization of software development costs................ (71,165) (11,493) (321,506) -- (192,996)
Restricted cash............................................. (700,000) 700,000 -- -- --
---------- ---------- --------- ----------- -----------
Net cash provided by (used in) investing activities..... (1,158,533) 465,526 (1,303,112) (133,551) (588,141)
---------- ---------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options..................... -- 25,050 -- -- 117,283
Warrant conversion.......................................... 59,400 1,350 -- -- 30,019
Notes receivable............................................ 100,000 -- -- -- --
Proceeds from long-term debt................................ -- 300,000 775,000 -- --
Repayment of long-term debt................................. -- (568,721) (300,000) (10,714) (38,750)
Repayment under line of credit.............................. -- (421,342) -- -- --
---------- ---------- --------- ----------- -----------
Net cash provided by (used in) financing activities..... 159,400 (663,663) 475,000 (10,714) 108,552
---------- ---------- --------- ----------- -----------
Net (decrease) increase in cash and cash equivalents.... (2,520,267) (1,028,181) 1,650,758 (109,295) (1,490,065)
Cash and cash equivalents, beginning of period................ 5,336,009 2,815,742 1,787,561 1,787,561 3,438,319
---------- ---------- --------- ----------- -----------
Cash and cash equivalents, end of period...................... $2,815,742 $1,787,561 $3,438,319 $1,678,266 $1,948,254
---------- ---------- --------- ----------- -----------
---------- ---------- --------- ----------- -----------
Cash paid during the period for:
Income taxes................................................ $ -- $ -- $ 6,599 $ -- $ --
Interest.................................................... $ -- $ 2,598 $ 28,506 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THREE MONTHS ENDED APRIL 30, 1997 AND 1998 IS
UNAUDITED)
1. DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of Innovative
Tech Systems, Inc. (the "Company") and its wholly-owned subsidiaries, which were
formed during fiscal year 1997. A third subsidiary, Innovative Tech Systems,
Inc. of Delaware, was merged into the Company on January 31, 1998 and the
separate coexistence of the subsidiary was terminated. The Company is
principally involved in the business of designing, developing and marketing
facilities management software products. The Company derives revenues from
selling and installing hardware and software for licensed use by clients in
diverse industries. The Company's revenues are predominantly generated through
sales to customers in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION (UNAUDITED)
Interim financial information for three months ended April 30, 1997 and 1998
included herein is unaudited. However, the Company believes the interim
financial information includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods. Operating results for the three months ended April 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ended January 31, 1999.
FISCAL YEAR
The Company's fiscal year ends on January 31. The year ended January 31,
1998 is fiscal 1998. References to years in these financial statements relate to
fiscal years rather than calendar years.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS
Financial instruments which are subject to fair value disclosure
requirements are included in the financial statements at cost which approximates
fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments. The Company
restricts investment of temporary cash investments to financial institutions
with high credit ratings.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Hardware sales and related costs are recognized as units are delivered.
Revenue from the licensing of computer software is recognized when the products
are shipped provided there are no significant vendor obligations remaining and
collection of the receivable is probable at the time all significant contractual
commitments are fulfilled. Revenue under maintenance contracts is recognized
ratably over the contract. Revenues from consulting and custom programming
services are recognized as the services are performed.
F-41
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THREE MONTHS ENDED APRIL 30, 1997 AND 1998 IS
UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue is reduced for estimated customer returns and allowances. Accounts
receivable arising from sales are not collateralized and, as a result,
management monitors the financial condition of its customers to reduce the risk
of loss. Accounts receivable is reduced for estimated uncollectible accounts.
The reserve for uncollectible accounts was $45,000 and $204,790 at January 31,
1997 and 1998, respectively.
INVENTORIES
Inventories consist of hardware, accessories and repair parts that are
purchased and resold to customers. Inventories are valued at cost, but not in
excess of net realizable value. Cost is determined using the first-in, first-out
method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Expenditures for major renewals,
improvements and betterments are capitalized and minor repairs and maintenance
are charged to expense. When assets are sold, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss from such
disposition is included in operations. Property and equipment is depreciated on
the straight-line method over the estimated useful lives of the respective
assets, generally over a period of five to seven years for property and
equipment and over the lesser of its estimated useful life or the remaining
lease term for leasehold improvements. For federal income tax purposes,
accelerated depreciation methods are used.
COMPUTER SOFTWARE
Internally developed computer software costs and costs of product
enhancements are capitalized subsequent to achieving technological feasibility;
such capitalization continues until the product becomes available for general
release. Maintenance and general upgrades are expensed as incurred. Capitalized
software costs are written down to net realizable value if the carrying amount
is in excess thereof. Software development costs are amortized on a
product-by-product basis over periods of 3 to 5 years. Software amortization was
$104,226, $255,835, and $462,064 for the years ended January 31, 1996, 1997 and
1998, respectively, and $103,033 and $130,433 for the three months ended April
30, 1997 and 1998, respectively.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred income taxes are determined based on
temporary differences between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect during the years in which the
differences are expected to reverse, and on available tax credits and
carryforwards.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" ("SFAS 128"). This statement establishes standards for
computing and presenting earnings per share. Basic earnings per share is
calculated using the average shares of common stock outstanding, while diluted
earnings per share reflects the potential dilution that could occur if stock
options and warrants were exercised. Stock options and warrants are excluded
from the calculation if their effect would be antidilutive. The Company adopted
SFAS 128 in the fourth quarter of fiscal 1998.
F-42
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THREE MONTHS ENDED APRIL 30, 1997 AND 1998 IS
UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying disclosures. Although these estimates are based on
management's best knowledge of current events and actions the Company may
undertake in the future, actual results ultimately may differ from those
estimates.
LONG-LIVED ASSETS
In fiscal 1996, the Company adopted Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of". SFAS No. 121 requires the Company to review its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through future cash flows.
Any loss would be recognized in the income statement and certain disclosures
regarding the impairment would be made in the financial statements. SFAS No. 121
had no material effect on the Company's financial position or results of
operations.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", for fiscal years beginning after December 15, 1995. SFAS No. 123
requires companies to either recognize or disclose compensation expense for
grants of stock, stock options, and other equity instruments to employees based
upon fair value.
Companies choosing to continue on APB No. 25 are required to disclose pro
forma net income and earnings per share data based on fair value for all awards
granted in fiscal years beginning after December 15, 1994. The Company has
adopted the disclosure requirements and will therefore continue to account for
stock-based compensation in accordance with APB No. 25.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components (revenue, expense, gains, and losses) in a full set of
general-purpose financial statements. The Company will adopt SFAS No. 130 in its
fiscal year 1999. Management believes the adoption of SFAS No. 130 will not have
a material effect on its consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," regarding operating segments. SFAS No. 131,
which is based on the management approach to segment reporting, establishes
requirements to report entity-wide disclosures about products and services,
major customers, and material countries in which the entity holds assets and
reports revenue. SFAS No. 131 requires limited segment data on a quarterly
basis. The Company will adopt SFAS No. 131 in the first quarter of fiscal year
1999. Management believes the adoption of SFAS No. 131 will not have a material
effect on its consolidated financial statements.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
provides guidance on applying generally accepted
F-43
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THREE MONTHS ENDED APRIL 30, 1997 AND 1998 IS
UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting principles in recognizing revenue on software transactions. The
Company will adopt SOP 97-2 in its fiscal year 1999. The Company anticipates
that SOP 97-2 will not have a material impact on its consolidated financial
statements.
In March 1998, the American Institute of Certified Public Accountants,
issued Statement of Position (SOP) 98-1. "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance
concerning the capitalization of costs related to such software. The Company
will adopt SOP 98-1 in its fiscal year 2000. The Company anticipates that SOP
98-1 will not have a material impact on its consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This Statement provides guidance on the financial reporting of
start-up costs and organization costs and requires that such costs of start-up
activities be expensed as incurred. The Company will adopt SOP 98-5 in its
fiscal year 2000. The Company has not yet determined the impact, if any, the
adoption of the accounting and disclosure provisions of SOP 98-5 will have on
the Company's financial statements, results of operations or related disclosure
thereto.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 31,
--------------------------
1997 1998
------------ ------------ FOR THE THREE MONTHS
ENDED APRIL 30, 1998
---------------------
(UNAUDITED)
<S> <C> <C> <C>
Computers and office equipment............ $ 924,697 $ 1,154,863 $ 1,426,208
Furniture and fixtures.................... 388,356 539,415 569,541
Leasehold improvements.................... 218,058 506,586 590,011
Automobiles............................... 10,746 10,746 10,746
------------ ------------ -----------
1,541,857 2,211,610 2,596,506
Less : Accumulated depreciation........... (657,056) (871,147) (973,517)
------------ ------------ -----------
$ 884,801 $ 1,340,463 $ 1,622,989
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
Depreciation expense was $104,122, $202,392, and $283,343 in fiscal 1996,
1997 and 1998, respectively, and $54,106 and $102,370 in the three months ended
April 30, 1997 and 1998, respectively.
F-44
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THREE MONTHS ENDED APRIL 30, 1997 AND 1998 IS
UNAUDITED)
4. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------
1996 1997 1998
----------- ---------- -------------
<S> <C> <C> <C>
Current taxes:
Federal............................................. $ -- $ -- $ 860,000
State............................................... -- -- 187,000
----------- ---------- -------------
-- -- 1,047,000
----------- ---------- -------------
Benefit of net operating loss carryforwards:
Federal............................................. -- -- (718,000)
State............................................... -- -- (93,000)
----------- ---------- -------------
(811,000)
----------- ---------- -------------
Deferred taxes:
Federal............................................. -- -- (142,000)
State............................................... -- -- (29,000)
----------- ---------- -------------
-- -- (171,000)
----------- ---------- -------------
$ -- $ -- $ 65,000
----------- ---------- -------------
----------- ---------- -------------
</TABLE>
The reconciliation of income taxes at the U. S. statutory rate to the
provision (benefit) for income taxes for 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Income taxes at the U. S. statutory rate................................. (34)% (34)% 34%
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal benefit............................. -- (7)% 7%
Limitation on the utilization of tax benefits.......................... 31% -- --
Acquisition accounting differences..................................... -- 56% 11%
Deferred revenue....................................................... 1% 17% 38%
Utilization of net operating loss carryforwards........................ -- (36)% (74)%
Other, net............................................................. 2% 4% (9)%
-- -- --
-- -- 7%
-- -- --
-- -- --
</TABLE>
F-45
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THREE MONTHS ENDED APRIL 30, 1997 AND 1998 IS
UNAUDITED)
4. INCOME TAXES (CONTINUED)
The tax effects of temporary differences which comprise the deferred tax
assets and liabilities at January 31, 1997 and 1998 were determined using an
effective rate of 41%. Tax effects of temporary differences are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Deferred tax debits
Net operating loss carryforwards.............................. $ 809,800 $ 0
Deferred revenue.............................................. 267,600 719,551
Other liabilities............................................. 29,200 99,346
Valuation allowance........................................... (1,047,700) (584,197)
------------- -------------
58,900 234,700
Deferred tax credits
Property and equipment........................................ (58,900) (82,700)
------------- -------------
Net deferred taxes............................................ $ -- $ 152,000
------------- -------------
------------- -------------
</TABLE>
Net deferred tax assets have been recorded to the extent realizable through
reversing temporary differences. The remaining net deferred tax assets are
offset by a valuation allowance due to the lack of consistent earnings history.
Income tax expense for the three months ended April 30, 1998 was recorded
based upon an estimated tax rate of 33%, which assumes reversal of the valuation
allowance against deferred tax assets.
5. LINE OF CREDIT
The Company has a $1. 5 million line of credit with a bank. The line is
payable on demand and bears interest at the rate of prime plus 1/4%. The line is
collateralized by all of the assets of the Company. There were no borrowings
outstanding under the line of credit at January 31, 1998. The terms of this
arrangement contain requirements for maintaining defined levels of working
capital, tangible net worth and cash flow. On February 9, 1998, the Company
entered into a letter of credit for $102,600 which is supported by the line of
credit. All borrowings will be due upon written demand by the bank or November
30, 1998, whichever is earlier. As of January 31, 1998, there were no borrowings
under the letter of credit.
A wholly-owned subsidiary maintained a line of credit with a bank bearing
interest at the rate of prime plus 1/2%. The line expired on July 31, 1996, and
the outstanding balance of $351,341 was paid in full on August 16, 1996.
6. LONG-TERM DEBT
In January 1998, the Company refinanced its term loan to $775,000 to finance
leasehold improvements and furniture and equipment purchases. The loan is
payable in sixty (60) fixed monthly principal payments of $12,917 plus interest
at the rate of prime plus 1/4%.
F-46
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THREE MONTHS ENDED APRIL 30, 1997 AND 1998 IS
UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities, company automobiles and company
apartments under operating leases.
The future minimum rental payments under noncancellable operating leases as
of January 31, 1998, are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
------------
<S> <C>
1999............................................................................ $ 601,840
2000............................................................................ 548,000
2001............................................................................ 213,706
2002............................................................................ 72,114
2003 & thereafter............................................................... 66,603
------------
$ 1,502,263
------------
------------
</TABLE>
Rent expense for the years ended January 31, 1996, 1997 and 1998 was
$124,164, $313,990 and $632,017, respectively.
The Company is defendant in various litigation matters in the ordinary
course of business, none of which management expect will have a material adverse
effect on the Company's financial position or results of operations.
8. SHAREHOLDERS' EQUITY
The shares of Common Stock and Redeemable Warrants are separately tradable.
Each Redeemable Warrant entitles the holder to purchase one share of Common
Stock at an exercise price of $2.33 for a period of 60 months commencing July
26, 1995. Each Redeemable Warrant is redeemable by the Company at a redemption
price of $.083 per Redeemable Warrant commencing October 26, 1995 upon not less
than 30 days prior written notice by the Company, provided that the average
closing bid price of the Common Stock equals or exceeds $2.92 for any 20 trading
days within a period of 30 consecutive trading days ending on the fifth trading
day immediately prior to the notice of redemption.
On September 30, 1997, the Company obtained consent from its warrant holders
to effect a one-for-eight reverse split of the Redeemable Common Stock Purchase
Warrants and a one-for-twenty-nine and one-eighth reduction in the exercise
price of the warrants. The total number of issued and outstanding Redeemable
Common Stock Purchase Warrants was reduced from 10,596,000 to 1,324,500 and the
exercise price was reduced to $0.08 from $2.33 per share. As a result, the
Company recorded an increase to warrants and accumulated deficit of $789,266.
Warrant holders exercised 375,251 Redeemable Common Stock Purchase Warrants
during the three month period ended April 30, 1998.
The Company also has outstanding (1) non-redeemable warrants to purchase
390,000 common shares at $2.50 per share which expire July 25, 1999 and (2)
warrants to acquire redeemable warrants to purchase 6,750 shares of common stock
at a total exercise price of $.09 per share which expire July 25, 1999.
F-47
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(INFORMATION RELATING TO THREE MONTHS ENDED APRIL 30, 1997 AND 1998 IS
UNAUDITED)
8. SHAREHOLDERS' EQUITY (CONTINUED)
The Board of Directors of the Company approved a three-for-one split of all
outstanding shares of Common Stock and all outstanding Redeemable Common Stock
Purchase Warrants on August 23, 1995. The three-for-one split was effective on
September 18, 1995.
As a result of the above transactions, all historic share amounts and per
share amounts in the accompanying financial statements have been adjusted to
reflect the stock split.
On July 22, 1994, the shareholders of the Company approved the conversion of
all Senior Preferred Stock into Common Stock on a one-for-one basis (prior to
the reverse stock split) and the authorization of a new class of Preferred Stock
with no par value and 200,000,000 authorized shares.
9. STOCK OPTIONS
The 1994 Stock Option Plan ("Plan") which became effective July 22, 1994
provides for the granting of options to purchase up to an aggregate of 2,175,000
shares of Common Stock. 975,000 of the options were authorized during fiscal
year 1995 and 1,200,000 were authorized during fiscal year 1998.
A summary of the status of the Company's Plan as of January 31, 1996,
January 31, 1997 and January 31, 1998 and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Outstanding at January 31, 1995................................ 975,000 $ 1.67
Granted...................................................... 500,000 $ 1.67
---------- -----
Outstanding at January 31, 1996................................ 1,475,000 $ 1.67
Granted...................................................... 12,500 $ 2.13
Exercised.................................................... (15,000) $ 1.67
Terminated................................................... (530,000) $ 1.67
---------- -----
Outstanding at January 31, 1997................................ 942,500 $ 1.68
Granted...................................................... 1,321,800 $ 1.45
Terminated................................................... (111,800) $ 1.52
---------- -----
Outstanding at January 31, 1998................................ 2,152,500 $ 1.55
---------- -----
Granted...................................................... 4,000 $ 4.16
Exercised.................................................... (70,666) $ 1.66
Terminated................................................... (1,500) $ 1.25
---------- -----
Outstanding at April 30, 1998.................................. 2,084,334 $ 1.55
---------- -----
---------- -----
Exercisable at January 31, 1998................................ 986,667 $ 1.62
---------- -----
---------- -----
Exercisable at April 30, 1998.................................. 1,089,313 $ 1.55
---------- -----
---------- -----
</TABLE>
These stock options are exercisable in whole or in part, in three (3) equal
annual installments, except for two (2) grants, one which vested immediately and
the other which vested in two (2) equal installments, with the first such
installment exercisable twelve (12) months from the date of the grant, but any
such exercise must occur within ten (10) years from the date of grant.
F-48
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THREE MONTHS ENDED APRIL 30, 1997 AND 1998 IS
UNAUDITED)
9. STOCK OPTIONS (CONTINUED)
The Company granted 100,000 options to non-employees as compensation for
services rendered. The fair value of the options, $120,000, was charged to
expense.
The Company applies APB 25 and related interpretations in accounting for its
plan. Accordingly, no compensation cost has been recognized for stock options.
Had compensation costs for stock options been determined based on the fair value
at the grant dates for awards under this plan consistent with the method of SFAS
123, the Company's net earnings and net earnings per share would have been
reduced to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 31,
-----------------------
1997 1998
----------- ----------
<S> <C> <C>
Net Earnings (Loss)
As Reported........................................................ $ (364,183) $ 911,242
Pro Forma.......................................................... $ (368,000) $ 579,558
Net Earnings (Loss) Per Share
As Reported Basic and Dilutive..................................... $ (0.03) $ 0.08
Pro Forma Basic and Dilutive....................................... $ (0.03) $ 0.05
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for options granted in fiscal 1997 and fiscal 1998: expected
volatility of 74% and 92% for the years ended January 31, 1997 and 1998,
respectively; no dividend payments are made for the expected terms; expected
term of ten years; risk free interest rate on the date of grant with the
maturity equal to the expected term; exercise price equal to the fair market
value on the grant date.
10. SIGNIFICANT CUSTOMERS
Revenues from significant customers as a percentage of total revenues were
as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 31,
-------------------------------------
CUSTOMER 1996 1997 1998
- ---------------------------------------- ----- ----- ----- FOR THE THREE MONTHS
ENDED APRIL 30,
------------------------------------
1997 1998
----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A.............................. --% --% 17% --% 4%
Customer B.............................. -- -- 11 -- --
Customer C.............................. 25 6 3 4 3
Customer D.............................. 11 6 2 4 23
Customer E.............................. 16 1 -- 2 2
</TABLE>
11. RELATED PARTY TRANSACTIONS
The Company leases office space under a five year lease at an annual rent of
$270,000. The building is owned by a Pennsylvania Limited Partnership owned by
William M. Thompson, John M. Thompson and Karen A. Thompson, who are executive
officers, directors and significant shareholders of the Company.
On March 17, 1995, the Company pledged a $700,000 certificate of deposit as
collateral for a mortgage loan obtained by Thompson Enterprises, L. P. On
January 30, 1997, Thompson Enterprises, L. P.
F-49
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THREE MONTHS ENDED APRIL 30, 1997 AND 1998 IS
UNAUDITED)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
refinanced the mortgage loan, and the certificate of deposit was released and
was classified as cash and cash equivalents in the January 31, 1997 balance
sheet.
12. ACQUISITION
Effective July 26, 1996, a subsidiary of the Company acquired 100% of the
outstanding common stock of Facility Management Systems, Inc. ("FMS") in
exchange for 645,619 shares of Innovative Tech Common Stock valued at $801,708.
The total purchase price aggregated $2,559,739, including acquisition costs and
liabilities assumed and was allocated based on relative fair values as follows:
<TABLE>
<S> <C>
Current assets.................................... $ 814,252
Property and equipment............................ 251,084
Software development costs........................ 923,903
In-process research and development............... 485,000
Other assets...................................... 85,500
------------
$ 2,559,739
------------
------------
</TABLE>
The in-process research and development of $485,000 represented the fair
value of in-process development projects that had not reached technological
feasibility and had no probable alternative future uses, which the Company
expensed at the date of the acquisition.
The results of operations are included in the Company's consolidated
financial statements from the date of acquisition. The following unaudited pro
forma financial information combines the consolidated results of operations as
if the acquisition had occurred as of the beginning of the periods presented.
Pro forma adjustments include only the effects of events directly attributed to
the transaction that are factually supportable and expected to have a continuing
impact.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Revenues........................................................ $ 7,224,252 $ 10,564,018
Net Loss........................................................ $ (1,220,378) $ (658,248)
Loss per Share.................................................. $ (.12) $ (.06)
</TABLE>
The pro forma financial information does not necessarily reflect the
operating results that would have occurred had the acquisition been consummated
as of the above dates, nor is such information indicative of future operating
results. In addition, the pro forma financial results contain estimates since
the acquired business did not maintain information on a period comparable with
the Company's fiscal year end.
13. 401(k) PLAN
Effective January 1, 1996, the Company instituted a 401(k) Plan to cover all
eligible employees. The Company makes a matching contribution of $.25 for every
dollar a participant contributes on the first 6% contributed, subject to a five
(5) year vesting schedule. The Company made matching contributions of $24,906
and $28,050 for the years ended January 31, 1997 and 1998, respectively.
F-50
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THREE MONTHS ENDED APRIL 30, 1997 AND 1998 IS
UNAUDITED)
14. EARNINGS PER SHARE
Earnings per share have been restated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." This restatement
resulted in no material change from amounts previously reported. Earnings per
share are computed as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------ FOR THE THREE MONTHS
ENDED APRIL 30,
----------------------------
1997 1998
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic earnings per share:
Net income (loss) available for common stock..... $ (858,174) $ (364,183) $ 911,242 $ 75,045 $ 196,139
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
Average common stock outstanding................. 10,227,837 10,569,089 10,888,456 10,888,456 11,078,963
Basic earnings (loss) per share.................... $ (0.08) $ (0.03) $ 0.08 $ 0.01 $ 0.02
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
Diluted earnings per share:
Net income (loss) available for common stock and
dilutive securities............................ $ (858,174) $ (364,183) $ 911,242 $ 75,045 $ 196,139
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
Average common stock outstanding................. 10,227,837 10,569,089 10,888,456 10,888,456 11,078,963
Additional common shares resulting from
dilutive securities:
Stock options.................................... -- -- 266,310 50,157 1,327,361
Warrants......................................... -- -- 428,616 -- 1,280,369
------------ ------------ ------------ ------------- -------------
Average common stock and dilutive securities
outstanding.................................... 10,227,837 10,569,089 11,583,382 10,938,613 13,686,693
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
Diluted earnings (loss) per share.................. $ (0.08) $ (0.03) $ 0.08 $ 0.01 $ 0.01
------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------- -------------
</TABLE>
15. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
ACCOUNTANTS
On May 7, 1998, Peregrine Systems, Inc. ("PSI") and the Company entered into
a definitive agreement (the "Merger Agreement") pursuant to which PSI will
acquire Innovative Tech in a tax-free merger in which a wholly-owned subsidiary
of PSI will merge with and into the Company, with the Company being the
surviving corporation. Accordingly, following the merger, the Company will
become a wholly-owned subsidiary of PSI.
Pursuant to the Merger Agreement, holders of shares of the Company's Common
Stock will receive 0.2341 shares of PSI's Common Stock for each share of the
Company's Common Stock held by them in a tax-free, stock-for-stock exchange. PSI
expects to issue approximately 3.19 million shares of its Common Stock in
exchange for all of the outstanding equity securities of the Company.
Consummation of the merger is subject to customary closing conditions,
including the approval of the merger by the stockholders of the Company, and the
registration with the Securities and Exchange Commission of the PSI shares to be
issued. The acquisition is expected to be consummated during the calendar
quarter ending September 30, 1998.
F-51
<PAGE>
EXHIBIT 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial information assumes a
business combination between Peregrine and Innovative, is accounted for as a
purchase and is based on the respective historical consolidated financial
statements and the notes thereto, which are included in this Proxy Statement/
Prospectus. The pro forma combined condensed balance sheet combines Peregrine's
March 31, 1998 consolidated balance sheet with Innovative's January 31, 1998
consolidated balance sheet. The pro forma statements of operations combine
Peregrine's and Innovative's historical results for each of the periods
indicated below.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had occurred as of the date or during the
periods presented, nor is it necessarily indicative of future operating results
or financial positions.
These pro forma financial statements are based on, and should be read in
conjunction with, the historical consolidated financial statements, and the
related notes thereto, of Peregrine and Innovative included in this Proxy
Statement/Prospectus.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1998
AFTER GIVING EFFECT TO THE MERGER
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PEREGRINE INNOVATIVE ADJUSTMENTS COMBINED
--------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............. $ 14,950 $ 3,438 $ -- $ 18,388
Short-term investments................ 7,027 -- -- 7,027
Accounts receivable, net.............. 16,761 4,350 -- 21,111
Inventory............................. -- 314 -- 314
Deferred tax assets................... 7,297 152 -- 7,449
Other current assets.................. 2,905 282 -- 3,187
--------- ---------- -------- ----------
Total current assets.................. 48,940 8,536 -- 57,476
Property and equipment, net............. 5,455 1,340 -- 6,795
Computer software, net.................. -- 1,139 (1,139)(F) --
Goodwill and other...................... 2,342 86 3,846(B,C) 6,274
--------- ---------- -------- ----------
$ 56,737 $11,101 $ 2,707 $ 70,545
--------- ---------- -------- ----------
--------- ---------- -------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................... $ 2,337 $ 745 $ -- $ 3,082
Accrued expenses...................... 9,310 945 9,750(A) 20,005
Deferred revenue...................... 11,570 1,750 -- 13,320
Current portion of long-term debt..... 151 155 -- 306
--------- ---------- -------- ----------
Total current liabilities............. 23,368 3,595 9,750 36,713
Long-term debt, net of current
portion............................... 966 620 -- 1,586
Deferred revenue, net of current
portion............................... 1,802 -- -- 1,802
--------- ---------- -------- ----------
Total liabilities..................... 26,136 4,215 9,750 40,101
Stockholders' Equity:
Preferred stock, $0.001 par value,
5,000,000 and 200,000,000 shares
authorized, respectively, no shares
issued or outstanding............... -- -- -- --
Common stock, $0.001 and $0.0185 par
value, 50,000,000 and 100,000,000
shares authorized, 18,700,000 and
10,888,000 shares issued and
outstanding, actual, respectively
and 19,930,000 Pro Forma
outstanding......................... 19 202 (202)(A,D) 19
Additional paid-in capital............ 74,351 7,410 65,516(A,D) 147,277
Warrants.............................. -- 1,641 (1,641)(D) --
Accumulated deficit................... (41,461) (2,367) (70,716)(B,D,E) (114,544)
Unearned portion of deferred
compensation........................ (1,493) -- -- (1,493)
Cumulative translation adjustment..... (553) -- -- (553)
Treasury stock, at cost............... (262) -- -- (262)
--------- ---------- -------- ----------
Total stockholders' equity.......... 30,601 6,886 (7,043) 30,444
--------- ---------- -------- ----------
$ 56,737 $11,101 $ 2,707 $ 70,545
--------- ---------- -------- ----------
--------- ---------- -------- ----------
</TABLE>
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PEREGRINE SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
AFTER GIVING EFFECT TO THE MERGER
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
INNOVATIVE
PEREGRINE TECH SYSTEMS, PRO FORMA
SYSTEMS, INC. INC. ADJUSTMENTS PRO FORMA
------------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues:
Licenses.............................. $ 38,791 $ 8,101 $ -- $ 46,892
Hardware.............................. -- 2,280 -- 2,280
Maintenance and services.............. 23,086 4,702 -- 27,788
------------- ------------- ------- ---------
Total revenues...................... 61,877 15,083 76,960
Costs and Expenses:
Cost of licenses...................... 326 512 -- 838
Cost of hardware...................... -- 1,311 -- 1,311
Cost of maintenance and services...... 10,326 2,473 -- 12,799
Sales and marketing................... 22,728 5,674 -- 28,402
Research and development.............. 8,394 1,105 -- 9,499
General and administrative............ 6,463 3,056 771(G) 10,290
Acquired in process research and
development......................... 34,775 -- --(E) 34,775
------------- ------------- ------- ---------
Total costs and expenses............ 83,012 14,131 771 97,914
------------- ------------- ------- ---------
Operating income (loss)............. (21,135) 952 771 (20,954)
Interest income and other............... 839 24 -- 863
------------- ------------- ------- ---------
Income from continuing operations before
income tax............................ (20,296) 976 771 (20,091)
Income tax expense...................... 5,358 65 -- 5,423
------------- ------------- ------- ---------
Net income (loss)....................... $(25,654) $ 911 $ 771 $(25,514)
------------- ------------- ------- ---------
------------- ------------- ------- ---------
Net income (loss) per share diluted:
Net income (loss) per share............. $ (1.48) $ 0.08 $ (1.28)
------------- ------------- ---------
------------- ------------- ---------
Shares used in diluted per share
computation........................... 17,380 11,583 19,930
------------- ------------- ---------
------------- ------------- ---------
Net income (loss) per share basic:
Net income (loss) per share............. $ (1.48) $ 0.08 $ (1.28)
------------- ------------- ---------
------------- ------------- ---------
Shares used in basic per share
computation........................... 17,380 10,888 19,930
------------- ------------- ---------
------------- ------------- ---------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma financial statements of Peregrine have been prepared
based on the historical financial statements of Peregrine for the year ended
March 31, 1998 and for Innovative for the year ended January 31, 1998,
considering the effects of the acquisition under the purchase method. The pro
forma balance sheet of Peregrine at March 31, 1998 has been prepared as if the
Merger had been consummated at March 31, 1998. The pro forma statement of
operations for the year ended March 31, 1998 has been prepared as if the Merger
had been consummated on April 1, 1997.
In management's opinion, all material adjustments necessary to reflect the
effects of the acquisition have been made. The unaudited pro forma financial
statements are not necessarily indicative of the actual financial position at
March 31, 1998, or what the actual results of operations of Peregrine would have
been assuming the acquisition had been completed as of April 1, 1997, nor are
they indicative of the financial position or results of operations for future
periods. The pro forma financial statements should be read in conjunction with
the historical financial statements and notes thereto of Peregrine and
Innovative included elsewhere herein.
2. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
(A) The purchase price for the completion of the Innovative acquisition was
determined by combining the value of Peregrine Common Stock issued to Innovative
stockholders (2,662,000 common shares valued at $22.875 per share plus $12,033
related to the value of outstanding options and warrants assumed), the net
assets acquired of Innovative and the estimated transactions costs for the
acquisition. The estimated direct transaction costs to be incurred by the
Combined Company include sign-on bonuses, transaction fees for investment
bankers, attorneys, accountants, financial printing and other related charges.
The purchase price for the completion of the Innovative Tech Systems, Inc.
acquisition is summarized below (in thousands):
<TABLE>
<S> <C>
Common stock and value of option and warrants
assumed......................................... $ 72,926
Estimated transaction costs....................... 9,750
Net assets acquired, excluding (F)................ (5,747)
-------
$ 76,929
</TABLE>
(B) Allocation of the purchase price for the completion of the Innovative
acquisition was determined as follows (in thousands):
<TABLE>
<S> <C>
Acquired in-process technology.................... $ 73,083
Goodwill.......................................... $ 3,846
---------
$ 76,929
</TABLE>
(C) Amortization of the goodwill for Innovative will be on the straight-line
method over five years and will be included in depreciation and amortization
expense.
(D) Elimination of Innovative stockholders' equity amounts.
(E) The pro forma statement of operations excludes the charge of $73.1
million for purchased in-process technology, which arose from the acquisition.
These charges will be included in the Combined Company's consolidated financial
statements for the three-month period ending September 30, 1998.
(F) Reflects the effect of the elimination of the acquiree's computer
software pending completion of valuation of the capitalized asset.
(G) Reflects the amortization of goodwill beginning April 1, 1997.
The purchase price for the Innovative acquisition was allocated to the
tangible and intangible assets of Innovative based on preliminary estimates of
the fair market value of those assets. The evaluation of the underlying
technology acquired considered the inherent difficulties and uncertainties in
completing the development, and thereby achieving technological feasibility, and
the risks related to the viability of and potential changes in future target
markets that the acquired technology has any alternative future uses.
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